Company Decision-making, the Company’s Officers and Shareholders

Question 1

What are the roles of directors and shareholders in a company’s decision-making structure, and what statutory provision primarily governs the directors’ authority?

Answer 1

Directors manage daily operations under Model Article 3, while shareholders fund the company and vote on major changes (e.g., altering the articles or company name) via special resolutions under CA 2006, ss. 21 and 77.

Question 2

What types of decisions are exclusively reserved for shareholders, and what is the legal impact of these decisions on directors?

Answer 2

Decisions reserved solely for shareholders often involve special resolutions, including changing the articles of association or the company’s name. Once shareholders approve these changes, directors must comply and ensure proper documentation with Companies House. Directors have no authority to overturn or ignore these shareholder decisions, as they are binding and must be formally executed

Question 3

Explain the two categories of shareholder decisions that require their involvement and approval. What is the rationale behind each category?

Answer 3

The first category involves decisions shareholders make alone, such as altering foundational company structures like its articles or name, requiring special resolutions (ss 21 and 77 CA 2006). The second category includes decisions that authorize directors to engage in contracts with potential personal gain or significant risk, e.g., when the company buys a director’s property. This approval prevents conflicts of interest and ensures directors act in the company’s best interests, not for personal advantage.

Question 4

What are the rules regarding notice, quorum, and conflicts of interest in board meetings, according to Model Articles (MA) and the Companies Act (CA) 2006?

Answer 4

According to MA 9, notice of a board meeting must be given to all directors. MA 11 specifies that a quorum of two directors is required for a valid meeting, reducing the risk of unilateral decisions. Under s 177 CA 2006, a director must declare any personal interest in a transaction. Per MA 14, directors with personal interests cannot count in the quorum or vote on resolutions related to their interest, ensuring fair decision-making.

Question 5

Distinguish between an ordinary resolution and a special resolution in terms of voting requirements and applicability. What rule clarifies this distinction?

Answer 5

An ordinary resolution requires a simple majority (over 50%) of votes, while a special resolution requires at least 75% of votes to pass at a shareholders’ meeting. These apply to different levels of decisions, with ordinary resolutions for regular business matters and special resolutions for more significant changes (e.g., altering the articles). This distinction is outlined in sections 282 and 283 CA 2006.

Question 6

How does a written resolution process work, and what are the key requirements for passing written resolutions under CA 2006?

Answer 6

Under s.288 CA 2006, private companies can use written resolutions to approve proposals without holding a general meeting. The board circulates the resolution with instructions and a 28-day response deadline. unlike genral meetings Voting is based on share ownership, requiring over 50% for ordinary and 75% for special resolutions. This saves time and is useful when meetings are impractical.

Question 7

How is the 14-day notice period calculated for general meetings, and what adjustments are required if notice is given by post or email?

Answer 7

The 14-day notice period includes “clear days,” meaning neither the day of notice receipt nor the meeting day count. For example, if notice is given on March 1, the earliest meeting date is March 16. If sent by post or email, notice is deemed received 48 hours after sending (s 1147(2) CA 2006), so two extra days are added, making the earliest meeting date March 18. This ensures shareholders have adequate time to prepare for the meeting.

Question 8

In what cases might a poll vote be preferred over a show of hands in a shareholders’ general meeting, and who can request a poll vote?

Answer 8

A poll vote, where each shareholder’s votes correspond to shares owned, may be called if a show of hands doesn’t reflect shareholder equity, as those with more shares have greater voting power.

A poll vote can be requested by the chair, the directors, two or more shareholders, or those representing at least 10% of voting rights (MA 44(2)). Poll votes ensure that shareholders’ voting power aligns with their financial stake, potentially changing outcomes from a show of hands.

Question 9

Under what conditions can a general meeting be held on short notice, and what are the percentage requirements for private and public companies to consent to this arrangement according to CA 2006?

Answer 9

A general meeting can be held on short notice if urgent decisions are needed and the 14-day period is impractical. Under s.307(5)–(6) CA 2006, this requires consent from a majority of shareholders holding at least 90% of voting shares (95% for public companies). Once consent is given, the meeting can take place immediately or later, as agreed.

Question 10

Under s.292 CA 2006, how can minority shareholders propose a written resolution, and can the required threshold be changed by the articles of association?

Answer 10

Shareholders holding at least 5% of the company’s voting rights can require the company to circulate a written resolution to all eligible shareholders under s 292 CA 2006. The company’s articles of association may reduce this threshold below 5% but cannot increase it beyond 5% (s 292(5) CA 2006). This empowers minority shareholders to propose resolutions without relying on board initiation.

Question 11

What rights do shareholders have to include additional information when requesting a circulated written resolution, and who is responsible for associated costs?

Answer 11

Shareholders who request the circulation of a written resolution can include a statement of up to 1,000 words addressing the resolution’s subject (s 292(3) CA 2006). This ensures that their views are shared alongside the resolution. However, these shareholders must bear the costs incurred by the company to distribute the resolution and accompanying statement, as per s 294 CA 2006

Question 12

What steps must directors take when shareholders request a general meeting, and how does the CA 2006 regulate the timing of these steps?

Answer 12

Under s.303 CA 2006, shareholders with at least 5% of voting rights can request a general meeting. The board must issue notice within 21 days (s.304(1)(a)) and hold the meeting within 28 days of that notice (s.304(1)(b)), limiting the total delay to seven weeks and preventing undue postponement

Question 13

What are the legal requirements for filing resolutions and other documents with Companies House, and what penalties exist for non-compliance?

Answer 13

Companies must file all special resolutions and specific ordinary resolutions with Companies House, as mandated by s 29 and s 30 CA 2006, to maintain transparency for third parties. Non-compliance results in fines imposed on both the company and its officers, emphasizing the critical nature of meeting filing deadlines to avoid penalization.

Question 14

What are statutory books, where should they be kept, and what are the relevant forms if these records are moved?

Answer 14

Statutory books are key internal records, such as the register of members and directors, maintained under CA 2006. They must be stored at the company’s registered office or an approved Single Alternative Inspection Location (SAIL). Changes in record location require notification to Companies House using form AD02 (to SAIL), AD03 (from SAIL), or AD04 (to another registered office).

Question 15

How long must companies keep board and general meeting minutes, and what specific documents are included in this requirement?

Answer 15

Companies must keep board meeting minutes (s 248 CA 2006), general meeting minutes (s 355 CA 2006), and records of any written resolutions for at least ten years at the registered office or SAIL. This extensive record-keeping ensures continuity and compliance, as it provides a formal history of the company’s decision-making processes over time.

Question 16

What key roles do solicitors play in advising companies on decision-making compliance with CA 2006, particularly in relation to shareholder and board meetings?

Answer 16

Solicitors help companies comply with CA 2006 by filing resolutions, maintaining registers, and drafting minutes. They ensure required documents (e.g. special resolutions) are filed with Companies House. Non-compliance can lead to fines, making legal guidance essential for corporate governance.

Question 17

What are the annual accounting and reporting obligations for companies, and what criteria define a “small company” or “micro-entity” under CA 2006?

Answer 17

Directors must keep accurate records and prepare annual accounts (ss.386 & 394 CA 2006). A small company has a balance sheet under £5.1M, turnover below £10.2M, and under 50 employees (s.382), while a micro-entity meets lower thresholds: under £316K balance sheet, £632K turnover, and fewer than 10 employees (s.384A). These classifications affect filing and reporting exemptions.

Question 18

What are the requirements for filing information with Companies House after a shareholder or board decision, and what forms are involved?

Answer 18

Following certain decisions, companies must file specific forms with Companies House to update the Registrar of Companies. For example, forms AP03 and AP04 are used to register human and corporate secretaries, respectively. If these roles change, form TM02 is used for secretary resignations, and changes to their details require forms CH03 or CH04, depending on the type of secretary.

Question 19

What is a Single Alternative Inspection Location (SAIL), and how does it relate to a company’s statutory books?

Answer 19

A SAIL is an alternative address where a company may choose to keep its statutory books, such as the register of members and directors. Companies notify Companies House of the SAIL address using form AD02, and any movement of records from or to this address must be reported using forms AD03 and AD04. This flexibility allows easier access for inspection purposes.

Question 20

What are the consequences of failing to keep accurate statutory books, and where must these be stored?

Answer 20

Failing to keep accurate and complete statutory books, including the register of members and minutes of meetings, is a criminal offense under CA 2006. Companies must store these records at their registered office or SAIL and maintain them for at least ten years. Non-compliance can result in fines for the company and its officers.

Question 21

What filing requirements must companies meet regarding board minutes and resolutions, and what is the significance of the ten-year retention period?

Answer 21

Companies must keep minutes of every board and general meeting, as well as records of any written resolutions, for at least ten years (s 248 and s 355 CA 2006). This long-term retention supports accountability and allows for historical reference in legal, financial, or administrative matters.

Question 22

What is a shareholders’ agreement, and how does it differ from the articles of association in terms of binding effect and privacy?

Answer 22

A shareholders’ agreement is a private contract binding only those shareholders who sign it, as opposed to the articles, which bind all current and future shareholders. This agreement can provide minority protections and include clauses not visible to the public, unlike the articles, which are filed with Companies House.

Question 23

What types of provisions are typically included in a shareholders’ agreement, and why might shareholders choose this route?

Answer 23

Common provisions in shareholders’ agreements include share transfer restrictions, non-compete clauses, and Bushell v Faith clauses (weighted voting rights). These agreements allow for privacy, protect minority shareholders, and help ensure certain terms are only changed with unanimous consent among signing parties.

Question 24

What are the voting rights of shareholders at general meetings, and what additional rights do they have in terms of participation and requisitions?

Answer 24

Shareholders can vote by show of hands (one vote per shareholder) and send a proxy to vote on their behalf. They have the right to requisition a general meeting, request a poll vote, receive notice of meetings, and apply to the court to call a meeting if necessary (s 306 CA 2006). Shareholders holding 5% or more of voting rights can also circulate written statements or resolutions.

Question 25

What rights do shareholders have regarding dividends and applying for company winding up, and under what conditions can these rights be exercised?

Answer 25

Shareholders have the right to receive dividends if there are available profits and the board recommends them (s 830 CA 2006). They can also apply for a court order to wind up the company if it is “just and equitable” to do so, such as in cases of management deadlock (s 122(g) Insolvency Act 1986).

Question 26

What are shareholders’ inspection rights concerning company records, and which specific documents are included?

Answer 26

Shareholders can inspect, free of charge, the minutes of general meetings, all shareholder resolutions, the statutory registers, directors’ service contracts, directors’ indemnities, and contracts related to the company’s share purchases. These rights ensure transparency and accountability within the company.

Question 27

What is the purpose of the PSC (Persons with Significant Control) register, and who must be included on it?

Answer 27

The PSC register lists individuals or entities with significant control (usually over 25% of shares or voting rights) to increase transparency. This allows third parties to see who holds influential control within the company, and it must be kept updated and available for inspection.

Question 28

How does the CA 2006 define corporate shareholders, and what rights do they have in terms of representation at meetings?

Answer 28

Corporate shareholders are companies that own shares in another company and can authorize a representative to act on their behalf at meetings, as allowed under s 323 CA 2006. This representative has the authority to vote and participate in company meetings, reflecting the interests of the corporate shareholder.

Question 29

Under CA 2006, what defines a “subsidiary” and a “wholly-owned subsidiary” in relation to a holding company?

Answer 29

A company is a subsidiary if another company holds a majority of its voting rights, appoints or removes a majority of its board, or has a controlling interest through agreements. It’s “wholly-owned” if the holding company is its sole member, directly or through other subsidiaries (s 1159 CA 2006).

Question 30

What are the specific legal requirements for single-member companies regarding the register of members, and what constitutes a breach of these requirements?

Answer 30

Single-member companies must clearly indicate this status on the register of members (s 123 CA 2006). If additional shareholders join, a note must be added stating the date the company ceased to be single-member. Failure to comply is a criminal offense.

Question 31

What are ordinary shares, and what specific rights and obligations do ordinary shareholders typically have?

Answer 31

Ordinary shares are the most common type of share, granting shareholders rights to attend and vote at general meetings, with each share typically entitling the holder to one vote. Ordinary shareholders may receive dividends if profits allow and if the board recommends it. Dividends vary based on company profits, and these shareholders are often last in line to receive assets if the company is liquidated.

Question 32

Explain the concept of “classes” of ordinary shares, such as ordinary A and B shares, and the purpose behind creating these classes.

Answer 32

Companies can create different classes of ordinary shares (e.g., ordinary A and B) to vary rights among shareholders, particularly for dividend distributions. For example, one class may receive dividends, while another does not. This classification, governed by the articles of association, allows the company flexibility in shareholder treatment based on investment or role, while ensuring that each class of shares is still considered “ordinary.”

Question 33

What are preference shares, and how do they prioritize dividends compared to ordinary shares?

Answer 33

Preference shares provide shareholders a priority claim to dividends, which are often fixed and paid out before any dividends to ordinary shareholders. The dividend rate is typically a percentage of the nominal value (e.g., 5% on £1 shares equals a 5p dividend per share). While preference shareholders generally lack voting rights, their dividend priority makes these shares appealing to investors focused on income stability over control.

Question 34

What is the difference between cumulative and non-cumulative preference shares, and why is this distinction important?

Answer 34

Cumulative preference shares entitle shareholders to unpaid dividends from previous years if future profits are sufficient, prioritizing these “back dividends” over current dividends for ordinary shareholders. Non-cumulative preference shares, however, forfeit unpaid dividends if they are not issued in a given year. This feature influences investor decisions based on risk tolerance for stable returns.

Question 35

Describe the additional rights participating preference shares may offer and the circumstances under which they apply.

Answer 35

Participating preference shares grant shareholders extra dividends or asset shares if the company achieves high profits. For example, participating shareholders may receive a bonus dividend if ordinary shareholders get more than a specified dividend amount. This added right allows preference shareholders to benefit further when the company is highly profitable, making these shares appealing for investors seeking both stability and potential growth.

Question 36

Why are protections for minority shareholders necessary, and what mechanisms are available to address their concerns?

Answer 36

Minority shareholders lack sufficient voting power to influence decisions directly, which can leave them vulnerable to actions by majority shareholders or directors that may harm their interests. Legal mechanisms like unfair prejudice petitions (s 994 CA 2006) and derivative claims offer avenues for redress if they face unjust treatment or feel the company’s affairs are managed in a way that unfairly disregards their rights.

Question 37

What constitutes an unfair prejudice petition, and what types of actions might lead a shareholder to file one under s 994 CA 2006?

Answer 37

An unfair prejudice petition allows shareholders to seek court remedies if they believe the company’s actions are detrimental to their interests. Common grounds include diverting business opportunities to competing ventures, awarding excessive director pay, or excluding a shareholder from management when involvement was initially promised. These actions harm shareholder interests and can be seen as breaches of fair conduct.

Question 38

What remedies can a court provide in an unfair prejudice action, and what is the most common outcome?

Answer 38

The court can order other shareholders to purchase the shares of the prejudiced shareholder or require the company to buy them back. This remedy effectively allows the aggrieved shareholder to exit the company, resolving conflicts and allowing them to recoup their investment. Other potential remedies include restricting changes to the articles or allowing a derivative claim if the issue relates to director misconduct.

Question 39

What is the purpose of a derivative claim, and under what conditions may a shareholder bring one?

Answer 39

A derivative claim allows shareholders to pursue legal action on behalf of the company if directors fail to address wrongdoing. It applies to cases of director negligence, breach of duty, or breach of trust. The claim enables shareholders to seek justice for the company when the board’s inaction would otherwise leave misconduct unaddressed, though the claim is filed in the company’s name, not the individual’s.

Question 40

What initial procedural step must shareholders complete to pursue a derivative claim, and how does the court screen these applications?

Answer 40

Shareholders must first apply to the court for permission to proceed with a derivative claim. The court reviews the application to ensure there is a prima facie case, filtering out weak or spurious claims. This initial step is crucial, as it protects the company from potential abuse of the legal system by disgruntled shareholders who might misuse the claim process for personal grievances.

Question 41

Under s 263(2) CA 2006, when must the court refuse permission for a derivative claim, and what considerations influence this decision?

Answer 41

The court must refuse permission if: (1) a reasonable director would not pursue the claim, (2) the alleged misconduct was authorized or subsequently ratified, or (3) continuing the claim does not promote the company’s success. These factors ensure claims align with the company’s interests, discouraging claims primarily driven by personal motives rather than corporate welfare.

Question 42

How can a public company exclude shareholders’ pre-emption rights when allotting shares to both existing shareholders and the public?

Answer 42

Under ss.570 and 571 CA 2006, a public company cannot generally exclude statutory pre-emption rights. However, it can exclude them for specific allotments either by: * Passing a special resolution, or * Including a provision in the company’s articles. It is incorrect to say exclusion can be done only by special resolution.

Question 43

What must be paid by a shareholder on the allotment of shares in a public company?

Answer 43

On allotment, a shareholder must pay at least 25% of the nominal value and the full amount of any share premium.

Question 44

How can a private company validly remove a director under the Companies Act 2006?

Answer 44

a director may be removed by an ordinary resolution at a general meeting of members. The written resolution procedure cannot be used for director removal.

Question 45

Can directors of a private company with two share classes issue new shares without shareholder approval under the Companies Act 2006 and Model Articles?

Answer 45

No. Although directors generally have delegated powers, they need authority from shareholders—either in the articles or by ordinary resolution—to issue new shares. Since the company has two classes of shares and the Model Articles do not provide automatic authority, the directors must obtain shareholder approval by ordinary resolution

Question 46

What is the effect of s.39 CA 2006 on acts done outside a company’s objects, and what are the potential consequences for directors?

Answer 46

Under s.39 CA 2006, a company’s actions cannot be challenged as invalid solely because they are outside its objects (i.e. not ultra vires). However, directors who permit such actions may face civil consequences under s.40 (regarding authority) and/or s.171 (duty to act within powers) of the Companies Act 2006.

Question 47

Under the Model Articles, what is the requirement for payment when a private company allots shares?

Answer 47

All shares must be fully paid-up on issue. The Model Articles specifically require this, meaning shareholders must pay the full nominal value and any premium at the time of allotment.

Question 48

In a private company with Model Articles and one class of shares, how can pre-emption rights be disapplied to allot shares to a new shareholder?

Answer 48

existing shareholders have pre-emption rights on new allotments. Since the Model Articles do not override this, the company must disapply pre-emption rights by passing a special resolution. This allows the shares to be allotted to the son.

Question 49

Under the Model Articles (with the chair’s casting vote removed), can the board of a private company refuse to register a proposed share transfer?

Answer 49

Yes. The board has absolute discretion under the Model Articles to refuse registration of a share transfer. Since decisions require a majority vote, both directors must agree to refuse. If they are split, the transfer will be registered. The board may also refuse the transfer unless the sister first offers the shares pro rata to the existing shareholders (the brothers).

Question 50

How can a new director be appointed in a private company that has adopted the Model Articles?

Answer 50

Under the Model Articles, a new director can be appointed either by: * A majority decision of the board, or * An ordinary resolution of the shareholders. Both methods are valid and may be used.