Managing companies: shares and shareholders

Question 1

What MA for shareholders reserve power?

Answer 1

MA 4

Question 2

What resolution for reserve power?

Answer 2

Special resolution

Question 3

Case for the shareholders may act where the board is unable to do so?

Answer 3

Barron v Potter

Question 4

Two ways for shareholders to pass resolution?

Answer 4

Vote at GM or written resolution (only available for private companies and not to remove directors/auditors)

Question 5

How can directors call GMs (with shareholders)

Answer 5

1. s302: pass board resolution at board meeting - simple majority
2. Board needs to give 14 clear days’ notice of GM (s307(1) & s360).
   - Unless short procedure is used (s307(4)-(6)) - if 90% shareholders agree; GM can occur straight after board meeting

Question 6

Can shareholders also call GM?

Answer 6

Yes - s303- 305
Usually when Directors refuse to call the meeting themselves: shareholders have reserve power to call one:
- s 303(1): shareholders holding not less than 5% of paid-up voting share capital of the company - 303 request

Question 7

Directors’ obligations on receipt of s303 request?

Answer 7

s304(1) = must call GM within 21 days from date which they received request - to be held on a date not more than 28 days after notice date

If directors fail, shareholders can call GM to be held within 3 months of date from initial s303 request - under s305 - can recover expenses (6)

Question 8

Do both private and public companies need AGMs?

Answer 8

No - only public.
called by directors (s 302) on 21 clear days’ notice (s 307(2), s 360(2)) within six months’ of the financial year end. Section 360 provides that the days must be “clear” days.
Directors show report - shareholders with voting rights vote

Question 9

At a GM, is the vote by a show of hands or poll?

Answer 9

MA 42 - show of hands unless a poll is duly demanded in accordance with the articles.
MA 44 - right to demand a poll vote - s321 CA - this cannot be excluded from articles

Question 10

Notice, Quorum and Proxies at GMs?

Answer 10

Notice: strict rules on giving timely (s 307) and appropriate (s 311) notice to all shareholders entitled to attend a General Meeting. The general notice is 14 clear days (s 307(1), s 360) although there is a procedure by which short notice can be used if sufficient members are in agreement to this (s 307(4) - (6)). The validity of resolutions passed at a general meeting depends on proper notice

Quorum: two shareholders under s 318(2) (other than for single member companies, for which the quorum is one (s 318(1)).

Proxies: s 324, shareholders may appoint a proxy to exercise any or all of their rights to attend and speak and vote at a General Meeting

Question 11

What’s the case concerning a clause for enhanced voting rights?

Answer 11

Bushell v Faith (clause): directors who are also shareholders can seek to prevent themselves from being removed from office. The clause is inserted into the articles of the company and provides that, when voting on a resolution for the removal of a director in a general meeting, the director/shareholder in question will have their votes weighted by a factor of great enough magnitude that the other shareholders cannot get the requisite majority in the meeting to pass this motion.

Question 12

What section for written resolutions? Procedure?

Answer 12

s 288
Both ordinary and special.
Written must be sent to all eligible members - time limit of 28 days o respond - then deemed as passed if correct number of people have agreed (over 50% for ordinary not less 75% special)

Question 13

What two resolutions cannot be passed by written resolution? Sections?

Answer 13

s168 - removing director

s510 - removing auditor

Question 14

What’s the Duomatic principle and what case does it come from?

Answer 14

Re Duomatic Ltd:
- Informal resolutions agreed by all shareholders outside of a formal meeting will be valid and binding.
- in order to apply there must be unqualified agreement of all shareholders - whether express or implied, verbal or by conduct.
Schofield v Schofield

Question 15

Can shareholders vote as they wish?

Answer 15

General principle: yes.
Under no fiduciary duty to the company.
However: shareholders must act bona fides - Clemens v Clemens Bros; could not vote to dilute power of minority shareholder.
Exceptional circumstances: courts have intervened from shareholders voting irrationally: Standard Chartered Bank Ltd v Walker - minority shareholder ordered not to vote against restructuring agreement where consequence would be to collapse company.

Question 16

What’s the situation with shareholders voting to amend the articles?

Answer 16

Must vote to amend articles in good faith and will look at whether reasonable shareholders would have considered amendment benefit to company.
Key case: Sidebottom v Kershaw, Leese & Co.
Citco Banking Corpn NV v Pusser’s Ltd - privy council, hong kong company. Privy council dismissed claim that amendments were invalid (that gave chairman control)

Question 17

Four ways company can raise funds?

Answer 17

• issuing shares (equity finance)
• borrowing (debt finance)
• issuing ‘hybrid’ investment - both debt and equity - i.e. convertible bond or preference share
• retaining its profits for use in the business (rather than paying dividends

Question 18

What’s the ISC?

Answer 18

Issued share capital - amount of shares in issue at any time - made up of:

1. shares purchased by first members of the company
2. further shares issued after the company has been incorporated - to new or existing shareholders

Question 19

What does s112 state?

Answer 19

• In order to become a member of a company, must be entered in the company’s register
  Glencoe Developments Ltd v Sneddon

Question 20

How do you become a shareholder? (4)

Answer 20

• Initial subscriber: person subscribes for the first shares issued when the company is incorporated
• Share issue: person acquires further shares issued by the company after incorporation
• Share transfer: person acquires shares by way of a transfer from an existing shareholder
• Transmission: title to shares is devolved other than by transfer. It typically applies to devolution by death (succession/inheritance), bankruptcy or marriage.

Question 21

What is the allotment, issue and transfer of shares?

Answer 21

Allotment: contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for price
s 549-551 CA 2006
Issue: no statutory def of ‘issue’ but has been held that shares only issued once shareholder registered - s112(2)
Transfer: contract to sell existing shares - company not party to contract - although s544, shares freely transferable, articles of most private company restrict this

Question 22

What is a share?

Answer 22

• fraction of capital of company - sets our shareholder’s financial stake
• measure of shareholder’s interest
• property right
  s 541: ‘personal property’

Question 23

Different classes of shares? (8)

Answer 23

1. **ORDINARY shares
2. Employees’ shares
3. Redeemable shares
4. Cumulative shares
5. **PREFERENCE shares
6. Convertible shares
7. Non-voting shares
8. Deferred shares

Question 24

Do companies have the power to issue different classes of shares?

Answer 24

Yes in MA 22 - but check articles to see if this is restricted

Question 25

1. Ordinary shares?

Answer 25

s 560: DEFAUT POSITION: Most common type of shares - if company’s shares issued without differentiation, they will be ordinary shares
- right to vote, to dividend and to receive share capital

Although ordinary shareholders receive dividends after preference shareholders, one advantage of ordinary shares is that the entitlement of ordinary shareholders to a dividend is unrestricted.

Question 26

5. Preference shares?

Answer 26

Usually entitled to have dividends paid at
a predetermined rate (e.g. 5% of their nominal value) in priority to any dividend paid on the ordinary shares.

Right to dividend may be cumulative or non-cumulative (where arrears of preference dividends not declared in earlier years must be paid as well as that for the current year, before any dividend is paid to the ordinary shareholders, or when only the current year’s right to a dividend is payable).

May also be participating or non-participating
- Either participate in dividend/capital on winding up alongside ordinary shareholders (receive both fixed preferential dividend plus fraction of general dividend) or receive only fixed preferential rights

Question 27

The other classes: deferred, redeemable, non-voting, convertible and employees’? What are they

Answer 27

Deferred: not common - only have right to dividend/return of capital after claims of pref and ord.
Redeemable: temporary shares that can be bought back - s 684-689 CA 2006
Non-voting: when company wishes to restrict control
Convertible: converted to different types of shares
Employees’: to employees

Question 28

What’s the presumption for class rights?

Answer 28

There is a presumption that all shares have equal rights unless there is an express provision in the articles to the contrary.
See Birch v Cropper: no express provision dealing with the distribution of assets on a winding up. The House of Lords held that the preference shareholders should therefore participate in the same way as the ordinary shareholders in the distribution of assets on the winding up

Question 29

What CA 2006 article says class rights can be varied? When? (2,2)

Answer 29

s 630:

1. In accordance with the relevant provisions in the company’s articles (which may specify more or less onerous provisions), or
2. If there is no provision in the articles, where:
   a. 75% in value of the shares of the affected class consent in writing, or
   b. A special resolution is passed at a separate meeting of the holders of the affected class of shares.

Voting to vary class rights must be within benefitting class as a whole British America Nickel Corpn Ltd

Question 30

When is a class right ‘varied’?

Answer 30

Not simply if company issues more shares - they are when rights are varied themselves.
White v Bristol Aeroplane Co
House of Fraser plc v ACGE Investments Ltd
Greenhalgh v Arderne Cinemas Ltd

Question 31

Is there a right to object to a variation of class rights?

Answer 31

Yes - s633; conditions are:

1. Only shareholders holding at least 15% of the issued shares of that class may challenge a variation, and
2. The variation must be challenged in court within 21 days of the date on which consent was given or the resolution was passed to vary the class rights.

Question 32

Do articles have legal affect?

Answer 32

Yes - s33 CA 2006 - articles constitute a contract which is binding.
Usual rule of contractual interpretation applies.
However; subject to differences -
1. articles cannot be supplemented by additional terms implied from extrinsic circumstances - Bratton Seymour Service Co Ltd v Oxborough)
2. court has no jurisdiction to rectify the articles - Scott v Frank F Scott (London) Ltd
3. literal interpretation of an article which gave each member of a housing management company one vote regardless of the number of shares held Sugarman v CJS Investments LLP
4. however terms can be ‘implied’ where necessary for the proper construction of the articles - In Equitable Life Assurance Society v Hyman [2002] 1 AC 408 (House of Lords)

Question 33

Can the members sue the company / be sued by the company?

Answer 33

General principle is that any member has the right to enforce the terms of the articles against the company under s 33, and the company is also under s 33 entitled to enforce and restrain breaches of the articles against its members:
Wood v Odessa Waterworks Co
Pender v Lushington

Articles only create a contract between the company and the members in their capacity as members, and not in any special or personal capacity

Question 34

Can the members sue each other / be sued by each other?

Answer 34

A member may sue another on the contract created by the articles without joining the company as a party.
Rayfield v Hands

Question 35

What’s a shareholder agreement?

Answer 35

Contract entered into between the shareholders.

• company may also be a party but not to any provisions in the agreement which would have the effect of fettering the statutory powers of the company.

Question 36

What advantages of a shareholder agreement? (3)

Answer 36

1. Normal contractual rules apply, so unlike the articles (which can be altered by special resolution – s 21 CA 2006), a shareholders’ agreement can only be altered if all shareholders agree.
2. The provisions of a shareholders’ agreement may also be enforceable by injunction.
3. It is a private agreement – contrast the articles which are a public document, registered at Companies House.

Note that a shareholders’ agreement only binds those shareholders who are parties to it. This can be differentiated from the provisions of the articles, which are binding on all shareholders.

Question 37

Effect of shareholders’ agreement?

Answer 37

Can be an effective way of shareholders limiting the possibility of major changes in the company
Russell v Northern Bank etc.

Question 38

Typical terms of shareholders’ agreement?

Answer 38

1. Each of the shareholders is entitled to appoint a director;
2. No shareholder will vote in support of an alteration in the company’s articles unless all agree;
3. No shareholder will vote to remove a director unless all agree;
4. Except in specified circumstances, no shareholder will require the repayment of money they had lent to the company.

Main disadvantage - binding only on those who signed up to it.