P1 - 4. The Members

Question 1

How is member defined in the Companies Act?

Answer 1

• The subscribers of the company’s memorandum of association are deemed to have agreed to become members of it and on registration of the company become members and must be entered as such in its register of members.
• Every other person who agrees to become a member of the company and whose name is entered in its register of members, is a member of the company (CA2006 s. 112).

Question 2

What are the two types of member?

Answer 2

Shareholder

Guarantor

Question 3

Who owns and controls companies and what are their rights?

Answer 3

Owned by members who have the right to appoint and remove directors and make changes to the company’s constitution (Articles).

Question 4

Who manages the company on a day-to-day basis?

Answer 4

The directors

Question 5

What are the requirements of becoming a member?

Answer 5

• The person must agree to become a member (consent).
• Their details must be entered in the company’s register of members (CA2006 s. 112).

Question 6

Who are the subscribers to the memorandum?

Answer 6

First members immediately on the registration of the company and their details must be entered in the register of members as such (CA2006 s. 112(1)).

Question 7

What is the process for a person applying for new shares?

Answer 7

The person will have those shares allotted to them by the directors

Once their details have been entered in the register of members, they become members and the shares become issued.

Question 8

When must the company enter the details of the share allotment onto the register?

Answer 8

As soon as practical and in any event within two months of the date of allotment (CA2006 s. 554(1)).

Question 9

What is the allotment date?

Answer 9

When the person acquires an unconditional right to be entered in the register of members.
(usually taken to be the date of the directors’ meeting to approve the share allotment.)

Question 10

What is the date of issue?

Answer 10

Date when the person (the allottee) acquires legal title to the shares when their details are entered in the register of members.

(While this can be the same date as the date of allotment it can be sometime later.)

Question 11

What happens when a person has acquired the shares by way of share transfer?

Answer 11

The company must either register the transfer by entering the details in its register of members or refuse to do so within two months of the date of receipt of a duly completed stock transfer form (CA2006 s. 771(1)).

Question 12

Subject to a companies Articles, how many members are companies required to have?

Answer 12

A minimum of one member (CA2006 s. 7(1)).

Question 13

How many shares must a private company limited by shares issue and is there a minimum nominal or paid up capital requirement?

Answer 13

One share – no minimum nominal or paid up capital requirement

Question 14

How many shares must a public company limited by shares issue and is there a minimum nominal or paid up capital requirement?

Answer 14

Must issue at least £50,000 in nominal value of shares, with each share at least 25% paid up as to its nominal value and 100% of any premium (CA2006 ss. 761 and 763) before commencing to trade

And to maintain this minimum capital at all times.

(This 50k could be issued in the form of 1 share as long as it meets the minimum capital requirement having a nominal value of not less than £50,000.)

Question 15

What are the restrictions on becoming a member?

Answer 15

Provisions in the Articles
Trusts
A subsidiary company

Question 16

What is a legal person?

Answer 16

Any natural person or an incorporated entity with legal capacity. Only legal persons may become a member of a company.

Question 17

In terms of minors – what is not considered good practice?

Answer 17

Not considered good practice to accept minors as members of a company in their own name, as their responsibilities would be voidable during their minority.

Question 18

Who are guarantors?

Answer 18

Members who guarantee the company’s debts, usually limited to a nominal value

Not true owners of the business, but should be viewed as trustees holding ownership temporarily

Question 18

Who is liable for future calls on share if they are transferred to a minor?

Answer 18

The member transferring the shares

Liable to indemnity

Question 18

If a small group or club wishes to purchase shares in a quoted company what must they do?

Answer 18

Clubs are not permitted to purchase shares in the name of the club - the shares should be registered in the name of one or more of the members or a corporate nominee used.

Question 19

How do guarantors transfer their membership?

Answer 19

Not possible for a person to transfer their guarantee to another person

Must resign as guarantor and a replacement must apply in their place.

Question 19

What is member activism?

Answer 19

Often referred to as shareholder activism covers a number of differing methods employed by members to achieve hugely varying aims.

Question 20

Where do shareholder activists usually invest?

Answer 20

In companies where they think change is needed to realise shareholder value (voting directors off boards, putting forward contrary resolutions at AGM’s).

Question 21

What are the broad areas of potential interest for activist investors?

Answer 21

Corporate governance (Board changes, directors remuneration)

Balance sheet (Dividends)

Strategic transactions (M&A’s)

Question 22

What is pressure group activism?

Answer 22

Rare issue for private companies.

Pressure groups who often purchase only nominal numbers of shares to attend and disrupt shareholder meetings with the intention of gaining publicity (climate change, animal welfare).

Question 23

Model article sections in terms of rights relating to shares

Answer 23

Members rights
Classes of shares
Right attaching to a class of shares
Variation of rights
Amending or replacing Articles
Entrenchment of articles

Question 24

Relevant section of unfair prejudice?

Answer 24

s.994

Question 25

In order to bring a successful claim for unfair prejudice, the aggrieved member must be able to demonstrate that the conduct complained of meets what two tests:

Answer 25

• the conduct must be unfair; and
• the conduct must have caused or is causing prejudice or harm to the interest or rights of the members or some part of the members of the company.

Question 26

Other than as a shareholder, what other forms can company membership take?

Answer 26

Guarantor or, for an unlimited company without a share capital, some other method of dividing ownership

Question 27

Is there a minimum or maximum number of members that a company must have?

Answer 27

Minimum of 1, no maximum

Question 28

What are the main disadvantages of registering shares for a long-term investment in children’s names?

Answer 28

As minors, children can void any obligation to pay funds to the company.

A minor cannot deal with any transaction themselves which would require a court order to ensure it was in their interests

Question 29

Can anyone become a member of a company?

Answer 29

Subject to the Articles, any natural person or entity with legal capacity may be a member.

However, subsidiaries are generally prohibited from owning shares in the parent entities.

Question 30

A professional partnership wishes to acquire some shares. How should they be registered?

Answer 30

In the name of one or more partners, unless it is a Scottish partnership which can register the shares in the partnership name.

Question 31

In order to establish the rights of a shareholder, which documents should be referred to?

Answer 31

The Articles or any separate terms stipulated at the time of the issue of the shares

Question 32

Are members always shareholders?

Answer 32

No – some members are guarantors

Question 33

How can a guarantor transfer their membership to someone else?

Answer 33

They can’t

Question 34

Does the guarantee cease immediately on the guarantor resigning?

Answer 34

No it remains for one year

Question 35

Which type of organisation is best suited to use a guarantee company structure?

Answer 35

Not for profit

Question 36

Why is aligning the interests of directors and shareholders difficult to achieve in practice?

Answer 36

Shareholders have many different reasons for becoming and remaining as shareholders so their interests are not aligned with each other

Question 37

What are the main differences between activist and pressure group shareholders?

Answer 37

Activist shareholders = use their holding and influence to bring about change.

Pressure group shareholders = try to bring about change through publicity achieved through campaigns and meeting disruption

Question 38

Rights attaching to shares can be divided into three broad categories, what are they?

Answer 38

Rights to vote, rights to distribution of profits and rights to capital

Question 39

What protection is given to members holding non-voting class shares if the members holding voting shares
resolve to amend the Articles in general meeting to increase their dividend rights?

Answer 39

Rights attaching to shares of a class cannot be amended without their consent, even if they are non-voting shares.

Question 40

Can a company with two classes of shares, ordinary shares and redeemable shares, purchase back all of the
ordinary shares?

Answer 40

No – this is because a company cannot have only redeemable shares

Question 41

What two tests must be satisfied in order to bring a claim for unfair prejudice?

Answer 41

The conduct complained of must be unfair and the conduct must have caused or is causing prejudice or harm to the interests of the members or a group of members

Question 42

Can anyone bring a derivative action claim against a company?

Answer 42

Must be brought by a member

Question 43

What is the difference between beneficial and legal ownership of shares?

Answer 43

Legal ownership is where the person is the registered member, the beneficial owner retains the economic benefit of ownership but is not the legal owner as the shares are registered in a nominee name