P4. Members Flashcards
How does the Act define members (2)
The subscribers of a company’s memorandum, who have agreed to become members upon the company’s registration
Every other person who agrees to become a member of the company and whose name is entered in its register of members
2 restrictions on membership of a company from the Act
Trusts are prohibited from becoming members, whether express, constructive or implied. Exception to this is companies whose name includes trust, trustee, nominee, etc. (these companies are then the legal owners and the underlying ownership is irrelevant)
Subsidiary company cannot be a member of its holding company.
Potential further restrictions on members from Articles (2)
Certain categories of person may be excluded - those unable to give declaration of British or EU nationality of firms requiring a certain level of membership from that nationality
May be a requirement for minimum percentage of members to hold a professional qualification
Why is it not considered good practice to accept minors as members?
Because it may involve the assumption of liabilities in respect of the shares held, these responsibilities being voidable during their minority
In the case of which type of share is the acceptance of a minor as a a member even worse practice? Why?
When the shares are partly paid, as this imposes an obligation to pay any calls
Can minors only be rejected on allotment or transfer if the Articles give power to do so?
No, it is a right conferred by general law
If a minor is a member, who is liable for calls on their shares?
The transferor (if acquired by transfer)
Are guarantors true owners’ of businesses
No, they should be viewed as trustees holding ownership until this is passed on to the next trustee
Are guarantors usually entitled to participate in profits or distribution of surplus assets
No, unless stipulated by the articles
How is a guarantee effectively transferred
By a guarantor resigning and a replacement applying in their place
Does personal guarantee cease immediately?
No, a year after resigning as a member
Two broad types of member activism
Investor activism
Pressure group activism
What is investor activism
Member activists are typically investment funds with a significant investment in the target company. They active seek to disrupt the status quo and current corporate strategy by engaging publicly and privately with the management to promote their agenda for change
Three broad areas of potential interests for activist investors
Corporate governance (corp gov changes, board changes directors’ remuneration)
Balance sheet (share buyback/dividends, divestment of non-core assets, adding value to underperforming assets)
Strategic transactions (M&A (promote or frustrate), strategic direction)
Which type of company is most likely to suffer from pressure group activism
Public companies
What is pressure group activism
Where pressure groups purchase a nominal number of shares in order to attend and disrupt shareholder meetings, in order to force a change in behaviour or strategy and to draw attention to their campaign
6 main types of shares
Ordinary
Non-voting
Preference
Deferred
Cumulative preference
Redeemable
Difference between preference share and cumulative preference
If not enough profit to pay preference cumulative preference dividend in full, it gets carried over to the next year
7 most common rights attached to shares
Voting
Receive dividend
Capital
Pre-emption on transfer
Pre-emption on allotment
Redemption
Conversion
What does right to redemption mean
After a pre-determined event, investor can demand that company buys shares back from them
What is threshold for variation of class rights according to Act
75% of nominal value of issued shares of relevant class (special resolution)
What percentage of a class can object to the court of a variation in class rights, and when will court intervene?
15% - court will disallow if it is satisfied that variation will unfairly prejudice the holders concerned
What is typically also required for variation of share rights (as well as that class agreeing)
Amendment to articles, and accordingly a special resolution of all voting members
Process of adopting new articles
Directors resolve to circulate written resolution listing amendments and explaining reasons
If approved (75%), copy of resolution and new articles sent to registrar within 15 days
What is the concept of entrenchment?
Provisions found previously in the memorandum are now incorporated in the Articles, allowing for them to be altered by special resolution
Why was entrenchment introduced?
To allow for provisions found in memorandum to be altered
What must be sent to CH when an entrenched provision is amended?
The resolution or court order making or evidencing the entrenchment
‘Statement of compliance’ on form CC01 or CC02, depending on whether amendment is to include or exclude entrenchment provisions
What is the fiduciary duty of directors?
The duty to (under common law and Act) to act in the interests of the members as a whole
Significance of fiduciary duty
Directors can be held liable if they act for the benefit of themselves or a subgroup of members
What must be demonstrated for a successful claim of unfair prejudice?
The conduct of the company was unfair, and the conduct caused or is causing prejudice or harm to the interest or rights of some or all members
When is conduct considered unfair?
There need not be any bad faith or intention. courts consider unfair if hypothetical reasonable bystander would consider it so
When are members rights considered prejudiced?
Court takes a broad view of what constitutes members’ rights, considering wider considerations not necessarily included in the articles or strictly legal rights of members (such as agreements in how the company would be managed)
Remedies available of successful claims of unfair prejudice (5)
Regulate future conduct of company’s affairs
Require company to refrain from continuing with act complained of
Authorise civil proceedings
Require company not to make alterations to articles without court approval
Provide for the purchase of shares by other members or the company itself (& if necessary, the reduction of capital accordingly)
What is a derivative action claim?
An action made by a member on behalf of, or in name of company, against a director or third party
Grounds for derivative action claim
An actual or proposed act of omission involving negligence, breach of duty or breach of trust
What must a claimant member do before derivative action claim can continue?
Apply to court for permission
What is the point in making a member apply for permission to bring a derivative action claim?
To filter out frivolous and vexatious claims
Would a court allow a claim to continue if it is against an action authorised or ratified by the members?
No
What do courts consider in allowing a derivative action to be continued? (6)
The views of other ‘independent’ shareholders
Whether the member is acting in good faith
The importance a director promoting company success would attach to the claim
Whether the conduct would likely be authorised/ratified
Whether the company has decided not to pursue the claim
Whether the applicant should pursue a remedy in their own right rather than on behalf of the company
