P4. Members

Question 1

How does the Act define members (2)

Answer 1

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

Question 2

2 restrictions on membership of a company from the Act

Answer 2

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.

Question 3

Potential further restrictions on members from Articles (2)

Answer 3

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

Question 4

Why is it not considered good practice to accept minors as members?

Answer 4

Because it may involve the assumption of liabilities in respect of the shares held, these responsibilities being voidable during their minority

Question 5

In the case of which type of share is the acceptance of a minor as a a member even worse practice? Why?

Answer 5

When the shares are partly paid, as this imposes an obligation to pay any calls

Question 6

Can minors only be rejected on allotment or transfer if the Articles give power to do so?

Answer 6

No, it is a right conferred by general law

Question 7

If a minor is a member, who is liable for calls on their shares?

Answer 7

The transferor (if acquired by transfer)

Question 8

Are guarantors true owners’ of businesses

Answer 8

No, they should be viewed as trustees holding ownership until this is passed on to the next trustee

Question 9

Are guarantors usually entitled to participate in profits or distribution of surplus assets

Answer 9

No, unless stipulated by the articles

Question 10

How is a guarantee effectively transferred

Answer 10

By a guarantor resigning and a replacement applying in their place

Question 11

Does personal guarantee cease immediately?

Answer 11

No, a year after resigning as a member

Question 12

Two broad types of member activism

Answer 12

Investor activism
Pressure group activism

Question 13

What is investor activism

Answer 13

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

Question 14

Three broad areas of potential interests for activist investors

Answer 14

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)

Question 15

Which type of company is most likely to suffer from pressure group activism

Answer 15

Public companies

Question 16

What is pressure group activism

Answer 16

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

Question 17

6 main types of shares

Answer 17

Ordinary
Non-voting
Preference
Deferred
Cumulative preference
Redeemable

Question 18

Difference between preference share and cumulative preference

Answer 18

If not enough profit to pay preference cumulative preference dividend in full, it gets carried over to the next year

Question 19

7 most common rights attached to shares

Answer 19

Voting
Receive dividend
Capital
Pre-emption on transfer
Pre-emption on allotment
Redemption
Conversion

Question 20

What does right to redemption mean

Answer 20

After a pre-determined event, investor can demand that company buys shares back from them

Question 21

What is threshold for variation of class rights according to Act

Answer 21

75% of nominal value of issued shares of relevant class (special resolution)

Question 22

What percentage of a class can object to the court of a variation in class rights, and when will court intervene?

Answer 22

15% - court will disallow if it is satisfied that variation will unfairly prejudice the holders concerned

Question 23

What is typically also required for variation of share rights (as well as that class agreeing)

Answer 23

Amendment to articles, and accordingly a special resolution of all voting members

Question 24

Process of adopting new articles

Answer 24

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

Question 25

What is the concept of entrenchment?

Answer 25

Provisions found previously in the memorandum are now incorporated in the Articles, allowing for them to be altered by special resolution

Question 26

Why was entrenchment introduced?

Answer 26

To allow for provisions found in memorandum to be altered

Question 27

What must be sent to CH when an entrenched provision is amended?

Answer 27

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

Question 28

What is the fiduciary duty of directors?

Answer 28

The duty to (under common law and Act) to act in the interests of the members as a whole

Question 29

Significance of fiduciary duty

Answer 29

Directors can be held liable if they act for the benefit of themselves or a subgroup of members

Question 30

What must be demonstrated for a successful claim of unfair prejudice?

Answer 30

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

Question 31

When is conduct considered unfair?

Answer 31

There need not be any bad faith or intention. courts consider unfair if hypothetical reasonable bystander would consider it so

Question 32

When are members rights considered prejudiced?

Answer 32

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)

Question 33

Remedies available of successful claims of unfair prejudice (5)

Answer 33

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)

Question 34

What is a derivative action claim?

Answer 34

An action made by a member on behalf of, or in name of company, against a director or third party

Question 35

Grounds for derivative action claim

Answer 35

An actual or proposed act of omission involving negligence, breach of duty or breach of trust

Question 36

What must a claimant member do before derivative action claim can continue?

Answer 36

Apply to court for permission

Question 37

What is the point in making a member apply for permission to bring a derivative action claim?

Answer 37

To filter out frivolous and vexatious claims

Question 38

Would a court allow a claim to continue if it is against an action authorised or ratified by the members?

Answer 38

No

Question 39

What do courts consider in allowing a derivative action to be continued? (6)

Answer 39

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