Rights & Remedies of Shareholders

Question 1

What is the ‘majority rule’?

Answer 1

Decisions reserved to the shareholders are taken following the principle of ‘majority rule’.

Question 2

What is the purpose of a shareholders agreement?

Answer 2

This aims to minimise the effect of the principle of majority rule by setting out how the company is to be run as between the shareholders and how the shareholders will vote on certain matters.

Question 3

What relationship do the articles regulate?

Answer 3

The Articles of a company regulate the relationship between the members and each other and between the members and the company.

Question 4

What is the purpose of section 33 CA 2006?

Answer 4

Members can sue under CA 2006 if their membership rights are infringed. The usual remedy is damages.

Question 5

What are examples of membership rights that have been enforced under s33 CA 2006?

Answer 5

*Right to a dividend once is has been lawfully declared;

*Right to share in surplus capital on a winding up;

*Right to vote at meetings; and

*Right to receive notice of GMs and AGMs.

Question 6

Is the right to be appointed as the company’s solicitor a membership right?

Answer 6

No.

Question 7

Will the court imply terms into the Articles?

Answer 7

A company’s Articles are deemed to be a complete contract and the court will not imply any terms into them whether to create business efficacy or otherwise. In order to protect members, it is important that any of their rights which are not membership rights are set out in a separate contract such as an SHA and not in the Articles.

Question 8

What is the purpose of a SHA?

Answer 8

This is almost an extension to the Articles in terms of governing how the company is run and can contain provisions that the law does not permit the Articles to contain.

Question 9

What provisions are likely to appear in an SHA?

Answer 9

• Unanimous voting over certain matters e.g. removing a director
• Quorum for GMs
• Dividend policy
• Allotment of new shares; and
• New and departing shareholders

Question 10

What is a shareholders agreement?

Answer 10

A contract between some or all of the shareholders, in which they can agree between themselves how to regulate the affairs of their company.

Question 11

Are there personal rights in the SHA?

Answer 11

Provisions in the SHA will constitute personal rights and obligations on the shareholders, including how they will exercise their voting rights on certain decisions.

Question 12

Is the SHA private?

Answer 12

The SHA is private (unless they are explicitly referred to the in Articles).

Question 13

Should the company be a party to the SHA?

Answer 13

The company should not be a party to any terms which restrict its statutory powers. However, this does not mean the company should never be a party to the SHA: only that it should not be party to those provisions that restrict it from exercising its statutory powers.

Question 14

What are the Articles treated as?

Answer 14

The Articles are treated as a contract between the company and its shareholders, and do not therefore deal with shareholders personal rights and obligations.

Question 15

Are the Articles and SHA subject to CA 2006?

Answer 15

The Articles are subject to CA 2006, whereas a SHA is an arrangement arrived at between the shareholders in their personal capacities and gives them more freedom in respect of what they can agree to.

Question 16

Can members enforce provisions of the SHA directly against another member?

Answer 16

Yes.

Question 17

If a term is breached in the SHA how is it enforced?

Answer 17

If a term in the SHA is breached it can be enforced in the usual way under general contract law principles. A shareholder will be able to claim for breach of contract, or alternatively could apply to the court for an injunction to prevent a breach of the terms of the agreement.

Question 18

Explain ‘reserved matters’ in the SHA

Answer 18

*Certain matters can be reserved in a SHA as matters requiring the consent of all shareholders or certain individual shareholders and this protects minority shareholders.

*For example, a SHA may provide that the unanimous consent of all shareholders is required to pass a resolution to remove a director. This does not remove the right of shareholders to remove a director under s168 CA 2006, as a company is bound to accept the vote of a shareholder even if it is in breach of the SHA.

*Where a removal resolution is passed without the required unanimity, provided a simple majority voted in favour (in accordance with CA 2006), the resolution would still be valid, and the director would be removed from office. The director would then have a claim against the other shareholders for breach of the SHA. The threat of a breach of contract claim effectively means that the minority shareholder is able to influence whether or not the resolution is passed.

Question 19

How are amendments made to the Articles and SHA?

Answer 19

Amendments to Articles can be made by passing a special resolution requiring 75% approval. Changes to SHA will require unanimous approval of all parties to the agreement. Therefore, minority party has a right to veto any proposed changes.

Question 20

What shareholder rights does ‘any shareholder’ have?

Answer 20

• Receive notice of a GM (s 307)
• Appoint a proxy to attend a GM in their place (s 324)
• Vote at a GM (provided they hold voting shares) (s 284)
• Receive a dividend (if declared)
• Receive a copy of the company’s accounts (s 423)
• Inspect minutes and company registers (s 116)
• Ask the court to prevent a breach of directors’ duties
• Commence a derivative claim
• Bring a petition for unfair prejudice
• Bring a petition for just and equitable winding up (s 122 Insolvency Act 1986)

Question 21

What shareholder rights does a shareholder with 5% or more have?

Answer 21

• Require directors to call a General Meeting (s 303)
• Require the circulation of written statements regarding proposed resolutions to be considered at a GM (s 314)
• Circulate a written resolution (s 292)

Question 22

What shareholder rights does a shareholder with 10% or more have?

Answer 22

Demand a poll vote (MA 44)

Question 23

What rights does a shareholder with over 25% shareholding have?

Answer 23

Block a special resolution (s 283) (note that a special resolution is passed by 75% or more of the votes)

Question 24

What rights does a shareholder with over 50% have?

Answer 24

Pass or block an ordinary resolution (s 282) (note that an ordinary resolution requires over 50% of the votes to pass, therefore a shareholder with exactly 50% of the shares can block an ordinary resolution but cannot pass the ordinary resolution alone)

Question 25

What rights does a shareholder with 75% shares have?

Answer 25

Pass a special resolution (s 283) (note that a special resolution is passed by 75% or more of the votes).