SGS 8: Internal Disputes 1

Question 1

What is the statutory footing for the removal of directors and what do these statutes say?

Answer 1

• MA 18(a) - person ceases to be a director by virtue of any provision of the CA 2006
• S168(1) - shareholders can remove director via OR

Question 2

What is the procedural point for the removal of directors re WR?

Answer 2

• Cannot use the Written Resolution Procedure
• S288(2)(a)
• Bushell v Faith clause - if the director is also a shareholder, in the articles of association granting the D weighed vote to remove them as D
• When checking if the D can block the OR, have to check the articles of association and the shareholder agreement.

Question 3

What are the procedural steps for removal of a director?

5 parts

Answer 3

1. Statute - MA 18(a) and s288(2)
2. Cannot use WR procedure - s288(2)(a)
3. Board calls GM + places removal resolution on the agenda of this GM
4. Board should send copy of this notice to the affected Director - s169(1)
5. D has right to defend himself
6. Reporting requirements to be met.

(tab this sections in tandem)

Question 4

In step 2 of removal of a director, what happens if the board calls a GM and places a removal resolution on agenda of GM?

Answer 4

• Under MA 9(1), director can call a GM
• Under s302 - director can call a GM
• Notice of the GM must comply with the s311 regulations + S312(2)
• 14 clear days - s307(1)
• Must give all s/h notice of the proposed resolution
• At the same time and the same manner

Question 5

In step 4 of the removal of a director, where is the directors right to defend himself found?

Answer 5

• S169(3) (4) - can make written representations to be circulated to shareholders, or read out in the GM
• S169(2) - has a right to SPEAK at the GM.

Question 6

In step 5 of the removal of a director, what are the reporting requirements?

Answer 6

• S167 - have to inform the registrar of removal within 14 days, form TM01
• S162 and 165 - update the register of directors / addresses
• S228(3) - copy of service contract kept for at least one year after termination

Question 7

Explain how the board can be uncooperative?

Answer 7

1. Board does not have to place the removal resolution on the agenda of the GM
2. SH need to force co-operation by serving a s303 request
3. D must respond to s303 request

Question 8

Explain how the board can be uncooperative by not placing the removal resolution on the agenda for the GM?

Answer 8

• Pedley v Inland Waterways case
• Directors are not bound to place OR to remove D on agenda
• Permitted not to cooperate.

Question 9

Explain how the board can be uncooperative because the shareholders need to force cooperation by serving a s303 request?

Answer 9

• SH holding together not less than 5% the paid up voting share capital
• Can serve a request on the board
• That requires them to call a GM.
• The request can state general nature of the business
• Might include text of resolution that they want to be proposed at the meeting

Question 10

Explain how the board can be uncooperative: what should happen when the directors respond to the s303 request?

Answer 10

• S304(1) - board must call GM within 21 days of request
• Meeting must be held within 28 days of notice being served
• These are not clear days

Question 11

What happens if the board do not call a GM within 21 days of the s303 request?

Answer 11

• S305(1)
• Members who made s303 request may call GM themselves if more than 50% agree
• If this occurs GM must be held within 3 months - s305(3) of the date that directors got the s303 request
• Must leave 14 clear days before notice and meeting - s307(1)

Question 12

What can shareholders do to speed up the process of getting the GM to go ahead?

Answer 12

• Shareholders can submit s303 request at the same time

- As sending the s312 special notice to the board.

Question 13

When does the board have to send copy of notice to the affected director? Which statute states this?

Answer 13

• S169(1)

- Board to immediately send copy of notice to the affected director

Question 14

Where is the directors right to defend himself found?

Answer 14

• S169(3) / (4) - director can make written representations to be circulated to shareholders, or read out in the GM.
• S169(2) - has a right to speak at GM

Question 15

What are the 3 reporting requirements for director removal? Where are they found in the statute?

Answer 15

1) S167: inform registrar of removal within 14 days, by form TM01
2) S162 + 165: update register of directors & addresses
3) S228(3) - copy of service contract should be kept for at least 1 year after termination

Question 16

Can the board postpone the removal of a director for longer or shorter if they cooperate or not?

Answer 16

• By cooperating, board can postpoine the removal of the director longer than if they didnt cooperate

Question 17

Timeline if the board DOES cooperate re the removal of a director?

Answer 17

From the s303 notice

• S304(1)(a) - directors will have 21 days to decide whether or not to call a GM.
• On day 22 - notice is served of GM and OR on shareholders.

Question 18

What are the 5 rights and remedies that are available for minority shareholders?

Answer 18

• Common law remedies
• DUM J
• Derivative actions - s260
• Unfair prejudice actions - s994
• Membership rights under s33
• Just and equitable winding up under s122 IA

Question 19

In the rights and remedies for minority shareholdersexplain: DERIVATIVE ACTIONS?

Answer 19

• S260: this is an action brought by a shareholder on behalf of the company
• Requirements in s260(3)
  • Member, bringing action on behalf of company, brought against director on grounds of negligence/breach of duty to get a remedy for the company benefit.

Question 20

What is the Foss v Harbottle rule?

Answer 20

• Where a wrong has been done to a company, the company is the proper claimant (not the member).
• This has effect that minority shareholders cannot sue for wrong committed against the company of which he is a member.

Question 21

What are the 5 exceptions to the rule in Foss v Harbottle?

Answer 21

i. Where majority exercise votes to defraud minority shareholders
ii. Ds in breach of fiduciary duty (provided not ratified by majority)
iii. Where company is proposing to act ultra vires or illegally
iv. Where company passed OR instead of SR/other special procedure
v. Where company acts on authority of resolution where inadequate notice was given

Question 22

What are the two parts of a s260 derivative claim?

Answer 22

▶ s260(1) – Express right to bring a claim in respect of a cause of action vested in the company and where seeking relief on behalf of the company
▶ s260(3) – May only be brought in relation to an act/omission involving (a) Negligence, (b) Default, (c) Breach of duty/trust

Question 23

What are the 2 stages to bringing a derivative claim?

Answer 23

a) s261(1) – Permission of court to continue claim – onus on member to make out a prima facie case.
→ s263(2) – Certain circumstances where permission must be refused
→ s263(3) – Certain circumstances where permission may be refused e.g. ratification
b) Court must have ‘particular regard’ to any evidence it has before it as to the ‘views of the members’ who have no ‘personal interest, direct or indirect, in the matter’. This is to make it harder for a single SH to bring proceedings against the wishes of the general body of SH.

Question 24

What does unfair prejudice allow for?

Answer 24

• S994 Allows a member to bring an action on the grounds that the company is being run in such a way that he/she has suffered unfair prejudice. SH sues on his own behalf:
• Small companies like a ‘quasi-partnership’ – Ebrahimi and O’Neill – SH have a LE to be involved in the management of the company
• s996(1) – Court has discretion to make an order as it sees fit.
• s996(2)(e) – Most common to order purchase of applicant’s shares by company/other SHs (usually relationship broken down to SH wants to leave)

Question 25

Can a company be a party to shareholder agreement?

Answer 25

• No

- Would fetter illegal statutory powers

Question 26

Is company procedure still valid even if there is a provision against it in the shareholders agreement?

Answer 26

• Yes it is

- This just means that D will have a claim for breach of contract under shareholder agreement – Russell case