Shareholder Rights and Minority Protection

Question 1

what are the main rights and protections of shareholders? (6)

Answer 1

1. shareholders can sue the company if their membership rights under the articles are infringed as articles act as a contract between company and members = remedy is damages
2. shareholders can enter a shareholders agreement which allows them to enforce the provisions as a breach of contract or apply for an injunction for future breaches
3. shareholders have rights under the Companies Act including those depending on their level of shareholding
4. bring a petition for unfair prejudice
5. bring a derivative claim against a director or other party
6. bring a petition for just and equitable winding up

Question 2

what are examples of rights under the articles which a shareholder can enforce against a company?

Answer 2

enforceable rights:
- right to a dividend once it is declared
- right to share in surplus capital on winding up
- right to vote at GM
- right to receive notice of GMs

but: rights under the articles which relate to members in their personal capacity are not enforceable against the company if breached

Question 3

what is a shareholders agreement and what provisions can it contain? (7)

Answer 3

a contract between some or all shareholders in which they agree how to conduct company affairs

it contains personal rights and obligations = unlike articles which is a contract between company and SH in their capacity as SH

examples of provisions:

• Unanimous voting over certain matters like a directors’ removal
• Quorums for GMs can be increased from 2 members
• Dividend policy
• Allotment of new shares
• transfer provisions requiring expelled director/SH to transfer their shares to existing provisions
• preventing SH from transferring their shares without unanimous consent of all shareholders
• preventing appointment of any more directors

Question 4

what are the advantages (6) and restrictions (3) of making a shareholders agreement?

Answer 4

advantages:

• private and confidential = its contents are not revealed to the public
• allows recourse against other parties to the agreement if it is breached = breach of agreement or injunction
• It can contain provisions and restrictions which the articles are not allowed to contain
• the mere existence of the agreement and threat of breach would detract others from breaching it even if it cannot prevent statutory restrictions
• it cannot be amended without the consent of all parties so a member has veto power over changes
• certainty of knowing rights are protected and cannot be changed without unanimous agreement

disadvantages:

• it is not a requirement for all shareholders to enter it so the right of action may not be available against all
• it cannot prevent matters mandated by statute like voting thresholds
• if the company is a party to the agreement, it cannot be party to any term that restricts its statutory powers and the member cannot enforce against the company for breach of that term (e.g., unanimous consent for director removal)

Question 5

how can a shareholders agreement protect minority shareholders?

Answer 5

1. provides a right of action against the other shareholders (unlike the articles) as a breach of contract = claim damages after the breach or injunction to stop the breach
2. if shareholder is also director, the agreement can require unanimous decision of shareholders to remove directors
3. amendments to shareholder resolutions require the unanimous consent of all shareholders (as it is a contract) = gives minority shareholders a veto right to any changes and certainty that the provisions are enforceable

Question 6

explain the scenario of a shareholders agreement requiring unanimous consent to remove a director? how can this be enforced if it is breached?

Answer 6

• A shareholders agreement can provide that unanimous consent of all shareholders is needed to pass the resolution to remove a director.
• Where a removal resolution is not passed with unanimity as required by the agreement, the resolution will still be valid and the director is still removed from office.
• However, a shareholder (who may be the director) would have a claim against the other shareholders for breach of the shareholders agreement.
• The company is still bound to accept the lawful resolution even if it breaches the agreement, as an ordinary resolution is a statutory requirement.
• Also the shareholder will not be able to bring a claim against the company under the shareholder agreement even if the company is a party (as the company cannot subscribe to provisions which fetter its statutory obligations).
• But the threat of a breach is an effective way to ensure the provisions of the agreement are followed.

Question 7

what % shareholding is needed for shareholders to call a GM under s 303?

Answer 7

5% of paid up voting capital

Question 8

what % shareholding is needed for shareholders to require circulation of written statements regarding issues to be considered at a GM?

Answer 8

5% of paid up voting capital

Question 9

what % shareholding is needed for shareholders to demand a poll vote?

Answer 9

10% of total voting rights entitled to vote (or 2+ shareholders entitled to vote)

Question 10

what % shareholding is needed for shareholders to block a special resolution?

Answer 10

• show of hands = more than 25% of shareholders entitled to vote on the resolution (and present if at a GM)
• poll vote = shareholders holding more than 25% of voting capital

Question 11

what % shareholding is needed for shareholders to pass an ordinary resolution?

Answer 11

• show of hands = more than 50% of shareholders entitled to vote on the resolution (and present if at a GM)
• poll vote = shareholders holding more than 50% of voting capital

Question 12

what % shareholding is needed for shareholders to block an ordinary resolution?

Answer 12

• show of hands = 50% of shareholders entitled to vote on the resolution (and present if at a GM)
• poll vote = shareholders holding 50% of voting capital

Question 13

what % shareholding is needed for shareholders to pass a special resolution?

Answer 13

• show of hands = 75% of shareholders entitled to vote on the resolution (and present if at a GM)
• poll vote = shareholders holding 75% of voting capital

Question 14

what % shareholding is needed for shareholders to initiate the short notice procedure to call a GM?

Answer 14

1. Majority of shareholders entitled to vote (over 50%)
   AND
2. holding at least 90% of the voting rights of those entitled to vote

Question 15

what is a derivative claim? when can it be brought and when is it appropriate? against who is it brought? who receives the remedy?

Answer 15

• a claim that a current shareholder brings on the company’s behalf for a cause of action vested in the company and seeks relief on behalf of the company
• a derivative claim can be brought against a director or third party for a director’s actual or proposed breach of director’s duties, negligence, or breach of trust
• any remedy granted is for the company and not the shareholder bringing the claim
• appropriate where directors do not want to bring the claim themselves

Question 16

what is the procedure for a derivative claim? (2 stages)

Answer 16

• Stage 1: the member must obtain the permission of the court to bring a derivative claim by establishing a prima facie case
• (there are some cases where the court must refuse permission and some where the court may refuse permission)
• stage 2: if permission is given, the full application will be heard (the court must have regard to particular criteria)

Question 17

when establishing a prima facie claim during stage 1 of a derivative claim, when MUST the court refuse permission? (3)

Answer 17

There is an absolute bar on permission to bring a derivative claim where the court must refuse permission in the following cases:

• the court is satisfied that a person acting in accordance with their duty to promote the success of the company would not seek to continue the claim
• the company ratified the acts
• the company gave permission to the director before they did the acts

Question 18

if the court establishes that there is no absolute bar when considering permission to bring a derivative claim under stage 1, what factors must it take into account when considering whether to give permission?

Answer 18

• whether the member is acting in good faith by bringing the derivative claim
• whether the director’s act would have likely been ratified by the company

Question 19

if permission is granted to bring a derivative claim, what consideration must the court have regard to when hearing the case?

what is the effect of this consideration on the likelihood of successfully bringing a derivative claim?

Answer 19

• the court must have particular regard to any evidence on the views of the other members who have no personal interest in the matter (whether direct or indirect)
• this means that it is hard for a member to bring proceedings against the wishes of the other shareholders
• in any case, courts adopt a very restrictive approach and deny permission to continue claims at the first stage

Question 20

what is an unfair prejudice claim? who is it brought against? under what ground?

Answer 20

a member can bring an unfair prejudice claim personally against the company on the grounds that the company is being run in a way that is unfairly prejudicial to its interests as a member

this is primarily for the acts of the directors

Question 21

what is the test applied for an unfair prejudice claim?

Answer 21

objective reasonable bystander test = the company’s affairs are objectively being conducted in a manner that is prejudicial to their interests

Question 22

what are examples of unfairly prejudicial conduct? what are not? what are main principles in determining what is unfairly prejudicial conduct?

Answer 22

grounds for unfair prejudice:

• excessive remuneration to directors is generally seen as unfairly prejudicial conduct
• non-payments of dividends may be unfairly prejudicial conduct
• serious or repeated mismanagement which puts the value of the member’s shareholding at risk
• in small companies, legitimate expectation of shareholders to be involved with management and preventing this can be unfairly prejudicial conduct

Not unfair prejudice:

• negligent or inept management does not amount to unfairly prejudicial conduct unless the conduct amounts to serious or repeated mismanagement which puts the value of the member’s shareholding at risk
• disagreement on company policy is not grounds for this petition

principles:

• there is no need to show bad faith or intent for the conduct to be unfair
• the claimant does not need to come to court with clean hands

Question 23

what are some remedies for shareholders if the court grants the petition for unfair prejudice?

Answer 23

• regulating future conduct of the company’s affairs
• orders requiring the company to do or not to do certain acts
• SHARE PURCHASE ORDERS requiring the company to purchase the petitioner’s shares

Question 24

would you recommend a minority shareholder claim for unfair prejudice?

Answer 24

• claims are expensive and time consuming and success is not guaranteed
• it is better to reach a negotiated settlement with the company and other shareholders
• the shareholder must be advised that the likely outcome if they are successful is a share purchase order, so a claim may not be appropriate where they want to continue to be part of the company

Question 25

if a share purchase order is granted after a claim of unfair prejudice, how are the shares valued?

Answer 25

• the court has wide discretion
• the aim is to set a fair price
• shareholders must first try to use a valuation mechanism in the articles if it is fair
• the court will not impose a discount
• the behaviour of the claimant may be relevant in determining value - like if they previously rejected a reasonable offer

Question 26

what is just and equitable winding up?

Answer 26

• a member can bring a claim to petition the court to wind up the company on the grounds that it is just and equitable to do so
• this is a draconian and last resort remedy
• the court has wide discretion
• this will result in the company’s dissolution so it is not appropriate where the member wants to continue business and where other options are available