Shareholder Rights and Remedies

Question 1

What are the disadvantages of some of the remedies available to shareholders?

Answer 1

They can be costly and uncertain

Question 2

Shareholders’ Agreement

Answer 2

Shareholders may enter into a shareholders’ agreement. This is a contract between some or all of the shareholders, in which they can agree between themselves how to regulate the affairs of the company. For example, how to vote on particular matters.

• It constitutes personal rights and obligations on the shareholders.
• It is a contract between shareholders, which outlines rights, obligations and how the company will be managed. It only binds the shareholders who are a party to the agreement.
• The company is not a party to any provisions which restrict it from exercising statutory powers.

It can contain provisions that the Articles cannot, such as:
- unanimous voting over certain matters
- quorum for GM
- dividend policy
- allotment of new shares

Question 3

What are shareholders’ voting rights?

Answer 3

Shareholders can exercise their vote as they wish

Question 4

Remedies or protections available to shareholders

Answer 4

• Membership rights under the company Articles - enforcement under s33 CA 2006
• Shareholders agreement
• Shareholder rights under CA 2006

Question 5

Membership rights under the Articles (s33)

Answer 5

This provision effectively means there is a contract between the company and its members, as the company’s Articles regulate the relationship between members and the company. This means members can sue under s33 for breach of their membership rights.

• Usual remedy is damages

To sue under s33, it must be a breach of a membership right.

Examples:
- right to a dividend
- right to share in surplus capital
- right to vote
- right to receive notice of GM / AGM

Rights which are not membership rights, should be set out in a separate agreement (Shareholders’ Agreement), to protect shareholders of these rights

Question 6

How can a shareholder agreement protect minority shareholders?

Answer 6

It provides a right of action against other members. The terms can be enforced directly against another member and if a term is breached, a shareholder can claim for breach of contract.

Question 7

Shareholders Agreement and removal of a director

Answer 7

A shareholders agreement may provide that 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 by ordinary resolution (s168 CA 2006). The company must still accept the vote, even if it is a breach of shareholder agreement
- The resolution would be valid and the director would be removed from office

However, the director would have a claim against the other shareholders for breach of the shareholder agreement. The director can claim for breach of shareholders’ agreement and seek damages or an injunction

Question 8

Rights available for shareholders holding 5% or more of the vote

Answer 8

• Require the directors to call a GM: s303 request
• Require circulation of written statements regarding proposed resolutions to be considered at GM
• Circulate a written resolution

Question 9

Rights of shareholders with 10% or more of voting rights?

Answer 9

Right to demand a poll vote

Question 10

Over 50% of voting rights

Answer 10

• Pass or block an ordinary resolution
• Shareholder with exactly 50% can block but cannot pass OR

Question 11

75% of voting rights

Answer 11

• Pass a special resolution

Question 12

Removal of directors by shareholders

Answer 12

Shareholders can remove a director by way of ordinary resolution (s168 CA 2006)
- directors who are also shareholders CAN vote in their capacity as shareholders on the ordinary resolution to remove them
- it is NOT possible to use written resolution procedure to remove a director

Special notice (s312 CA 2006):
- Shareholders proposal of a removal resolution must give notice of the proposed resolution to the company at least 28 days before the GM at which the vote will be held

Question 13

What options does the board have after receiving special notice to remove a director?

Answer 13

1. The board may place the removal resolution on the agenda of a GM
2. The board may decide not to place the removal resolution on the agenda of the GM

Question 14

Option 1: board places removal resolution on the agenda

Answer 14

• Board gives ALL shareholders notice of resolution at the same time / same manner as it gives notice of general meeting
• Board must give shareholders at least 14 clear days notice of removal resolution
• GM takes place to allow shareholders to vote on removal resolution

Question 15

Option 2: board does not place the resolution on the agenda

Answer 15

The directors are not bound to place the removal resolution on the agenda. In this case, the shareholders can force the directors to call a general meeting under s303 (shareholders holding not less than 5% of paid up voting share capital)
- s303 is a general request which requires the board to hold a GM

Question 16

Directors’ obligations on receipt of s303 request

Answer 16

When directors receive a s303 request, they must call the GM:
- within 21 days from date on which they receive the request
- to be held on a date not more than 28 days after the date of calling the GM

If the directors fail to call a GM:
- the shareholders who submitted the s303 request can call a GM themselves (s305)
- if the shareholders call it themselves, it must be called on no fewer than 14 clear days’ and held within 3 months of date the directors received the s303 request

Question 17

Practical advice for a client (unhappy shareholder)

Answer 17

To ensure that resolution to remove a director is heard as soon as possible, they should submit a s303 request requiring the directors to call the GM at the same time as the s312 special notice

Question 18

Timeline where the board does co-operate with a s303 request

Answer 18

• Day 1: shareholders serve notice under s303 (with s312 special notice)
• Day 22 (latest): board has 21 days to decide whether to call a GM
• Day 50 (latest): if the board decides to call a GM, it must be held within 28 days of calling it

Question 19

Timeline where the board does NOT co-operate with s303 notice

Answer 19

• Day 1: shareholders serve s303 request
• Day 22 (latest): Board has 21 days to decide whether to call a GM. Board loses control of the process on Day 23
• Day 38: If the board does not decide to call a GM, from Day 23 the shareholders can call a GM on normal notice 9
  (14 clear days)

Question 20

The director’s rights following notice of resolution to remove them

Answer 20

• The company must immediately send a copy of the notice to the director concerned
• The director has the right to make representations in writing (reasonable length) and these should be circulated before the GM to all members
• Director has the right to be heard and speak in their defence at the GM

Question 21

Protections for a director who is also a shareholder

Answer 21

1. Bushell v Faith clause
2. Shareholders’ agreement

Question 22

Director’s entitlement to compensation after removal

Answer 22

• Company may decide to pay the director compensation for loss of office
• This must be approved by shareholders by ordinary resolution
• Memorandum setting out particulars of payment must be available to shareholders for 15 days before ordinary resolution is passed

Unless:
- payment does not exceed £200
- payment is made in good faith

Any payment by a company to director of its holding company must be approved by that company
- no approval required for wholly owned subsidiary

Question 23

Derivative claims s260

Answer 23

A derivative action allows a shareholder to sue a company’s director on behalf of the company, for wrongdoing that harms the company. It is brought by shareholders in their own name, but on behalf of the company and the remedies are granted to the company

• A cause of action can only be brought against acts or omissions of a director
• A claim must be brought by a current member. A former member cannot bring a claim

Question 24

Derivative claim process

Answer 24

1. The member must obtain permission from the court: i.e., is there evidence for a good cause of action? The court decides if there is a case. The member needs to make out that there is a case.
2. If the court allows it to progress, at stage 2, there is a detailed consideration of criteria, including evidence from other members. Case then proceeds to trial

Derivative claims are rare in practice

Question 25

Bars for a derivative claim

Answer 25

Absolute bars - permission must be refused if the court is satisfied: (a) That a person acting in accordance with duty to promote the success of the company would not seek to continue the claim, or (b) Where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or (c) Where the cause of action arises from an act or omission that has already occurred, that the act or omission (i) was authorised by the company or (ii) has been ratified by the company since it occurred Discretionary bars - factors court must take into account: (a) Whether member is acting in good faith in seeking to continue the claim (b) The importance that a person acting in accordance with duty to promote the success of the company would attach to continuing it (c) Where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be: (i) authorised by the company before it occurs, or (ii) ratified by the company after it occurs (d) Where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company (e) Whether the company has decided not to pursue the claim (f) Whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company

Question 26

Unfair prejudice (s994)

Answer 26

This typically arises where a minority shareholder finds their interests prejudiced by majority shareholders. The shareholder sues for themselves, if they believe the company is causing them harm or unfair prejudice. Grounds: - company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of members, including themselves - that an actual or proposed act or omission of the company is or would be prejudicial

Question 27

What is the test for unfair prejudice?

Answer 27

It is an objective test: that of the reasonable bystander

Question 28

Examples of unfair prejudice

Answer 28

- Excessive remuneration to directors - Non-payment of dividends - Directors dealing with associated persons - Exclusion from management where the shareholder has a legitimate expectation Not sufficient to bring a claim: - Negligent / inept management, unless serious/repeated so as to risk the value of the minority shareholder's interest - Disagreements as to company policy

Question 29

Meaning of unfairly prejudicial conduct

Answer 29

- The conduct must be so serious or repeated mismanagement which puts at risk the value of the minority shareholder's interest - Disagreements as to company policy will not be grounds for a petition - No need to show bad faith - Conduct of the claimant may be relevant - Shareholders in small private companies may be considered to have a legitimate expectation to be involved in the management of the company

Question 30

Unfair prejudice remedies

Answer 30

The court has the power to grant such remedies as it thinks fit (court's discretion) The most commonly made order is an order that the company or other shareholders purchase the petitioner's shares Valuation of the shares - Court has wide discretion and aims to set a fair price - In practice, where one side is willing to buy out the shares and the dispute concerns the valuation of these shares - the court will encourage the parties to settle by means of a binding third party valuation

Question 31

Principles applied to valuation of shares following an order for the purchase of a petitioner's shares?

Answer 31

- Shareholders should first attempt to use any valuation mechanism set out in the articles, provided it is fair. If not, then court valuation is necessary - Courts will generally not impose a discount on the value of minority shareholding in a private company - Valuation date is the date on which the court order was made in respect of sale of shares - Behaviour of petitioner may be relevant Negotiated settlement is a better option

Question 32

Advice for a client on whether to pursue a petition under s994

Answer 32

- If a shareholder wants to avoid the situation where the court makes an order for the purchase of their shares, an unfair prejudice petition is unlikely to be suitable - s994 petitions are expensive, time-consuming and complicated, and uncertain as the court has discretion - Generally a negotiated settlement is the preferred option

Question 33

Just and equitable winding up (s122(1)(g) IA 1986)

Answer 33

This is the most drastic remedy available to shareholders - the right to bring a petition to the court for the company to be wound up on the grounds it is just and equitable to do so It is possible but rare for a minority shareholder to bring this claim

Question 34

What is a quasi-partnership and how can it impact an unfair prejudice claim?

Answer 34

- Small private company: established based on mutual trust and confidence between the founding members - Shareholders may have a legitimate expectation that they be involved in the management of the company and prevention of such involvement may equate to unfairly prejudicial conduct

Question 35

Why might a company want to agree to buy a petitioner's shares following claim for unfair prejudice? (Advising client on settlement options)

Answer 35

It is advantageous for a company to buy the shares of a disgruntled shareholder as their continued involvement does not benefit the company

Question 36

Negotiation strategy in resolving unfair prejudice claim:

Answer 36

1. Consider what the client should open negotiations with (e.g., purchase the petitioner's shares at market value) - If the court is unlikely to award substantial compensation for the shareholder's unfair treatment - advise the client not to open with this - consider negotiation strategies in line with likely court awards - consider what opening offers the client can make 2. Are there concessions that can be made if necessary to avoid litigation and resolve the matter expeditiously? - what the client should consider offering at what stage in the negotiation process --> set this out as part of strategy