Shareholders

Question 1

Decisions that shareholders make

Answer 1

Fall into two categories:
1) Decisions which the shareholders alone make e.g changing the articles of association of the company and changing the name of the company - both special resolutions
2) Decisions which give the directors permission to enter into certain types of contract which carry particular risks for the company or where the directors could potentially use their position as a director to benefit personally from the contract

Question 2

Becoming a shareholder - First shareholders

Answer 2

The two people who sign the memorandum of association as subscribers automatically become the first shareholders of the company and must be entered on the company’s register of members

Question 3

Becoming a shareholder - After the first shareholders

Answer 3

Once the company is up and running a person or company can become a new shareholder in one of two ways:
1) The new shareholder can obtain shares from an existing shareholder or
2) A company may allot new shares

Question 4

Register of members

Answer 4

A company must enter the new shareholder on the register of members or reflect an existing shareholder’s increased number of shares as soon as practicable within 2 months

Question 5

The PSC register

Answer 5

The purpose of the PSC register is to enable third parties to understand who holds power in the company. Any shareholder who owns more than 25% of the shares or controls more than 25% of the voting rights in the company must appear.

Question 6

Shareholder’s rights - Articles of association

Answer 6

gives the shareholders a remedy for breach of contract if one or more shareholders or the company itself does not abide by the constitution.

Question 7

Shareholder’s rights - Shareholder’s agreements

Answer 7

A shareholder’s agreement will bind all of the parties to the agreement and provide a remedy if one of its terms is breached. It’s main advantage is the protection of minority shareholders.

Question 8

Protection of minority shareholders - Unfair prejudice petitions

Answer 8

Allows any shareholder to apply to the court for an order for a remedy where they feel that they have been unfairly prejudiced as a shareholder.

Question 9

Protection of minority shareholders - Derivative claims

Answer 9

This is a claim instigated by a shareholder for a wrong done to a company which has arisen from an act or omission of a director.

Question 10

Types of share - Ordinary shares

Answer 10

Generally give the shareholders the right to attend and vote at general meetings. Ordinary shares are also entitled to receive dividends.

Question 11

Types of share - Preference shares

Answer 11

Preference shareholders receive enhanced rights of some sort over and above the ordinary shareholders. E.g they might have a guaranteed right to a dividend and the ordinary shareholder will only receive dividends if there are any profits left after the preferential shareholders have been paid. They don’t usually have the right to vote.

Question 12

Ordinary resolution

Answer 12

For an ordinary resolution to be passed over half of the votes cast at a shareholder’s general meeting must be in favour of the resolution

Question 13

Special resolution

Answer 13

For a special resolution to be passed 75% or more of votes cast at a shareholders’ general meeting must be in favour of the resolution

Question 14

How to pass shareholders’ resolutions

Answer 14

2 ways:
1) General meeting
2) Written resolution

Question 15

General meeting

Answer 15

Called by the board of directors by passing a board resolution. They will call a general meeting when they want the shareholders to pass a shareholder’s resolution. In order for a general meeting to be valid the notice requirements under the CA must have been complied with

Question 16

Contents of the notice of general meeting

Answer 16

The directors must give notice to every shareholder and every director. It must be given in hard copy, in electronic form or by means of a website. The notice must set out:
1) The time, date and place of the meeting
2) The general nature of the business to be dealt with at the meeting
3) The exact wording of the special resolution if there is one
4) Each shareholders’ right to appoint a proxy to attend on their behalf

Question 17

Notice period

Answer 17

14 clear days. Clear = the day the notice is deemed received and the day of the general meeting are not counted. Only the days between the two dates. If the notice is sent out by post or email it is deemed received 48 hours after the notice was posted or emailed.

Question 18

Quorum

Answer 18

Quorum of a general meeting is 2.

Question 19

Voting in a general meeting

Answer 19

Is on a show of hands and each shareholder has one vote.

Question 20

Quorum and voting - personal interests

Answer 20

Unlike board meetings shareholders are not prevented from counting in the quorum or voting if they have a personal interest in the matter. There are two key shareholders’ resolutions where the votes of a shareholder with a personal interest are not counted:
1) A resolution to buy back some or all of a shareholder’s shares
2) An ordinary resolution to ratify a director’s breach of duty where the director in question is also a shareholder

Question 21

Poll votes

Answer 21

Where shareholders vote in a general meeting on the basis of one vote per share. A poll vote may be demanded by:
a) The chair of the meeting
b) The directors
c) Two or more persons having the right to vote on the resolution
d) A person or persons representing not less than one tenth of the total voting rights of all the shareholders
It can be demanded before a general meeting or during the meeting either before or after voting on a show of hands. If after the poll vote will override

Question 22

Short notice

Answer 22

For a general meeting to be validly held on short notice:
- A majority in number if the company’s shareholders
- Who between them hold 90% or more of the company’s voting shares must consent.
The general meeting can be held straight away.

Question 23

Written resolutions

Answer 23

Alternative to a general meeting. Must be circulated to every eligible member. It must include:
- how to signify agreement
- the deadline for returning the written resolution - lapse date (usually 28 days unless stated otherwise)

Question 24

When are written resolutions passed?

Answer 24

They are passed when the required majority of eligible members have signified agreement to the resolution (sending it back). Each shareholder has one vote for each share that they own.

Question 25

When the shareholders take matters into their own hands - Shareholders’ request to circulate a written resolution

Answer 25

A shareholder(s) who have 5% or more of the voting rights in the company are entitled to require the company to circulate a written resolution. The company must then circulate this within 21 days of the shareholder’s request

Question 26

When the shareholders take matters into their own hands - Requisitioning a general meeting

Answer 26

The shareholders can require the directors to call a general meeting. The directors are required to do this when they have received requests to do so from shareholders representing at least 5% of voting rights at GM. They must then call it within 21 days.

Question 27

Post-decision requirements

Answer 27

CA requires companies to notify the registrar of companies when certain decisions are made. E.g minutes of both the board meeting and the general meeting must be kept at the company’s registered office, copies of special resolutions must be sent within 15 days, form TM01 informing companies house of termination of an appointment of a director within 14 days.

Question 28

Directors service contracts

Answer 28

Service contract for more than 2 years must be approved by ordinary resolution. However, if the company has the power under the terms of the service contract to terminate it with notice of two years or less, it will not fall under the definition of a guaranteed term of more than two years and will not need shareholder approval. It is the guaranteed term element of the contract that requires authorisation not the overall length of the contract. If it’s for any less the directors can pass it at a BM.

Question 29

Control on directors

Answer 29

These involve situations where directors could benefit personally at the company’s expense so need shareholder’s authorisation. E.g SPT, loans to directors, long-term service contract, payment for loss of office

Question 30

Substantial property transactions - Definition

Answer 30

A SPT is where:
- A director or someone connected with a director
- Buys from or sells to the company
- A non - cash asset
- Of substantial value
Ordinary resolution is required

Question 31

Substantial property transactions - What is a person connected with a director?

Answer 31

It is either a member of a director’s family or a company in which the director or a person/persons connected with a director:
- Own/owns at least 20% of the body corporate’s shares or
- Is/are entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of the company

Question 32

Substantial property transactions - What is a non-cash asset?

Answer 32

Any property or interest in property other than cash.

Question 33

Substantial property transaction - What is classed as substantial?

Answer 33

2 ways:
- It will automatically be classed as substantial if its value is over £100,000
- It will also be substantial if it is worth more than £5,000 and more than 10% of the company’s net asset value

Question 34

Substantial property transaction - Effect of breach

Answer 34

If a company proceeds with a SPT without obtaining the necessary ordinary resolution the transaction is voidable

Question 35

Loans to directors - General rule

Answer 35

A company may not make a loan to a director of the company or its holding company unless the transaction has been approved by an ordinary resolution.

Question 36

Loans to directors - Exceptions

Answer 36

No. of exceptions to the requirement for an ordinary resolution:
- Expenditure on company business - covers expenditure for the purposes of the company or for the purposes of enabling the director to properly perform their duties - max. £50,000
- Expenditure on defending civil/criminal proceedings in relation to the company
- Expenditure on defending regulatory proceedings
- Minor business transactions not exceeding £10,000

Question 37

Loans to directors - Effect of breach

Answer 37

If the company lends money to a director without the shareholders first passing an ordinary resolution the transaction is voidable.

Question 38

Payment for loss of office

Answer 38

When a directorship ends the director will often receive payment. Any payments of £200 or more other than those to which the director is legally entitled can only be paid with the prior agreement of shareholders by ordinary resolution.

Question 39

Filing special resolutions

Answer 39

Special resolutions always need filing at companies house