Shareholders Flashcards
Shareholders
When does a person become a shareholder of the company?
What is the position of a transferee if they were never entered on the register of members?
When entered on the register of members (i.e. when the shares are issued)
They will be the beneficial owner, but the transferor will be legal owner.
On the second point, at general meetings, it is the transferor who will be permitted to attend, although they must vote in accordance with beneficial owner’s wishes. The transferor will also be entiteld to dividends.
When must a company register a new shareholder or reflect an increased shareholding?
If the company only has one member, what is required?
When does the company need to issue a share certificate to a shareholder? Why is it important for the shareholder to have?
As soon as practicable, and no later than 2 months after the allotment or transfer.
A statement to that effect on the register.
Within 2 months of the allotment or transfer. The share certificate is evidence of their title to the shares.
It is a criminal offence to have an incorrect or incomplete register of members (including the fact that it is a one-member company).
PSC Register
When must a PSC register be kept and when is a shareholder a PSC?
A PSC Register must always be kept.
A shareholder with more than 25% of shares or who controls 25% of the voting rights in the company is a PSC
PSCs can apply to keep their name and residential address private.
Admin
Forms to be completed:
- PSC01 - by any individual who becomes a PSC.
- PSC02 - by any relevant legal entity who becomes a PSC.
- PSC04 - any PSC individual whose details change.
- PSC05 - any PSC legal entity whose details change.
- PSC07 - any PSC who ceases to be a PSC.
Deadline is 14 days from the date that the company made a change to the register.
The company’s constitution
What are the primary documents that make up the company’s constitution?
The constitution is a statutory contract between…
The articles and memorandum
Each shareholder and the company, and between the shareholders
As such, if a shareholder or the company does not abide by the constitution, other shareholders will have a remedy for breach of contract.
Shareholders’ Agreements
Shareholders may enter into a shareholders’ agreement, binding on all parties to it.
What are the advantages of having a shareholders’ agreement?
What is one limitation of a shareholders’ agreement?
Main advantages:
- Greater minority shareholder protection may be given.
- Privacy.
Limitation: cannot restrict shareholders from voting a particular way in board meetings if they are a director.
Shareholders’ Agreements
Provide a few examples of matters commonly included in shareholders’ agreements.
- Restrictions on transferring shares;
- Bushell v Faith clauses - give shareholders weighted votes, i.e. more votes than they would normally be entitled to when a resolution considers removal of that shareholder from their office as director;
- Non-compete clauses.
Non-voting rights
What are some of the shareholders’ main rights other than voting?
- Right to remove a director (ordinary resolution);
- Right to remove an auditor (ordinary resolution);
- Right to apply to court for the company to be wound up on the grounds that it is just and equitable to do so.
- Right to receive dividends
- Right to inspect certain documents.
E.g. of ‘just and equitable’ winding up: management is in deadlock and no way of resolving.
Note: Right to receive dividends, if profits are available for that purpose, the directors have recommended and shareholders have approved.
Other rights:
- Right to receive a copy of the company’s annual accounts and reports;
- Right to seek an injunction to restrain the company from breaching its constitution.
Types of Shares
What are the most common types of shares? Name a couple of other types.
Most common: ordinary shares and preference shares.
Other types include redeemable and deferred shares.
Ordinary shares
What are the two main rights attaching to ordinary shares?
- Right to attend and vote at general meetings.
- Right to receive dividends if declared.
There may be different types of ordinary shareholders: Ordinary A and B shares to be treated differently in certain circumstances. E.g. dividends to Ordinary A but not Ordinary B shares. Rights will be set out in the articles. Otherwise, all shares rank equally.
Preference shares
What do preference shares receive?
What do preference shareholders typically forego?
Enhanced rights, usually to guaranteed dividend payments.
Voting rights.
Preference shares typically give a guaranteed right to dividend, whereas ordinary shareholders may only have that right if profits remain after preferential shareholders are paid.
Ordinary shareholders are often willing to grant enhanced rights to keep more control of voting rights.
Amount of dividend is usually expressed as a percentage of the nominal value of the preference share. e.g. 5% preference share = 5% of their initial shareholding will benefit from a dividend.
Preference shares
What are two types of preference shares that are commonly seen and what rights do they each give?
Cumulative - right to any missed dividends from previous financial years, provided there are profits available. Ranks before dividends to ordinary shareholders.
Participating - Beyond their standard preference right to receive a profit, they have a further right to profits if a surplus remains in a liquidation event.
Protection of minority shareholders
What are the two legal mechanisms for the protection of minority shareholders?
- Unfair prejudice actions (s.994 CA 2006)
- Derivative claims
Unfair prejudice petitions (s.994 CA 2006)
How are unfair prejudiced petitions raised?
What are the grounds for an unfair prejudice petition?
Any shareholder can apply to court for an order where they have been unfairly prejudiced.
Grounds:
- the company’s affairs being conducted in a manner that is unfairly prejudicial to the interests of some or all members,including the claimant).
- actual or proposed act of the company would be unfairly prejudicial.
Removal of an auditor by shareholders on the grounds of divergence of opinion in accounting is unfairly prejudicial.
Unfair prejudice petitions (s.994 CA 2006)
What is the meaning of ‘prejudicial’?
What is test for unfairness?
Give examples of ‘unfair’ conduct.
‘Prejudicial’ means causing harm to one or more shareholders.
Unfairness: would a bystander believe the act to be unfair?
Unfair conduct
- diverting opportunities to a competing business in which the majority shareholder has an interest;
- excessive pay to directors;
- excluding a shareholder from management where negotiations led them to believe they would participate.
Unfair prejudice petitions (s.994 CA 2006)
What is the most common order the court would make after a successful unfair prejudice petition?
Ordering that the other shareholders buy the shares from the unfairly prejudiced shareholder, or company buyback.
Other orders: restricting the company changing its articles without leave of the court; permitting the unfairly prejudiced shareholder to bring a derivative claim.
