Shareholders Flashcards
S33 CA 06
Shareholders can sue if their membership rights are infringed
Sue company and other SH
Membership rights include right to vote, receive dividend etc
(If not a membership right but want to be able to enforce, put it in SH agreement)
S260 CA 06
Derivative Actions
Shareholders can bring an action ON BEHALF OF THE COMPANY where Ds have breached their statutory duties
D does not have to have benefited personally from the breach
Under S260 can bring claim against Ds and 3P
Process for brining derivative action?
1) Get court’s permission to continue claim
Member makes prima facie case
Permission must be refused if the action does not promote the success of the company
2) If not dismissed, court will consider particular criteria
Including view of members who have no personal interest in the claim
BUT; courts have adopted restrictive approach - expensive and uncertain and coming from co money
S994 CA 06
Unfair Prejudice
SH can bring a claim on the grounds that the company has acted in a way that is unfairly prejudicial to SH
(i.e. excessive pay to Ds - Maidment v Atwood)
SH suing on behalf of himself, not the company
Re Guidezone Ltd (2000)
What is unfairly prejudicial conduct?
Objective test - what the reasonable bystander would consider unfairly prejudicial
What is unfairly prejudicial conduct?
For negligence or inept management to pass must be serious and repeated
Disagreement over company policy is not enough
But do not need to show bad faith or conscious intent
Excessive remuneration (Maidment v Attwood)
Legitimate
Maidment v Attwood
Unfairly prejudicial conduct includes excessive remuneration to directors
Ebrahimi v Westbourne Galleries
Unfairly prejudicial conduct includes where the SH had a legitimate exception of continuing to be a director
S996 CA 06
If S994 action proved, court can grant an order as it sees fit
Most common remedy for unfairly prejudicial conduct under S996 CA 06?
Order purchase of petitioners shares
Value is controversial - encourage independent valuation, to ensure fair price
Shareholder Agreements
Companies act will prevail but will still be possible to sue for breach of contract
Can use SH to agree things outside the scope of the articles, as company cannot restrict its statutory powers in its articles
If the company is party to the SH agreement - can only sign up to some, non-restrictive provisions
Wrongful dismissal
Where employer in dismissing employee has breached the contract of employment i.e. did not give required notice or PILON. 6 year limitation period as contract claim.
Remedy - damages for breach of contract. Is duty to mitigate losses.
Unfair dismissal
Only employees can bring claim
Must have been employed for 2 years
Must show was dismissed
BOP on employer to show it was fair in reasoning and procedure (ACAS procedure)
Capability + conduct are 2 / 5 legit reasons for dismissal
3 month limitation period
Remedies - reinstatement, rengagement, compensation
Damages:
1) basic award which is age x service years x pay
2) compensation - actual loss suffered
Get additional 25% if ACAS procedure was not followed
4 types of restrictive covenant?
1) Not disclose confidential information (implied)
2) Non-compete
3) Non-dealing
4) Non-solicit
Non-compete clause
Prevents employee from working for a competitor or setting up a competing company
Non-dealing clause
Prevents the employee having dealings with ex-employees AND customers
Non-solicitor
Prevents the employee from soliciting customers AND staff to join new business
When is a restrictive covenant enforceable?
General rule - restraints on trade (restricts employee from earning a living) are VOID and UNENFORCEABLE
Unless;
Protect a legitimate interest of business (i.e. customer connections) AND
Must not go further than REASONABLY NECESSARY to protect those legitimate interests
Courts will enforce as minimum as can to protect business interests
Courts will not enforce if restraint on trade
If employer breaches agreement i.e. wrongful dismissal, contract repudiated and restrictive covenants cease to be live
Blue pencil test?
Courts will not rewrite a restrictive covenant to make it enforceable
May strike out the unenforceable part but the rest must make independent sense to be enforceable
Criteria for assessing reasonableness of restrictive covenants:
Duration Geographical location Needs & interest of business Duties of employee Interest business trying to protect
Is the clause drafted wider than necessary to protect the employer’s business interests?
S217 CA 06
Need SH approval by ordinary resolution for payment made to a director for loss of office
Exception - if less than £200
Includes when the payment is made to a connected person - S215
Settlement Agreements
The general rule is that an employee’s right to bring action cannot be excluded, unless the agreement fulfils requirements in S203 ERA
Should restate the restrictive covenants in a settlement agreement - more likely to be enforceable as this agreement negotiated
Restrict future claims that haven’t arisen yet i.e. personal injury, pension rights
Include clause requiring buy-back of shares
Agree good reference and schedule
S203 ERA 1996
For a settlement agreement to be enforceable, the agreement must:
1) Be in writing
2) Refer to a specific claim or particular proceedings
3) Identify an independent advisor who the employee has received advice from
4) Advisor his prof. indemnity insurance
5) State S203 requirements are satisfied
Service Contracts
Must have a clause which states that if the D ceases to still be a D, agreement will continue (so no claim for wrongful dismissal)
Garden leave clause - company can reduce or withdraw duties, but continue to receive salary
Garden leave clause may be possible unenforceable if in a fast paced industry
PILON clause - important so that if terminate without notice, will not be in breach of contract so restrictive covenants will stay enforceable
How long is a restrictive covenant enforceable for?
Max 1 year
Exception - confidentiality, or during acquisition where promise will not set up a competing business for 2 / 3 years
S168 CA 06
Shareholders can remove director before expiry of service contract by ordinary resolution
Special notice is required, to inform board of proposed removal resolution
S312 CA 06
Special notice is 28 clear days
S360 CA 06
Clear days means excluding day of notice and day of meeting - X number of FULL days
What options does the board have when receiving S168 notice?
1) Agree, call GM and put removal resolution on the agenda. If do so, must give 14 days clear notice to SH of the GM.
2) Ignore - Board is not bound to put it on the agenda (Pedley v Inland Waterways)
If the board ignores the S168 notice, what can the shareholders do?
S303, SH who together hold at lease 5% of paid up share capital can force the board to call a GM
S304 - on receipt of such notice, the board must call a GM to be held within 28 days
What if after receiving S303 notice, the board still does not call a GM?
Under S305, the SH themselves can call a GM, which must be held within 3 months
S169 CA 06
A director has a right to request removal.
Have the right to make representations that are sent to SH before meeting.
If not enough time, has the right to make representations at the meeting
Does S168 deprive the removed director the right to receive damages?
S168(5) - No.
Still entitled to damages for breach of service contract, breach of shareholder agreement tc.
What about if the director who the shareholders want to remove, is also a shareholder?
Need to check articles to see if there is a Bushell v Faith clause, which gives a director who is also a shareholder weighted voting rights at a GM where a removal resolution is on the agenda. This means the SH may be unable to pass the OR.
Can a written resolution be used to remove a director?
No - S288(2)(a)
What is the definition of convene?
To CALL the meeting, not to hold the meeting
S239 CA 06
Shareholders can ratify directors conduct of negligence, breach etc.
S252
definition of ‘connected persons’
Doctrine of maintenance of share capital - S658
Capital is liability owed to SH
Capital money for creditors if default
Co not usually allowed to return capital to SH
> this is why SH sell their shares to get return on investment
Any payments i.e. dividends to SH must be made out of profits (S830(1))
S830(1)
Can only declare dividends from profits
A30 MA
declare final dividend by OR
interim dividends are D choice alone, not SH
General rule for companies buying back and/or redeeming shares:
Both public and private companies can buy-back or redeem shares (provided authorised in articles) from distributable profits and/or proceeds from a fresh issue of shares. However, ONLY private companies can fund a buy-back or redemption from capital, and is stringent procedure to do so
To redeem shares from profits (easiest), must ensure:
1) Issuing redeemable shares not restricted in articles
2) Non-redeemable shares are in issue (need SR to create redeemable shares)
3) Shares to be redeemed are fully paid up
4) Terms of redemption is set out in articles
4) Redeemed shares are then treated as cancelled
5) Must notify C.H. within 1 month, along with statement of capital
Accounts must not be more than 3 months old
To redeem shares from capital, must ensure:
As above but must adhere to capital rules i.e.:
Need director statement on liquidity of company
Need auditors report
Need SR approving payment from capital
Need advert in newspaper
Must wait 5 weeks for creditors to object before purchase can occur
Can redeemable shares be purchased as well as redeemed?
Yes but obviously different procedure followed
To buy-back shares from profits, must ensure:
S694 - need OR to approve contract of purchase. Contract must be available to SH 15 days before GM, and at the GM itself, so need 15 days notice.
Selling SH can vote in the OR but their vote is ineffective if that vote then carries the resolution
What is different about the procedure when a buy-back is approved by written resolution?
The contract must be sent with the written res
The selling SH cannot vote in the written res
Rules for redeeming and/or buying-back shares from capital:
Only PRIVATE companies can do this - is a criminal offence for public company to use capital
Purchase from capital must not be restricted in articles
Must use distributable profits first
Need written statement of solvency from D
Need copy of auditors report
> D statement and report must be finalised 7 days before GM
SR to approve payment from capital
Notice in gazette and another np 7 days after SR - 5 weeks for creditors to object
Purchase takes place between 5-7 weeks
Things to remember re buy-back/redemption:
If buy-back - purchase via contract - OR and 15 days notice of GM for inspection
If redemption - no contract as terms of redemption in articles
If capital - SR to approve payment from capital
ALWAYS check articles to ensure buy-back/redemption allowed
Capital -ensure accounts no more than 3 months old
Profit - ensure figures verified by accountant
ALWAYS USE DISTRIBUTABLE PROFITS FIRST
PMM for redemption/buy-back?
Notify C.H by sending return and send statement of capital within 28 days of purchase
Amend register of members
Cancel / re issue share certificates
Send SR to registrar within 15 days of passing (S30)
Keep a copy of contract for 10 years
Benefit of putting shares in treasury when buy-back?
Shares in treasury do not carry voting rights so SH shareholdings remain the same - no changes so someone gets negative holding etc.
Changing back from treasury > ordinary shares needs SH approval.
If shareholder is also a director, do any of the directors duties apply?
Yes, must disclose interest under S177.
How is balance sheet affected by buy-back/redemption?
1) Share capital is reduced by ORIGINAL VALUE of shares cancelled, and then increase capital redemption reserve by same.
2) Profit is reduced by amount it cost to buy-back, and shareholder funds with also decrease by this amount
3) Net assets will be reduced by amount it cost to buy back - net assets should balance with bottom
