Shareholders and GM

Question 1

Process for shareholders to call a GM

Answer 1

s. 303 request- shareholders holding not less than 5% paid up share capital can serve request on Board to call a GM
s. 304- directors have up to 21 days to call a GM to be held not less than 28 days later
s. 305- if directors fail to call a GM under s. 304, shareholders may then call the meeting themselves to be held within 3 months of s. 303 request

Question 2

Re Duomatic Ltd- the Duomatic principle

Answer 2

Informal resolutions agreed by all shareholders outside of formal meeting will be valid and binding.
- must be unqualified agreement of all shareholders

Question 3

Schofield v Schofield

Answer 3

No unqualified agreement so Duomatic principle did not apply. Informal agreement was proposed without notice requirements of s.307 and son (holding one share) was dismissed as director whilst Dad (holding remaining shares) was made sole director.

Question 4

Rights of shareholders to vote

Answer 4

Shareholders may vote in their own interests, regardless of whether vote in best interests of company.

Under no fiduciary duty to company.

Must act in way that is bona fides (Clemens v Clemens Bros)

As must directors, when they are voting in their capacity as shareholders (Northern Counties Securities Ltd v Jackson)

Question 5

Shareholders may also vote as they wish to remove a director, provided due process has been followed

Answer 5

Citco Banking Corp v Pusser’s Ltd

Question 6

in exceptional circumstances the courts have made orders to restrain a shareholder from exercising their vote in a manner which was irrational

Answer 6

Standard Chartered Bank v Walker

Question 7

What will the court look at with shareholders voting on a decision to amend the articles

Answer 7

the court will look at whether reasonable shareholders could have considered that the amendment was for the benefit of the company.
Shareholders must vote to amend the articles in good faith (Allen v Gold Reefs of West Africa Ltd
and not to undermine substantive rights of minority shareholders. If not, the court may hold the amendment invalid.

Question 8

How does a company raise funds?

Answer 8

Issuing shares- equity finance

Borrowing- debt finance

Question 9

Capital

Answer 9

The funds available to run the business of a company

Question 10

Share capital

Answer 10

The money raised by the issue of shares.
Is contributed by investors in the company.
Represented by shares that are issued to those investors who become shareholders (or members).

Question 11

What are shares?

Answer 11

There are three aspects to a share: it is a financial stake in the company, an interest in the company and a property right.

• sets out the shareholder’s financial stake in the company, which allows the shareholder to receive dividends and capital on a winding up (if the share carries these rights).
• It is a measure of the shareholder’s interest in the company as a member and their right to vote.
• It is a property right which can be bought and sold and carries legal and beneficial interests.
• No formal definition in CA 2006 but s 541 confirms that shares are “personal property”.

Question 12

Incentives for investing in a company

Answer 12

The receipt of income (by way of dividend) and a capital gain (by way of the growth in the value of the company, and therefore the value of the individual shares), although neither are guaranteed.

Question 13

When will shareholders of a private company get their investment back?

Answer 13

W

Question 14

Issued Share Capital (ISC)

Answer 14

Amount of shares in issue at any time.
Made up of:
• Shares purchased by the first members of the company, known as the ‘subscriber shares’; and

• Further shares issued after the company has been incorporated, to new or existing shareholders.

Question 15

When can new shares be issued?

Answer 15

At any time, provided the correct procedure is followed.

Question 16

Company’s register of members:

• what is it a primary source of?
• who needs to keep it up to date?
• what does it ensure?
• what is the consequence of not keeping it up to date?

Answer 16

The register is the primary source of who the members are and how many shares they own.
Needs to be kept up to date by company.
The member’s register ensures that nobody other than a company member can vote on decisions which affect the company.

Furthermore, by not keeping an up to date register of members a company is committing an offence under CA 2006. Both the company and every officer of the company who is in default may be liable for a fine.

Question 17

Glencoe Developments v Sneddon

Answer 17

The purported vote of a prospective shareholder to pass a resolution was invalid, because his name had not been entered into the register of shareholders.

Question 18

In which ways are shares issued?

Answer 18

Initial subscriber – where that person subscribes for the first shares issued when the company is incorporated;

• Share issue – s further shares issued by the company after incorporation;
• Share transfer – transfer from an existing shareholder;
• Transmission – this is a mechanism by which the title to shares is devolved other than by transfer. It typically applies to devolution by death (succession/inheritance), bankruptcy or marriage. On registration of the transmission of shares, the person entitled to the transmission of shares becomes the shareholder of the company and is entitled to all rights and subject to all liabilities as such shareholder. While transfer of shares is brought about by delivery of a proper instrument of transfer duly stamped and executed, transmission of shares is done by forwarding the necessary documents (such as a notarised copy of a death certificate) to the company.

Question 19

Allotment of shares

Answer 19

Creation and issuing of new shares

Question 20

What section of CA 2006 do the powers of directors to allot shares come from?

Answer 20

Derive from s 549 – 551 CA 2006

Question 21

When are shares alloted?

Answer 21

When a person acquires the unconditional right to be included in the company’s register of members in respect of those shares (s 558 CA 2006).

Question 22

When are shares ‘issued?’

Answer 22

Section 112(2) - full legal title to shares is only achieved once a person’s name is entered into the company’s register of members.

This is when shares are issued and form part of the company’s issued share capital.

Question 23

Transfer of shares

Answer 23

A contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is not a party to the contract on a transfer of shares.

Question 24

Are shares freely transferable?

Answer 24

In principle yes, although the articles of most private companies restrict their members’ rights to transfer their shares, so as to ensure control over the ownership of the company.

Question 25

Can private companies offer their shares to the public?

Answer 25

Private companies are prohibited from offering their shares to the public (s 755).

Question 26

Authority that a share grants the holder rights in a company as conferred by a company’s constitution

Answer 26

Borland’s Trustee v Steel Bros

Question 27

Share ownership does not give any entitlement to ownership of company assets, which are owned by the company itself

Answer 27

Macaura v Northern Assurance

Question 28

Where are the rights attached to a class of shares determined?

Answer 28

In the company's articles. 
Nothing in CA 2006 which defines classes of shares or class rights and the label attached to a share is not determinative.

Question 29

Different classes of shares (8)

Answer 29

Ordinary shares

Redeemable shares

Preference shares

Non-voting shares

Employees’ shares

Cumulative shares

Convertible shares

Deferred shares

Question 30

Section 629 CA 2006

Answer 30

States that “shares are of one class if the rights attached to them are in all respects uniform”.

Question 31

Does the company have power to issue different classes of shares.

Answer 31

MA 22 gives companies the power to issue different classes of share. Unless this has been excluded in the company’s articles, the company will therefore have this power.

Question 32

Does the company and the shareholders have freedom to agree to different class rights?

Benefit for directors?

Answer 32

Yes.
Also, the enhanced quality of rights for a class will allow directors to charge a premium for their issue.

Question 33

Ordinary Shares

Answer 33

Most common type of shares and are the default position: if a company’s shares are issued without differentiation, they will be ordinary shares.

Carry a right to vote in GM
A right to receive a dividend if one is declared by the directors and
A right to receive a share of the capital when a company is wound up (if there is surplus capital left after the creditors have all been paid).

Ordinary shares are defined in s 560(1) CA 2006 as “shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount in a distribution”. This negative definition illustrates the point that ordinary shares are the default position and are shares that have an unlimited right to participate in dividends and in surplus capital when a company is wound up. These shareholders receive a fraction of the dividend and capital in accordance with their shareholding.

Although ordinary shareholders receive dividends after preference shareholders, one advantage of ordinary shares is that the entitlement of ordinary shareholders to a dividend is unrestricted.

Question 34

Preference Shares

Answer 34

Preference shares: these shares are usually entitled to have dividends paid at a predetermined rate (e.g. 5% of their nominal value) in priority to any dividend paid on the ordinary shares. Dividends can only be paid where the company has distributable profits and a dividend is declared, but where this is the case, the first claim will be for the preference shareholders.

Preference shareholders often have a right to priority over the ordinary shareholders when capital is returned to the members in a winding up. The rights of preference shareholders to a dividend may be cumulative (where arrears of preference dividends not declared in earlier years must be paid as well as that for the current year, before any dividend is paid to the ordinary shareholders) or non-cumulative (when only the current year’s right to a dividend is payable).

Preference shares may also be participating (where the shareholders can also participate in a dividend or capital on a winding up alongside the ordinary shareholders, meaning that they will receive both their fixed preferential dividend/ fraction of capital plus a fraction of the general dividend/capital in accordance with their shareholding) or non-participating (where the shareholders receive only their fixed preferential rights).

Question 35

Deferred Shares

Answer 35

These shares normally only have a right to a dividend and/or return of capital after the claims of the preference shareholders and the ordinary shareholders. They are not common. They are usually issued to the founders of the company where those founders offer to defer their own entitlements to those of other investors.

Question 36

Redeemable Shares

Answer 36

These are in effect temporary shares which may be bought back by the company at a future date. The rules governing redeemable shares and their redemption are set out in Chapter 3 s 684 – 689 CA 2006.

Question 37

Non- Voting Shares

Answer 37

These shares may be issued where the company seeks to restrict control of the company, eg when a family owned company seeks outside investors for additional capital, or shares issued to employees.

Question 38

Convertible Shares

Answer 38

These are shares which may be converted to a different type of share in the issuing company according to a pre-arranged formula set out in the company’s articles.

Question 39

Employees’ Shares

Answer 39

Companies may issue shares to their employees, often under an employees’ share scheme which has tax advantages. These are usually issued as ordinary shares but are subject to restrictions eg on transfer.

Question 40

There is a presumption that all shares have equal rights unless there is an express provision in the articles to the contrary.

Answer 40

Birch v Cropper

Question 41

Companies can entrench the class rights of shares in their Articles.

Answer 41

If so, this protection cannot be circumvented by changing the rights attached to the shares under s 630.

Question 42

Shareholders voting at a class meeting to vary rights must vote with the dominant purpose of benefitting the class as a whole, or the variation may be deemed invalid.

Answer 42

British America Nickel Corpn Ltd v O’Brien

Question 43

How can class rights be varied?

Answer 43

• Class rights may be varied either by any method set out in the articles or under s 630.

Question 44

s 630 process for variation of class rights

Answer 44

class rights can only be varied:
In accordance with the relevant provisions in the company’s articles (which may specify more or less onerous provisions), or
If there is no provision in the articles, where:

a. 75% in value of the shares of the affected class consent in writing, or
b. A special resolution is passed at a separate meeting of the holders of the affected class of shares.

Question 45

White v Bristol Aeroplane

Answer 45

Class rights are not "varied" simply if the company issues more shares of that same class, even though it may dilute eg the amount of dividend previously paid. That is because the substantive legal rights of the class have not been altered, only the way in which the exercise of the rights may be enjoyed.
Here- the actual rights attaching to the preference shares were not varied by the addition of extra shares, even though the exercise of their rights was affected by the increase in shares.

Question 46

Greenhalgh v Arderne Cinemas

Answer 46

Class rights are not “varied” simply if the company issues more shares of that same class, even though it may dilute eg the amount of dividend previously paid. That is because the substantive legal rights of the class have not been altered, only the way in which the exercise of the rights may be enjoyed.

Question 47

Dissenting members of a class of shares have a right to challenge a variation.

Answer 47

Section 633
The conditions for this are:

Only shareholders holding at least 15% of the issued shares of that class may challenge a variation, and
The variation must be challenged in court within 21 days of the date on which consent was given or the resolution was passed to vary the class rights.

Question 48

Possible ground of challenge to variation of class rights

Answer 48

Since the common law cases indicate that a vote on a resolution to vary class rights must be exercised for the purpose, or dominant purpose, of benefitting the class as a whole, this may be a ground of challenge (British America Nickel Corpn Ltd v O’Brien

Question 49

The right to demand a poll vote

Answer 49

MA 4
Can be demanded:
- in advance of the GM
- at GM, either before or immediatelyafter show of hands on resolution

Can be demanded by:

• chairman of meeting
• directors
• two or more persons having right to vote
• a person/s representing not less than 1/10 of total voting rights of all shareholders having the right to vote on the resolution

Question 50

MA 42

Answer 50

Resolution put to vote at GM must be decided on show of hands unless poll vote demanded in accordance with Article (MA 44).

Question 51

Voting at a GM

Answer 51

Show of hands- one vote per shareholder
Poll vote- each shareholder has one vote per share

(Re Horbury Bridge Coal Co)

Question 52

If shareholders forced to call GM themselves

Answer 52

s. 305(6) - can recover their reasonable expenses for doing so from the company
- company can then recoup money back from directors who should have called GM initially

Question 53

Process for directors to call a GM

Answer 53

Directors can call a GM (S. 302) by passing a board resolution at a Board Meeting.
Need a simply majority. If equal, MA 13 stipulates who has casting vote.
14 clear days notice of GM (s. 307 (1) and s. 360) - unless short notice procedure is used which requires agreement of 90% of shareholders with voting rights.

Question 54

MA 4- Shareholder’s reserve power

Answer 54

1) Shareholders may, by special resolution, direct directors to take/ refrain from taking specified action
2) No such special resolution invalidates anything the directors have done before its been passed

Question 55

How can shareholders pass a resolution?

Answer 55

Vote either at a GM or use the written resolution procedure.

Question 56

Votes at GMs

Answer 56

Counted out of all shareholders present and voting,

Question 57

Ordinary resolution

Answer 57

s. 282(1)-simply majority of more than 50%

Question 58

Special resolution

Answer 58

s. 283(1)- majority of not less than 75%

Question 59

Notice and Quorum

Answer 59

Notice- validity of resolutions passed at GM depends on proper notice being given.
Quorum- required minimum of number of shareholders at a GM.

Question 60

Summary of process for shareholders to call a GM

Answer 60

s. 303 request- shareholders holding not less than 5% paid up share capital can serve request on Board to call GM
s. 304- directors have 21 days to call GM to be held not less than 28 days later
s. 305- if directors do not call GM under s.304, shareholders may call meeting themselves, to be held within 3 months of initial s.303 request.

Question 61

The legal effect of a company’s articles

Answer 61

s 33 CA 2006, a company’s articles constitute a contract which is binding on the company and the members themselves
In general, the usual rules of contractual interpretation apply to the articles.

Question 62

The articles cannot be supplemented by additional terms implied from extrinsic circumstances

Answer 62

Bratton Seymour Service Co Ltd v Oxborough (Court of Appeal). In this case the court had to consider whether it was possible to imply into the articles of a management company a term that the members should make contributions to the upkeep of the communal areas. It was held that no such term could be implied.

Question 63

The court has no jurisdiction to rectify the articles

Answer 63

Scott v Frank F Scott (Court of Appeal).

Question 64

As long as the article in question is clear and unambiguous and not ‘commercially absurd’, the court will not interfere to rewrite the article, even where the outcome is “improbable”.

Answer 64

Sugarman v CJS Investments LLP
The Court of Appeal held that the literal interpretation of an article which gave each member of a housing management company one vote regardless of the number of shares held (which correlated to the number of flats leased) had to be applied, even though the effect of this was that a member with one flat had the same voting power as another member with 66 flats.

Question 65

However terms can be ‘implied’ where necessary for the proper construction of the articles

Answer 65

Equitable Life Assurance Society v Hyman
The company’s articles gave the directors a wide discretionary power to pay bonuses on the members’ life insurance policies and the directors had exercised this power to pay some policyholders a larger bonus than others, contrary to ‘guarantees’ which were given when some of the members took out their policies. Lord Steyn held that the articles should be read as containing an implied term that the directors would not exercise their discretion ‘in a manner which deprived the guarantees of any substantial value.’

Question 66

Can a member enforce the terms of the articles against the company?

Answer 66

Yes, under s 33
Wood v Odessa Waterworks Co
On the application of W, a shareholder, the court granted an injunction to prevent the company from acting on that resolution (proposing to pay no dividend but instead give the shareholders debenture-bonds) as it was inconsistent with the articles.

Question 67

The articles only create a contract between the company and the members in their capacity as members, and not in any special or personal capacity. They also do not give any rights to a person who is not a member.

Answer 67

Eley v Positive Government Security Life Assurance Co Ltd (Court of Appeal)
Any member may bring an action against the company to enforce the articles under s 33, but only in their capacity as a member

Question 68

The company may also enforce the articles against its members under s 33

Answer 68

(Hickman v Kent or Romney Marsh Sheep-Breeders’ Association)

Question 69

A member may sue another on the contract created by the articles without joining the company as a party.

Answer 69

Rayfield v Hands

Question 70

Clemens v Clemens Bros

Answer 70

In Clemens v Clemens Bros the court refused to allow a majority shareholder to authorise an allotment of shares where the motive was to dilute the voting power of the minority shareholder.

Question 71

Final stage of issuing shares to a new shareholder

Answer 71

S 112 CA 2006- in order to become a member of a company a person must be entered into the company’s register of members.
Until register updated, shares are not legally transferred to new shareholder.

The transfer of shares should only be recorded where a stock transfer form has been completed and the appropriate Stamp Duty has been paid, if applicable.