Shareholders' Rights Flashcards
Give a summary of the various things shareholders can do at their respective levels of shareholding
5% - circulate a written resolution; requisition a general meeting; circulate a written statement (with respect to any resolution or business to be dealt with at a general meeting)
10% - demand a poll vote
over 25% - block a special resolution
50% - block an ordinary resolution
over 50% - pass or block an ordinary resolution (can block with exactly 50%; need over 50% to pass OR)
75% - pass or block a special resolution
100% - pass all resolutions
Who are the first shareholders of any company?
The two people who sign the memorandum of association as subscribers are automatically the first shareholders and must be entered on the company’s register as members
How can someone become a shareholder of a company?
Can become a new shareholder by (1) obtaining shares from existing shareholders, by buying them, as gift or when they die; or (2) buying shares from the company when they allot new shares
- Company must keep register of members and add new shareholders to the register within maximum two months of share transfer being lodged with the company
- All shareholders have a right to receive a share certificate and they must be issued within 2 months of allotment/transfer of shares
The company’s constitution is a statutory contract between each shareholder and the company, and the shareholders between them.
In light of this, what action can a shareholder take against the company or another shareholder who doesn’t follow the constitution?
They have a remedy for breach of contract
The articles provide the wording of the statutory contract
What is a shareholders agreement?
Shareholders can enter an agreement which binds the shareholders who entered it – remedy for a party if there is a breach
Articles bind all shareholders, but the agreement only binds those who enter it
A shareholder’s agreement is private, unlike the publicly viewable articles
Common agreements:
- Restrictions on transferring shares
- Bushell v Faith clauses – give shareholders weighted voting rights when the resolution being considered is one to remove the shareholder from their office as director
- Non-compete clauses
What is the difference between ordinary shares and preference shares?
Ordinary shares
- These give the shareholder the right to attend and vote at GMs + right to receive dividends
Preference shares
- (1) Preference shareholders receive enhanced rights over ordinary shareholders
- (1a) They may have a guaranteed right to a dividend
- (2) Preferential shareholders are often people who wish to invest in a company
- (2a) They may forego voting rights in return for greater financial returns
- (3) If a preference share is described as cumulative, this means the PS has to be paid any missed dividends from previous financial years as well as the current financial year, as long as there are profits available to pay the dividends
- (3a) Non-cumulative preference shares do not carry this right
- Participating shareholders have the further right to receive profits or assets, in addition to their other preference share rights
There are some legal mechanisms to protect minority shareholders. One of these is ‘unfair prejudice petitions.’ What do these involve?
1) Any shareholder can apply to the court for an order for a remedy where they feel they have been unfairly prejudiced as a shareholder
2) Potential grounds:
- the company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the members generally, or some part of its members (including the claimant); or
- an actual or proposed act or omission of the company is or would be so prejudicial
3) The conduct must be prejudicial in that it causes harm to one or more shareholders, and it must also be unfair
4) In order to ascertain whether a shareholder has been unfairly prejudiced, the court will apply an objective test. The court will ask whether a hypothetical bystander would believe the act or omission to be unfair
What would be some example situations of when an unfair prejudice petition might be used?
Diverting opportunities to a competing business in which the majority shareholder holds an interest;
Awarding excessive pay to directors; or
Excluding a shareholder from management of the company, where, when the company was incorporated, the shareholders’ negotiations led to the shareholders believing they would participate in management
What would be the likely remedy from a successful unfair prejudice petition?
The court can make any order they see fit
Most likely remedy is for company to buy back shares, but a lot of evidence required before court will decide the claimant has been unfairly prejudiced
Another legal mechanism to protect minority shareholders is that of ‘derivative claims.’ What does this involve?
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
- Can only be brought in relation to a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director
First stage is for the shareholder to apply to the court for permission to continue the claim – they will only allow the claim to proceed if there is a prima facie case for continuing
A claim can be brought against shadow directors and former directors
If there is a prima facie for a derivative claim, what will the court take into account?
Whether the shareholder is acting in good faith in seeking to continue the claim;
The importance that somebody who is acting in good faith to promote the company’s success would attach to continuing;
Whether any past or future action or omission was authorised, or if not, would be likely to be ratified;
Whether the company has decided not to pursue the claim; and
Whether the act or omission gives rise to a cause of action that a member could pursue in their own right
They will consider shareholders with no interest in the matter and their views too
What are the possible remedies for a derivative claim?
Granting an application on such terms as the court sees fit
Often applied for in instances where directors take an excessive salary - If the claim itself is successful, note that excess salary is paid back to the company, not the claimant
When can a company be wound up?
A company may be wound up by the court if one of the below apply:
- the company has by special resolution resolved that the company be wound up by the court,
- the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
- the company is unable to pay its debts,
- the court is of the opinion that it is just and equitable that the company should be wound up.
What are the requirements and possible remedies of just and equitable winding up by the court?
Requirements - Petitioner must prove a tangible interest in the company - i.e. that they must be able to get back some money if the company is wound up - and that it is just and equitable that the company be wound up
Remedy would be to wind up the company
