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Business Law and Practice (V) > Shareholders' rights and remedies > Flashcards

Shareholders' rights and remedies Flashcards

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1
Q

What is the principle of ‘majority rule’?

A

Important decisions of a company are reserved to (the majority of) shareholders - often little a minority can do unless they join forces with other shareholders to block minority

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2
Q

As minority protections/remedies are costly/uncertain, what is preferable?

A

Entering into a shareholders’ agreement - establishes how a company is to be run between shareholders and how they vote on certain matters

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3
Q

What are all (7) remedies/protections available to shareholders?

A
  1. Membership rights under the Articles (s33)
  2. Shareholders’ agreements
  3. Shareholders’ rights CA 2006
  4. Removal of directors (s168)
  5. Derivative actions (s260)
  6. Unfair prejudice actions (s994)
  7. Just and equitable winding up (s122 IA)
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4
Q

What is the effect of s33 for members re Articles and what remedy does it provide?

I.e. membership rights under the Articles

A
  • Members can sue under s33 if membership rights are infringed (as Articles are effectively a contract between members/each other and members/company)
  • Remedy will usually be damages
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5
Q

What have been considered to be membership rights of any shareholder (and thus enforceable under s33)?

A
  • Right to dividend (once delcared)
  • Right to share in surplus capital on winding up
  • Right to vote at meetings (or appoint proxy)
  • Receive copy of accounts
  • Inspect minutes and company registers
  • Right to receive notice of GMs and AMs
  • Use remedies - derivative claim, unfair prejudice, j+e winding up
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6
Q

What are the membership rights of those with 5%/more and 10%/more?

A
  • 5%/more = require directors to call GM, require circulation of written statements regarding proposed resolutions for GM, circulate WR
  • 10%/more = demand a poll vote
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7
Q

What are the membership rights of those with over 25% and over 50% shareholding?

A
  • Over 25% = block special resolution
  • Over 50% = pass or block ordinary resolution (those with 50% can block but cannot pass OR alone)
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8
Q

What will not be enforceable under s33?

A

Rights of members which are not ‘membership rights’ e.g. right to be appointed as company solicitor not a membership right (Eley)

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9
Q

Will the court imply terms into Articles for business efficacy? Should something different be used?

A

No - Articles are a complete contract. Any rights that are not membership rights should be set out in separate contract (shareholders’ agreement)

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10
Q

What is the purpose of a shareholders’ agreement?

A

An extension to Articles to contain provisions that the law does not permit Articles to contain

Could rely solely on Articles - but SA usually entered into

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11
Q

Will a shareholders’ agreement overrule law?

A

No - but gives personal rights/obligations that can be enforced personally

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12
Q

What are the likely provisions in a SA?

A
  • Unanimous voting over certain matters e.g. removing a director
  • Quorum for GMs
  • Dividend policy
  • Allotment of new shares
  • New and departing shareholders
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13
Q

What is the difference between SA and Articles?

A

SA = contract between some/all of shareholders to agree how to regulate company - provisions are agreed more freely and constitute personal rights/obligations on shareholders

Articles = ‘contract’ between company and shareholders in their capacity as shareholders and does not deal with personal rights/obligations - provisions are subject to CA

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14
Q

What right of action does a SA give to a minority shareholder?

A

If a SA term is breached, it can be enforced by a member under contract law principles

Provision that would not be regarded as membership right can be enforced

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15
Q

If certain matters are reserved in SA as requiring the consent of all/certain shareholders, will a resolution passed without the required unanimity be void?

E.g. reserved matter in SA that removal of a director must be with unanimity, but then an OR is passed with the required majority (>50%)

A
  • No! Resolution will still be valid as it is in accordance with CA 2006 - company must accept the vote of a shareholder in spite of SA (so a director will be removed!)
  • But a director has a claim against other shareholders for breach of SA

The threat of breach = influence over the resolution

The right of the shareholders are not removed by the SA, but it does provide a personal right to be enforced against them

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16
Q

How might amending Articles be different to amending SA?

A

Whereas Articles can be amended with SR, SA may require unanimity to amendments = minority party can veto any proposed changes

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17
Q

What resolution must be used to remove a director (before the expiration of their office period)?

A

Ordinary resolution

I.e. the ‘removal resolution’

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18
Q

Can the Board remove a director?

A

Not unless the Articles specifically permits

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19
Q

Can directors (who are also shareholders) vote in their capacity as shareholder on the OR to remove them?

A

YEs!

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20
Q

What can not be used by a company to remove a director?

A

A written resolution

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21
Q

What kind of notice is required for a removal resolution from a proposing shareholder and how long is this (before what event)?

A

A special notice - 28 clear days before GM at which removal resolution voted on by shareholders

I.e. shareholders proposing removal resolution must give notice of it to board at least 28 days before GM

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22
Q

If the board places the removal resolution on the agenda of the next GM, what notice must it give shareholders? What if this is not practical?

A
  • 14 clear days’ notice of removal resolution (at same time as it gives notice of GM)
  • If not practical - e.g. notice of GM already sent out - may be given in any other mode (e.g. advert) allowed in Articles at least 14 days before GM
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23
Q

Must a board place the removal resolution from shareholders on the agenda of the next GM?

A

No - can simply ignore proposed removal resolution = not considred at GM

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24
Q

What can shareholders do to get around the fact that directors may ignore their removal resolution?

A

Use s303 request - shareholders holding together not less than 5% of paid up voting share capital can serve a request on board requiring it to call a GM

Must state general nature of business shareholders wish to be dealt with

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25
Q

Is the power of shareholders to call a GM (s303) limited to removal resolutions?

A

No - the power of directors to require board to call a GM is a general power

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26
Q

If a director receives a s303 request - i.e. not less than 5% shareholders require them to call GM - when must directors call GM and when must this be held?

Call = say it is going to happen
Held = actually host it

A

Call GM within 21 days from date they become subject to s303 request which should be held no longer than 28 days after date of notice calling the GM

I.e. subject to S303 > call GM within 21 days > hold no more than 28 days after calling

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27
Q

What happens if directors fail to call GM after receiving s303 within the 21 day period?

I.e. 21 day period to call GM passes

A

All shareholders who submitted s303 request/any representing more than half of voting rights of those who submitted can call GM themselves on normal notice (14 days) - recovering reasonable expenses for doing so from company

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28
Q

When shareholders do it themselves, on what notice can they call GM and when must it be held from giving the s303 request?

As directors have not after receiving s303 request

A
  • Can call on normal notice (14 days)
  • Must be held within 3 months of s303 request
29
Q

What is the best time for an unhappy shareholder to submit a s303 (requiring directors to call GM) request?

A

At the same time as special notice (so either directors will call GM with removal of director on agenda or the shareholders can step in and call GM themselves)

Puts directors under time pressure!

30
Q

What are the two timelines for when a board does and does not cooperate with a s303 notice?

A

Does cooperate:

  • Day 1: unhappy shareholders serve s303
  • Day 22: last day to decide whether to call a GM (has 21 days to)
  • Day 50: last day to hold the GM if it was called (has 28 days to)

Does not cooperate:

  • Day 1: unhappy shareholders serve s303
  • Day 22: last day to decide whether to call a GM (has 21 days to)
  • Day 23: board loses control and shareholders can call a GM on normal 14 day notice (Day 38) or within 3 months of s303 request
31
Q

What must the company send to the director concerned once they receive it and when?

A
  • A copy of notice (that one or more members intends to propose removal resolution)
  • Immediately
32
Q

What does the director have the right to do? Does this depend on whether or not they are a shareholder?

A
  • Make (reasonable length) representations in writing setting out why they should not be removed which should be circulated/read out at GM
  • Has right to be heard to speak in defene at GM (whether a shareholder or not)
33
Q

In context of removing directors, what two protective measures should be considered if the director is also a shareholder?

A
  1. Bushell v Faith clauses (check Articles and SA)
  2. Shareholders’ Agreement
34
Q

What does a Bushell v Faith clause do and what is the effect of this?

A

Gives the director (who is a shareholder) weighted voting rights at a GM where removal resolution is proposed - means shareholders are unable to pass an OR to remove director concerned

Contained in Articles

35
Q

Would a court intervene with a Bushell v Faith clause as it is seemingly contrary to the removal of a director by OR?

A

No, this is a private contractual agreement that does not change the OR requirement, but merely changes how votes are amassed

Often found in smaller companies where director played role in setting up company and expects to continue with the business

36
Q

If the Shareholders’ Agreent provides that unanimous consent of all shareholders is required in order for a removal resolution to be passed, can the majority of shareholders no longer remove a director under s168?

A

No, company must accept majority vote of shareholders even if against SA; the resolution is valid

Director has claim against other shareholders in breach of SA

37
Q

What is needed for a director to be paid compensation for loss of office?

A

If approved by company’s shareholders by way of OR

Distinguish from breach of employment contract compensation

38
Q

When will an OR not be needed for a director to be compensated for loss of office?

I.e.for what 2 payments

A
  1. The payment does not exceed £200 (along with any other relevant payments)
  2. The payment is made in good faith (discharge of existing legal obligation, by way of damages re obligation, in settlement/compromise of claim in connection with termination, by way of pension in respect of past services)
39
Q

Must a payment by a company to a director of its holding company be approved by that company?

A

Yes, unless it is a wholly-owned subsidiary

40
Q

Can directors avoid provisions (OR) by payment being made to a TP rather than directly to a director themselves?

I.e. person connected to a director

A

No - payments made to a person connected to a director or for the benefit of a director/connected person will be treated as a payment to the director and will also require shareholder approval

41
Q

Re payment for loss of office, a memorandum must be made setting out what and available to who for how long?

A

Memorandum setting out particulars of the payment must be made available to shareholders for 15 days before OR passed, ending with the date of the general meeting

42
Q

What other kinds of payments loss of office requires shareholder approval?

A
  • Payment for loss of office made by any person to a director in connection with transfer of whole or part of undertaking or property of a company
  • Payment for loss of office made by any person to a director in connection with a transfer of shares of a company/its subsidiary resulting from a takeover bid
43
Q

What is a derivative claim?

A

Right of action not personal to shareholder but instead derives from company’s right of action which the company has not exercised

I.e. minority shareholder can sue for a wrong committed against the copany even if the company has not taken action

44
Q

To whom will the remedy for a derivative claim be granted?

A

Any remedy granted to the company and not bringer of claim (shareholder)

I.e. member of company initiates in respect of a cause of action vested in company and seeking relief on behalf of company

45
Q

For what can a derivative claim be brought?

A

Breach of statutory duty (s170-s177) by director inc duties at common law that do not fall within CA 2006

Even if no benefit personally

46
Q

Can a derivative claim only be brought against a director and must they have benefitted?

A
  • Director (inc shadow and former) or ‘another person (TP)
  • No requirement for a director to have benefitted personally

Brought for acts or omissions

TP can be D of claim either in lieu of director or in addition

47
Q

In what circumstances can a derivative claim be brought against a TP?

A

In very narrow circumstances of knowing assistance e.g. against a third party to a contract entered into in breach of the director’s duties, where that third party knew about the breach.

48
Q

Who may bring a derivative claim?

A

A member

49
Q

Can a member bring a claim for an event that happened before they became a member? And can a former member bring a claim for an event that happened whilst they were a member?

A
  • Member can bring a claim for events that happened before or after they became a member (cause of action vested in company rather than member)
  • But a former member cannot bring a claim re events that occurred whilst they were one
50
Q

What are the two stages to bringing a derivative claim?

Re court approval

A
  1. Member must obtain permission from the court to continue a derivative claim
  2. If not dimissed at first stage, court must consider particular criteria
51
Q

Why would the court refuse permission at stage 1?

A

If they are satisfied that a person acting in accordance with s172 (duty to promote success of company) would not seek to continue claim

Absolute bar to continuation

52
Q

If there is not an absolute bar to cotinuation (i.e. someone acting in accordance with s172 would seek to claim), what must court then consider under s263(3)?

Still at stage 1

A

Whether member acting in good faith, whether act/omission which gave rise to cause of action would likely be ratified by company

53
Q

What particular criteria would the court consider at stage 2?

A

Court must have particular regard to any evidence it has before it re views of the members who have no ‘personal direct or indirect interest in the matter’

I.e. evidence from other members

Harder for single member to bring proceedings against wishes of general body of shareholders

54
Q

Summary of two stage process

A
55
Q

What do unfair prejudice actions allow a member to bring an action for and against whom?

A

On the grounds that the company is being run in such a way that they have suffered unfair prejudice - brought against the company

56
Q

What conduct might be held to be unfairly prejudicial to the interests of members?

A
  • Granting of excessive remuneration to directors
  • Directors’ dealing with associated persons
  • Non-payment of dividends
57
Q

How does an unfair prejudice claim differ from a derivative action?

A

In unfair prejudice claim, the shareholder sues for themselves

Cf derivative action - sues on behalf of company

58
Q

On what 2 grounds can a claim for unfair prejudice be brought?

A
  1. Company’s affairs being/have been conducted in a manner that is unfairly prejudicial to interests of (some part of its) members generally
  2. An actual/proposed act/omission of company is/would be so prejudicial
59
Q

What kind of test is used to show that company’s affairs are being conducted in a manner unfairly prejudicial to their interests?

A

Reasonable bystander (objective) test

60
Q

What might be considered as ‘unfairly prejudicial’ conduct?

A
  • Negligent/inept management of a company (must be serious/repeated mismanagement)
  • Disagreements as to company policy (change in direction of business)
  • Bad faith (no need for conscious intent)
  • Breaches of Articles
  • C’s conduct (but does not need to come with clean hands)
  • Excessive remuneration
  • Legitimate expectation (in case of quasi-partnerships; shareholders have a legit expec to be involved in management of company in small private companies)
61
Q

What is the most commonly made order as a remedy for unfair prejudice?

Other than orders regulating future conduct/requiring company to do or refrain from doing certain acts

A

Provide for the purchase of petitioner’s shares by the wrongdoer(s) at market value (at discretion of court)

Valuation of shares is argued

62
Q

When will a court valuation not be necessary?

A

Where ther is a fair valuation mechanism set out in the Articles

63
Q

When will the court impose a discount on the value of a minority shareholding and when will it not?

i.e. the valuation principles

A
  • Will not impose discount: if a quasi-partnership (company controlled by all shareholders playing major roles) - on basis that they are being forced to sell their shares because of unfairly prejudicial conduct of the majority
  • May order discount: if shareholding is viewed as an investment/company operated along commercial lines
64
Q

What is the valuation date of the minority shareholding?

A

That on which the court order was made re sale shares

65
Q

Is the behaviour of the C relevant in valuation?

A

Maybe - e.g. if they previously rejected reasonable offer

66
Q

What is the preferred option for valuation of minority shareholding?

A
  • A negotiated settlement, but if no settlement…
  • A binding third-party valuation
67
Q

On what grounds can a shareholder bring a petition to the court for the company to be wound up?

A

That it is just and equitable to do so (will be decided by the court)

Most drastic remedy

68
Q

What other action may be brought at the same time as a winding up petition?

A

A claim for unfair prejudice

Business Law and Practice (V) (13 decks)

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