Shareholders' rights and remedies

Question 1

What principle is applied to decisions reserved to shareholders?

Answer 1

Majority rule-a requisite majority of the shareholders must vote in favour of the proposed resolution in order for it to be passed.

Question 2

What can members do under s33 CA 2006 if their membership rights are infringed and what is the usual remedy?

Answer 2

Members can sue under s33 CA 2006 if their membership rights are infringed. The usual remedy for breach of s33 CA 2006 is damages.

Question 3

In order to protect members, how should they set out any of their rights which are not membership rights?

Answer 3

In a separate contract such as a shareholders’ agreement.

Question 4

What is a shareholders’ agreement?

Answer 4

A private contract between the shareholders which acts as a kind of extension to the Articles in terms of governing how the company is run and can contain provisions which the Articles do not permit.

Question 5

What provisions are likely to be included in a shareholders’ agreement?

Answer 5

-Unanimous voting over certain matters
-Quorum for GMs
-Dividend policy
-Allotment of new shares
-New and departing shareholders

Question 6

Outline the right of action/enforceability in the context of a shareholders’ agreement.

Answer 6

Shareholders’ Agreement provides a right of action which enables one member to enforce the provisions of the agreement directly against another member.

If a term is breached, it can be enforced in the usual way under general contract law principles.

Question 7

How can minority shareholders be protected via a shareholders’ agreement (provide an example)?

Answer 7

Certain matters can be reserved as requiring the consent of all shareholders and this protects minority shareholders eg may provide that the unanimous consent of all shareholders is required to pass a resolution to remove a director.

Question 8

Where a removal resolution is passed without the required unanimity outlined in a shareholders’ agreement, if a simple majority voted in favour, would the resolution still be valid?

Answer 8

Yes, but the director would then have a claim against the other shareholders for breach of the shareholders’ agreement (due to unanimity not being reached).

Question 9

How are amendments to a company’s Articles made?

Answer 9

By special resolution requiring 75% approval.

Question 10

How may a minority shareholder obtain a veto in respect of amendments to a company’s Articles?

Answer 10

By entering into a Shareholders’ Agreement that requires the unanimous approval of all parties to the agreement.

Question 11

What are the rights of a shareholder with any shareholding under CA 2006?

Answer 11

-Receive notice of a GM (s 307)

-Appoint a proxy to attend a GM in their place (s 324)

-Vote at a GM (provided they hold voting shares) (s 284)

-Receive a dividend (if declared)

-Receive a copy of the company’s accounts (s 423)

-Inspect minutes and company registers (s 116)

-Ask the court to prevent a breach of directors’ duties

-Commence a derivative claim (s 260)

-Bring a petition for unfair prejudice (s994 )

-Bring a petition for just and equitable winding up (s122 Insolvency Act 1986)

Question 12

What are the rights of a shareholder with a shareholding of 5% or more under CA 2006?

Answer 12

-Require directors to call a General Meeting (s 303)

-Require the circulation of written statements regarding proposed resolutions to be considered at a GM (s 314)

-Circulate a written resolution (s 292)

Question 13

What is the right of a shareholder with a shareholding of 10% or more in relation to the MA?

Answer 13

Demand a poll vote (MA 44).

Question 14

What is the right of a shareholder with a shareholding of over 25% under CA 2006?

Answer 14

Block a special resolution (s283) as a special resolution is passed by 75% or more of the votes.

Question 15

What is the right of a shareholder with a shareholding of over 50% under CA 2006?

Answer 15

Pass or block an ordinary resolution (s282) as an ordinary resolution requires over 50% of the votes to pass.

Question 16

What is the right of a shareholder with a shareholding of over 75% under CA 2006?

Answer 16

Pass a special resolution (s283) as a special resolution is passed by 75% or more of the votes.

Question 17

How may a company remove a director before the expiration of their period of office?

Answer 17

By ordinary resolution under s168(1) CA 2006.

Question 18

What type of notice is required of a removal resolution under CA 2006?

Answer 18

Under s168(2), special notice is required of a removal resolution (28 clear days before the GM).

Question 19

Is it possible for a company to use a written resolution to remove a director?

Answer 19

No, as per s288(2)(a) CA 2006.

Question 20

If the board places the removal resolution on the agenda of a GM, how should they give notice of that removal resolution?

Answer 20

It should give the shareholders notice of that removal resolution at the same time and in the same manner as it gives notice of the GM, meaning the board will need to give shareholders’ at least 14 days clear notice of the removal resolution.

Question 21

If the board does not place the removal resolution on the agenda of a GM, what can the shareholders do?

Answer 21

If the removal resolution is not placed on the agenda, it will not be considered at the GM and the shareholders may need to force the directors to call a GM in accordance with s303 CA 2006.

Question 22

What shareholders can serve a s303 CA 2006 request on the company to hold a GM?

Answer 22

Under s303, shareholders together holding not less than 5% of the paid up voting share capital of the company can serve a request on the company.

Question 23

What must directors do when they receive a s303 CA 2006 request?

Answer 23

Under s304(1) CA 2006, when a s303 request is received, the directors must call the GM:

-within 21 days from the date on which they become subject to the s303 request

-to be hold on a date not more than 28 days after the date of the notice calling the GM

Question 24

If the directors fail to call a GM under s304(1) CA 2006, what happens?

Answer 24

All of the shareholders who submitted the s303 request or any of them representing more than one half of the voting rights of those who submitted that s303 request, can call a GM themselves pursuant within 3 months of the s03 request.

Question 25

In order for the unhappy shareholders to ensure the resolution to remove a director is heard as soon as possible, what should they do?

Answer 25

Submit a s303 request requiring the directors to call a GM at the same time as sending their s312 CA 2006 special notice to the board.

Question 26

If a company receives notice that one or more members intends to propose a removal resolution, what must the company do?

Answer 26

Immediately send a copy of the notice to the director concerned (s691(1) CA 2006).

Question 27

What are a director's rights to protest removal?

Answer 27

-Right to make representations in writing provided those representations are of a reasonable length (s169(3) CA 2006) -Right to be heard and speak in their defence at the GM (s169(2) CA 2006)

Question 28

What is a Bushell v Faith clause?

Answer 28

A clause in the Articles of association which may give a director, who is also a shareholder, weighted voting rights at a GM at which a removal resolution is proposed. It likely means that the shareholders are unable to pass an ordinary resolution to remove the director concerned.

Question 29

Outline how any compensation payments to a director for loss of office must be approved, including any relevant exceptions.

Answer 29

By way of ordinary resolution by the company's shareholders (s217 CA 2006) unless; -the payment does not exceed £200 (s221 CA 2006) -the payment is made in good faith

Question 30

How long must a memorandum setting out particulars of compensation for loss of office to a director be made available for?

Answer 30

Must be made available to shareholders for 15 days before the ordinary resolution is passed, ending with the date of the GM (s217(3) CA 2006).

Question 31

What is a derivative claim?

Answer 31

A derivative claim is one where the shareholder’s right of action is not one which is personal to that shareholder but instead it is one which is derived from the company’s right of action, which the company has not exercised. S260 CA 2007 defines it as a claim: a) in respect of a cause of action vested in the company; and b) seeking relief on behalf of the company

Question 32

When can a derivative claim be brought?

Answer 32

Section 260(3) provides that a claim may be brought only in respect of 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 of the company.

Question 33

Who can bring a derivative claim and who can they be brought against?

Answer 33

Derivative claims must be brought by a member. The cause of action may be brought against the director or another person (or both), including third parties who are shadow directors for example.

Question 34

What are the two stages for bringing a derivative claim?

Answer 34

Stage 1-court decides if there exists a prima facie case. If a prima facie case exists, the case can proceed to the next stage. Stage 2-court allows case to proceed and carries out a detailed consideration of criteria, including evidence from other members. Case then proceeds to trial.

Question 35

Who is the remedy of a successful derivative claim granted to?

Answer 35

Any remedy granted is to the company, not to the shareholder bringing the claim.

Question 36

What type of action does Section 994 CA 2006 allow a member to bring?

Answer 36

An action on the grounds that the company is being run in such a manner that they have suffered unfair prejudice, or an actual or proposed act/omission would be so prejudicial (s994(1) CA 2006).

Question 37

Under s994 CA 2006 unfair prejudice actions, who do the shareholders sue for?

Answer 37

They sue for themselves, whereas under derivative actions the shareholders sues on behalf of the company in respect of the company's loss.

Question 38

What is the test for considering whether a company's affairs are being conducted in a manner unfairly prejudicial to the interests of a shareholder?

Answer 38

Reasonable bystander (objective) test-Re Guidezone Limited (2001). The petitioner must show that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members.

Question 39

What remedies can the Court grant in respect of an unfair prejudice action, and what is the most commonly made order?

Answer 39

Under s996(1) CA 2006, the court has the powers to grant such order as it thinks fit to provide relief. The most commonly made order is to provide for the purchase of the petitioner's shares by the wrongdoer.

Question 40

What principles apply to valuation when considering the value of a petitioner's shares in a successful unfair prejudice action?

Answer 40

-Shareholders should first attempt to use a valuation mechanism set out in the Articles -The courts will not generally not impose a discount on the value of a minority shareholder in a private company -The valuation date is that on which the court order was made in respect of the sale shares -The behaviour of the claimant/petitioner may be relevant

Question 41

Why are Section 994 CA 2006 unfair prejudice petitions not a suitable course of action in most cases?

Answer 41

They are expensive, time-consuming and complicated to bring. They also bring a great deal of uncertainty for the petitioner therefore a negotiated settlement will usually be the preferred option.

Question 42

What is the final and most drastic remedy available to any shareholder under Section 122 Insolvency Act 1986?

Answer 42

The right to bring a petition to court for the company to be wound up (liquidated) on the grounds that it is just and equitable to do so.