Shareholders' rights and remedies Flashcards
What happens if a members rights are infringed?
They can sue under s33 of the companies act 2006. The usual remedy is damages.
Examples of membership rights
- right to a dividend once it has been lawfully declared
- right to share in surplus capital on winding up
- right to vote at meetings
- right to receive notice of GMs and AGMs
- appoint proxy at attend GM in their place
- receive copy of the company’s accounts
- inspect minutes and registers
- ask court to prevent breach of directors’ duties
- commence a derivative claim
- bring petition for unfair prejudice
- bring petition for just and equitable winding up
Note: if not a membership right it is not enforceable under s33 CA even if it is included in the articles.
Therefore important to include it in a separate contract (eg shareholders’ agreement) and not the articles.
What is a Shareholders’ agreement?
Acts as a kind of extension to the Articles in terms of governing how the company is run and can contain provisions which are not permitted in the Articles.
Likely to include provisions relating to:
- unanimous voting over certain matters (eg removing a director)
- Quorum for GMs
- Dividend policy
- Allotment of new shares
- New and departing shareholders
Shareholder agreement vs articles
- Shareholder agreement:
is a contract between some or all of the shareholders in which they can agree between themselves how to regulate the affairs of their company.
Can agree not to change the Articles of the company and not to remove a director unless in agreement.
Such provisions will constitute personal voting rights and obligations on the shareholders including how they will exercise voting rights.
Also are private. - Articles:
- contract between company and shareholders in capacity as shareholders.
Provision of articles are subject to CA 2006 whereas shareholders agreement is an arrangement in personal capacity and has more freedom.
Removal of director by shareholders
Shareholders may remove a director before expiration of their period of office by ordinary resolution.
Board cannot remove a director unless in articles.
Must give special notice (28 clear days) of a removal resolution.
CANNOT use a written resolution.
Special notice of removal resolution
Shareholders proposing a removal resolution must give notice of that proposed removal resolution to the company at least 28 clear days before the GM.
Board has two options when received notice:
- Place removal resolution on agenda
- Board decides not to place removal resolution on the agenda
- Board places removal resolution on the agenda
- Will give shareholders notice of the removal resolution at the same time as placing on agenda and in same way as giving notice of a GM
- Means board will need to give shareholders’ at least 14 clear days notice of the removal resolution
Note: gives notice because not all shareholders may be aware and notice will make sure all shareholders are aware this vote will be taking place
- Board does NOT place removal resolution on the agenda of the GM
Directors are not bound to place the removal resolution on the agenda.
If not on agenda it will not be considered at the GM - in this instance the shareholders may need to force the directors to call a general meeting in accordance with s303 CA 2006
Shareholders’ power to require calling of a general meeting
If the shareholders together hold at least 5% of the paid up voting share capital of the company they can serve a request on the board. This request will require the board to call a GM. (Known as a s.303 request)
Request must state the general nature of the business which the shareholders wish to be dealt with at the GM and may include the text of the resolution they want proposed at the GM.
Note: not limited to removal resolutions.
Directors’ obligations on receipt of a s303 request
After receipt of s303 request, directors must call the GM:
a) within 21 days from the date they become subject to the request; and
b) to be held on a date not more than 28 days after the date of the notice convening the GM (within 28 days of calling the GM)
If directors fail to call the GM, all the shareholders who submitted the request, or any with more than half of the voting rights of those who submitted the request can call the GM themselves.
- called on no fewer than 14 clear days notice
- held within 3 months of the date the directors received the request
In this instance, can recover reasonable expenses from the company and the company can recoup these from the directors
s303 practical points
To save time shareholders will submit a s303 notice requiring directors to call a GM at the same time as sending their s312 CA 2006 special notice.
Bushell v Faith clause
- Can be found in the articles (will not be one if the articles are unamended)
- If in articles, will give a director who is also a shareholder weighted voting rights at a GM at which a resolution is proposed.
- Likely means that shareholders are unable to pass an ordinary resolution to remove the director.
Director’s rights to protest removal
If company receives notice of a removal resolution, company mist immediately send a copy of the notice to the director concerned.
Director has the right to make representations in writing which should be circulated to the members of the company or read out at the GM.
Director also has a right to be heard i.e. speak in their defence at the GM whether or not they are a shareholder
Shareholders Agreements - removing a director
A shareholders agreement may require unanimous consent of all shareholders is required for a resolution to remove a director
This does not remove the rights of majority shareholders to remove the director.
The resolution would be valid and the director would be removed from office but the director would have a claim against the other shareholders for breach of the shareholders’ agreement
- breach of contract
- injunction
Compensation for loss of office
Any such payment must be approved by the company’s shareholders by ordinary resolution unless:
- payment does not exceed £200; or
- payment is made in good faith: (i) in discharge of an existing legal obligation; (ii) by way of damages in respect of legal ob.; (iii) in settlement of compromise in respect of a claim in connection with termination or (iv) by way of pension.
Note: no need for approval if wholly owned subsidiary
Memorandum must be available for 15 days before OR is passed
What is a derivative claim?
Shareholders can bring a derivative claim where directors have breached their statutory duties.
Includes: shadow directors and former directors.
Note: any remedy granted is granted to the company itself and not to the shareholder bringing the claim
Third parties may be defendants in lieu or in addition to the director.
What shareholders can bring a derivative claim?
Must be brought by a member. Does not matter if the cause of action arose before they were a member.
Former members cannot bring causes of action even if it arose while they were members.
Court Approval for a derivative action
Two stages:
1) Member must obtain permission of the court
- court will decide if there is a prima facie case
- will consider if must be refused s263(2) CA 2006 or look at the factors in s263(3)
If do not dismiss the case, will go on to:
2) Will have particular regard to consideration of criteria including: evidence and views of other members
Stage one considerations
Must be refused if:
court is satisfied that a person acting in accordance with s172 CA 2006 would not bring a claim (duty to promote the success of the company)
Factors:
Include:
- if member is acting in good faith
- whether the act or omission which gave rise to the action would likely be ratified by the company
Stage 2 considerations
Court must have particular regard to the evidence it has before it as to the views of the members who have no personal interest, direct or indirect in the matter.
This provision makes it harder for a single member to bring proceedings against the wishes of the general body of shareholders.
Unfair prejudice action
Allows a member to bring an action on the grounds that the company is being run in such a way that they have suffered unfair prejudice.
Examples of conduct:
- granting of excessive remuneration to directors
- directors’ dealings with associated persons
- non-payment of dividends
Shareholder is suing for themselves
Key principles of unfair prejudice claims
- Negligent or inept management of a company: this will not amount to unfairly prejudicial conduct unless that conduct is serious and/or repeated mismanagement which puts the value of shareholders interests at risk
- Disagreements as to company policy: not grounds
- Bad faith: no need to show bad faith for it to be prejudicial
- Breaches of the articles: not ordinarily unless breach on how the affairs of the company should be conducted
- Claimants conduct: no requirement for clean hands
- Excessive remuneration: courts will take a wide view of the prejudice that may be suffered by minority shareholder
- Legitimate expectation: in small companies (quasi-partnerships) shareholders may have legitimate expectation that they be involved in the management of the company and prevention of this may amount of unfair conduct
Grounds for an unfair prejudice action
(a) the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members; or
(b) that an actual or proposed act or omission of the company is or would be so prejudicial
Remedies for unfair prejudice
Court has power to grant such order as it thinks fit to provide relief
Most common order it to provide for the purchase of the petitioners shares by the wrongdoer
Valuation of shares
- first attempt to use valuation mechanism in articles (if provided)
- courts will generally not impose a discount on the value of the shares - especially where quasi-partnership (court may order a discount if shareholding is purely an investment)
- general rule is valuation date is the date on which court order was made on the sale of shares
Behaviour of claimant/petitioner may be relevant if previously rejected a reasonable offer.
Unfair prejudice - commercial points
- bringing claim is expensive, time-consuming and complicated
- also outcome is uncertain
Generally a negotiated settlement is the preferred option
Just and equitable winding up
Under insolvency act 1986, a disgruntled shareholder has the right to bring a petition to the court for the company to be wound up on the grounds that it is just and equitable to do so.
Rather a drastic solution as the life of the company is brought to an end.
Court has discretion to decide whether it is just and equitable for a winding up to take place.
Normally brought at the same time as an unfair prejudice petition.
