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SQE1 - Business Practice > The interests, rights, obligations and powers of stakeholders > Flashcards

The interests, rights, obligations and powers of stakeholders Flashcards

1
Q

What is the purpose of a shareholders’ agreement?

A

Bind the parties to the agreement and provide a remedy for breach.

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2
Q

Outline some of the shareholders’ rights.

A
  • To receive dividends if there are profits available, directors made recommendation and this is approved by shareholders
  • Apply to court for company to be wound up if just and equitable to do so
  • Remove director by ordinary resolution
  • Remove auditor by ordinary resolution
  • Right to inspect without charge:
    o Minutes of general meetings and WRs
    o Statutory registers
    o Service contracts
    o Director’s indemnities
    o Contracts relating to purchase of own shares
  • Right to receive annual accounts
  • Right to seek injunction to restrain against prohibited by constitution.
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3
Q

When will a company be considered a subsidiary of another company?

A

If the holding company holds a majority of its voting rights.

That other company is a member of it an has the right to appoint or remove a majority of its board of directors.

The other company is sole member.

It is a subsidiary of a company that is itself a subsidiary of another company.

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4
Q

What are ordinary shares?

A

Most common types of shares. Give right to attend and vote at general meetings and receive dividends if declared.

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5
Q

What are preference shares?

A

Receive enhanced rights over ordinary shares such as guaranteed right to dividends.

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6
Q

What is a cumulative share?

A

The preference shareholder has to be paid missed dividends from previous financial years as well as current financial years if there are profits available. This ranks ahead of dividends to ordinary shareholders.

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7
Q

How does an unfair prejudice petition work to protect minority shareholders?

A

Allows shareholder to apply to court for remedy if a shareholder feels company is:

o Company’s affairs conducted in matter which is unfairly prejudicial to interests of members generally
o Actual or proposed act or omission of company is prejudicial
o Diverting opportunities to competing business
o Excessive pay to directors
o Excluding shareholder from management where shareholder understood they would be participating in management.

Court can then make an order.

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8
Q

What is a derivative claim?

A

Claim brought by shareholder for wrongdoing by a director.
First stage - apply to court for permission. Court then considers evidence w/o hearing to see if there is a case.
The full hearing.

Court may refuse permission if not satisfied person not promoting success of company. Cause of action not yet occurred and been authorised by company or cause of action occurred and ratified by company.

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9
Q

What is a substantial property transaction?

A

Where a director in their personal capacity or someone connected with a director.

Buys and sells to the company

A non-cash asset of substantial value.

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10
Q

How does a company authorise a substantial property transaction?

A

Ordinary resolution.

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11
Q

What is a person connected with a director?

A

Family member / long term partner owns at least 25% of the corporate body’s shares or has the right to exercise or control more than 20% of voting power at a general meeting of company.

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12
Q

What is a non-cash asset?

A

Any property other than cash (not loans).

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13
Q

What is classed as substantial for an SPT?

A

Automatically substantial if over £100,000.

But also substantial if over £5000 and more than 10% of company’s net asset value.

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14
Q

What is the effect of completing an SPT without relevant approval?

A

The transaction is voidable and individuals may have to account to the company for any gains they have received

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15
Q

Explain the difference between a NED and ED?

A
  • EDs- have service contracts which set out their job title, duties and responsibilities
  • NEDs - appointed to board and registered at Companies House but won’t have service agreements. No salary but will receive director’s fees to attending board meetings
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16
Q

What articles of the Model Articles do director’s derive their power from?

A

MA 3 - power to run company by passing board resolutions.

MA 7 and 8 can exercise powers unanimously without a meeting if they indicate they have common agreement

MA 5 - can delegate their power as they see fit.

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17
Q

What is a de facto director?

A

Person carrying out the job of a director even though they have not been officially appointed.

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18
Q

What is a shadow director?

A

A person in accordance with whose directions or instructions the directors of the company are accustomed to act.

Great deal of control but not formally appointed as a director.

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19
Q

What is an alternative director?

A

Someone appointed by a director to attend a board meeting and vote with the instructions of a director.

No power for this in MAs so special article must be adopted.

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20
Q

What restrictions are there on being appointed as a director?

A

A person who has been disqualified from acting as a director cannot be appointed.

Person ceases to be director if bankruptcy order against them or unfit to act.

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21
Q

What information is covered in a director’s service contract?

A

Salary, responsibilities, benefits and notice period.

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22
Q

Which kinds of service contracts must be approved by shareholders ordinary resolution?

A

If it has a guaranteed term of more than 2 years.

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23
Q

How are short-term service contracts approved? What exceptions are there to this rule when the board of directors only has two members?

A

The board of directors can agree on the terms.

When there are only two directors one cannot vote as they are interested so the meeting will not be at quorate.

The company could change the articles permanently by special resolution.

They could also temporarily suspend the quorum provision in the articles by ordinary resolution.

Here must keep copy of memorandum at registered office for 15 days prior to meeting

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24
Q

What happens if a service contract with a guaranteed term of more than 2 years is not approved by the shareholders?

A

The guaranteed term element is void but the rest of the contract is valid.

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25
Q

What forms are used to remove a director from office?

A

TM01 - individual
TM02 - company

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26
Q

A director’s service contract has come to an end. Are they still a director?

A

Yes if they have not been removed from office at companies house.

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27
Q

How can the shareholders remove a director from office?

A

Under s168 must be by ordinary resolution passed at a general meeting.

Special notice must be given.

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28
Q

What is special notice? What is it used for?

A

Intention to pass the resolution to remove a director must be given to the company at least 28 days before the general meeting.

Directors must then give shareholders 14 days notice before the general meeting.

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29
Q

What is a Bushell v Faith clause?

A

A clause in the Articles that provides for weighted voting rights to a director who is also a shareholder. It is important to check if trying to dismiss a director under s. 168

30
Q

What notification requirements are there in relation to directors?

A
  1. Companies must keep register of directors including their name, address and dob.
  2. Must keep register of residential addresses.
  3. Must use from CH01 and CH02 to note change in directors’ details.
  4. Must notify companies house of appointment of director on form AP01/AP02 within 14 days of appointment. Same for resignation but on TM01/02
31
Q

List the director’s duties under ss171-177 CA 2006.

A

S171 Duty to act within powers
S172 Duty to promote the success of the company
S173 Duty to exercise independent judgment
S175 Duty to avoid conflict of interests
S176 Duty not to accept benefits from third parties
S177 Duty to declare interest in proposed transaction or arrangement with the company.

32
Q

What are the exceptions to s177 director must declare their interest in a transaction?

A
  • Interest cannot reasonably be regarded as likely to give rise to conflict of interest.
  • Director not aware of interest
  • Other directors already reasonably aware
  • Concerns nature of director’s service contract
33
Q

What are the consequences of a breach under ss171-177

A

Company can decide to take civil action against the director.
o Account of profits
o Equitable compensation
o Recession of contract entered into as result of director or indirect result of breach.
o Injunction to prevent further breaches.
o Restoration of property transferred as a result of breach.

34
Q

How can a breach under ss171-177 be ratified?

A

By ordinary resolution of the shareholders.

Where the director in breach is also a shareholder they cannot vote on the ordinary resolution.

35
Q

What is the duty to declare an interest under ss182 CA

A

This is a duty to declare an interest in an existing transaction.

Criminal offence punishable by fine.

36
Q

When can a wrongful trading claim be made against a director?

A
  1. company has gone into liquidation
  2. before winding up proceedings began director knew or ought to have known there was no reasonably prospect that company would avoid liquidation
  3. person was a director of the company at that time.

Claims are brought by a liquidator or administrator.

37
Q

What is the defence available for directors accused of wrongful trading?

A

If they took every step with a view to minimising potential loss to company’s creditors.

Considers general knowledge care and skill expected and skill that director has.

38
Q

When can a claim for Fraudulent trading under s213 IA 1986 be made against a director?

A

If it appears business carried on with intent to defraud.

Directors are liable to make contributions to assets as court thinks proper.

39
Q

When can a claim for misfeasance be brought against a director?

A

Misfeasance means any breach of fiduciary duty by a director. During winding up of company they can be forced to contribute.

40
Q

What is required for a loan to a director to be permitted?

A

The loan must be authorised by ordinary shareholder resolution

41
Q

What are the four exceptions to the rule that a loan to a director must be approved by ordinary resolution?

A

o Expenditure on company business - only available for expenses up to £50,000
o Expenditure on defending civil or criminal proceedings in relation to the company or associated company
o Expenditure defencing regulatory proceedings or defending the director in investigation with regulatory authority.
o Minor and business transactions not exceeding £10,000

42
Q

How are payments to directors on loss of office authorised?

A

Under s217 - By written resolution for payments of more than £200.

Also applies to payments to past directors and persons connected with a director.

If a company makes a payment without authorisation any director who authorised payment is joint and severally liable.

43
Q

Give some examples of the other liabilities placed on directors whilst in office.

A
  • Failure to maintain company records - punishable by fine. Accounting records - by prison
  • Failure to file certain documents such as special resolutions within 15 days at companies house punishable by fine
  • Liability for financial records
  • Breach of health and safety legislation
  • Bribery
  • Making political donations without shareholder approval
  • Civil and criminal liability under environmental legislation
44
Q

How can a person be disqualified as a director under the CDDA 1986?

A

o Conviction for indictable offence
o Persistent breaches of companies legislation
o Fraud on winding up
o Summary conviction for failure to file required notice or document
o Being an unfit director of insolvent company
o Investigation and finding of unfitness
o Fraudulent or wrongful trading
o Breach of competition law

The effect of disqualification is that a director cannot be a director again without the leave of the court (which is rarely granted).

45
Q

How many years can a director be disqualified?

A

Between 2-15 years.

46
Q

What are the three ways shares can change hands?

A

Allotment - company creates shares and gives them to new or existing shareholders.

Transfer - shareholder sells or gives shares to another shareholder

Buy-back - company buys back some of its own shares

47
Q

What does it mean when a share has been allotted?

A

A person acquires an unconditional right to be included in the company’s register of members in respect of those shares as the shares have been transferred and paid for.

48
Q

What does it mean when a share has been issued?

A

When the new shareholder has been entered on the register of members.

49
Q

What are the 3 key questions to ask when the directors issue new shares?

A
  1. Are there restrictions on the allotments?
  2. Do the directors have authority to allot the shares?
  3. Are there any pre-emption rights
50
Q

What is an ASC clause? What is the effect of such a clause? How can an ASC clause be removed?

A

Before the CA 2006 was enacted there was an upper limit on the number of shares a company could have. If articles have not been updated the ASC will still be in place.

An ASC clause can be removed by an ordinary resolution. This is one of the exceptions to the rule that articles can only be amended by special resolution.

51
Q

A private company only has one class of shares, do the director’s have authority to allot the shares without the permission of the shareholders?

What formalities are required?

A

Under CA 550 - If the company has one class of shares before and one after the allotment the directors can proceed without the authority of the directors if the company was incorporated under CA 2006.

If the company was incorporated before CA came into force then an ordinary resolution must be passed by the shareholders to activate CA 550.

52
Q

How is authority granted under s551 CA 2006 when the company has more than one class of share?

A

Directors of public or private companies with more than one class of share before or after allotment need shareholder permission via an ordinary resolution.

The ordinary resolution must be passed no more than 5 years before the date of allotment.

Authority to allot can also be included in the articles and will state when the right should expire, articles from incorporation this cannot be more than 5 years from incorporation of the company.

Ordinary resolutions passed under s551 must be filed at companies house.

53
Q

What types of shares do pre-emption rights apply to?

A

Equity securities - only ordinary shares not preference shares/

54
Q

What is a pre-emption right?

A

The idea that a company must offer new equity securities to current shareholders before new shareholders - to allow the shareholders to keep the proportion of their current shareholding.

The period of acceptance for the offer cannot be less than 14 days.

55
Q

When do pre-emption rights not apply?

A

If the consideration is wholly or partly non-cash or shares are to be allotted under an employee share-save scheme.

56
Q

What might a company’s articles contain in relation to pre-emption rights?

A

A company can exclude pre-emption rights in their articles.

There are no pre-emption rights in the model articles.

57
Q

How can pre-emption rights be disapplied?

A

Pre-emption rights can be disapplied by special resolution - s659-571.

58
Q

How can private companies with one class of shares disapply pre-emption rights?

A

By passing a special resolution under CA 569

59
Q

How can public companies or private companies with more than one class of shares disapply pre-emption rights?

A

Companies which don’t have automatic authority to allot will need an ordinary resolution to give the directors authority

And then a special resolution to remove the pre-emption rights.

60
Q

In summary how can pre-emption be disapplied?

A

Those within the company’s articles can be checked then removed by special resolution.

Pre-emption rights under s561 apply can be disapplied by special resolution.

Company is disapplying rights under s571 CA 2006 director’s must make written statement justifying the misapplication.

61
Q

What resolutions in relation to allotting shares are required to the sent to CH within 15 days?

A

All special resolutions
Ordinary Resolution removing authorised share capital in pre-CA 2006 company.

Ordinary resolution to activate s550 in pre-CA company.

Any s551 ordinary resolution granting directors authority to allot.

62
Q

What company forms should be sent to CH and when?

A

SH01 within 1 month of allotment.

And change of PSC forms.

63
Q

When must the holder of the new shares be entered into the company’s register?

A

Within 2 months of allotment

64
Q

When must share certificates be issued following allotment?

A

Within 2 months of allotment.

65
Q

Do pre-emption rights apply to transfers of shares?

A

Nothing in CA 2006 to prevent shareholder from transferring shares nor obligation to offer shares to those already holding shares first.

66
Q

How can companies prevent shares from being transferred?

A

Articles cannot restrict a shareholder from selling shares and stop a particular buyer from buying them however person is not a shareholder until they are entered on the register of members.

Under MA26 the board has the discretion to refuse to register a new member.

67
Q

Describe the process for transferring shares.

A
  • Complete STF and give to transferee with share certificate
  • Sale price over £1,000 need to pay stamp duty on ST
  • None payable if the shares are a gift
  • Transferee sends share cert and STF to company
  • Company then:
    o Sends new shareholder share cert in their name within 2 months
    o Notifies Registrar of Companies of charge in ownership of shares when filing annual CS01.
68
Q

When are shares automatically transmitted?

A
  • If shareholder dies shares pass to PRs or;
  • Shareholder bankrupt shares automatically vest in trustees.
  • PRs and trustees don’t become shareholders but are entitled to dividends
  • Can chose to be registered as shareholder and then share sells
  • Or can sell in capacity as representative.
69
Q

What can dividends be paid out of?

A

Cannot be paid out of capital, only distributable profits.

When can a company buy back its own shares?

70
Q

Does the sale of land by directors require shareholder approval?

A

If the sale and purchase of land value exceeds 10% of the company’s asset value

SQE1 - Business Practice (7 decks)

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