The members

Question 1

What is a member?

What is the difference between members and shareholders?

How many members must a company have?

What are the 2 elements generally required to become a member?

Answer 1

S.112 CA2006 = a member is:
1. The subscribers of the company’s memorandum of association who become members upon incorporation (and have their names entered into the register of members)
2. Every other person who agrees to become a member and whose name is entered on the register of members

All companies have members, but companies without share capital do not have shareholders (ltd by guarantee or unlimited)

S.7 CA2006 = all companies, subject to Articles, must have a minimum of 1 member

i. The person must agree to become a member (agreement can be explicit by a person filing out an application form, or implicit if acquiring shares through a share transfer)
ii. Their details must be entered in the company’s register of members

Question 2

When does a person become a member?

What is the allotment date?

What is the issue date?

Which case law made the distinction between allotment and issue of shares?

What must a company do following the allotment of any shares?

What must the company do when a person acquires shares through transfer?

Answer 2

Once the share have been allotted to them and their details have been entered on the ROM

Allotment date = date the person acquires an unconditional right to be entered in the ROM = usually date of directors’ meeting to approve the share allotment/transfer

Issue date = date when their details are entered on the ROM = they acquire legal title to the shares

National Westminster Bank plc v Inland Revenue Commissioners 1995

S.554 CA2006 = enter the details of any shares allotted in ROM as soon as practical but within 2 months of the date of allotment

S.771 CA2006 = either register the transfer by entering the details in ROM or refuse to do so within 2 months of the date of receipt of a duly completed STF

Question 3

Who can be a member?

What are the 2 restrictions on membership in the CA2006?

Name an example of a restriction in the Articles.

What would happen if a sole trader was entered on the register of members?

Answer 3

Any legal person may hold shares in a company (subject to Articles and the 2 restrictions)

1. S.126 CA2006 = companies cannot recognise trusts over their shares (shares must be held in name(s) of trustees)
2. S.136 CA2006 = a subsidiary company cannot be a member of its holding company unless the subsidiary is acting:
   * only as personal representative or trustee without having any beneficial interest in the shares, or
   * as an authorised dealer in securities

Ltd Articles may require min % of members to hold a particular qualification

NO! Only legal persons can be. A court order to rectify the register would be required (because no legal capacity and no power/authority to give instructions) and the name of the business owner should be entered on the ROM on behalf of the body

Question 4

Why is is not good practice to accept minors as members of the company and enter them in the register of members in their own name? (2)

Is the right of rejection of a minor conferred by general law?

What is the remedy for an allotment?

What is the remedy for a transfer?

How else could these situations be resolved?

How may this holding look on the register?

Who can amend the register of members?

Answer 4

1. Minors’ responsibilities are voidable during their minority (under 18 in E,W&NI) (e.g. any obligation to pay a call or sanctions for non-payment are unenforceable)
2. a minor cannot deal with transactions themselves (would require a court order)

Yes, but the Articles could also give express power to reject allotments and transfers in the name of a minor

Companies may refuse to accept the contract for the allotment of shares

The transferor may be reinstated as the holder of the shares

Company should request that the shareholding be held in the name of a suitable adult (for example a relative)

The holding may be annotated ‘a/c [name of minor] to explain the holding

S.125 CA2006 = only the court is authorised

Question 5

SHAREHOLDERS
When are the terms ‘member’ and ‘shareholder’ interchangeable?

What do shareholders provide to the company?

What is the benefit of being a shareholder?

What is the risk?

What is shareholders’ liability limited to (if a limited company)?

In order to establish the rights of a shareholder which documents should be referred to?

Answer 5

For a company with share capital

Shareholders provide working capital to allow the company to operate

Shareholders are owners of the company so benefit from any capital growth in the value of the company in proportion to their shareholding

The value of shares may fall and they could lose all their investment

Liability limited to the amounts unpaid on their shares = once shares fully paid they have no further liability for losses incurred by the company

Articles or any separate shareholder agreements

Question 6

GUARANTORS
Why are members known as guarantors in a company limited by guarantee?

Are guarantors true owners of the business?

Are guarantors entitled to participate in profits or distributions of surplus of assets?

What is a guarantor’s liability limited to?

Can a person transfer their guarantee to another person?

If a guarantor resigns, does the personal guarantee cease?

Which type of organisation is best suited to use a guarantee company structure?

Answer 6

Because the members guarantee the company’s debts (usually limited to a nominal amount)

No - should be viewed as trustees holding ownership temporarily until this is passed on to the next trustee

Not usually, but Articles may state otherwise

Limited to the amount they have agreed to contribute in the event of winding up (stated on incorporation)

No = guarantor must resign and a replacement must apply in their place

S.11 CA2006 = the personal guarantee does not cease immediately but continues for 1 year after resigning as a member

Not for profit

Question 7

What is member activism?

PRESSURE GROUP ACTIVISM

What do pressure groups often do and why?

What practical steps can be taken to prevent or minimise any distribution at a meeting? (2)

What are the main differences between activist and pressure group shareholders?

Answer 7

= activities by members to influence governance and strategy decisions in companies in which they invest

Purchase only nominal numbers of shares to attend and disrupt shareholder meetings with the intention of gaining publicity

1. Meeting can be adjourned
2. Disrupting members can be ejected if there is persistent disruption during the meeting

Pressure group shareholders try to bring about change through publicity achieved through campaigns and meeting disruption

Activist shareholders try to bring about change using their holding and influence

Question 8

INVESTOR ACTIVISM

Who are typically shareholder activists?

What do they do and why?

How do they engage?

Name 3 shareholder rights investor activists use to promote their agenda for change.

Answer 8

Investment funds who are rarely the largest shareholder

Invest in companies where they think change is needed

Engage publicly and privately, often aggressively, with management

○ campaigns to vote directors off the board
○ putting forward contrary resolutions at AGMs
○ calling for informal shareholder votes/meetings

Question 9

INVESTOR ACTIVISM

What are the 3 broad areas of potential interest for activist investors?

How can cosec help manage company’s investors? (4)

Answer 9

1. Corporate governance = Board change or Directors’ remuneration
2. Balance sheet = Share buyback/dividends
3. Strategic transactions = M&A (promote or frustrate)

A. Work preparation is essential = know company’s advisory team, be familiar with corporate processes etc.
B. Monitor the shareholder base and keep board updated
C. Engage at any early stage with new investors
D. Ensure meaningful, transparent, and accurate disclosure/communications to enhance member trust

Question 10

How many share classes must a company have?

Rights attaching to shares can be divided into three broad categories, what are they?

DEFERRED SHARES

What rights do deferred shares have?

Answer 10

S.629 CA2006 = where all members are to have equal rights, the company need only have one class of shares
BUT
If members or groups of members are to have different rights = membership must be divided into different classes

(1) Rights to vote, (2) rights to income (rights to distribution of profits), and (3) rights to capital

Have one or more deferred rights e.g. have no right to dividends either at all or not until a specified level of profit is reached

Question 11

ORDINARY SHARES

What rights must ordinary shares have?

Were do they rank in the order for payment of dividends?

What do ordinary shares constitute?

What are ordinary non-voting shares?

Answer 11

S.560 CA2006 = must have rights to participate in distributions with no upper limit on that participation

Behind other classes that have a preferred or fixed dividend entitlement

Constitute the company’s ‘risk capital’ – i.e. each year, the directors declare a dividend to be paid subject to distributable profits (dividends may be reduced or even omitted in a year)

Ordinary non-voting shares = have similar rights to those of the other ordinary shares, but are non-voting

Question 12

PREFERENCE SHARES

What rights do preference shares have? (2)

Were do they rank in the order for payment of dividends?

What do preference shares constitute and the advantage of this? (repayment of capital in liquidation)

What are cumulative preference shares?

Answer 12

1. Carry a preferential right to a fixed rate of dividend (same rate each year unless profits are insufficient, then reduced or omitted)
2. on a winding up, to return of capital with or without a premium, together with arrears of dividend

Ahead of ordinary shares

Constitute part of the company’s share capital = repayment of capital ranks ahead of ordinary shareholders in a liquidation

Have an additional right that if profits in 1 year are insufficient to pay the preference dividend in full or at all, any unpaid amount will be carried forward to be paid once the profits improve

Question 13

REDEEMABLE SHARES

What are redeemable shares?

Where will the redemption terms be set out? (2)

Can a company with 2 classes of shares, ordinary shares and redeemable shares, purchase back all of the ordinary shares?

Answer 13

Shares that will be redeemed by the company at a future date or on the achievement of a particular event

Either in Articles or determined by directors at the time of the allotment

No - s.684 CA2006 = Companies must always have at least 1 share in issue that is not redeemable

Question 14

DEBENTURES AND LOAN STOCKS

What are loans and debenture stocks?

What is the difference between the 2?

Payment of the interest on debentures and loan stocks ranks ahead of what?

Must interest on debentures always be paid each year? (consequence)

Do debentures and loan stock form part of the company’s capital and carry voting rights?

Answer 14

Loans to the company carrying a fixed rate of interest (not shares but share many features of shares)

Generally, debentures are secured loans on the assets of the company, whereas loan stocks are normally unsecured

The payment of dividends

Yes even if the company does not have sufficient distributable reserves (failure to pay may lead to an event of default)

No

Question 15

What are the 7 most common share rights differentiating one class of shares from another?

Answer 15

1. Right to vote
2. Right to receive dividend
3. Right to capital = right to participate in a distribution of surplus capital on a winding up or on a return of capital
4. Pre-emption rights on transfer = existing shareholders have the right to purchase shares from selling shareholders in priority to any 3rd party purchaser
5. Right of pre-emption on allotment = give protection from dilution when new share issued
6. Right of redemption = allow investors to realise their investment at a pre-determined date or upon the achievement of a pre-determined event
7. Right to conversion = allow the conversion of shares normally into ordinary shares

Question 16

VARATION OF RIGHTS

What are the 2 ways to vary class rights?

What are the 2 ways consent can be given?

What must shareholders/members do and what is the consequence if they do not?

After a variation of class rights, what will usually be required?

Answer 16

1. By complying with the articles if contain a provision stating how to vary class rights (model articles don’t provide)
2. Complying with S.630 and 6.31 CA2006 = obtain consent from the shareholder / members of that class = consent can be
   ○ In writing from the holders of at least 3/4 in nominal value of issued shares of that class (at least 3/4 of the members of that class if no share capital)
   ○ Via a special resolution passed at a class meeting

Shareholders/members must decide whether the dominant purpose of the variation is to benefit the class as a whole
* If they do not do so, the variation may be invalidated

Usually require an amendment to Articles = special resolution of the members entitled to attend and vote at GM in addition to class consent

Question 17

VARATION OF RIGHTS

What is the right of objection for those who did not consent to the variation?

What is the effect of an objection?

When may the court reject the variation?

What must happen following this?

Answer 17

Shareholders/members who did not consent to the variation can apply to the court within 21 days to object to the variation, provided that they represent:
* not less than 15% of the issued shares of the class of shares in question (in the case of a company with a share capital); or
* not less than 15% of the class of members in question (in the case of a company without a share capital)

Effect = the variation will have no effect until it is confirmed by the court

Court may disallow if variation would unfairly prejudice the class represented by the applicant(s)

Copy of court order must be filed with Registrar within 15 days of it being made

Question 18

Articles may be amended in any way subject to what 4 conditions?

Answer 18

Articles may be amended in any way subject to the following:

1. When the Court deals with a s.994 unfair prejudice application, the court may amend the Articles and prohibit any alteration of that amendment without its consent
2. An amendment to the Articles cannot increase the liability of any member unless the member agrees in writing, before or after the amendment has taken place (s. 25)
3. If the amendment seeks to vary class rights, it will not be valid unless the resolution has also been passed at a class meeting of the members of that class
4. Any amendment must be bona fide for the benefit of the company and not a potential fraud on minority shareholders

Question 19

What are the 7 steps in the process for amending the Articles?

Answer 19

1. Directors at BM resolve to either circulate a WR or convene a GM to consider the special resolution, to approve a circular to members explaining the reasons for the alterations and, (for Listed company) to approve a 3-way proxy form
2. All amendments in wording must be included in the resolution
3. Obtain confirmation from financial institutional investors that proposed Articles are acceptable (If a significant proportion of the shares are held by financial institutions)
4. Once approved, send a certified copy of the resolution and amended/new Articles to the Registrar within 15 days of the meeting
5. (Listed and AIM companies only) send 2 copies of the resolution and amended/new Articles to the FCA for publication
6. A reprint of the memorandum, revised Articles and a copy of the special resolution should be prepared and sent to directors, auditors, solicitors and others who use the Articles
7. Copies of the amended Articles must be sent to any members on request

Question 20

ENTRECHMENT OF ARTICLES - S.22 CA2006

Can companies provide that a certain provision in the Articles can never be repealed or amended?

What is entrenchment?

What must a company do if an entrenched provision is included in its Articles?

When else does this apply?

What must a company do if it amends any entrenched provisions in its Articles? (2)

What does the statement of compliance certify?

Answer 20

No - CA2006 has made it possible for the provisions in the memorandum to be altered by special resolution

S.22 CA2006 = Articles contain a provision stating that specified provisions may only be amended / repealed if conditions are met / complied with that are more restrictive than those of a special resolution

S.23 CA2006 = must give notice to the Registrar

If the Articles are altered by court order to restrict or exclude the power of the company to amend its Articles

Send to the Registrar:
1. the resolution or court order evidencing the amendment
2. a ‘statement of compliance’ or Form CC01 (to include entrenchment provision) / Form CC02 (to exclude entrenchment provision)

Certifies that the amendment has been made in accordance with Articles / court order

Question 21

UNFAIR PREJUDICE

What is the unfair prejudice petition?

In order to bring a successful claim for unfair prejudice, the aggrieved member must be able to demonstrate that the conduct complained of meets what 2 tests?

Are member’s interests the same as their rights?

What are equitable considerations?

Answer 21

S.994 CA2006 = a member may petition to the court for a remedy where:
(a) The company’s affairs are / have been conducted in an unfairly prejudicial manner to the interests of members generally, or some part of its members
(b) An actual or proposed act or omission of the company is or would be so prejudicial

The conduct must be:
1. Unfair = Objective test = is unfair if a hypothetical reasonable bystander would believe it to be unfair
2. Prejudicial = must show conduct has caused or is causing harm to the interests or rights of the members, or group of members

Members’ interests are wider than members’ rights = courts will consider equitable considerations

Equitable considerations often involve a fundamental understanding between the members forming the basis of their association but was not put into contractual form
Breach of such understanding = unfairly prejudicial conduct (O’Neill v Philips)

Question 22

UNFAIR PREJUDICE

Name 4 common examples of unfair prejudice.

Answer 22

1. Exclusion from management of a quasi-partnership company
2. The diversion of business to another company in which the majority shareholder/director(s) are interested
3. Failure to observe pre-emption rights on the allotment of shares
4. Abuses of power and breaches of the Articles

Question 23

UNFAIR PREJUDICE

What are the remedies available to the courts for an unfair prejudice petition? (6)

Answer 23

1. S.996 CA2006 = any order it deems appropriate

Non-exhaustive list included in S.996:

2. Regulate the conduct of the company’s affairs in the future
3. Require the company to stop doing something or start doing something
4. Authorise civil proceedings to be brought in the company’s name and on behalf of the company
5. Restricting company from altering its Articles without the leave of court
6. Order the share purchase of any member(s) by other members of the company itself

Question 24

DERIVATIVE ACTION CLAIM

What is a derivative action?

What is the statutory derivative action claim?

Who can bring a derivative action claim against a company?

Who do the benefits from a derivative action claim go to?

Answer 24

A derivative action = an action made by a member, on behalf of the company, for the benefit of the company

S.260 CA2006 = Any member may, on behalf of the company, bring a derivative action claim against a director or 3rd party for an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust

Only a member acting in their capacity as a member.

Any benefits got to the company and not the member(s)

Question 25

DERIVATIVE ACTION CLAIM

What is the derivative claim procedure? (6 steps)

Answer 25

1. Member applies to court for permission to make a claim
2. Courts will establish if there is a prima facie case (must be to continue)
3. Member (or another member) applies to court to continue the claim
4. Courts will determine whether to grant permission:

a. The Mandatory Test = s.263 CA2006 = 2 circumstances to deny permission:
i. If a person acting in accordance with s.172 would not seek to continue the claim
ii. If conduct complained of has been authorised or ratified by the company

b. The Discretionary Test = s.263 CA2006 = 6 factors courts must consider:
i. Whether the member is acting in good faith by seeking to continue the claim
ii. The importance a person acting in accordance with s.172 would attach to the claim
iii. The likelihood of authorisation or ratification of the conduct by the company
iv. Views and evidence of other ‘independent’ members
v. Why the company has decided to not to pursue the claim
vi. Whether the member pursue a remedy in their own right rather than on behalf of the company

5. If permission denied claim is dismissed
6. If permission is granted, claim continues

Question 26

JUST AND EQUITABLE WINDING UP

Under what section and act can a just and equitable winding up petition be made?

Who can make a just and equitable winding up petition? (5)

In what circumstances is the petition usually used?

Answer 26

S.122 IA1986 = a member or other specified persons can petition for an order winding up the company

Petition can be made by:
1. Company
2. Directors
3. Majority of creditors
4. Members
5. Other person liable to contribute to assets of company on a winding up

Usually used where a shareholder dispute has caused a breakdown in mutual trust and confidence and is impeding the management of the company

Question 27

JUST AND EQUITABLE WINDING UP

When will it be just and equitable to wind up a company?

Name 3 examples of conduct of when this type of petition may be used.

Answer 27

Just and equitable is a question of fact and each case must depend upon own circumstances

A. In situations of 50:50 deadlock between members
B. Mismanagement by one party
C. Exclusion from management of a quasi-partnership

Question 28

What is the difference between beneficial and legal ownership of shares?

Answer 28

Legal ownership is where the person is the registered member

The beneficial owner enjoys the economic benefit of ownership but is not the legal owner because the shares are registered in a nominee name