Unit 3

Question 1

What is a substantial property transaction?

Answer 1

SPT is where a director or someone connected with a director buys from or sells to the company a non-cash asset of substantial value.

Note - if a director is a director in two companies who are entering into an SPT, this won’t be a problem. If a director is then a shareholder at another company, a conflict of interest could arise.

Question 2

How can a board enter into a SPT?

Answer 2

1. BM1 - draft contract
2. Shareholders must consent by way of ordinary resolution (GM)
3. BM2 - enter into contract

Note - it is the involvement of a director, in their personal capacity, which triggers the need for an ordinary resolution.

Question 3

What is a director seeking the SPT is also a director of the company’s holding company or a person connected with such a director?

Answer 3

Transaction must be approved by ordinary resolution of the shareholders of the parent company.

Question 4

(SPT)

What is a person connected with a director?

Answer 4

Is either member of a director’s family OR a company in which the director or a person/persons connected with a director (or the director and persons connected with the director taken together):

1. own at least 20% of shares
2. is entitled to exercise control of more than 20% of the voting power or any GM of the company.

Question 5

(SPT)

Member’s of a director’s family are defined as:

Answer 5

1. director’s spouse/civil partner
2. child or stepchild
3. parents
4. unmarried parter who lives with the director
5. any child of the person who lives in an enduring relationship with the director as their partner.

Question 6

(SPT)

What is a non-cash asset?

Answer 6

Any property or interest in property other than cash.

Question 7

(SPT)

What is classed as substantial?

Answer 7

An asset can be classed as substantial in one of two ways:

1. it will automatically be classed as substantial if its value is over 100k
2. it will also be substantial if it is worth more than 5k and more than 10% of the company’s net asset value

Note: to be substantial only one of the two tests needs to be met.

Question 8

How to enter into a SPT?

Answer 8

3 meetings are required.

1. BM1 - directors approve contract draft
2. GM - ordinary resolution of shareholders
3. BM2 - directors enter into contract

What admin is required?
- minutes from the meetings

NOTE: where for both companies, the transaction is a SPT, a board resolution is required from each company to enter into the contract and a shareholder’s OR is required from each company approving the transaction.

Question 9

When will an ordinary resolution not be needed to approve a SPT transaction?

Answer 9

1. An SPT when the company in question is a wholly owned subsidiary of any other company;
2. A transaction between a company and a person in his character as a member of the company
3. A transaction between a holding company and its wholly owned subsidiary; or
4. A transaction between two wholly owned subsidiaries of the same holding company

Question 10

What is the effect of breach of procedure in an SPT?

Answer 10

Without obtaining the necessary ordinary resolution - the transaction is voidable.

Individuals may be ordered to account to the company of any gain and indemnify the company of any loss or damage.

Question 11

How many meetings are required to enter into a long-term service contract?

Answer 11

Process:

1. BM1 - boar resolution to approve contract and call GM
2. GM - shareholders pass ordinary resolution
3. BM2 - board resolution to enter into contract.

Note: A company may not enter into a service contract with a director for a guaranteed term of more than 2 YEARS unless the shareholders have authorised the guaranteed term element of the service contract by ordinary resolution.

Question 12

How man meetings are required to agree an overdraft extension with the company’s bank?

Answer 12

1. BM1

Model Article 3: Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.

Question 13

Briefly outline the company decision making process

Answer 13

C - calling
N - notice
Q - quorum
R - resolutions
A - administration

Question 14

What decisions do shareholders make?

Answer 14

1. Decisions that shareholders make alone, such as resolution to change the articles of association and change the company’s name

Note - a change of a company’s name has effect from the date on which the new certificate of incorporation is issued (s 81 CA 2006)

(both require special resolutions, needing 75% if the shareholders to agree)

2. Decisions which give directors permission to enter into certain contracts which carry risks for the company OR where the directors could use their position as directors to benefit personally from the contract. eg. SPT

Question 15

What are shareholders’ right depending on holding (voting related)?

Answer 15

Rights based on shareholdings -

100% - pass all resolutions

75% - pass or block a special resolution

over 50% - pass or block an ordinary resolution (shareholders can block an ordinary
resolution with exactly 50% of the shares; it does not have to be over 50%,
but they need over 50% of the shares to pass an ordinary resolution)

50% - block an ordinary resolution

over 25% - block a special resolution

10% - demand a poll vote

5% - circulate a written resolution, requisition a general meeting, circulate a written statement

Question 16

What can shareholders do (regardless of shareholding)?

Answer 16

• vote (if they hold voting shares)
• receive notice of general meetings
• send a proxy to general meetings
• receive a dividend (if declared)
• receive a share certificate
• have their name on the register of members
• receive a copy of the company’s accounts
• inspect minutes and registers
• ask the court for a general meeting
• restrain a breach of directors’ duties
• bring an unfair prejudice petition
• bring winding-up proceedings
• instigate a derivative action

Question 17

What is MA 9?

Answer 17

When a director calls a board meeting, they must give notice to other directors.

Decisions are called BOARD RESOLUTIONS

• Notice must be reasonable
• What is reasonable depends on the facts
• Notice doesn’t need to be in writing, but must include time, date and place of the meeting.
• Notice must state the method of communication and as long as the directors can each communicate to the others any information/opinions they have on any particular item of the business of the meeting.

Question 18

What is MA 11?

Answer 18

A quorum of two directors must be present at all times during a board meeting.

When the quorum is present at a board meeting, the meeting is QUORATE.

Question 19

What is MA 14?

Answer 19

A director may not count in the quorum or vote if a proposed decision off the board is concerned with an actual or proposed transaction or arrangement with the company in which a director is interested.

• Directors are supposed to make decisions based on what best promotes the success of the company.
• Note that a director who is prevented from counting in the quorum or voting on a resolution by virtue of MA 14 can count in quorum for the part of the meeting where other resolutions are being passed and can vote on other resolutions.

Question 20

Do directors need to declare their interest in a proposed transaction/arrangement?

Answer 20

Yes - s 177 CA 2006 states that where a director has a personal interest in a proposed transaction/arrangement with the company, they must declare the nature and extent of this interest to the board.

Question 21

What are the exceptions to s 177(6) CA 2006?

Answer 21

A director does not need to declare their interest in a proposed transaction/arrangement with the company:

1. if it cannot reasonable be regarded as likely to give rise to a conflict of interest;
2. if, or to the extent that, the other directors are already aware of it; or
3. if, or to the extent that, it concerns terms of a service contract that have been or are to be considered…by a meeting of the directors

Question 22

What is best practice when it comes to directors declaring their interest in a proposed transaction/arrangement (s 177 CA 2006)?

Answer 22

Always declare a personal interest even if one of the exceptions in (s 177(6) CA 2006) applies.

Question 23

Can companies disapply s 177 CA 2006 or MA 14?

Answer 23

Companies cannot disapply s 177

Companies can disapply MA 14, enabling directors to count in the quorum and vote even when they have a personal interest in the subject of a resolution.

Question 24

What is MA 7?

Answer 24

Board resolutions are passed by a simple majority, which means that over half of those present must vote in favour in order for the board resolution to be passed.

• voting carried out by show of hands
• 1 vote per director
• if a chair is appointed, the chair will have a casting vote in an event of a tie. Chair will only need to use this casting vote if they are in favor of the resolution.

Question 25

What is MA 8?

Answer 25

It is possible to pass a board resolution in the form of a resolution in writing or any other method which shows that all eligible directors have indicated to each other that they share a common view on a matter.

• to use a written resolution, the directors must vote UNANIMOUSLY in favour of a resolution or it will not validly pass.

Question 26

What are the steps in a SPT?

Answer 26

1. There needs to be a transaction
2. Transaction between director & company OR connected person (to director) & company
3. Non-cash asset
4. Substantial asset (more than 100k or more than 5k + more than 10% of the company’s net asset value)
5. Ordinary resolution of shareholders

Question 27

Board Meeting Procedure

Answer 27

Notice:
- MA 9: when directors call a BM, they must give reasonable notice. What is reasonable will depend on the facts.
- Notice doesn’t need to be in writing, but MUST include time, date and place of meeting (MA 9(3)).

Quorum:
- MA 11: quorum of 2 directors must be present at all times during the BM.

Directors’ personal interests:
- MA 14: directors may not count in quorum or vote if proposed decision of the board is concerned with actual or proposed transactions/arrangements in which a director is interested.
- Note that directors excluded by MA 14 can still vote and count in quorum at the BM where other resolutions are being passed.
- Note that a company can disapply MA 14.

• s 177 CA 2006: where a director has a personal interest in a proposed transaction/arrangement with the company, they must declare the nature and extent of this interest to the board.
• s 177(6) sets out exceptions. Director does not need to declare their interest:
  (a) if it cannot reasonable by regarded as likely to give rise to a conflict of interest;
  (b) if, or to the extent that, the other directors are already aware of it; or
  (c) if, or to the extent that, it concerns terms of service contract that have been or are to be considered…by a meeting of directors.

Voting:
- MA 7: board resolutions are passed by a simple majority ie. over half of those present must vote in favour for the resolution to pass.
- show of hands
- Chair will have casting vote, which they’ll use if they are in favour.
- When the board vote is tied the “negative view prevails”

Unanimous decisions:
- MA 8: can pass resolution in the form of a written resolution/other method which shows that all eligible directors have indicated to each other their shared view in the matter.
- Must vote unanimously for the resolution to pass

Admin:
- Must keep minutes of board meetings and outcomes of written resolutions at the company’s registered office/SAIL for 10 years.

Question 28

General Meeting Procedure

Answer 28

Note that directors will pass a board resolution to call a GM or shareholders will request a GM.

Notice:
- s 310: directors must give notice to every shareholder and director.
- s 502: and an auditor is there is one
- s 308: notice can be a hard copy, written, electronic or combination.
- s 311(1) & (2): sets out notice requirements
(a) time, date and place of meeting
(b) general nature of business of meeting
(c) if special resolution is proposed, it’s exact wording
(d) each shareholders right to appoint a proxy to attend meeting on their behalf and vote
- s 307 & 360: minimum notice period if 14 clear days (notice on 1 March…14 CLEAR days…earliest meeting 16 March)
If notice is sent by post/email, it is deemed received in 48 hours. (notice on 1 March…earliest meeting 18 March)

Quorum:
- s 318: subject to company’s articles the quorum of a GM is two (where a company has only 1 shareholder the quorum is one)

Voting:
- MA 42: show of hands vote (1 vote per person)
Note: unlike directors shareholders are not prevented from counting in quorum/voting if they have a personal interest. HOWEVER, there are 2 resolutions where a shareholder’s vote will not count if they have a personal interest:
(a) resolution to buy back shareholder’s shares
(b) ordinary resolution to ratify a director’s breach of duty under s 239, where the director in question is also a shareholder.

Usually shareholders are considered to have the same interest as the company, but in those two instances the shareholders would clearly be voting in their own individual interest.

Note: shareholders not present at the GM or those who abstain will not be counted.

At a BM, shareholders who are also directors would not count in quorum and can’t vote, at a GM they can unless one of the two restrictions apply.

Poll votes:
- one vote per share, not one vote per person
- MA 44(2): poll vote may be demanded by
(a) chair of meeting
(b) directors
(c) two or more people having the right to vote on the resolution
(d) person(s) representing not less than 1/10th of the total voting rights of all the shareholders having the right to vote on the resolution.

Poll vote can be demanded before/during the GM, and before/after the initial voting takes place.

Short notice:
- s 307(5)-(6): for a GM to be validly held on short notice a majority in number of the company’s shareholders who between them hold 90% or more of the company’s voting shares must consent.
- 95% for PLCs.

Question 29

Written Resolution Procedure

Answer 29

Procedure, Paperwork, Deadlines:
- s 288: WR permitted for LTDs, not PLCs.

Board will not issue a GM notice, but will distribute a written resolution. The text will set out the ordinary/special resolution in question.

WR must be sent to every eligible member. Shareholders entitled to vote as at the circulation date.

• s 291(4) sets out certain info which must be included in the WR:
  (a) how to signify agreement
  (b) deadline to return the WR (lapse date)

Lapse date is 28 days from circulation unless articles state otherwise. Deadline is at midnight of the 28th day.

Voting:
- s 296: WRs are passed when the required majority of eligible members have signified agreement to the resolution.
- 1 vote per share

Note: at a GM shareholders who abstain/are not present are not counted at all in the vote. WR - all eligible shareholders are counted.

Admin:
- Must keep GM minutes for 10 years at registered office/SAIL.
- Companies House must be notified when certain decisions are made. Penalty fine for company and officers for noncompliance.
- Companies House provides forms for filings
- Copies of special resolutions must be filed at Companies House.

Question 30

How can shareholders request for the company to circulate a written resolution?

Answer 30

s 292: shareholder(s) with 5%+ of the voting rights are entitled to require the company to circulate a WR.
Note - articles could reduce the 5%, but cannot increase it.

Shareholder(s) can require that the WR is circulated with a statement (1000 words max)

Directors must circulate the WR + statement within 21 says of request.

Shareholder(s) making the request must pay company expenses for circulation.

Question 31

How can shareholders request a General Meeting?

Answer 31

s 303: shareholders can require directors to call a GM if they represent 5%+ of paid-up capital of the company.

Request must state the general nature of the business to be dealt with at the meeting.

Directors must call the meeting within 21 days of the request. GM notice period is usually 14 clear days (minimum), but when shareholders make the request, the GM must be held within 28 days.

Question 32

What are a company’s internal administration responsibilities?

Answer 32

Records must be kept up to date -
1. register of members
2. register of directors

Records don’t need to be filed at CH, but must be kept at registered office or SAIL.
- AD02: form to notify the CH of the SAIL address.
- AD03: form to notify CH of the change of SAIL address.
- AD04: form to notify CH that docs moved from SAIL to registered address.

BM and GM minutes and WR outcomes must be kept at registered office/SAIL for 10 years.

Question 33

What are the Company’s Annual Responsibilities?

Answer 33

Accounts:
Must keep adequate accounting records. Directors are responsible for ensuring accounts are produced annually, and are true and reflect a fair state of affairs. Not doing this is an offence.

Directors’ report:
s 415: directors of every company (apart from small company or micro-entity) must prepare director’s report for each financial year to accompany to accounts.

Directors must circulate 1. accounts 2. directors’ report 3. auditor report, to every shareholder and anyone else entitled to receive notices of GMs.

Deadlines:
Accounts + Directors’ Report must be filed at the CH within 9 months from the end of the accounting reference period (LTD). 6 months for PLC. New companies have the option of filing 3 months after the end of the company’s first accounting reference period.

Confirmation statement:
Every company must file a confirmation statement (CS01) within 14 days from the company’s confirmation date (anniversary of incorporation).
Why? To ensure records of members, directors and PSC are up to date.
It is a criminal offence to file confirmation statement late or not at all.

Question 34

What is considered a small company?

Answer 34

1. Balance sheet total is no more than 5.1M
2. Turn over is no more than 10.2M
3. No more than 50 employees for a duration of the financial year

Question 35

What is considered a micro-entity?

Answer 35

1. Balance sheet total no more than 316K
2. Turn over no more than 632K
3. No more than 10 employees

Question 36

Who can change the articles of association?

Answer 36

Shareholders can make the changes

Procedure for change:
1. BM where resolution is finalised and GM is called
2. Special resolution at GM or WR (s 21CA 2006)
3. Copy of special res + amended articles must be sent to the Registrar not later than 15 days after the amendments takes effect. The changes take effect immediately.

Question 37

Who can change tha account referencing date at a company?

Answer 37

Directors

Question 38

Who can appoint a new director?

Answer 38

Either directors or shareholders (by ordinary resolution)

MA 17 -

(1) Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director—

(a) by ordinary resolution, or (shareholders)

(b) by a decision of the directors. (directors)

WRs can be used to appoint a director, but not to remove one

Admin:
- AP01 form must be filed within 14 days of appopintment

Question 39

Who are the company’s officers?

Answer 39

Directors, secretary, auditor

Question 40

What are the requirements for having a corporate secretary?

Answer 40

LTDs are not obliged to have them, PLCs must have them.

Note: it is possible to have a corporate company secretary, the secretary will act through a human being authorised by the company appointed as company secretary.

You can have more than one secretary - joint secretaries.

Note: if a company doesn’t have a secretary, but the CA requires a company secretary to do something, it can be performed by a director or someone authorised by them.

Question 41

What are the company secretary’s responsibilities?

admin related

Answer 41

1. Companies House filings
2. Meeting filing deadlines
3. Writing up company’s BM and GM minutes

Note - company secretaries will often be the person named on the IN01 form.

Question 42

How is a corporate secretary appointed and what is the subsequent procedure?

after incorporation

Answer 42

1. By board resolution
2. Company must notify CH on form AP03 (human sec) or AP04 (corporate sec) within 14 days of the appointment of a company sec
3. Every company with a company sec must keep a register of secretaries with certain specified particulars. (Note - LTDs can choose to not keep their own register of secretaries, instead ensuring that the information is filed and kept up-to-date on the CG register)
4. Company must notify CH within 14 days of any change in particulars of the company secretary kept on the register of secretaries on form CH03 (human sec) and CH04 (corporate sec).

Question 43

Procedure of removing a company secretary from office

Answer 43

1. Secratery can resign or be removed by board resolution
2. Sometimes written contracts will set out the oconsequences of removal from office and this may include compensation for breach of contract
3. When a company sec resigns/is removed, the company must notify the CH within 14 days of their resignation/removal on form TM02. Note - the register of secretaries will need to be updated.

Question 44

What are the auditor’s responsibilities?

Answer 44

Main duty is to prepare a report on the companny’s annual accounts to be sent to the shareholders.

Auditor must confirm whether in their opinion the accounts are prepared property and give a truthful and fair view of the company.

Note that an auditor must be someone who is qualified (certified/chartered accountant) and independent (not connected with anyone involved in the company).

Question 45

Are companies obliged to have an auditor?

Answer 45

Obligation for LTDs to appoint auditors to review their accounts comes from s 485 CA 2006.

Note that small companies ar exempt from the statutory audit requirement.

Dermand companies (which do not trade) are also permitted to file abbreviated accounts and are exempt from audit.

Question 46

How is an auditor appointed?

Answer 46

Directors of a private company appoint the company’s first auditor. After that, shareholders also have the right to appoint an auditor by ordinary resolution.

Auditor of a private company is deemed to be reappointed annually. Exceptions include situations where the auditor was appointed by the directors, as the first auditor will have been, or when the company’s articles of association require the auditor to be reappointed yearly.

Question 47

Auditor’s liability

Answer 47

Auditors can be sued for negligence by the company they are auditing but auditor DO NOT owe a general duty of care to the shareholders or directors when conduting their annual audit. Auditors’ general duty of care is owed only to the company, thus shareholders cannot sue auditors in negligence.

two criminal offences related to auditors:
1. Knowingly or recklessly including misleading, false or deceptive material in the auditor’s report
2. Omitting certain statements from the report which are required by CA 2006.

Question 48

Process of removing an auditor/resignation

Answer 48

Shareholders can remove the auditor any time by ordinary resolution

Shareholders must give special notice to the company of the proposal to remove the auditor.

Auditor can resign at any time by notice in writing. Must deliver a statement to the company explaining why they are ceasing to hold office.

Question 49

Ways of becoming a shareholder

Answer 49

New company:
1. Two people who sign the memorandum of associations as subscribers automatically beocme the first shareholders (must be entered on the company’s register of members)

Existing company:
1. Obtain shares from an existing shareholder by (a) buying shared from an existing shareholders; (b) receiving shares from an existing shareholder as a gift; (c) receiving shares by way of transmission when a shareholder dies/becomes bankrupt, and electing to become a shareholder rather than transferring the shares to a third party.
2. Company may allot new shares.

Question 50

Process of registering a new shareholder

Answer 50

Same process for transfers/allotment

1. Add the shareholder on register of members/register the transfer
2. Reflect increased number of members/existing shareholders’ increase in holdings
3. This must be done as soon as practicable but no later than 2 months after the transfer has been loodged with the company.

Note - if there is only one shareholder, there must be a statement oto that effect on the register of members. It is a criminal offence if the register is complete/incorrect, including no reference to the fact that there is only 1 shareholder.

Note - where the company keepts its register of members at its registered office/SAIL it must be available to shareholders for inspection for free. Anyone else must pay a fee.

Question 51

What is a share certificate?

Answer 51

All shareholders have the right to receive a share certificate. It is prima facie evidence of the holder’s title to the shares.

Companies must issue share certificates within 2 months of the allotment/transfer of shares.

Question 52

What is the PSC register?

Answer 52

• Companies must disclose information about PSC in IN01.
• All private companies and non-traded public companies must keep a PSC register
• Anyone who (i) owns more than 25% of shares (owning exactly 25% won’t qualify you as a PSC); (ii) controls more than 25% of voting rights; or (iii) has the right to appoint or remove the majority of the board of directors must appear on the PSC register (applies to people and companies)
• PSC register enables third parties to see who has power
• Companis must keep a PSC register even if no shareholders are entered on it
• s 790 CA 2006: private companies can keep the information regarding PSC on the central register at CH.
• The PSC register must be updated within 14 days of any changes.

Question 53

How do individual/company details appear on the PSC?

Answer 53

1. PSC (like directors) can apply to keep their residential address private
2. Can apply to have their name private - if application is successful all that will appear on the register is that there is a PSC who successfully applied to keep their details private and will state how many shares they have (identity and address will be hidden)

Question 54

What forms need to be completed regarding PSC?

including deadlines

Answer 54

1. PSC01 - must be completed by any individual who is to appear on the PSC register for the first time
2. PSC02 - must be completed by any relevant legal entity who is to appear on the PSC register for the first time
3. PSC04 - any shareholder who already appears on the PSC register but whose details change.
4. PSC05 - any legal entity who is already on the register but whose details change
5. PSC07- anyone ceasing to be a PSC

Deadline: 14 days from the date the company made the change in its PSC register.

Question 55

What is a company’s constitution?

Answer 55

Memorandum of association + articles of association = Company’s constitution

Company’s constitution is a statutory contract between each shareholder and the company, and between each shareholder.

Question 56

What are the effects of a company’s constitution?

Answer 56

Gives shareholders a remedy for breach of contract. Note that the CA 2006 reduced the significance of the memorandum, so the articles provide the terms of the statutory contract.

s 33(1) - allows shareholders to take action against other shareholders of the company where that shareholder’s membership rights have been infringed.
* membership rights include voting rights, right to share in the company’s profits by receiving dividends.

Question 57

What is a shareholder agreement and what are its effects?

Answer 57

Shareholder agreement will bind all of the parties to the agreement. Provides remedy if there is a breach.

It can be entered into in addition to the articles. Remember - articles bind every shareholder (present and future).

Advantages of SA:
1. privacy and protection of minority shareholders
Note - under articles of association minority shareholders have very little power

Note - shareholders can only take acton under the articles where it relates directly to their rights as a member

Question 58

What is commonly included in a shareholders’ agreement?

Answer 58

1. Restrictions on transferring shares
2. Bushell v Faith clauses - give shareholders weighted voting rights when the resolution under considerations is a resolution to remove that shareholder form their office as director
3. A noncomplete clause, preventing the shareholders from involvement in a business which competes with the company

Restriction -
* SA cannot restrict shareholders from voting a particular way in board meetings if they are also a director (could lead to breach of their directors’ duties)

Question 59

What are shareholders’ voting rights?

Answer 59

In addition to voting and attending GMs, shareholders have the following rights with regard to exercising their power to vote:

1. right to send a proxy on their behalf to a GM
2. right to a poll vote
3. right to receive notice of GM
4. right to requisition a GM
5. right to apply to the court to call a GM
6. right for a shareholder(s) with 5% + voting rights ( or 100+ shareholders with the right to vote, as long as they have paid up an averange of £100 + on their shares) to require the circulation of. written statement (1000 words max) with respect to any resolution or business to be dealt with at a GM
7. right of shareholders holding 5% + of the company’s shares to require the company to circulate a written resolution and accompanying statement

Question 60

What other rights do shareholders have?

Answer 60

1. right to receive dividends as long as there are profits available for the purpose and as long as directors have made a recommendation as to its amount and this has been approved by the shareholders
2. right to apply to court for the company to be wound up on the grounds that it is juist and equitable to do so
3. right to remove a director by ordinary resolution
4. right to remove an auditor by ordinary resolution
5. right to inspect without charge (a) company’s minutes of GMs and all shareholders’ resolutions passed otherwise than at GMs’ (b) all of the company’s statutory registers; (c) directors’ service contracts and any directors’ indemnities; (d) any contracts relating to the company’s purcahse of its own shares
6. right to receive ac company of the company’s annual accounts and report
7. right to seek an injuction under s 40(4) CA 2006 to restrain the company from doing something prohibited by its constitution

Question 61

When will a company be considered a subsidiary?

Answer 61

s 1159(1) CA 2006 states that a company is a subsidiary of another (its holding company) if:

1. the other company holds a majority of the voting rights in it; or
2. that other company is a member of it and has the right to appoint/remove a majority of its board of directors; or
3. that other company is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it; or
4. it is a subsidiary of a company that it itself a subsidiary of that other company.

A wholly-owned subsidiary company is a company with no other members except another company.

Subsidiary’s enable corporations to divide liability

Question 62

What are joint shareholders?

Answer 62

Shares can be held by two or more individuals jointly. The register of members will need to reflect both names but only one address.

Question 63

What are the most common types of shares?

Answer 63

Ordinary

Preference

Question 64

What powers are attached to ordinary shares?

Answer 64

Ordinary shares give shareholders the right to attend and vote at a GM.

Shareholders are entitled to receive dividends if directors recommend the payment and shareholder approve.

A company can have different types of ordinary shares:
* Ordinary A
* Ordinary B
The different shares will have different powers attached to them - will be set out in the articles.

Question 65

What powers are attached to preference shares?

Answer 65

Preference shares receive enhanced rights - set out in articles.

Example of enhanced right:
1. guaranteed right to dividend (dividend is usually expressed as a percentage of the nominal value of the preference share ie. if the preference share is a 5% share, then the holder will receive a fixed dividend of 5p for each £1 preference share they own)

Preferential shareholders will often forego their voting rights in return for a greater financial return.

Question 66

What is the difference between cumulative/non-cumulative shares?

Answer 66

Cumulative - preference shareholder has to be paid any missed dividend from previous financial years + current financial year’s dividends as long as there are profits available to pay

Non-cumulative - if a divident is not paid in a particular year, the shareholder loses the right to that year’s dividend and cannot receive it in the future.

Question 67

What rights do participating shareholder have?

linked to preference share rights

Answer 67

Participating shareholders have the further right to receive profits/assets in addition to their other preference share rights.

Can be entitled to additional payment.

Question 68

What protections are available to minority shareholders?

Answer 68

Legal mechanisms protect minority shareholders. Namely, unfair prejudice actions and derivative claims.

Question 69

What is involved in unfair prejudice petitions?

Answer 69

s 994 CA 2006 allows any shareholder to apply to court for a remedy where they feel that they have been unfairly prejudiced as a shareholder.

Potential grounds for a petition include:
1. the company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of all/part of the members; or
2. an actual proposed act or omission of the company is or would be prejudicial

The conduct must be prejudicial in that it causes harm to one or more shareholders and is unfair.

Examples of conduct which could result in an unfair prejudice action:
1. diverting opportunities to a competing business in which a majority shareholder hold an interest;
2. awarding excessive pay to directors; or
3. excluding a shareholder from management of the company, where, when the company was incorporated, the shareholders’ negotiations led the shareholders believing they would participate in management.

Note - removal of an auditor by shareholders on the grounds of divergence of opinion on accounting/audit procedures is deemed to be unfairly prejudicial.

Question 70

What will the courts do when an unfair prejudice petition is brought before them?

Answer 70

The court may order that the other shareholders must buy the shares of the unfairly prejudiced shareholder or an order for the company to buy back the unfairly prejudiced shareholder’s shares.

Another possible order is a restriction on the company altering its articles of association without the leave of the court.

Another order could be that the unfairly prejudiced shareholder has permission to bring a derivate action.

Question 71

How do the courts decide if a shareholder has been unfairly prejudiced?

Answer 71

Objective test

Will a hypothetical bystander believe the act or omission to be unfair?

Question 72

What are the disadvantages of bringing an unfair prejudice claim?

Answer 72

Expensive

Time consuming

Often need an expert’s report

Court unlikely to see unfair prejudice if the conduct the C is complaining about is in accordance with the company’s articles.

Question 73

What is involved in a derivate action claim?

Answer 73

A derivative claim is a claim instigated by a shareholder for a wrong done to a company which has arisen from an act or omission of a director.

The company is the claimant.

A derivative claim can be brought in relation to a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty of breahc of trust by a director.

Question 74

What is the process of issuing a derivative claim?

Answer 74

1. Shareholder apply to the court for permission to continue the claim
2. The court will consider the application and evidence in support of it without a hearing
3. Court will only allow the claim to continue if the application and evidence disclose a prima facie case for continuing

If the court decides that the application does disclose a prima facie case the court may:
1. give directors as to the evidence to be provided by the company; or
2. adjourn the proceedings to enable evidence to be obtained.

Under s 263(2) a court must, at the hearing stage, refuse permission to continue in these situations:
1. where the court is satisfied that a person acting in accordance with s 172 would not seek to continue the claim (someone who is not promoting the success of the company cannot bring a claim)
2. where the cause of action arises from an act or omission that has not yet occurred, but which has already been authorised by the company; or
3. when the act or omission has already occurred and was authorised before it occurred or will be/has been ratified by the company since it occurred. (Note: if shareholders passed a resolution by the time of the court hearing, the court must refuse the shareholder permission to continue the claim (s263(2)). If not, the court still has a discretion to refuse permission where ratification could be, and is likely to be, ratified.)

The court must also take into account under s 263(3):
(a) whether the shareholder is acting in good faith in seeking to continue the claim;
(b) the importance that someone is acting in accordance with s 172 would attach to continuing;
(c) whether any past or future action or omission was authorised, or if not, would be likely to be ratified;
(d) whether the company has decided not to pursue the claim;
(e) whether the act or omission gives rise to a cause of action that a member could pursue in their own right.
Consider - ratification can be authorised by board resolution or ordinary resolution.

Note - the courts are obliged to have particular regard to any evidence showing the views of those shareholders with no personal interests in the matter. (objective view)

Question 75

What is the Duomatic principle?

Answer 75

Under the Duomatic principle, if all shareholders, having discussed the matter, who have a right to attend and vote at a meeting unanimously agree that it should pass then the company will be bound without the need for a meeting or written resolution (as the matter could have been put into effect by a resolution had a general meeting been held).