Unit 3 Company Decision Making

Question 1

Decisions shareholders make

Answer 1

1. Decisions shareholders alone can make:
   - Changing the articles of association of the company.
   - Changing the name of the company.
   Both require special resolutions.
2. Decisions which give the directors permission to enter into certain types of contract which carry particular risks for or where could benefit personally.

Question 2

Decision- making

Answer 2

Directors make decisions at board meetings with board resolutions.

Can delegate powers.

Question 3

Decision- making - board meetings

Answer 3

• Notice
  Must give notice and must be reasonable depending on facts. No need to be in writing but must give time, date, place and method of communication.
• Quorum
  Quorum of two directors must be present at all times during a board meeting.

A director may not count in the quorum or vote if a proposed decision of the board is:
- concerned with an actual or proposed transaction or arrangement with the company
- in which a director is interested
Can be disapplied by company articles.

Question 4

Decision- making - Directors’ personal interests

Answer 4

MA14 - Must declare personal internet in proposed transaction or arrangement.

Exceptions:
1. if it cannot reasonably 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.

Cannot be disapplied by company articles.

Question 5

Decision- making - board meetings - voting

Answer 5

Passed by a simple majority, over half of those present.

Voting is carried out by a show of hands and each director has one vote. If the board has appointed one of its directors to act as chair of the board, that director will have a casting vote (ie one extra vote) in the event of a tie.

• Unanimous decisions

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.

No need for board meeting.

Question 6

Shareholders’ resolutions

Answer 6

For an ordinary resolution to be passed, over half of the votes cast at a shareholders’ general meeting must be in favour of the resolution

For a special resolution to be passed, 75% or more of votes cast at a shareholders’ general meeting must be in favour of the resolution.

Can be passed in general meeting or written resolution.

Question 7

Shareholders’ resolutions - general meeting

Answer 7

Called by board of directors posing a board resolution.

Public companies must hold a general meeting every year.

Notice must be given to every shareholder and every director. Set out time, date etc, special resolution proposed if there is one, shareholders might to send proxy.

Minimum notice required for a general meeting is 14 clear days.
If sent by post or email deemed received 48 hours after sent.

For a general meeting 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.
This percentage is increased to 95% for public companies.

Question 8

Shareholders’ resolutions - general meeting - Quorum and voting

Answer 8

Quorum = 2.
If 1 shareholder = 1.

Votes not counted if:
- a resolution to buy back some or all of a shareholder’s shares
- an ordinary resolution to ratify a director’s breach of duty under s 239 CA 2006, where the director in question is also a shareholder.

• Poll vote
  One vote for each share they own.
  Can be demanded by:
  (a) the chair of the meeting;
  (b) the directors;
  (c) two or more persons having the right to vote on the resolution; or
  (d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution.
  Can be anytime even after vote.
• Written resolutions
  Must be circulated to every eligible member.
  Deadline midnight on 28th day following circulation.

Passed when the required majority of eligible members have signified agreement to the resolution.
Each shareholder has one vote for each share that they own.

Question 9

When the shareholders take matters into their own hands

Answer 9

• Request for the company to circulate a written resolution
• A shareholder or shareholders who have 5% or more of the voting rights
• Companies articles can reduce percentage but not increase it.
• Requisitioning a general meeting
• once they have received requests to do so from shareholders representing at least 5% of such paid- up capital of the company as carries the right of voting at general meetings.
• Directors must call it within 21 days.
• Normal min 14 clear day notice period. Can be no more than 28 days to prevent delay.

Question 10

Post- decision requirements

Answer 10

Copies of all special resolutions must be filed at Companies House. Some ordinary resolutions must also be filed.

• Internal docs must be kept up to date
• Register of members, register of directors
• Board minutes, minutes of general meetings and written resolutions for 10 years.
• Adequate accounting records and directors report unless small company

Question 11

The company’s officers - company secretary

Answer 11

Private companies are not required to have a company secretary but public limited companies must have one.

Deal with legal admin requirements.

Are an officer of the company.

Can be a company.

If don’t have one directors responsible.

Can be removed or appointed by board resolution. Can resign.

Question 12

The company’s officers - the auditor

Answer 12

A qualified accountant.
Prepare report on annual accounts to be sent to shareholders.

Private companies have to have one unless small.

Directors appoint first one after that shareholders also have power by ordinary resolution.

No duty of care to shareholders.

Can resign. Shareholders can remove by ordinary res - must give notice to company of proposal to remove.

Question 13

Shareholders

Answer 13

The two people who sign the memorandum of association as subscribers automatically become the first shareholders of the company.

Become one after up and running by company allowing new shares or acquire existing shares.

Must keep register of members.
Must register transfer as soon as practicable, max 2 months.

Right to receive share certificate within 2 months of allotment.

Question 14

Shareholders - The PSC register

Answer 14

All private companies and non- traded public companies must keep a register of persons with significant control (‘PSC register’).

Any shareholder who owns or controls more than 25% of voting rights.
or
Have the right to appoint or remove a majority of the board of directors of the company;
or
Have the right to exercise, or who actually exercise, significant influence or control over the company.

Must keep register even if no one on it.

Can apply to keep name and residential address private so not on companies house.

The deadline for filing the forms is 14 days from the date the company made the change in its PSC register.

Question 15

Shareholders’ rights - articles of association and shareholders agreements

Answer 15

Articles of association contract between shareholders and company - can take action against other shareholders.

Can also enter into shareholders agreement (more private).
Limitations on what it can contain e.g. cannot restrict shareholders from voting a particular way in board meetings if they are also a director, because this could lead to the shareholder being in breach of their directors’ duties.

Question 16

Shareholders’ rights - voting rights

Answer 16

1. Right to send a proxy to a general meeting on their behalf
2. Right to a poll vote
3. Right to receive notice of general meetings
4. Right to requisition a general meeting
5. Right to apply to the court to call a general meeting, if for some reason it is not possible for one to be held otherwise.
   E.g. where the other shareholders are refusing to attend a general meeting and so it is not possible to hold a meeting which is quorate.
6. Right for a shareholder or shareholders with 5% or more of the voting rights in the company (or 100 or more shareholders with the right to vote, as long as they have paid up an average of £100 or more on their shares) to require the circulation of a written statement of up to a thousand words with respect to any resolution or business to be dealt with at a general meeting.
7. Right for shareholders holding 5% or more of the company’s shares to require the company to circulate a written resolution and accompanying statement.

Question 17

Shareholders’ rights - other rights

Answer 17

1. Right to receive dividends, as long as there are profits available for the purpose and as long as the directors have made a recommendation as to its amount and this has been approved by the shareholders.
2. Right to apply to the court for the company to be wound up, on the grounds that it is just and equitable to do so
   E.g. because the management is in deadlock and there is no way of resolving the situation other than winding up the company.
3. Right to remove a director by ordinary resolution
4. Right to remove an auditor by ordinary resolution
5. Right to inspect, without charge:
   * the company’s minutes of general meetings and all shareholders’ resolutions passed otherwise than at general meetings;
   * all of the company’s statutory registers
   * directors’ service contracts and any directors’ indemnities; and
   * any contracts relating to the company’s purchase of its own shares.
6. Right to receive a copy of the company’s annual accounts and reports.
7. Right to seek an injunction under to restrain the company from doing something prohibited by its constitution.

Question 18

Types of share - Ordinary shares

Answer 18

Companies usually formed with only ordinary shares.

Give right to receive dividends, to attend and vote at general meetings.

Can have different types of ordinary shareholder like A and B. Created so can be treated differently.

Rights attaching to the shares will be set out in the company’s articles of association and if they are not, all shares rank equally.

Question 19

Types of share - Preference shares

Answer 19

Receive enhanced rights over and above ordinary. Set out in articles of association.

• Cumulative/ non- cumulative:
  Cumulative = has to be paid missed dividends from previous financial years, as long as profits available. Right ranks before dividends to ordinary shareholders in current year.
• Participating
  = further right to receive profits or assets, in addition to other rights.
  E.g. if the ordinary shareholders receive a dividend over a specified amount, this could give the participating preference shareholder the right to an additional payment, over and above their usual entitlement.

Question 20

Protection of minority shareholders - Unfair prejudice petitions

Answer 20

Apply to court for remedy where been unfairly prejudiced as a shareholder.

Grounds:
* unfairly prejudicial to the interests of the members generally, or some part of its members (including the claimant); or
* an actual or proposed act or omission of the company is or would be so prejudicial (causes harm to one or more shareholders, and it must also be unfair).

E.g. removal of auditor by shareholders on grounds of divergence of opinion.

Court can make any order it sees fit.
Most common - other shareholders must buy shares of the unfairly prejudiced shareholder.

Objective test.

Question 21

Protection of minority shareholders - Derivative claims

Answer 21

Instigated by a shareholder for a wrong done to a company which has arisen from an act or omission of a director.

Must be an actual or proposed act of omission involving negligence, default, breach of duty or breach of trust.

Question 22

Controls on directors - Substantial property transactions

Answer 22

• a director, in their personal capacity, or someone connected with a director
• buys from or sells to the company
• a non- cash asset
• of substantial value.

Need shareholders consent by ordinary resolution.

Person connected =
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):
- owns at least 20% of the body corporate’s shares; or
- is entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of the company.
Includes person who lives with them in enduring relationship as partner and children of such person.

Substantial =
- value is over £100,000.
- worth more than £5,000 and more than 10% of the company’s net asset value.

Effect of breach = transaction voidable.
May be made to account to company for gain and indemnify for any loses or damage.
Includes other director who authorised arrangement not just one with interest and connected persons.