UNIT 6 - Shareholders 2 Flashcards
The directors of a private limited company intend to sell a property which the company owns. The buyer is the mother of one of the directors. The three directors of the company are also the only shareholders, each holding a third of the shares. It has been agreed that the sale price of the property will be £95,000. The most recent audited accounts of the company show that net profits are £860,000 and net assets are £900,000. The company’s constitution is the Companies (Model Articles) Regulations 2008 without amendment.
Does the proposed transaction require shareholder approval?
A) No, because the property is not being sold to a director of the company.
B) Yes, because the transaction involves the sale of a property with a value which exceeds 10% of the company’s net profit value to a person connected with a director.
C) Yes, because the transaction involves the sale of a property with a value which exceeds 10% of the company’s net asset value to a person connected with a director.
D) No, because the price of the transaction does not exceed £100,000.
E) No, because the directors have general authority to run the day to day business of the company.
CORRECT ANSWER C -
The board of directors of a private limited company is proposing to grant a service contract for a guaranteed term of three years to a new director. The three year term of the contract requires the prior approval of the shareholders by ordinary resolution. The company has a total issued share capital of £200,000 divided into 200,000 ordinary shares of £1 each.
There are four shareholders with the right to vote, a man, his sister, his son and his daughter: the man has 40,000 shares; his sister has 60,000 shares (but will be abstaining from the vote); his son has 50,000 shares; and his daughter has 50,000 shares. The company has adopted Model Articles for private companies limited by shares (unamended) as its articles of association.
The board propose to use the written resolution procedure to pass the ordinary resolution.
Which of the following statements best describes whether the ordinary resolution will be validly passed?
A) Shareholders holding at least 5% of the voting rights must agree to the use of the written resolution procedure before the ordinary resolution can be validly passed.
B) All of the shareholders, including the sister, must vote before the resolution can be passed.
C) Only the son and daughter need to vote in favour before the deadline for the ordinary resolution to be validly passed.
D) The required majority of members must signify their agreement within the deadline of 14 days after the circulation of the written resolution for the ordinary resolution to be validly passed.
E) The man, his son and his daughter must vote in favour before the deadline for the ordinary resolution to be validly passed.
CORRECT ANSWER E -
A director of a company is not married or in a civil partnership but has lived with his partner for 10 years. He has a sister. His father died several years ago. The director’s mother and grandfather have lived with the director since the father’s death.
Which one of the following most accurately describes who would be a person connected to the director for the purposes of deciding whether shareholder approval is required for a substantial property transaction?
A) The director’s partner only.
B) The director’s partner and his sister.
C) The director’s partner, his sister and his mother.
D) The director’s partner and his mother.
E) The director’s partner, his mother and his grandfather.
CORRECT ANSWER D - Shareholder approval for a substantial property transaction is only required if the transaction involves a director or a person connected to a director. Connected persons include the following members of a director’ family: their husband, wife or civil partner or partner with whom they have an ‘enduring relationship’, parents, children (and step-children) (ss.252 and 253 CA 2006). The director’s partner and his mother are therefore connected persons.
Options A, B and C are therefore wrong. A civil partner is a connected person but wider family such as brothers and sisters are not connected persons.
Option E is wrong. Grandparents who live with a director are specifically excluded (s.253(3) CA 2006).
A company is proposing to enter into a contract to sell a storage unit to one of its directors. The storage unit is valued at £80,000.
Following the sale, what must be filed at Companies House?
A) The shareholders’ resolution approving the sale.
B) The shareholders’ resolution approving the sale, a memorandum of the terms of the sale agreement and a fee.
C) The shareholders’ resolution approving the sale, Form SPT1 and a fee.
D) There are no documents that need to be filed.
E) It will depend on the asset value of the company.
CORRECT ANSWER D - It is not certain from the facts whether or not this transaction would amount to a substantial property transaction requiring an ordinary resolution of the shareholders (s190 Companies Act 2006). Although this is a sale of a non-cash asset to a director, it is not clear whether this is a substantial non-cash asset. Although the storage unit is worth less than £100,000 (s.191(2)(b), to determine this it would be necessary to know the net asset value of the company, or if no statutory accounts have been prepared, the amount of the company’s called up share capital of the company (s.191(3). However, even if it were a substantial property transaction, there would be no related filing needed at Companies House.
Options A, B and C are wrong because, even if this was a substantial property transaction which required authorisation by an ordinary resolution of the shareholders, the resolution would not need to be filed at Companies House. There is therefore no associated fee. A substantial property transaction does not require the preparation of a memorandum of the terms of the sale agreement. Form SPT1 does not exist.
Option E is wrong because whilst the asset value is relevant to determining whether or not the transaction is a substantial property transaction, as explained above, it is not relevant in determining what documents need to be filed at Companies House.
A private company is proposing to make a loan of £25,000 to the one of its directors. He will use the loan to buy a car for his husband.
Which of the following statements best reflects the position in relation to authorisation of the loan by the shareholders?
A) The shareholders must approve the loan by passing an ordinary resolution.
B) The shareholders must approve the loan by passing a special resolution.
C) Shareholder approval is not required as lending money is within the general power of the directors.
D) Shareholder approval is not required as the loan is below £50,000.
E) Without shareholder approval for the loan, the transaction will be void and the director must repay the loan immediately.
CORRECT ANSWER A - Under s.197 CA 2006, shareholder approval by ordinary resolution is required for a loan to a director.
Options B is therefore wrong.
Option C is wrong. A loan contract would normally fall under the directors’ general power, but not if the loan is made to a director (as above).
Option D is wrong. A director can borrow up to £50,000 if the purpose of the loan is to enable a director to properly perform his duties, otherwise the limit is £10,000. This is not a loan for business purposes.
Option E is wrong. If shareholder approval is not obtained, the transaction is voidable at the instance of the company.
A company has three directors and five shareholders (none of whom are directors). At a recent board meeting, the directors of a private company agreed to enter into the following transactions:
The sale of office premises for £200,000 to the wife of the Managing Director;
A loan of £250,000 to the husband of the Finance Director;
A payment of £30,000 to the Sales Director on his retirement next month;
The award of a six-year fixed term service contract to the Marketing Director.
Shareholder consent was not obtained for any of the transactions but the directors know that all of the shareholders approve of these transactions.
Which of the following statements best reflects the position in relation to affirmation of these transactions?
A) The sale of the office premises to the Managing Director’s wife may be affirmed by the shareholders or it will be voidable at the option of the company.
B) The loan to the Finance Director’s husband must be affirmed by the shareholders or it will be voidable at the option of the company.
C) The payment of £30,000 to the Marketing Director may be affirmed by the shareholders to prevent the directors from being personally liable to repay the £30,000 to the company.
D) The service contract is void and cannot be affirmed by the shareholders.
E) None of the transactions can be affirmed as the unanimous consent of the shareholders is required to do so.
CORRECT ANSWER A - The transaction is a substantial property transaction (SPT) and will be voidable as shareholder approval has not been obtained. However, under s.196, shareholder may affirm a SPT by ordinary resolution. Four out of the five shareholders approve, so this will be possible.
Options B is wrong. A loan to a member of a director’s family does not require shareholder approval, and so there is no need for affirmation.
Option C is wrong. There is no provision in the Companies Act 2006 allowing a payment for loss of office to be affirmed, so the directors will be personally liable to repay the sum as shareholder approval has not been obtained.
Option D is wrong. Only the provision in the service contract granting the fixed term is void. The remainder of the contract is valid. There is no provision in the Companies Act 2006 allowing a the fixed term provision to be affirmed.
Option E is wrong. Loans and SPT’s can be affirmed by ordinary resolutions (as above). Unanimous consent is not required.
The directors of a company are proposing to award one of its directors a guaranteed fixed term service contract for three years when her current one-year contract expires. The company has five shareholders: a doctor, a dentist, an accountant, a solicitor and an architect. Their shareholdings are as follows:
The doctor holds 50% of the shares
The dentist holds 25% of the shares
The accountant holds 10% of the shares
The solicitor holds 10% of the shares
The architect holds 5% of the shares
Which ONE of the following statements best explains the position in relation to the resolutions which may be used?
A) The decision will require an ordinary resolution of the shareholders.
B) The decision will require a special resolution of the shareholders.
C) Only the directors can propose a written resolution.
D) All of the shareholders except the architect can call for a written resolution.
E) Where the written resolution procedure is used, the vote must be unanimous for the resolution to pass.
CORRECT ANSWER A - A service contract for a guaranteed term of more than two years must be approved by ordinary resolution of the shareholders (s.188(2)(a) CA 2006).
Option B is therefore wrong.
Option C is wrong. A resolution may be proposed as a written resolution by the directors or by shareholders holding 5% or more of the shares, so all the shareholders can call for a written resolution (s.288(2) and s.292).
Option D wrong. All the shareholders have at least 5% of the shares.
Option E is wrong. As this would be an ordinary resolution if taken at a general meeting, only a simple majority is required.
A private limited company has five shareholders, a builder, a decorator, painter, an electrician, a carpenter and a plumber, all of whom are also directors of the company. Their shareholdings are as follows:
The builder has 30,000 shares.
The electrician has 30,000 shares.
The decorator has 10,000 shares.
The carpenter has 20,000 shares.
The plumber has 10,000 shares.
The company has one class of ordinary £1 voting shares. It has adopted the Model Articles for private companies limited by shares unamended.
The company is considering a proposal to loan £25,000 to the builder. The carpenter and the plumber support the builder and will vote for the proposal. The decorator and the electrician are against the proposal.
A fortnight ago, the directors of the company circulated a written resolution in order to obtain the necessary shareholder approval to the terms of the loan agreement. The builder and the carpenter have returned the written resolution, signifying their consent. The decorator and the electrician have told the board that they will not vote on the proposal. The plumber is away and has not yet returned the resolution.
Which of the following statements best describes whether the resolution has passed?
A) A majority of 75% of the votes of all the eligible shareholders is required to pass the necessary resolution, so it cannot pass.
B) In view of the fact that the electrician and the decorator will not be voting on the resolution, it has received sufficient votes for it to pass.
C) As the builder has an interest in the matter, his votes will not count so the resolution cannot pass.
D) The lapse date has not passed so the board must wait until then before they can resolve to enter into and execute the loan agreement.
E) The resolution will not pass until the plumber returns the resolution signifying his agreement
CORRECT ANSWER E - An ordinary resolution of the shareholders is required to approve a loan to a director (s197 Companies Act 2006 (CA06)). This requires more than 50% of the eligible members to vote in favour so the votes of the plumber are needed to pass the resolution.
This makes Option A wrong.
Option B is wrong as the builder and the carpenter have exactly 50% of the votes, which is not sufficient for the resolution to pass. Note that the percentage is calculated on the total number of eligible voting shares, not on the number of votes cast.
Option C is wrong. There are no restrictions on a shareholder voting in favour of a personal loan, even though they have an interest in the loan, so the builder is an eligible member as he is entitled to vote.
Option D is wrong because as soon as a simple majority of the votes of all eligible members are received, the resolution will pass, whether or not the lapse date has passed. Note that there is no concept of voting against a written resolution, so it makes no difference that the electrician and the decorator will not vote.
A private limited company has five shareholders, a lawyer, a banker, a teacher, a doctor and a dentist. They hold the following numbers of ordinary shares:
The lawyer: 20
The banker: 35
The teacher: 10
The doctor: 10
The dentist: 25
The company has adopted Model Articles for private companies limited by shares (unamended) as its articles of association.
The company proposes to amend its articles. A written resolution was circulated to the five shareholders, who were all eligible members, on 1 March.
Four shareholders signed and returned copies of the resolution to signify their agreement to it. These were received by the company on the following dates:
The lawyer: 14 March
The banker: 19 March
The teacher: 27 March
The doctor: 30 March
The dentist did not return his copy of the resolution.
When, if at all, was the resolution passed?
A) 19 March.
B) 27 March.
C) 28 March.
D) 30 March.
E) The resolution was not passed.
CORRECT ANSWER E - because the resolution was not passed. A special resolution is required to amend the articles. For a special resolution to be passed by written resolution, it must be passed by members representing not less than 75% of the total voting rights of eligible members. It therefore required 75 votes in favour, which must have been received before the end of the lapse date; they therefore needed to have been received by the end of 28 March. At that point in time, only 65 out of 100 votes (65%) had been received in favour. The doctor’s vote was too late.
Option A is wrong because by 19 March 55% of the total voting rights had been cast in favour. A special resolution passed by written resolution requires 75% of the total voting rights to be cast in favour.
Option B is wrong because by 27 March 65% of the total voting rights had been cast in favour. As mentioned above, a special resolution passed by written resolution requires 75% of the total voting rights to be cast in favour.
Option C is wrong because by 28 March, the lapse date, only 65% of the total voting rights had been cast in favour. This is insufficient to pass a special resolution by written resolution.
Option D is wrong because the written resolution lapsed on 28 March.
A company has Model Articles for private companies limited by shares unamended.
Which one of the following statements best reflects the position in relation to the payment of dividends by the company?
A) The directors can declare the amount of a final dividend at a board meeting.
B) The directors do not have authority to pay an interim dividend without the approval of the shareholders.
C) The shareholders declare a final dividend by passing a special resolution but may only do so if the directors have made a recommendation.
D) Once a final dividend has been declared, it must be paid to the shareholders.
E) If an unauthorised dividend is paid to the shareholders, the shareholders may be required to repay it but the directors will not be personally liable.
CORRECT ANSWER D - Once declared, a final dividend [but not an interim dividend] becomes a debt of the company owed to the shareholders.
Options A is wrong. The directors recommend the amount of the final dividend, but it is the shareholders who will declare the dividend.
Option B is wrong. The directors have the power to pay interim dividends without the approval of the shareholders.
Option C is wrong. A dividend is declared by passing an ordinary, not a special, resolution.
Option E is wrong. The statement is partly correct – shareholders who knew or ought to have known that the dividend was unauthorised will be required to repay it. Under the common law, if the directors knew or ought to have known that the dividend was unauthorised, they will be liable to repay it.
