Workshop 4: Shareholders’ Rights and Remedies Flashcards
What is the name of the principle that is reserved for shareholders when important decisions are made?
What is the definition of this principle?
The ‘majority rule’
The majority rule is the majority of shareholders that must vote in favour for a resolution for it to be passed
What are the six protections or remedies open to shareholders, predominantly minority shareholders, that can influence whether a resolution is passed?
- Shareholders agreements
- Membership/shareholder rights
- Derivative claims
- Unfair prejudice actions
- Just and equitable winding up
- Removal of directors
How can a shareholder agreement minimise the effect of the majority rule for minority shareholders in unfavourable circumstances?
A shareholder’s agreement sets out how the company is to be run between shareholders and how shareholders will vote on certain matters
What are some examples of membership rights that have been enforced under s33 CA 2006 or the corresponding section of CA 1985?
- The right to a dividend once it has been lawfully declared
- The right to share in surplus capital on a winding up
- The right to vote at meetings
- The right to receive notice of GMs and AGMs
How can membership rights act as a protection for shareholders in unfavourable circumstances?
Shareholders can sue under s33 CA 2006 are breached, as membership rights are included within the Model Articles
Explain why shareholders rights that are not a part of the Model Articles will not be enforceable under s33 CA 2006
Because the company’s Model Articles are deemed to be a ‘complete contract’, where terms will not be implied for the purposes of business efficacy or otherwise
Who is the Shareholders’ Agreement a contract between?
Some or all of the shareholders
What type of provisions can you usually see within a Shareholders’ Agreement?
Provisions relating to
- Unanimous voting over certain matters e.g., removing a director
- Quorum for GMs
- Dividend policy
- Allotment of new shares and
- New and departing shareholders
How do Shareholders Agreement act in relation to a company’s MA?
As an extension in governing how the company is run/regulating the company’s affairs and the relationship between the shareholders
What are the three primary reasons why Shareholders’ Agreements exist?
- Shareholders’ Agreement provisions constitute personal rights and oblige shareholders to keep to their promise
- Shareholders’ Agreements can be kept private unless they are explicitly referred to in MA
- Shareholders’ Agreements can require the unanimous approval of all parties regarding making amendments to Articles, instead of the 75% special resolution of shareholder approval
Why do the Articles not deal with shareholders person rights and obligations?
Because the Articles are treated strictly as a contract between the company and its shareholders in their capacity as shareholders pursuant to s33 CA 2006
How should the company be included within the SA?
The company should not be a party to any terms which restrict its statutory powers
What is the different between MA and SA?
The provisions in the Articles are subject to CA 2006 whereas a SA is purely an contractual arrangement arrived at between shareholders in their personal capacities
What is the name of the aspect of a SA that is particularly relevant to minority shareholders and what does this enable?
Right of action/enforceability,which enables one shareholder to enforce the provisions of SA director against another shareholder
What happens in the event a SA is breached?
The SA can be enforced in the usual way under general contract law principles
What two things could a shareholder claim for under a breach of the SA?
- Breach of contract
- Apply to the court for an injunction to prevent a breach of terms in the agreement
How can ‘reserved matters’ protect minority shareholders in a SA?
These matters can be reserved as matters requiring the consent of all shareholders, or certain individual shareholders e.g,, matter of removing a director requires a unanimous vote
How may the reserved matter of shareholders needing to unanimously consent on a removing a director impact the right of shareholders to remove a director under s168 CA 2006?
It doesn’t - a company is bound to accept the vote of a shareholder even if it is in breach of the SA provisions
What happens if a removal [of director] resolution is passed with a simply majority rule instead of with the required unanimity, as in the SA?
What can be done regarding the SA?
The resolution would be valid and the director removed from the office
The shareholder would be able to claim against other shareholders for breach of SA
What is the point in the SA if the CA 2006 can override it anyway, in circumstances such as removing a director?
The minority shareholder can claim a breach of contract which influences whether the resolution is passed or not
What are the rights of shareholders with 5% shareholding or more?
- Require directors to call a GM (s303)
- Require circulation of written statements regarding proposed resolutions to be considered at a GM (s314)
- Circulate a written resolution (s292)
What are the rights of shareholders with 10% shareholding or more?
- Demand a poll vote
What are the rights of shareholders with over 25% shareholding?
- Block a special resolution (s283)
How is a special resolution passed?
By 75% or more of the votes
What are the rights of shareholders with over 50% shareholding?
- Pass pr block an ordinary resolution (s282)
How is an ordinary resolution passed?
Over 50% of votes needed
Can a shareholder with exactly 50% of shareholding block an ordinary solution?
No
Can a shareholder with exactly 50% of shareholding pass an ordinary resolution alone?
No, because over 50% of votes in required to pass an ordinary resolution
What are the rights of shareholders with more than 75% shareholding?
- Pass a special resolution (s283)
What does s 33 CA 2006 mean for shareholders if their rights are infringed?
Shareholders can sue if their membership rights are infringed, with usual remedy for breach being damages
What can s168 CA 200Y oblige regarding the removal of a director?
That a director can be removed from office before the expiration of their period of office via ordinary resolution (simple majority rule)
Can the Board, generally, remove a director?
What circumstances apply?
Generally, no, unless the Articles specifically provide for this
Can directors who are also shareholders vote in their capacity as a shareholder regarding the removal of a director?
Yes
What is the name of the notice required for a special removal?
Special notice under s 168(2) CA 2006
How many ‘clear days’ constitute a special notice?
28 clear days
True or false
A company can use a written resolution to remove a director under s 288(2)(a)
False
When is the special notice required before?
The GM where the removal resolution will be voted on by shareholders
Who decides what will be discussed and matters considered at a GM?
The board of directors
What are the two possible courses of action when the board receive the special notice for proposed removal resolution?
- Board puts the removal resolution of GM agenda
- Board may decide NOT to put removal resolution on agenda of meeting
What is the Board requires to do if the put the removal resolution in the agenda for the GM?
Give shareholders notice of the following at the same time:
1. Removal resolution
2. GM
How long is required for the Board to notify shareholders of removal resolution under ss 307(1) and 360(1) and (2) CA 2006.
14 clear days
Why is the Board required to send notice of the removal results on to shareholders when it was the shareholders who sent them notice of removal resolution in the first place?
Because not all shareholders may be aware of
What happens if the removal resolution is not on the agenda of a GM?
It will not be considered
True or false
Directors are bound to place the removal resolution in the agenda for the consideration
False
What can shareholders do if board of directors do not put the removal resolution in the GM agenda or refused to call for a GM for the first time and for the second time?
- First time, shareholders may have the ability to require directors to call a GM
- Second time, shareholders may be able to call GM themselves
What t&cs apply for to shareholders if they are to serve a s 303 request to the board to call a GM?
They must hold no less than paid up 5% of shareholding
What t&cs apply for to shareholders if they are to serve a s 303 request to the board to call a GM?
They must hold no less than 5% of shareholding
What two things are required of a s 303 request when being applied?
- State the general nature of the business which the shareholders wish to be dealt with at GM
- May include text of proposed resolution at GM
True or false
A s 303 request is not unique only to removal resolution and is a general power of shareholders
True
What two condition must the Board meet when calling a GM after having received a s 303 request under s 304(1) CA 2006?
- Must call the GM within 21 days from the date they become subject to call a GM subject to s 303 request
- Ensure the GM is held no more than 28 days after the date of notice calling [convening] the GM
What happens if the Board fail to call a GM under s 304(1) CA 2006?
Pursuant to s 305 CA 2006, the following people can call a GM themselves in this circumstance:
1. All shareholders who submitted s 303 request
2. Any shareholder representing more than a half of voting rights of those which submitted the s 303 request
When must notice be served and GM held if the shareholders call GM themselves pursuant to s 305 CA 2006?
It must be called no fewer than 14 clear days
It must be held within 3 months of the date that the directors received the s 303 request
What benefit can shareholders receive if tepee shareholders are forced to call a GM under s 305 CA 2006?
Shareholders can recover their reasonable expenses for calling GM from company and then the company recoups those expenses from directors
What is thesignificance of shareholders submitting s 303 request requiring directors to call a GM at the same time of their special notice to board?
Applies time pressure
What day is the latest the Board can decide to call a GM after being served a s 303 request?
Day 22
What is the latest day the Board must hold the GM after having called it under a s 303 request?
Day 50
On what day does the Board lose control of the process after refusing to call a GM after being given a s 303 notice?
What happens from this point?
Day 23
From day 23, the shareholders can call a GM on the normal notice on 14 days, with the GM being held within 3 months of the initial s 303 request
What must the company do if it receives notice that one or more shareholders intends to propose a removal resolution?
The company must send a copy of the notice to the director concerned s 169(1) CA 2006
True or false
The company must send special notice to the director concerns regarding the removal resolution, even if the Board decides not to out the removal resolution on the agenda
True
What is the director entitled to do if they receive a copy of the removal resolution notice?
Can they do this even if they are a shareholder?
Make representations in writing to be circulated to shareholders. If representations are not made, they should be read out at the GM
They can do this whether they are a shareholder or not
What is a Bushell v Faith clause in the Articles or a SA?
A clause that may give a director, who is also a shareholder, weighted voting rights at a GM
What does a Bushell v Faith clause likely to mean?
That shareholders are unable to pass an ordinary resolution to remove the director concerned
Where and why are Bushell and Faith clauses found?
Usually found in smaller companies Articles because the directors are likely to have played a key role in company set up and expect to be involved in the running of the business
Where should Bushell and Faith clauses be searched for?
Articles and SA
What are ‘transfer provisions’?
Provisions that require a director to transfer their shares to other shareholders if they are removed as a director
True or false
The company may decide to pay the director, who has lost or leaves their position, for loss of office
True
In which circumstances do loss of office payments not need to be approved by the company’s shareholders by ordinary resolution?
- Where loss of office or ‘other relevant payments’ do not exceed £200 (s 221 CA 2006)
- The payment is made in good faith
- The payment is made in discharge of an existing legal obligation
- The payment is made by way of damages in respect of such an obligation
- The payment is made in settlement or compromise of a claim in connection with one’s office or employment
- Payment is made by way of pension in respect of pass services
What two things does ‘payment for loss of office’ include?
- Cash benefits
- Non-cash benefits
Which two documents must payments regarding directors be distinguished?
- Director’s service contract
- Payments under s 217 CA 2006
What entitlements does a director have if their service contract is breach by their removal of director office?
A breach of contract could mean they’re entitled to damages or compensation
What is a derivative claim under s 260 CA 2006?
A claim where the right of action is not personal to the shareholder, but one that is derived from the company’s right of exercised that the company hasn’t exercised, breaching the statutory duties
Who is the claimant in a derivative claim?
The company, whom is being acted for on behalf of a shareholder or director
Whom to is the remedies under a derivative claim awarded to?
The company
What does s 260(3) CA say about when a derivative claim can be brought?
In respect of a cause of action arising from an actual or proposed act or omission …. by a director of the company
True or false
For a successful derivative claim, a director must have benefitted personally from the breach or omission
False
Who does s 260(3) CA 2006 say the derivative claim cause of action can be brought against?
Director or another person or both
When can third parties be defendants to a derivative claim?
Generally, relating to concept of ‘knowing assistance’ in respect of a breach of duty by a director
When can third parties be defendants to a derivative claim?
Generally, relating to concept of ‘knowing assistance’ in respect of a breach of duty by a director
Whom by must the derivative claim be brought by under s 260 CA 2006?
By a shareholder
True or false
A shareholder can bring a derivative claim against director(s) before they became a member of the company
True
This highlights the cause of action is vested into the company and not the member
True or false
A former member cannot bring a claim even in relation to events which occurred before they were a shareholder
True
What is the two stage process of bringing a derivative claim?
- Stage 1 is obtaining permission of the court, where they can allow to dismiss claim to progress to stage 2
- Stage 2 is a detailed consideration of criteria, which then allows the case to proceed to trial
What does s 994 CA 2006 allow a shareholder to bring action for?
Shareholder sues for themselves on the grounds that the company is being run in a way that the shareholder has suffered unfair prejudice
What are three examples of unfairly prejudicial conduct?
- Granting excessive remuneration to directors
- Non payment of dividends
- Directors dealing with associated persons
What are seven key principles or concepts to take note of regarding unfair prejudice?
- Negligent or inept management of company will not amount to unfair prejudice generally
- Disagreements to company policy will not afford grounds for a petition under s 994 CA 2006
- There is not need to show bad faith or conscious intent for conduct to be ‘unfair’
- Breach of terms may give rise to complain of unfairness - Lord Hoffman *Pin O’Neill v Philips
- Claimant is not required to come to the court with ‘clean hands’ for successful unfair prejudice claim
- The courts will take a wider view of prejudice suffered by minority shareholder
- Legitimate expectation of shareholders will be evaluated
What is the most common order of unfair prejudice?
To provide for the purchase of the petitioner’s shares by the wrongdoer
What is the most drastic remedy available to shareholders regarding a company?
That the company be wound up on the grounds it is just and equitable to do so under s 122(1)(g) Insolvency Act 1986
