Shareholders

Question 1

S540

Answer 1

share in relation to a company means share in the company’s share capital

Question 2

Shareholder (member) rights

Answer 2

Right to attend and vote at the GM on matters reserved for GM
Right to a return of capital when the company is wound up
Right to participate in distribution of profits: if company has profits available for distribution (s830), the directors recommend a dividend and the GM ‘declares’ it (Art 30, MAPC); if the directors decide to retain profits, the shareholders will make a capital gain (they will hold shares in relation to a company which is more valuable)
Right to transfer shares: s544 with the company’s articles;
for private companies see Art 26 MAPC, giving directors power to refuse to register -

Question 3

Classes of shares

Answer 3

Ordinary shares
Other classes of shares

Question 4

Ordinary shares

Answer 4

Variable return on money contributed
Payment only after creditors and preference shareholders have been paid in full, and if directors decide to recommend a dividend, and shareholders declare by ordinary resolution
Highest risk, but greater upside than preference shares

Question 5

Preference Shares

Answer 5

Fixed return on money contributed; may be cumulative (ie if not paid one year, then two years to be paid the next year)
Payment only after creditors have been paid in full, and if directors decide to recommend a dividend
Higher risk, but more predictable returns than ordinary shares

Question 6

General meetings

Answer 6

Certain matters reserved for shareholders
Eg. removal of a director or alteration of articles
Normally, directors call GMs (s302), but shareholders with 5% of voting rights can call GMs
(s303(2))
GM voting normally by simple majority (ordinary resolution: s282), but some matters require
special resolution (75% majority: s283);

Question 7

The company’s articles

Answer 7

ss17 and 29: company’s articles and any special resolutions form the constitution of a company
Special resolutions = 75% of votes
S19: model articles to be published (see The Companies (Registration) Regulations 2008)
S20: model articles take effect by default as articles of company if articles are not registered, or if bespoke articles do not exclude or modify model articles

Question 8

Default contents of model articles for private companies

Answer 8

Power of board arts 3-6
Article 3 - general power of management for directors
Article 4 - shareholders’ reserve power
Decision making by directors arts 7-16
Art 7 - nature of board as a collective instrument and directors need to take decisions collectively
Director’s appointment arts 17-20
Meetings arts 37-41
Voting by shareholders arts 42-47

Question 9

Section 33 (1) Effect of company’s constitution

Answer 9

The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions
This is referred to as the ‘statutory contract’

Question 10

What happens if this contract is breached?

Answer 10

Per Lord Wedderburn (1957), the following are included:
voting rights;
share transfer rights; rights intended to protect a class;
pre-emption rights;
right to be registered as member and obtain a share certificate;
right to enforce a dividend that has been declared;
Other procedural rights

Question 11

Can outsider rights ever be enforced?

Answer 11

Three possible arguments:
1. Articles evidence a separate contract
2. A member can apply to the court to have the company run in accordance
with its articles, indirectly enforcing outsider rights
3. Court can interpret articles as creating rights and obligations for members, at least in ‘quasi-partnership’ company where some members will ‘work’ for the company

Question 12

Other limits to the articles

Answer 12

Articles cannot restrict mandatory shareholder rights, e.g. the right to remove a director by ordinary resolution

Question 13

Amending the articles

Answer 13

Unlike a normal contract, where consent of all parties required for variation, the statutory contract may be amended by a special resolution: s21(1) CA 2006

Question 14

Restrictions on amendment of articles

Answer 14

Statutory restrictions where increase liability of shareholders: s 25
Entrenchment possible, but variation always possible by unanimous consent – s 22
Shareholders generally allowed to vote in own self-interest (Pender v Lushington, per Jessel MR), except where voting to alter the articles

Question 15

Bona fide for the benefit of the company as a whole

Answer 15

Test 1: Subjective test, but subject to the proviso that invalid if no reasonable shareholder could consider the change to be for the benefit of the company as a whole
Test 2: Discrimination and impact on individual hypothetical member

Question 16

Modern tests for Bona fide for the benefit of the company as a whole

Answer 16

Citco v Pusser’s Ltd [2007] UKPC 13: Privy Council followed Shuttleworth: a subjective test with an objective minimum standard.

Question 17

When is there a class of rights?

Answer 17

s629: Shares form one class if the rights attached to them are in all respects uniform. This will be straightforward in the case of ordinary shares, ‘A’ preference shares, ‘B’ preference shares etc

Question 18

What is variation?

Answer 18

A company may want to restructure its shares: may be too complex or returns to preference shares may be too high etc

Question 19

s630 CA 2006

Answer 19

Procedure where company proposes to alter the rights attaching to a class of shares:
1. Company must follow any provision in the articles for variation.
2. If no provision in articles, company must obtain a special resolution passed at a class meeting, or consent in writing of holders of three quarters of the shares in the class by nominal value (s630(4))
In addition, shareholders at class meeting must vote in good faith in the interests of the class (and not in, say, the interests of the ordinary shareholders):

Question 20

Allotment or issue of shares

Answer 20

Directors may decide that the company needs to raise more share capital for its business; the alternative is likely to be borrowing from a bank with the directors giving personal guarantees

Question 21

Statutory controls on issues of shares by directors

Answer 21

s550 allows directors of private company with only one class of shares to exercise all
powers of company to allot
Otherwise s551 provides directors must have authorisation from the articles or an
ordinary resolution of the GM

Question 22

Shareholders’ pre-emption rights

Answer 22

Shareholders are also protected against dilution by rules requiring directors who are proposing to allot ordinary shares to first offer them to existing shareholders in proportion to their shareholdings on the same or more favourable terms: s561

Question 23

Shareholder agreements

Answer 23

Private contract between members as to how they will vote (e.g. on resolution to
remove a director), can be enforced by injunction
Can be an alternative to including a provision in the articles making it difficult to
remove directors
Need to explicitly consent

Question 24

Members’ remedies

Answer 24

The member may have the right to bring a personal action, independent of the statutory remedies
Could enforce the terms of constitution, bring a derivative claim, commence an unfair prejudice petition or petition to have company wound up

Question 25

Personal actions

Answer 25

a wrong done to members, action in their own name, obtain a remedy for themselves: Unfair prejudice and petition to wind up the company - Breach of constitution (s.33) - Breach of shareholders’ agreement - Breach of other statutory rights (e.g., s125.name is omitted from the register) - Directors owe a duty directly to a member (in highly limited instances)

Question 26

The reflective loss’ principle

Answer 26

The reflective loss principle applies to any situation where the company and a member have a cause of action deriving from the same facts against the same wrongdoer. The effect of the rule is that the member’s personal claim will generally be prevented from proceeding ‘even if the company has failed or declined to make good that loss’

Question 27

Sevilleja v Marex Financial [2020] UKSC 31

Answer 27

Rejected the double recovery argument by Millet, and reinforced Bingham’s idea This is because they do not suffer an individual loss outside of the claim

Question 28

Derivative Claim

Answer 28

Enforcing directors’ duties - S170 (1) - directors owe their duties to the company, thus, it is the company, and the company only, who can enforce a breach of the duties - The decision to commence litigation on behalf of the company is made by the BOD (Art 3 MAPC) - However, this will be problematic where the litigation is to against directors

Question 29

Statutory derivative claim

Answer 29

S260 (1) defines a derivative claim as one brought by a member in respect of a cause of action vested in the company, seeking relief on behalf of the company A derivative claim may be brought against a director or another person (or both) s260 (3)

Question 30

Grounds for a derivative claim:

Answer 30

A derivative claim can arise from an actual or proposed act or omission by a director involving: - Negligence - Default - Breach of duty - Breach of trust

Question 31

The prima facie test

Answer 31

Does the applicant have a prima facie case? Is there a cause of action with merit? Relatively easy to pass

Question 32

The mandatory refusal test

Answer 32

S263(2): permission to continue the claim must be refused if any of the three circumstances exist: Where the court is satisfied that a person acting in accordance with s172 would not seek to continue the claim s263 (2) (a) Where the act or omission has been authorised by the company s263 (2) (b) Where the act or omission has been ratified by the company s263 (2) (c)

Question 33

The discretionary test

Answer 33

The court will exercise its discretion and determine whether permission should be granted for the claim to continue

Question 34

Costs

Answer 34

Remedy flows to company; still not much incentive for minority shareholders to bring, costs rules therefore very important: the risk of costs will be a serious deterrent to a diversified shareholder

Question 35

Why bring a derivative action?

Answer 35

Few advantages for the minority shareholder: - Any remedy would flow to the company - The law about when leave would be given was very complex - There was considerable uncertainty about costs, and if the claimant failed at the leave stage they would be likely to have to pay costs - If they were locked in (because of restrictions on share transfer – Art 26(5) MAPC allowing directors to refuse to register transfer), then even if they could show bad faith, they would remain in an association with the wrongdoers

Question 36

Petition about unfair prejudice

Answer 36

s994(1): (1)A member of a company may apply to the court by petition (a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b)that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

Question 37

What is unfair prejudice

Answer 37

Must be real, rather than merely technical or trivial Must cause prejudice or harm to the relevant interest of the member (usually, but not limited to financial damage) to show unfairness, the petitioner normally needs to show either: - some breach of terms - some use of the rules equity would regard as contrary to good faith

Question 38

Grounds for unfair prejudice

Answer 38

Abuse of a controlling position Breach of directors’ duties Breach of statutory rights or the constitution Serious mismanagement Exclusion from management

Question 39

Abuse of a controlling position

Answer 39

Directors or controlling shareholders abusing their position, obtaining advantage usually at the expense of the minority shareholders,

Question 40

Breach of directors’ duties

Answer 40

Most cases concerning breach of duty involve private companies

Question 41

Breach of statutory rights or the constitution

Answer 41

Failure to prepare proper financial accounts Failed to hold AGMs No adequate notice for extraordinary meetings

Question 42

Exclusion from management

Answer 42

Only in quasi-partnership companies, the members are likely to have an expectation that they will participate in management and so exclusion can amount to unfairly prejudicial conduct

Question 43

Remedies

Answer 43

The unfair prejudice petition is not an equitable remedy, no requirement for ‘come with clean hands’ But unmeritorious behaviour on the part of the petitioner might lead to a reduction of remedy

Question 44

Share purchase orders

Answer 44

The court may order that the respondent (usually the majority shareholder) buy the shares of the petitioner (most common) The court may order the respondent to sell their shares to the petitioner The court may order the company concerned to purchase the shares of the petitioners

Question 45

Relationship with derivative claims

Answer 45

Certain conduct may amount to unfairly prejudicial and allow a member to commence a derivative claim (e.g. breach of duties) - If both claims are brought based on the same conduct, the court will, examine both remedies and determine which is more appropriate - If successful unfair prejudice petition can obtain the relief sought, then permission to continue the derivative claim will likely be refused

Question 46

Winding Up

Answer 46

s122(1)(g): IA1986 ‘A company may be wound up by the court if - […](g) the court is of the opinion that it is just and equitable that the company should be wound up.’

Question 47

Who may apply: S124 IA 1986

Answer 47

A company, its directors, creditors, the liquidators or a contributor of at least six months standing may petition

Question 48

Come with clean hands

Answer 48

S122 (1)(g) is an equitable remedy, the petitioner’s own conduct may be relevant in determining whether a winding-up can proceed.

Question 49

A petition will not succeed

Answer 49

Where the petitioner’s own misconduct causes a breakdown in confidence Where the petitioner is using a winding-up petition to put pressure on the company

Question 50

Who may petition?

Answer 50

Any member A person who is not a member, if shares in the company have been transferred or transmitted to them by operation of law The Secretary of State A member of an LLP

Question 51

Against whom?

Answer 51

Directors Members The company Third parties

Question 52

When will courts order winding up?

Answer 52

The company’s substratum or principal object has failed There is a complete deadlock Where the petitioner has justifiably lost confidence in the management of the company’s affairs (Loch v John Blackwood Ltd) Where there have been serious breaches of expectations of reasonable behaviour in a quasi- partnership company Where one party has exercised their strict legal rights in an inequitable way

Question 53

Deadlock in 2 circumstances

Answer 53

The first is where there is a ‘functional deadlock’ The second is where there is an irretrievable breakdown in trust and confidence between the participating members of a quasi- partnership company

Question 54

When will the court not make a winding-up order?

Answer 54

s125(2) – court may not order winding up if some other remedy is available and it considers the petitioner is acting unreasonably in seeking winding up Generally winding up is a remedy of last resort: for example, is a liquidator needed to resolve the company’s affairs?