Company ws5 Managing companies shares and shareholders PDF

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Introduction to Managing Companies, shares and shareholders.The General Meeting and Shareholder powers.ShareholdersIn this element you will consider the role of shareholders in a limited company in more detail. So far we have seen that the shareholders (also known as members) own the company and it ...

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Introduction to Managing Companies, shares and shareholders.

The General Meeting and Shareholder powers. Shareholders In this element you will consider the role of shareholders in a limited company in more detail. So far we have seen that the shareholders (also known as members) own the company and it is their investment that is at risk in the company. There are two important consequences of this: • The shareholders exercise ultimate control over the company; and • The shareholders hope to receive a financial return on their investment. The shareholders exercise their control in two key ways: • By determining the company’s constitution; and • By voting on shareholder resolutions. Although the directors manage the company on a day to day basis, a key element of shareholders’ control is their power to vote on a resolution to remove directors from the board (s 168 CA 2006), and/or to appoint new directors whose approach to managing the company the shareholders prefer (MA 17). The powers of shareholders derive from CA 2006 but also from the company's articles. Separation of powers – Directors' powers As you have already seen, the directors have control of the company’s day to day management and necessarily have broad powers to carry out such management under MA 3 and MA 5. However, CA 2006 places certain controls on directors which act as a check against abuse of their powers, by way of the extensive duties that directors are subject to (s 170 – 177). As part of these duties (which you saw in the previous topic): • Directors must disclose certain information about themselves and their dealings with the company, • Shareholder approval must be obtained for certain transactions; and • Shareholders have certain important decisions reserved to them (such as amending the company’s articles of association, s 21).

Separation of powers – Shareholders' reserve powers

As well as having certain decisions reserved to them under CA 2006, under MA 4, shareholders also have a reserve power. This is important as it acts as a further check on the powers of directors and offers protection for shareholders. "MA 4 Shareholders’ reserve power (1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. (2) No such special resolution invalidates anything which the directors have done before the passing of the resolution." The company's articles regulate the relationship (and allocate power) between directors (acting as a board) and shareholders (acting through the general meeting). Remember that companies are free to draft their own articles or to make amendments to the Model Articles, but the Model Articles will apply in default of the company registering its own articles. The Model Articles envisage that the role of the shareholders is a minor one, with their power limited to constitutional decisions only, which reflects the modern reality in many companies. The shareholders may act where the board of directors is unable to do so Barron v Potter****[1914] 1 Ch 895: This case established that the shareholders of the company in a general meeting may act in place of the directors where there is no board of directors competent or able to do so. Here the two directors of the company were not on speaking terms, so that effective board meetings could not be held. B (one of the directors) called a general meeting at which the shareholders attempted to appoint additional directors. P (the other director) objected that the power to appoint directors was stated under the company's articles to belong to the directors alone. The court held that in view of the deadlock, the power to appoint directors reverted to the shareholders and so the appointments were valid. The General Meeting In order for shareholders to pass a resolution, they need to vote either at a General Meeting or use the Written Resolution procedure (remember that this is only available for private companies and not available for resolutions to remove directors or auditors). We will first look at the General Meeting procedure. General Meetings are usually called by the directors (s302) by passing a board resolution at a Board Meeting. Board Meeting The Board of directors has the power to call a General Meeting of the shareholders by passing a board resolution. This is usually passed by a simple majority of the directors.

General Meeting The Board needs to give 14 clear days' notice of a General Meeting (s 307(1) & s 360) This is unless the short notice procedure is used (s 307(4) - (6)). If 90% of shareholders with voting rights agree, the short notice procedure allows the general meeting to take place on short notice, immediately after the Board Meeting. Shareholders can also call a General Meeting s 303 - 305 If the Board refuse to call a General Meeting, the shareholders have a reserve power to do so themselves. Under s 303(1) CA 2006, shareholders together holding not less than 5% of the paid-up voting share capital of the company can serve a request on the company i.e. the Board. The request will require the Board to call a General Meeting (the “s 303 request”). The s 303 request must state the general nature of the business which the shareholders wish to be dealt with at the General Meeting, and may include the text of the resolution they want to propose at the meeting. What are the directors’ obligations on receipt of a s 303 request? Under s 304(1) CA 2006, when the directors receive a s 303 request, they must call the General Meeting within 21 days from the date on which they become subject to the s 303 request to call the General Meeting, to be held on a date not more than 28 days after the date of the notice convening the General Meeting. What happens if the directors fail to call the general meeting? If the directors fail to call a General Meeting under s 304(1) CA 2006, all of the shareholders who submitted the s 303 request or any of them representing more than one half of the voting rights of those who submitted that s 303 request, can call a General Meeting themselves pursuant to s 305 CA 2006. If the shareholders call the General Meeting themselves then that General Meeting must be held within 3 months of the date that the directors received the initial s 303 request. Under s 305(6) CA 2006, if the shareholders are forced to call the General Meeting themselves, they can recover their reasonable expenses for doing so from the company. The company is then able to recoup the monies back from the directors who should have called the General Meeting initially. This process is summarised below. Summary of the process for shareholders to call a GM S 303: Shareholders together holding not less than 5% of the paid-up share capital can serve a request on the Board to call a GM.

21 days S 304: Directors must call the GM within 21 days of the s 303 request to be held not more than 28 days later. 28 days S 305: If directors do not call the GM under s 304, shareholders may then call the meeting themselves. GM must be held within 3 months. 3 months GM Annual General Meeting (AGM) You may have heard of an Annual General Meeting. CA 2006 abolished the requirement for private limited companies to hold an AGM, but public companies remain subject to this requirement (see s 336). For public companies an AGM must be called by directors (s 302) on 21 clear days' notice (s 307(2), s 360(2)) within six months' of the financial year end. Section 360 provides that the days must be "clear" days. This section applies to most of the provisions regarding notice of meetings in CA 2006. "Clear" days means that the day the notice is given and the day of the meeting are discounted in calculating the relevant number of days. At the AGM, the directors of the company present an annual report containing information for shareholders about the company's performance and strategy. Shareholders with voting rights then vote on current issues, such as appointments to the company's board of directors, executive compensation, dividend payments, and the selection of auditors. Voting at General Meetings Shareholders can vote at a General Meeting either on a: • Show of hands (where each shareholder has one vote), or a • Poll vote (where each shareholder has one vote per share held). Re Horbury Bridge Coal Co (1879): Lord Jessell MR described the position at common law as regards the rights of members with different numbers of shares in the company, saying: "We first of all consider what may be termed the common law of the country as to voting at meetings. It is undoubted, and it was admitted by Sir Henry Jackson in his argument for the Respondents, that, according to such common law, votes at all meetings are taken by show of hands. Of course it may not always be a satisfactory mode – persons attending in large numbers may be small shareholders and persons attending in small numbers may be large shareholders, and therefore in companies provision is made for taking a poll, and when a poll is taken the votes are to be counted according to the number of shares..." Under MA 42, a resolution put to the vote of a General Meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the articles.

MA 44 deals with the right to demand a poll vote as follows: 44 (1) A poll on a resolution may be demanded (a) in advance of the general meeting where it is to be put to the vote, or (b) at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared. (2) A poll may be demanded by (a) the chairman 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. Note that this right cannot be excluded: Section 321(1) CA 2006 states that a provision of a company's articles is void in so far as it would have the effect of excluding the right to demand a poll at a general meeting on any question other than (a) the election of the chairman of the meeting, or (b) the adjournment of the meeting. Shareholder voting: Ordinary and Special Resolutions There are two types of shareholder resolution under the CA 2006 requiring different voting thresholds. These are: • ordinary resolutions; and • special resolutions. Where the CA 2006 does not specify the type of resolution to be used then an ordinary resolution is required unless the company’s articles require a higher majority (s 281(3) CA 2006). Special resolutions are required for more key or constitutional decisions such as amending the articles (s 21 CA 2006). Votes at General Meetings are counted out of all shareholders PRESENT AND VOTING. Ordinary Resolution Requires a simple majority (more than 50% of votes are cast in favour of the resolution). (s 282(1) CA 2006). Special Resolution Requires a majority of not less than 75% (s 283(1) CA 2006). Shareholder voting at General Meetings: Quorum, Proxies and Enhanced voting rights Notice:

There are strict rules on giving timely (s 307) and appropriate (s 311) notice to all shareholders entitled to attend a General Meeting. The general notice is 14 clear days (s 307(1), s 360) although there is a procedure by which short notice can be used if sufficient members are in agreement to this (s 307(4) - (6)). The validity of resolutions passed at a general meeting depends on proper notice being given. Quorum: The quorum for a General Meeting is two shareholders under s 318(2) (other than for single member companies, for which the quorum is one (s 318(1)). MA 38 confirms that no business other than the appointment of the chairman of the meeting is to be transacted at a General Meeting if the persons attending it do not constitute a quorum. Proxies: Under s 324, shareholders may appoint a proxy to exercise any or all of their rights to attend and speak and vote at a General Meeting. Corporate shareholders must appoint a representative to attend General Meetings under s 323. Enhanced voting rights You learnt about **Bushell v Faith **clauses in the previous topic. You will recall that a Bushell v Faith clause is a mechanism by which a company's directors who are also shareholders can seek to prevent themselves from being removed from office. The clause is inserted into the articles of the company and provides that, when voting on a resolution for the removal of a director in a general meeting, the director/shareholder in question will have their votes weighted by a factor of great enough magnitude that the other shareholders cannot get the requisite majority in the meeting to pass this motion. Bushell v Faith clauses do not change the requirement under s 168 to pass an ordinary resolution to remove a director; rather they represent an internal agreement amongst the shareholders as to the weight their vote carries on a specific resolution which is not something the courts intervene in. Shareholder Voting: Written Resolutions Under s 288, private companies may pass shareholder resolutions (both ordinary and special resolutions) using the written resolution procedure, instead of at General Meetings. A written resolution has effect as if passed at a General Meeting (s 288(4)). Written resolutions must be sent to all eligible members (ie those entitled to vote on the resolution). A time limit of 28 days applies for the eligible members to respond, after which time the resolution will be deemed not passed if a sufficient majority of shareholders (over 50% of eligible members for an ordinary resolution or not less than 75% of eligible members for a special resolution) have not indicated that they vote in favour of the resolution. Written resolutions must be passed by the required percentage of all eligible members.

There are two resolutions which may NOT be passed as written resolutions. A General Meeting will always be required for these resolutions to allow representations to be made: Section 288(2)(a) a resolution under s168 removing a director before the expiration of his period of office; Section 288(2)(b) a resolution under s 510 removing an auditor before the expiration of his term of office. Informal decision making - the "Duomatic" principle Re Duomatic Ltd [1969] 2 Ch 365 established the principle that informal resolutions agreed by all the shareholders outside of a formal meeting will be valid and binding. In this case the liquidator of Duomatic claimed repayment of remuneration from one of the company’s directors, Mr Elvins, on the ground that the payments were not formally authorised by the company in general meeting. The court allowed the decision to stand despite the fact that it was not made at the general meeting, as it clearly had the backing of all shareholders. In order for the Duomatic principle to apply, there must be unqualified agreement of all shareholders, whether this is express or implied, verbal or by conduct. In Schofield v Schofield [2011] EWCA Civ 103, Neil Schofield (representing the corporate holder of 99.9% of the shares in the company) unsuccessfully argued that he and Lee (his son and the owner of the remaining share) had agreed, informally, to treat as valid and effective a meeting which was called without regard to the notice requirements of s 307, and at which (amongst other matters) Lee was dismissed as director and Neil was appointed sole director. The court found that there was no unqualified agreement by Lee to the validity of the meeting or the decisions made. The rights of shareholders to vote General principle: shareholders may vote in their own interests Shareholders are under no fiduciary duty to the company and can vote as they wish, regardless of whether their vote would be in the best interests of the company. However, shareholders must act in way that is bona fides. In Clemens v Clemens Bros [1976] 2 All ER 268 the court refused to allow a majority shareholder to authorise an allotment of shares where the motive was to dilute the voting power of the minority shareholder. The same principle also applies to shareholders who are also directors, when they are voting in their capacity as shareholders (Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 1 WLR 1133). Shareholders may also vote as they wish to remove a director, provided due process has been followed (Citco Banking Corporation NV v Pusser's Ltd [2007] UKPC 13). However, in exceptional circumstances

the courts have made orders to restrain a shareholder from exercising their vote in a manner which was irrational e.g. Standard Chartered Bank Ltd v Walker [1992] 1 WLR 561, where a minority shareholder was ordered not to vote against a restructuring agreement where the consequence of his doing so would be that the company would collapse and his shareholding would become worthless. Voting on a decision to amend the articles However, where shareholders are voting on a decision to amend the articles, the court will look at whether reasonable shareholders could have considered that the amendment was for the benefit of the company. Shareholders must vote to amend the articles in good faith (Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656) and not to undermine substantive rights of minority shareholders. If not, the court may hold the amendment invalid. Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154: In this case the court held that the power to alter a company's articles must be exercised bona fide for the benefit of the company as a whole. The facts of this case were that the company had altered its articles to introduce a provision which gave the directors the power to buy out, at a fair price, the shareholding of any member who competed with the company's business. The plaintiffs were minority shareholders who carried on a competing business, who challenged the validity of this alteration. The court held that the alteration had been introduced bona fide for the benefit of the company and, was therefore valid. Citco Banking Corpn NV v Pusser's Ltd [2007] UKPC 13: This was a Privy Council case involving a Hong Kong company, which at a general meeting amended the share rights in its articles and created a new class of shares, which had the effect of giving the Chairman of the company control. The Privy Council dismissed the claim by Citco that these amendments were invalid. They stated that the test was whether reasonable shareholders could have considered that the amendment was for the benefit of the company. On the facts of this case it was found that it would have been reasonable for shareholders to have accepted in good faith the arguments put forward by the Chairman as to why the amendment would be in the interests of the company.

How does a company fund its business? Why does a company need funds? When a company is set up, funds are needed to get the business started, eg to pay rent, buy stock and machinery, etc. Funds are also needed to keep the business going – this is commonly known as ‘working capital’. Funds are also needed for expansion and growth, eg by taking on new premises or buying other businesses. There are various ways in which a company can raise funds, including by: • Issuing shares (‘equity finance’);

• Borrowing (‘debt finance’); • Issuing a ‘hybrid’ investment which has the characteristics of both debt and equity (for example a convertible bond or a preference share), and/or • Retaining its profits for use in the business (rather than paying the profits to the shareholders by way of a dividend). A company is likely to use some or all of these methods at different stages in its growth. Share terminology We will consider the nature of shares and how shareholders may acquire shares in a company, but first it is important to understand some of the terminology used. The general term ‘capital’ is used to refer to the funds available to run the business of a company. For example, you may hear that a business needs an ‘injection of capital’. All it means is that the company requires more finance or funding to run its business. In company law, the term ‘share capital’ relates to the money raised by the issue of shares. The share capital is contributed by investors in the company...