Shareholders\' powers & functions - Revision PDF

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CL 5 Revision notesShareholders (Basics)  ‘Own the company’, it is their investment that is at risk in the company.  The shareholders exercise ultimate control over the company; and  The shareholders hope to receive a financial return on their investments.  Definition of company’s articles : reg...

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CL 5 Revision notes Shareholders (Basics)  ‘Own the company’, it is their investment that is at risk in the company.  The shareholders exercise ultimate control over the company; and  The shareholders hope to receive a financial return on their investments.  Definition of company’s articles: regulate the relationship and allocate power between the directors (acting as a board) and shareholders (acting through general meeting) and company.

So, how do they exercise this ‘ultimate control’?  A) Determining the company’s constitution B) Voting on shareholder resolutions.  E.g. Vote on a resolution to remove directors from the board (although has to be general meeting) (s 168 CA 2006) and/or appoint new directors whose approach to managing the company the shareholders prefer (MA 17).  E.g. as part of their duties, directors must: (i) disclose certain information about themselves and their dealings with the company.  E.g. Shareholder approval must be obtained for certain transactions (‘’Substantial property loans, etc).  E.g. Shareholders have certain decisions reserved to them (such as amending the company’s articles of association, s 21).  E.g. MA 4 Shareholders’ reserve power (i) Shareholders may, by special resolution, direct the directors to take, or refrain from taking, certain action.’’  E.g. Act where the board of directors is unable to do so. Barron v Potter [1914] General Meeting  Usually called by directors (s302) by passing a board resolution at a board meeting.  When called by directors: 14 days’ notice (s307(1) & 360) unless short notice procedure is used – 90% of shareholders with voting rights agree (s 307(4).  Shareholders can also call general meeting, s 303 – 305.  If board refuses to call a General Meeting, shareholders have reserve power to do so themselves.  When called by shareholders: shareholders together holding no less than 5% of the paid-up share voting capital, can serve request on company, (s 303(1). The ‘303 request’. Must state general nature of business shareholders want to be death with and may include text of resolution.  ^So directors on receipt of 303, must call general meeting within 21 days from date on which they became subject to s 303 – then

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GM must be held on date no more than 28 days after notice convening GM. If they fail, all of the shareholders who submitted original 3-3- or at least more than half of their voting rights, can call GM themselves pursuant to s 305 CA 2006. Should be held within three months of date directors received initial s 303 request. 305 (6), if shareholders forced to call general meeting themselves, can recover reasonable expenses from doing so from company who can recoup from the directors.

Voting at General Meetings  

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(i) Show of hands (ii) Poll vote, Re Horbury Bridge Çoal Co (1879). MA 42: 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. 44 (1) Poll on a resolution may be demanded – (a) in advance of general meeting where it is to be put to the vote, (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. Poll vote may be demanded by – (a) chairman of the meeting (b) directors (c) two or more persons having the right to vote on the resolution; (d) a person or person representing not less than 1/10th of the total voting rights of all the shareholders having the right to vote on the resolution. *This right cannot be excluded by articles: s 321(1) CA 2006. Ordinary resolutions 50%+: When CA 2006 does not specify type of resolution to be used then ordinary resolution is required unless company’s articles require higher majority (s281(3) e.g. overturning board decision or key constitutional decisions (s21 CA 2006) Special majority -75%. Votes counted out of all shareholders PRESENT AND VOTING. Quorum – two shareholders, s318(2) or one shareholder (single member companies, s318(1)). MA 38 – no business other than appointment of the chairman of the meeting is to be transacted at General meeting if persons attending do not constitute a quorum.

Written Resolution 

Private companies may pass shareholder resolutions (both ordinary and special resolutions) using the written resolution procedure, instead of at General Meetings, s 288. Written resolution has effect as if passed at a General meeting (s 288(4)).

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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%) have not indicated they vote in favour of resolution. Two resolutions which may NOT be passed as written resolutions. A general meeting will be required to allow representations to be made: s 288(2) (a) a resolution under s 168 removing a director before the expiration of his period in office//or auditor s 288(2) (b).

Informal decision making – the ‘’Duomatic’’ principle. 

Re Duomatic Ltd [1969] 2 Ch 365 – informal resolutions agreed by all the shareholders outside of a formal meeting will be valid and binding – but needs ‘’unqualified’’ agreement of all shareholders, whether this is express or implied, verbal or by conduct. Schofield v Schofield [2011]

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 a way that is bona fides, Clemens v Clemens Bros [1967] and this applies to shareholders who are also directors, when they are voting in their capacity as shareholders, Northern Counties Security Ltd v Jackson & Steeple Ltd [1974]. In Clemens 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.  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]). However, in exceptional circumstances courts have made orders to restrain shareholders from exercising their vote in a manner which was irrational e.g. Standard Chartered Bank Ltd v Walker [1992].  Also, where shareholders are voting on decision to amend articles, court will consider whether reasonable shareholders could have considered that the amendment was for benefit of the company. Shareholders must vote to amend the articles in good faith and not to undermine substantive rights of minority shareholders. If not, the court may hold the amendment invalid. Allen v Gold Reefs of West Africa Ltd [1900]  Sidebottom v Kershaw, Leese & Co* [1920] – power to alter company’s articles must be exercised bona fide for the benefit of the company as a whole.

Shares  Raising funds: issuing shares (equity finance) & borrowing (debt finance)  Shares (basics): capital means the funds available to run the business of a company. Share capital refers to money raised by the issue of shares. The share capital is contributed by investors in the company and is represented by shares that are issued to such investors who become shareholders (or members).  What is a share? ‘bundle of rights’ – by investing in the share capital of any company, investor becomes part owner and will often have voting rights at shareholders meetings.  Why become a shareholder//invest? Receipt of income (by way of dividend) and capital gain (by way of growth in the value of the company and value of individual share). Neither guaranteed obvs.  Also, in private companies, long term investment which is incentivised by sale of their stake, sale of the company, or when company is wound up.  Issued Share Capital (ISC). Amount of shares in issue at any time. 1. Shares purchased by initial subscribers 2. Further shares issued after company has been incorporated, to new or existing shareholders.  Share Ownership: s112 – In order to become a member of a company, person must be entered into company’s register of members. Register is the primary source of who the members are and how many shares they own. Until the register of members is updated, shares are not legally transferred to the prospective new shareholder.  How do you become a shareholder? i. initial subscriber ii. Share issue – where a person acquires further shares issued by the company after incorporation iii. Share transfer – where person acquires shares by way of transfer from an existing shareholder iv. Transmission – shares devolved (death, inheritance etc).  Allotment? Contract between company and new/existing shareholder under which company agrees to issue new shares in return for purchaser paying subscription price. Power of directors to allot derives from s 549 – 551 CA 2006. Shares are ‘allotted’ when a person acquires unconditional right to be included in company’s register of member in respect of those shares. Issued? Only issued and form part of a company’s issued share capital once shareholder has actually been registered as such in company’s register, and title complete; 112 (2) confirms that full legal title to share only achieved once person’s name entered into register.

 Transfer? Contract to sell existing shares in the company between existing shareholder & purchaser – though freely transferrable, under s 544, articles of most private companies restrict members rights to transfer shares.

Shares Cont. The legal nature of shares & class rights  What is a share? 1. Fraction of the capital of the company and sets out shareholder’s financial stake in the company, which allows shareholder to receive dividends and capital on a winding up. 2. Measure of the shareholder’s interest in company as a member and their right to vote 3. Property right which can be bought and sold and carried legal and beneficial interests. Boland’s Trustee v Steel Bros & Co Ltd [1901].  *Note – share ownership does not give any entitlement to ownership of the company’s assets, which are owned by the company itself (Macura v Northern Assurance Co Ltd (1925)).  Classes rights? Different classes of share carry different rights and entitlements relating to voting, entitlement to dividends and return of capital when a company is wound up. Note* Nothing in CA 2006 which defines classes of share rights and the label attached to a share is not determinative. *The rights attached to class of share are determined by the company’s articles.  ORDINARY SHARES: default position, if company’s shares are issued without differentiation, they will be ordinary shares. Carry right to vote in general meetings, right to receive dividend if one is declared by directors, and right to receive share of capital when company is wound up (surplus capital) in accordance with their shareholdings. Entitlement of ordinary shareholders to a dividend is unrestricted.  PREFERENCE SHARES: Usually entitled to have dividends at a predetermined rate (e.g. 5% of their nominal value) in priority to any dividend paid on the ordinary shares. Dividends can only be paid where the company has surplus profits and a dividend is declared, but where this is the case, first claim will be for the preference shareholders. Preference shareholders often have right to priority over ordinary shareholders when capital is returned to members in a winding up.  The rights of preference shareholders to a dividend may be cumulative (where arrears of preference dividends not declared in previous years must be paid as well as for current year) or non-cumulative (just current year’s right to dividend. May also be participating (participate in dividend or winding up alongside ordinary shareholders or non-participating (receive only their fixed preferential rights).  PREFERENCE SHARES EXAMPLE: PGDL limited has nonparticipating preference shares in issue which carry right to receive fixed preferential dividend of 5% of total subscription price per share

per annum. Shares have par value of £1 each but were subscribed for at price of £2 per share. Assuming dividend has been declared, preference shareholders would be entitled to receive dividend of 10p per share per annum before ordinary shareholders received any dividend. Would not be entitled to any further dividend.  Other classes – deferred (right to dividends/capital on winding up, after claims of preference & ordinary shareholders) Redeemable (temporary shares which may be bought back by company in the future) Non-voting shares, Convertible share (may be converted to a different type of share) Employee’s share.

Variation of Class rights  Birch v Cropper (1889): Established that where the terms of issue of a class of shares are silent in some respect there is a presumption that all shareholders rank equally.  Variation of class rights: s 630 CA 2006 provides class rights can only be varied: 1. In accordance with the relevant provisions in the company’s articles (which may specify more or less onerous provisions); 2. If there is no provision in articles a. 75% in value of the shares of the affected class consent in writing, or b. Special resolution is passed at a separate meeting of the holders of the affected class of shares.  Companies may also entrench class rights in their articles, s 22, so s 630 does not apply.  *Shareholders voting at a class meeting must vote with the dominant purpose of benefitting the class as a whole, or variation may be deemed invalid. British America Nickel Corpn Ltd v O’Brien [1927].  *Also, statutory provisions of s 630 only apply if class rights, not exercise of these rights, are varied. So, for example, class rights are not ‘’varied’’ simply if the company issues more shares of that same class, even though it may dilute e.g. the amount of dividend previously paid. The substantive legal rights of the class have not been altered. White v Bristol Aeroplane Co [1953].  Right to object to variation of class rights: s 633 gives the dissenting members of class of shares right to challenge variation. Conditions = only shareholders holding at least 15% of issued shares of that class may challenge variation & must be within 21 days of date on which resolution was passed to vary class rights.

The Articles and Shareholder’s Agreements

 Provisions of a company’s constitution bind the company and its members to the same extent as if there were

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covenants on the part of the company and of each member to observe those provisions. Legal interpretation of articles – in general usual terms of contractual interpretation apply, however: articles cannot be supplemented by additional terms implied from extrinsic circumstances, Bratton Seymour Service Co Ltd v Oxborough [1992], the court has no jurisdiction to rectify the articles, unless is ‘’commercially absurd’’, Sugarman v CJS Investments LLP [2014]. However, terms can be implied where necessary for ‘proper construction’ of the articles, Equitable Life Assurance Society v Hyman [2002]. SUEING: General principle is that any member has the right to enforce the terms of the articles against the company under s 33, and the company is also under s 33 entitled to enforce and restrain breaches of the articles against its members. Wood v Odessa Waterworks Co (1889). **The articles only create a contract between the company and their members in their capacity as members, and not in any special or personal capacity. They also do not give any rights to a person who is not a member. Eley v Positive Government Security Life Assurance Co Ltd (1876) – E was seeking to enforce rights in his capacity as a solicitor (outsider). Member v Member: A member may sue another member on the contract created by the articles (i.e. if a member accepts a personal obligation to another member through the articles, like transferring shares) without joining the company as a party. Rayfield v Hands. Shareholders agreement: Usually on significant event such as incorporation, though can be entered into at any time, and can be between certain classes of shareholders only. **The company may also be a party but not to any provisions in the agreement which would have the effect of fettering the statutory powers of the company. Advantages v articles: 1. Normal contractual rules apply, so unlike the articles (which can be altered – s21 CA 2006), a shareholder’s agreement can only be altered only if all shareholders agree. 2. Private agreement – articles a public document, which has to be registered at Companies House. Downside: Shareholder’s agreement only binds those shareholders who are parties to it, unlike articles which binds all shareholders. Purpose? The purpose of the shareholder’s agreement is generally for the shareholders themselves to agree how they will vote on particularly important decisions, in a way which the company cannot do in the articles, due to the restrains of the CA 2006. Typical provisions: Each of the shareholders is entitled to appoint a director, No shareholder will vote in support of a resolution of an

alteration in the company’s articles unless all agree, No shareholder will vote to remove a director unless all agree.  Effect of shareholders agreement: effective way of shareholders  limiting the possibility of major changes of the company and protecting the interests of minority shareholders, Russel v Northern Bank Development Corpn [1992]....