WS4 Company Meetings; Shareholders; Directors; Shareholder Agreements PDF

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MANAGEMENTRELATIONSHIP BETWEEN DIRECTORS AND SHAREHOLDERS1 Directors (a) Manage the company on a day to day basis: Articles; Model Articles CA 2006; Model Article 3; Model Article 5. Subject to the articles, the directors are responsible for the management of the company’s business, for which purpos...

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MANAGEMENT RELATIONSHIP BETWEEN DIRECTORS AND SHAREHOLDERS 1 Directors (a) Manage the company on a day to day basis: Articles; Model Articles CA 2006; Model Article 3; Model Article 5. Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company. (b) Power restricted: Certain actions can only be taken by directors if the shareholders have given authority; owe duties to the company. 2 Shareholders (a) Own the company; exercise ultimate control over it; hope to receive a financial return on investment. (b) Restrict directors: (i) MA 4. Grants the shareholders a reserve power. The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. (ii)

Power to control amendments to the company’s articles: Section 21 CA. Which require approval by the shareholders by way of special resolution.

(iii)

Removal of a director by ordinary resolution: Section 168 CA.

(iv)

Granting a director a long-term service contract: Section 188 CA

(v)

Making a loan to a director: Section 197 CA

(c) Control key decisions: Are able to control key decisions through (i) Determining the company’s constitution (ii)

Voting on shareholder (eg to give directors authority to change the articles, or name of the company, to vary class rights)

3 Further relationship prescribed by the articles: MEETINGS BOARD MEETINGS 1 Board Meetings (a) Who: Directors (b) What: Day to day operations of the company.

(c) Who can convene a board meeting: ? (d) Structure: Article 9 MA. Gives the directors flexibility in regulating their meetings, providing that any director may call a BM or require the company secretary (if the company has one) to do so at any time. (e) Notice: Reasonable notice necessary. Whatever notice is usual for the directors to give. Browne v La Trinidad (1887). Therefore, if all of the directors are in the same building, the meeting could be called almost immediately, if such notice is custom for the directors. If directors are in various buildings or countries this can vary. (f) Alternative procedure: unanimous decision of the directors. Article 8 MA. Makes provision for directors to make decisions, by unanimous agreement, without having to hold a BM. (i) Indication: By any means so this can include for example a written resolution or a telephone conversation as long as a written record of the decision is kept Article 15. (g) Companies with one director: The requirements in the MA as to decision-making by directors do not apply to companies with only one director. In such companies the sole director can take decisions on his own Article 7(2) BOARD RESOLUTIONS 1 Procedure: The Articles will regulate the procedure for passing board resolutions. (a) Simply majority: in most cases this means that the directors make decisions by passing board resolutions at a board meeting and board resolutions are usually passed by a simple majority of those who are present at the meeting and voting. (b) Unanimous: As an alternative the Articles usually allow directors to take decisions unanimously by some other means that allows all the directors to indicate common consent. 2 Board Resolutions (a) Definition: The standard day to day decisions of the company are taken by its board of directors in board meetings. (b) Quorum: The number of people required to attend a meeting in order for the meeting to be valid. No proposal may be voted on at a BM unless a quorum is participating in the meeting. Article 11 MA. This quorum can be decided by the directors themselves but it must never be less than two and unless otherwise fixed it is two. (c) Voting: Board resolutions are passed by majority vote on a show of hands. Majority: Article 7(1) MA. Decisions at BMs are taken by majority vote on a show of hands. For example if there are four directors participating in the BM, at least three must vote in favour of a resolution for the board resolution to be validly passed. (i) Deadlocks: Can therefore happen. Article 13 MA provides that in the event of a deadlock the chairman of the BM (if appointed under Article 12 MA) will have a casting vote. (ii) Articles can vary.

(d) Written resolutions: Article 8(2) MA. Allows directors to take decisions in the form of a directors’ written resolution provided the prescribed procedure is followed. This is uncommon in practice. GENERAL MEETINGS 1 General Meetings: Section 281 - 335 CA; Model Articles (a) Who: Attended by the members of the company who are the owners of the company and exercise control over it. (i) Members (ii) Shareholders: Used to denote members in a company limited by shares. (b) What: Fundamental decisions. (i) Matters outside the powers of the directors that must be approved by a resolution of the shareholders (1) Making of amendments to a company’s articles of association: Section 21 CA. Provides that amendments to articles of association are to be made by a special resolution of the company’s shareholders. (2) The formal declaration of dividends (3) Power to remove a director (ii)

Matters within the powers of the directors but that requires the prior approval of the shareholders before the directors can be authorised to act. (1) The approval of certain transactions between the directors and the company: Such as a loan. Section 197 CA. A company may make a loan to a director, but not without the prior approval by a resolution of the shareholders.

(c) Who convenes / calls: (i) The board: It is the board’s responsibility to convene (ie call) general meetings. Section 302 (ii)

Shareholders reserve powers: If the board refuse to call a General Meeting, the Shareholders (who must hold not less than 5% of the paid up voting share capital of the company) have a reserve power to do so themselves. Section 303-305. (1) Board then has 21 days to call on a date on no more than 28 days: Then the Board must call the GM within 21 days from the date on which they become subject to the request to be held on a date not more than 28 days after the date of the notice convening the General Meeting. Section 304(1). (2) If they fail to do so within 21 days: All the shareholders who submitted the Section 303 request or any of the shareholder representing more than one half of the voting rights of those who

submitted the section 303 request, can call a General Meeting themselves. This must be held within 3 months of the date that the directors received the initial request. Section 305. (3) Expenses: Section 305(6). If the shareholders are forced to call the GM themselves, they can recover reasonable expenses for doing so from the company which can then get that money back from the directors.

(d) Notice: (i) Private companies: At least 14 clear days prior to GM / or special notice (defined in articles). Section 307(1); Section 360 (ii)

What is “Notice”: (1) Document: Sent by the directors to the shareholders, announcing that a GM will take place (2) A period of time: Which elapses between the directors’ act of calling a GM (by circulating the notice document to the shareholders) and the GM itself taking place.

(e) Short notice GMs: GMs may be called on less than the usual amount of short notice if sufficient members agree. Section 307(4-6). This can be done if: (i) 90% of shareholders with voting rights agree: it is agreed to by a majority in the number of members who together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM. (ii)

This percentage may be increased up to 95% by a provision in the company’s articles of association.

3 Annual General Meetings (a) Who needs them (i) Public companies: Are required Section 336. (ii)

Private companies do not: Abolished by CA 2006

(b) Who attends: Members (c) Called by: (i) Board of directors: Usually called by the directors by passing a board resolution at a board meeting Section 302 (d) Notice: At least 21 clear days prior to AGM / / or special notice (defined in articles).

SHAREHOLDER RESOLUTIONS 1 Shareholder resolutions (a) Can be passed by way of (i)

General Meeting

(ii)

Votes in Writing* (Written resolution) (1) Only private companies: Section 281 CA. To minimize cost and to allow resolutions to be passed without meeting. Section 284(1) CA. Requires the same majorities. Section 288(5). (2) How: A copy of the proposed resolution (ordinary or special) will be sent to each member along with a statement. Note that a written resolution is a method of voting, not a type of vote. Shareholders must always vote by ordinary or special resolution. a) Must be passed by the required percentage of all eligible members b) Written ordinary resolution: Section 282 CA. Can be passed by a simple majority of the total voting rights of eligible members. c) Written special resolution: Section 283 CA. A written special resolution can be passed by a majority of members representing not less than 75% of the total voting rights of eligible members. d) Every member has one vote in respect of each share held by him when voting on a written resolution: Section 284 CA. e) Time limit to respond: A time limit of 28 days. (3) Why: Part of reform to CA 1985 on the background of criticism that the act catered to large companies. Cost minimisation. (4) Limits: There are two resolutions that may not be passed as written resolutions. Section 288(2) a) Removal of a director under Section 168; Section 288(2)(a). b) Removal of an auditor under Section 510; Section 288(2)(b)

2 Two different types of shareholder resolutions (a) Ordinary Resolutions: SIMPLE MAJORITY (MORE THAN 50 PERCENT). Section 282(1) CA. Where the CA 2006 does not specify the type of resolution to be used then

an ordinary resolution is sufficient unless the company’s Articles require a higher majority. Section 281(3) CA. (b) Special Resolutions: NOT LESS THAN 75 PERCENT MAJORITY. Section 283(1) CA (i) Example decisions that need special resolution: required for more key or constitutional decisions such as meaning the articles. (1) Changing the name of the company: Section 77 CA. (2) Changing a board decision 3 Quorum: Each must have quorum. (a) For General Meetings: Quorum is two shareholders (including proxies and representatives) Section 318(2) CA; Model Articles. or one qualifying person if the company has only one member. Section 318(1). (b) If no quorum: No business other than the appointment of the chairman of th emeeting is to be transacted at a General Meeting if the persons attending it do not constitute a quorum. Model Articles 38 4 Voting (a) Decided by the articles: The MA provides that a resolution at a meeting will be decided on a show of hands, unless a poll is demanded in accordance with the articles. (b) Types of voting (i) Show of hands: Section 320 CA; See too Section 284(2). One vote per hand / shareholder. Each member will have one vote. (ii)

Poll: Section 321, 322 and 322A CA; Section 284(3) CA; Re Horbury Bridge Coal Co (1879). Where a vote is taken by poll, unless the articles provide otherwise, each member will have one vote per share, except where the company has no share capital, in which case each member will have one vote. (1) The right to demand a poll vote: Important and will make a significant difference when the shareholders are not in agreement over a resolution. Article 44 MA. a) Must be i) In advance of a general meeting ii) At a general meeting iii) By a chairman; directors; two or more persons having the right to vote on the resolution; a person / persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution. (2) Right cannot be excluded: Section 321(1) CA;

(c) Proxy: Section 324 CA. A member of a company is entitled to appoint another person as his proxy to exercise all or any of his rights to attend and to speak and vote at any GM, in his place. Someone else votes for you. If you cannot physically attend the meeting. Must be informed about it. Someone who will act exactly in the same way the

shareholder wants. (i) Rationale - large public companies: In large public companies, the appointment of proxies is especially important because only a small minority of the company’s members will actually attend the meeting. Many other members will appoint a proxy to exercise their votes. (ii)

Rationale - company groups: Very many companies have corporate shareholders because they are subsidiaries within a group of companies. If a corporation is a member of a company, it may by resolution of its directors authorise a person or persons to act as its representative at any meeting of the company Section 323 CA.

(d) Votes are counted out of all shareholders present and voting 5 Bushell v Faith clauses: Bushell v Faith clauses are allowed. A clause giving weighted voting rights allowing director shareholders to block such resolutions trying to remove them as a director. Such a clause is valid and effective. 6 Shareholders and bona fides: (a) Shareholders are under no fiduciary duty to the company (b) Can therefore vote as they wish regardless of whether their vote would be in the best interest of the company (c) However must act with bona fides: Clemson v Clemens (1976) ; Northern Counties Securities Ltd v Jackson & steeple (1974); Citco Banking Corporation NV v Pusser’s Ltd (2007); (d) Only in exceptional situations will shareholders ability to vote be restricted: Standard Chartered Bank Ltd v Walker (1992) 7 Stricter standards for voting to amend the articles: 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 or the benefit of the company. (a) Shareholders must vote to amend 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 (1900); Sidebottom v Kershaw, Leese & Co (1920); Citco Banking Corporation NV v Pusser’s Ltd (2007); POST-MEETING 1 Dealing with documentation (a) Copies: Copies of all resolutions affecting the company’s constitution must be sent to the Registrar of Companies within 15 days of their being passed. Copies of any amended articles must also be filed Section 26(1). (b) Special resolutions will form part of a company’s constitution: Section 17(b); Section 29(1)(a) CA.

(c) Some ordinary resolutions will form part of the company’s constitution: When specified by the relevant provisions of the CA. (iii)

After the GM has taken place, a second BM will be necessary, to enable the directors to implement the matter on which the shareholders have voted. BM; GM; BM. (1) BM: resolve to convene GM. Approve notice of GM and send to members. (2) GM: Members vote on resolutions set out in notice (3) BM: Directors authorise relevant action and instruct PMM (4) PMM: Carried out by company secretary or a director.

DUOMATIC PRINCIPLE Duomatic principle: Duomatic (1969); Schofield (2011) (a) Principle: Informal resolutions agreed by all the shareholders outside of a formal meeting will be valid and binding; There must be unqualified agreement of all shareholders, whether express or implied, by verbal or behavioural conduct.

SHAREHOLDER AGREEMENTS 1 Shareholder agreements (a) Definition: Agreement concluded among some or all the shareholders, but existing outside and separate from the articles and to which the company itself may not be party. It regulates the relationship between shareholders (such as the way people vote; how directors (if shareholders too) will be involved in management etc. (b) Rationale: Shareholders an generate their own rules for the governance of their affairs that is a private document which does not have to be registered at Companies House (not part of the company’s constitution) (c) Contractual force: Derives its contractual force from the normal principles of contract law and not from the Act. Limitations of constitutions (articles) do not apply. If the shareholders deviate from the agreement, they can sue in breach of contract. Demonstrated in. Russell v Northern Bank Development Corporation (1992); (d) The company may be a party to the shareholder agreement but not to any terms that would have the effect of fettering the statutory power of the company (e) Disadvantage: The shareholder agreement does not automatically bind new members of the company, as the articles do.

(f) Typical shareholder agreements (i) Each of the shareholders is entitled to appoint a director (ii)

No shareholder will vote in support of an alteration in the company’s articles unless all agree

(iii)

No shareholder will vote to remove a director unless all agree

(iv)

Except in specified circumstances no shareholder will require repayment of money lent to the company.

Russel v Northern Bank Development Corporation (1992) Principle: → A company may not bind itself by being member of a shareholders agreement not to exercise its statutory powers, → However an agreement by the members in a shareholders’ agreement that they will not support such a resolution is binding. → Shareholders’ agreements can therefore be an effective way of shareholders limiting the possibility of major changes within the company and protecting the interest of minority shareholders. → A shareholding agreement trying to bind a company to not issue shares without agreement from shareholders is an unlawful fetter on the company’s statutory powers. Facts: TBL was a company which was set up with five shareholders which comprised the bank and four executives (including R). The shareholders and the company entered into a shareholders’ agreement which provided that no further share capital would be created or issued without the consent of all of the parties. Several years later the Board of Directors proposed to make an increase of capital to 4 millon by a rights issue of shares. R objected to this. Held: The court made a declaration that the agreement was binding on the shareholders but not on the company itself. An injunction would not be enforceable against the company itself. Hickman v Sheep Breeders

SHAREHOLDERS’ AGREEMENTS V ARTICLES 1 Advantages of shareholders’ agreements (a) Normal contractual rules apply, so unlike the articles (which can be altered by special resolution - section 21) a shareholder agreement can only be altered if all shareholders agree

(b) The provision of a shareholders’ agreement may also be enforceable by injunction. (c) It is a private agreement - contract the articles which are a public document, registered at Companies House 2 Disadvantages: Note that a shareholders’ agreement only binds those shareholders who are parties to it. This can be differentiated from the provisions of the articles, which are binding on all shareholders....