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LPC - BLP MODULE - SHAREHOLDERS AND COMPANY PERSONNEL (DISTINCTION)
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Notes on shareholders and their role within the company as well as other company personnel
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BLP.Shareholders and Company Personnel.
Two Key Roles.
• Shareholders – responsible for major decisions
• Directors – responsible for day-to-day decisions
The same person might wear both these “hats”
Private companies no longer need a company secretary, but may still choose to have one and many
companies still need Auditors, except small companies.
Role of the shareholder.
• Provide financial backing by “buying” shares.
• Make the major decisions affecting the company.
• Can appoint and dismiss directors (s168 CA06).
• First shareholders are called the “subscribers”. They are the shareholders are the ones who
sign the Memorandum and the Articles of association.
Shareholder rights.
• Primarily governed by the CA 2006 and Articles. Normally will be the Model Arts but with
some amendments.
• The usual rights depend on the % shareholding (page 98-99 of the BLP Manual)
• Other rights may be set out in a shareholder agreement.
Right not to be unfairly prejudiced (section 994 CA06):
• petition the court – based on past, present or anticipated events
• prejudice relates to all or any shareholders
• the court will apply an objective test used – the impartial outsider
• court can make any order – common for purchase of shares at a fair value
Right to have company wound up (section 122(1)(g) Insolvency Act 1986):
• must show tangible interest – company is solvent so shareholder will get something
back.
• application to court - remedy of last resort
• company will cease to exist
If a shareholder has more than 10% of the company shareholding = Right to refuse to consent to
short notice (s307 CA06)
more than 25% = Can block a special resolution
more than 50% = Can pass an ordinary resolution by yourself.
Restrictions on shareholders.
• When voting, shareholders can generally vote in their own self-interest – but it is recognised
that with a higher %, comes a degree of power.
• The rule in Clemens v Clemens (1976) provides that majority shareholders are subject to
“equitable considerations” when voting.
• When changing the Articles, the effect of s33 CA06 is that shareholders should only make
changes that are bona fide in the best interests of the company.
Restrictions on the minority:
, • Little point in allowing the minority to take action for any irregularity that the company can
by ordinary resolution ratify
• Only the company should be the claimant - the rule in Foss v Harbottle (1843)
• Exception to this is the “derivative action” whereby shareholders seek the courts consent to
begin an action in the name of the company – section 260 CA06 codifies and widens this
right.
If the company wants to bring an action against anybody even their own directors only the company
should be the claimant. The shareholders will have to pass an ordinary resolution to allow an action
to be brought. Therefore, if the majority are the ones doing the company wrong the application to
court will be required.
Articles vs Shareholder Agreement.
• Articles = internal “constitutional” document
• Shareholders agreement = a normal contract
• Common to find that both are used.
Articles:
• Bind only the shareholders
• A contract of sort but only applies in respect of “membership rights” but is ineffective at
protecting non-membership rights. For example, it is no use in enforcing a shareholders right
to be a director.
• Public document
• Can be altered by special resolution although CA06 provides some scope for “entrenched
articles” - page 83 BLP Manual
Shareholder agreement:
• Bind all who agree to it which will not always only be the shareholders
• Applies in respect of “non-membership rights”
• Private document
• Can be altered only if all agree
Usual clauses in shareholder agreements.
• No amendment to Arts without all parties consent so any such amendment will result in a
breach of this agreement.
• Unanimity for major decisions
• Roles
• Confidentiality
• Exit provisions & restrictive covenants.
• Arbitration
• Power to force others to join in a resolution for voluntary winding up
Breach of shareholder agreement.
• Is breach of contract
• The shareholder who has breached the agreement may be liable to the other shareholders.
• If a shareholder who under the Shareholder Agreement is to be a “director” is dismissed by
fellow shareholders under section 168 CA06, he may sue them for breach of contract.
Role of directors
• Manage the company
• Day-to-day control brings a significant degree of power.
• Act as company’s agents so they have authority.
• Safeguards are built in by common law, Articles and statute = duties & controls –
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