Lecture 9: Company Law III : Meetings, Shareholder Protection & Liquidation

What are shareholder meetings and what do they consist of?

Shareholder meetings are gatherings where shareholders and directors convene to discuss and vote on matters affecting the company. There are different types of shareholder meetings, such as General Meetings, Annual General Meetings (AGMs), and Class Meetings.

General Meetings: All shareholders and directors are invited to General Meetings. They can be called at any time, and their purpose is to discuss and vote on various company matters.

Annual General Meetings (AGMs): Every public company must hold an AGM within six months of their financial year end. AGMs are attended by all shareholders and directors and involve crucial business such as financial reports, dividend declarations, and director/auditor appointments.

Class Meetings: These are gatherings where only shareholders holding a specific class of share are entitled to attend. They are called to vote on matters that specifically affect that class of shareholders.

During these meetings, decisions are made through passing resolutions, which can be ordinary or special resolutions. Ordinary resolutions require a simple majority, while special resolutions need a majority of at least 75%. Shareholders also have the right to propose resolutions at these meetings.

Overall, shareholder meetings provide a platform for shareholders to participate in the company's decision-making process and exercise their rights as owners of the company.

What are the matters that require shareholder resolutions?

Shareholder resolutions during company meetings are required for various matters, including:

Passing ordinary resolutions for decision-making on regular company matters. Passing special resolutions for major changes, such as amending the company's articles or ratifying a director's conduct in breach of duty to the company. Proposing resolutions related to specific issues, such as higher welfare conditions for chickens in the case of Tesco plc, as mentioned in the context.

What are the differences between resolution in meeting and resolution by circulation?

The main differences between a resolution in a meeting and a resolution by circulation are as follows:

Resolution in a Meeting:

Passed during a physical or virtual gathering of shareholders. Shareholders vote in person or by proxy. Majority vote is required, and the number of votes may be determined by the number of shares held. Amendments to the resolution are possible, as long as they are minor. Notice of the meeting and proposed resolutions must be given to shareholders in writing. Resolution by Circulation:

Passed through written agreement by shareholders, excluding decisions to dismiss a director or auditor. A copy of the resolution is sent to every eligible shareholder, and the agreement process is outlined. The time frame for passing the resolution may be specified in the company's articles, and if not, it lapses after 28 days. Requires either a simple majority or a 75% majority, depending on the nature of the resolution. Shareholders proposing the resolution have the right to circulate a statement in support of their proposal.

What are general meetings?

General meetings are gatherings to which all shareholders and directors of a company are invited. These meetings can be called at any time by the company's directors and serve as a platform for shareholders and directors to discuss and vote on matters that affect the company. The purpose of general meetings is to enable shareholders to attend in person, participate in discussions, and vote on important company matters. It also provides a forum for the management to communicate important information to the shareholders and seek their input and approval on various company decisions.

What are annual general meetings?

The purpose of an Annual General Meeting (AGM) is for the directors to report on the company's initiatives, achievements, and developments. Shareholders have the opportunity to discuss the company's performance and vote on issues. It is also at the AGM that the directors have to produce the annual accounts and reports of the company for approval by the shareholders. Additionally, other business conducted at the AGM includes the declaration of dividends, and the appointment or re-appointment of directors and auditors.

What are the functions and purposes of general meetings?

General meetings serve several functions and purposes:

Reporting: It is at the general meeting that the directors report on the initiatives, achievements, and developments of the company. This includes presenting the annual accounts and reports for approval by the shareholders.

Discussion and Voting: Shareholders have the opportunity to discuss the companys performance and vote on issues such as the declaration of dividends, appointment or re-appointment of directors and auditors, and any other proposals put forward by shareholders or directors.

Decision-Making: General meetings are a platform for making important decisions that affect the company. Resolutions are passed at these meetings, and they are essential for the company's governance and operations.

Shareholder Engagement: General meetings provide a forum for shareholders to engage with the company's management, ask questions, and express their concerns about the company's performance and management.

Legal Compliance: For public companies, holding general meetings, including the annual general meeting, is a legal requirement. It ensures compliance with company law and provides transparency and accountability to shareholders.

These functions and purposes ensure that general meetings play a crucial role in the governance, decision-making, and transparency of the company.

What are class meetings?

The purpose of class meetings is to allow shareholders holding a particular class of share to discuss and vote on matters that specifically affect that class of shareholder. These meetings are important when the interests of different classes of shareholders differ, and it may be necessary to vote on issues that specifically impact a particular class of shares, such as varying the special rights attached to preference shares.

Entitled to attend class meetings are shareholders holding the specific class of share being discussed, or their proxies. However, with unanimous consent, others may also be allowed to attend.

What happens in AGMs?

During an Annual General Meeting (AGM), several activities take place:

Directors report on the initiatives, achievements, and developments of the company. The annual accounts and reports of the company are presented for approval by the shareholders. Declaration of dividends occurs, where shareholders have the opportunity to vote on the proposed dividends. The appointment or re-appointment of directors and auditors is conducted. These activities are essential components of an AGM and contribute to the transparency and governance of the company.

Who can call a general meeting?

The authority to convene a general meeting lies with the directors of a company, as per section 302 of the CA 2006. However, shareholders holding at least 5 per cent of the voting shares in the company also have the power to require directors to convene a General Meeting, as stated in section 303 of the CA 2006.

Sections 302, 303, 518, and 306 of the Companies Act 2006 have significant implications for shareholder rights and company governance:

Section 302: This section pertains to the power of shareholders to propose resolutions. It allows shareholders of private and public companies, holding at least 5 per cent of the voting shares, to require directors to convene a General Meeting. This is important as it gives shareholders a mechanism to have their voices heard and influence company decisions.

Section 303: Section 303 further strengthens the position of shareholders by allowing them to convene a meeting themselves and recover their expenses if the directors fail to call a meeting. This provision ensures that shareholders have the ability to take proactive steps to address important company matters when necessary.

Section 518: Section 518 is related to the resignation of auditors. It empowers auditors to demand the directors to call a meeting if they intend to resign. This is crucial for transparency and accountability in company governance, as it allows auditors to explain the reasons for their resignation directly to the shareholders.

Section 306: Section 306 provides the court with the power to call a meeting if it is impracticable for the directors to do so. This is a safeguard to ensure that in situations where the normal processes fail, shareholders still have the opportunity to convene a meeting and address critical issues affecting the company.

Overall, these sections play a vital role in upholding shareholder rights, promoting transparency, and ensuring effective company governance.

What are the types of notices?

The different types of notices mentioned in the context are:

General Meeting Notice: Notice for a general meeting must be sent at least 14 days before the date of the meeting. Special Notice: On occasions special notice of at least 28 days is needed for a meeting, especially when there is a proposal to remove an auditor or director. Shorter Notice: Shorter notice is allowed in a public limited company where the meeting is not the AGM, and shareholders holding at least 95% of the voting shares agree to it. For a private limited company, shareholders with at least 90% of the shares can agree to shorter notice.

What is voting?

During shareholder meetings, the voting process can be conducted in two ways: by a show of hands or by poll.

Voting by a show of hands involves each member or their proxy present at the meeting raising a hand to vote. Each shareholder has one vote regardless of the number of shares they hold. This method is quick and simple, suitable for non-controversial matters and small gatherings.

On the other hand, voting by poll allows each shareholder or their proxy present at the meeting to use as many votes as their shareholding allows. Generally, each shareholder has one vote for each share they hold, but some company articles may allow for more than one vote per share. The decision whether to use a show of hands or a poll is important, as the two methods can produce different results.

The model articles provide that a decision is to be taken by a show of hands unless there is a demand for a poll. A demand for a poll can be made before or after a vote by a show of hands, and it cannot be excluded by the companys articles except for the election of the chairman or adjournment of the meeting.

In the case of a poll, a company quoted on the Stock Exchange must publish the results of each poll taken at General Meetings on its website.

What are shareholders’ resolutions?

Shareholders' resolutions are decisions made by the shareholders of a company. These resolutions can be ordinary or special. Ordinary resolutions are passed by a simple majority, while special resolutions require a majority of at least 75%. Shareholders can propose resolutions, and these are voted on either at general meetings or by written resolution. Shareholders have the right to require the company to circulate a statement in support of their proposed resolution. Additionally, the Companies Act 2006 provides protection to minority shareholders, allowing them to bring derivative claims and sue for unfair prejudicial conduct.

Who proposes resolutions?

In the context of shareholders' decisions, resolutions can be proposed by the directors of a company. Additionally, shareholders holding a sufficiently large number of shares also have the authority to propose resolutions. The proposed resolutions must be communicated to every shareholder in writing, either in hard copy, electronically, or via a website. Each resolution proposed is voted on separately, and in a meeting, a resolution may be amended, provided the amendments are minor and do not expand the scope of the resolution beyond the business stated in the notice.

What is protection of minority shareholders?

In the context of company governance and decision-making, minority shareholders are protected in several ways:

Statutory Derivative Claim: The Companies Act 2006 allows a minority shareholder to bring a legal action known as a statutory derivative claim against a director whose actions or omissions involve negligence, breach of duty, or breach of trust.

Protection Against Unfair Prejudice: Minority shareholders can petition the court if they believe that the affairs of the company are being conducted in a manner that unfairly prejudices the shareholders. The court will determine whether the conduct is unfair and prejudicial to the minority shareholder(s).

Control Over Resolutions: Minority shareholders have the right to attend meetings and pass resolutions on company matters. They can also require the company to circulate written resolutions, and in certain circumstances, they can propose resolutions themselves.

Protection from Majority Decisions: The Companies Act 2006 provides protection for minority shareholders, who may, as a last resort, apply to have the company wound up if they believe they are being oppressed by majority decisions.

Exceptions to Foss v Harbottle Rule: There are exceptions to the rule in Foss v Harbottle, which states that when a wrong is done to a company, it is the company itself that should take court proceedings to enforce its rights. Minority shareholders can bring claims without the authority of the directors.

Overall, minority shareholders are protected through legal actions, petitioning the court, control over resolutions, and exceptions to legal rules to ensure their rights are safeguarded in company governance and decision-making.

What is the Foss v Harbottle case?

The case of Foss v Harbottle (1843) established the principle that when a wrong is done to a company, it is the company itself that should take court proceedings to enforce its rights. This means that the board of directors, as the controlling body of the company, is usually responsible for initiating legal action on behalf of the company. However, if the directors are in breach of their duty to the company, it is unlikely that they will take action against themselves.

The rule in Foss v Harbottle can create challenges for minority shareholders who believe that the company has been wronged by its directors but are unable to initiate legal proceedings on behalf of the company. To address this, statutory provisions in the Companies Act 2006 provide protections for minority shareholders and allow them to bring derivative claims or take action to address unfair prejudicial conduct.

In summary, the Foss v Harbottle case established the general principle that the company itself should take legal action when a wrong is done to it, but statutory provisions have been enacted to provide protections for minority shareholders in situations where the directors are in breach of their duties.

What are derivative claims, unfair prejudice and petition by shareholder for winding up on just and equitable grounds?

Derivative claims allow a shareholder to bring a legal action on behalf of the company against a director, former director, or shadow director for negligence, default, breach of duty, or breach of trust, even if the director has not personally gained from the breach. This type of action is not personal to the shareholder but derives from the right of the company to sue. It can be brought for an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust.

Unfair prejudice occurs when the affairs of a company are conducted in a manner that unfairly prejudices the shareholders generally or a section of shareholders. This conduct may not necessarily be illegal, and the directors do not have to have acted negligently or in bad faith. Shareholders have the power to petition the court if they believe they have been unfairly prejudiced.

Shareholders can petition the court to have a company wound up on just and equitable grounds under certain circumstances. This may be considered as a last resort, and the court will generally refuse to wind up a successful company if there is the possibility of an alternative remedy.

What are processes involved in derivative claims?

The process for derivative claims involves two stages of permission before the claim is heard. At the first stage, the claimant shareholder must seek the permission of the court to bring the claim. The court will consider the issue based on the evidence filed by the claimant shareholder, and the company is not required to participate at this stage. This is to ensure that the shareholder has adequate grounds for pursuing the claim and to minimize the expense for a company if a claim has no merit.

At the second stage, the court will decide whether the case should continue after hearing evidence from both sides. Permission must be refused if a notional director acting properly in promoting the success of the company would not continue with the claim, or if the claim arises from an act or omission that the company has authorized to be carried out, or ratified after it was carried out. Shareholders have the power to ratify directors conduct which amounts to negligence, default, breach of duty, or breach of trust, by ordinary resolution.

How does the unfair prejudice process work?

The unfair prejudice process allows a shareholder to petition the court if they believe that the affairs of the company have been, are being, or are going to be conducted in a manner that unfairly prejudices the shareholders. The court will determine whether the conduct complained of is both unfair and prejudicial to the minority shareholder(s). It is not necessary for the conduct to be illegal, and the directors do not have to have acted negligently or in bad faith for the petition to be considered.

To succeed in a claim of unfair prejudice, the minority shareholder must demonstrate that the conduct complained of is indeed unfair and prejudicial. This may involve examining the company's articles of association to see if the conduct is in contravention of the terms of the articles. While generally a shareholder cannot complain about something that is provided for in the articles, there may be cases where strictly adhering to the legal rights in the articles goes against equity (fairness) and the principles of good faith.

Examples of conduct that has been found to be unfairly prejudicial to minority shareholders include the diversion of company business to another company controlled and owned by the directors, directors making inaccurate statements to shareholders, and directors refinancing the company to the detriment of the company but to the benefit of another company owned by the directors

In the case of Rodliffe (Simon) v Rodliffe (Guy) and Home & Office Fire-Extinguishers Ltd (2012), the facts are as follows: Simon and Guy Rodliffe were both directors and shareholders of the company. Simon asked for a salary advance from the company, which Guy refused on the basis that the company was financially struggling. This led to a physical altercation at the company's premises, where both parties alleged that the other one had initiated the attack with a hammer. However, based on the evidence, it was found that Simon instigated the attack.

The decision of the court was to order Simon to compulsorily purchase Guy's shares in the company, on the grounds that Simon's conduct in attacking Guy with a hammer was unfairly prejudicial and made it unfeasible for them to maintain their working relationship as directors and shareholders.

What is insider dealing?

Insider dealing, also known as insider trading, is a criminal offense under the Criminal Justice Act 1993. It occurs when an individual uses price-sensitive information, which has not been made public, relating to the present or future value of company securities (such as shares and debentures) for their own profit. Price-sensitive information is information known to an individual but not generally known, and acquired by virtue of the individual's position. This typically involves individuals who have access to non-public information about a company through being a director, employee, shareholder, or having access to the information because of their office or profession. Insider dealing is prohibited in order to maintain public confidence in the reliability of the stock exchange and to prevent the unfair advantage gained through the use of non-public information.

What is market abuse?

Market abuse involves improper conduct related to investments traded on a financial market. It encompasses behaviors such as insider dealing, unlawful disclosure of inside information, and market manipulation, which distorts the market. This includes activities like share dealing that interferes with the normal process of share prices moving up and down in accordance with supply and demand. The Financial Conduct Authority (FCA) may take enforcement action against market abuse, with penalties including fines, injunctions, and orders for restitution.

What is winding up and liquidation?

Winding up and liquidation refer to the process of bringing a company to an end. This involves selling the company's assets to pay off its debts, and any surplus money is then distributed to the shareholders. Winding up can be either compulsory, where a court orders the liquidation, or voluntary, where the shareholders or creditors decide to wind up the company. In both cases, a liquidator is appointed to oversee the process of selling the company's assets and distributing the proceeds to creditors and shareholders.

What is compulsory liquidation?

The process of compulsory liquidation for a company involves several steps:

Court Order: Compulsory liquidation is initiated by a court order. This occurs when a petition is made to the court for the company to be wound up.

Appointment of Liquidator: The liquidator appointed by the court is usually the Official Receiver, who is a government official and an officer of the court. If the Official Receiver determines that the company has significant assets, he may seek to have an insolvency practitioner (usually an accountant or a lawyer) appointed as the liquidator.

Winding Up: The appointed liquidator takes over the affairs of the company and is responsible for collecting all the companys assets and distributing them to its creditors.

Dismissal of Employees: If the company is insolvent, its employees are automatically dismissed, although they may be re-employed by the liquidator.

Debt Collection and Distribution: The liquidator identifies and contacts creditors, and advertises for details of debts to be submitted. After collecting all the money owing to the company, the liquidator pays the company's debts in a particular order. Any surplus money after all the debts are paid is returned to the shareholders.

Termination of Company: Once the winding up process is complete, the company ceases to exist.

What is voluntary winding up?

In voluntary winding up, the process is initiated by the shareholders of the company without a court order. There are two types of voluntary winding up: members (shareholders) voluntary winding up and creditors voluntary winding up.

Members Voluntary Winding Up:

The directors must make a sworn statement (declaration of solvency) stating that the company is solvent and will be able to pay all its debts in full within a specified period (not exceeding 12 months from the start of the winding up). The directors must attach a list of the companys assets and liabilities to the declaration of solvency. Within five weeks of the declaration of solvency, the shareholders must pass a special resolution at a General Meeting to wind up the company. Once the resolution is passed, the company must cease trading. A liquidator is appointed by the shareholders to collect and distribute the company's assets. Creditors Voluntary Winding Up:

If the directors are unable to make a declaration of solvency, creditors voluntary liquidation of the company can take place. The shareholders must pass a special resolution stating that it is advisable to wind up the company because it cannot continue in business due to its liabilities. Once the resolution is passed, the company must cease trading and, within 14 days, call a meeting of all its creditors. The creditors decide who is to be appointed as the liquidator to collect and distribute the company's assets. Liquidator: In both types of voluntary winding up, a qualified insolvency practitioner (usually an accountant or a lawyer) is appointed as the liquidator. Once the liquidator is appointed, the directors powers to run the company cease, and the process of collecting and distributing the company's assets begins

What is the liquidator's role?

The liquidator plays a crucial role in the winding up process of a company. Their responsibilities include collecting all the companys assets, distributing them to creditors, selling company property, and collecting money owed to the company. In a compulsory winding up, the liquidator is usually the Official Receiver appointed by the court. In a voluntary winding up, the liquidator must be a qualified insolvency practitioner appointed by the shareholders or creditors. Once the liquidator is appointed, the directors powers to run the company cease, and if the company is insolvent, its employees are automatically dismissed. The liquidator also has the task of writing to creditors, advertising for details of debts, and distributing any surplus money among the shareholders of the company.

What is the distribution priority?

In the winding up process, the priority for distributing the company's assets is as follows:

Secured creditors with fixed charges: These creditors have a first claim on the company's assets, and they are paid from the proceeds of the sale of the specific assets against which they hold a fixed charge.

Costs of winding up: This includes the fees of the liquidator and other winding up expenses.

Preferential creditors: This category includes arrears of salary due to employees, holiday pay, and pension contributions.

Secured creditors with floating charges made before 15th September 2003: The assets of the floating charge become crystallized, and the creditors are paid out of these assets.

Unsecured creditors: These are all the creditors who are not preferential creditors and who do not have a fixed or floating charge over the companys assets. They are paid from any remaining assets after the above categories have been satisfied.

Shareholders: Any surplus money after all the debts are paid is returned to the shareholders according to their rights set out in the companys articles.

What is wrongful and fraudulent trading?

Wrongful trading occurs when a company continues to trade even though its directors knew or should have known that there was no reasonable prospect of the company avoiding insolvent liquidation. The directors also took insufficient steps to minimize the potential loss to the company's creditors. It is not a criminal offense, and it applies when a company has gone into insolvent liquidation.

On the other hand, fraudulent trading is a more serious offense. It applies when the business of a company has been carried on with the intention of defrauding the creditors of the company or for some other fraudulent purpose. This is both a civil and criminal offense, and those found liable for fraudulent trading can face severe penalties, including disqualification from being a company director for up to 15 years.

What is administration and twofold purpose?

Administration is a mechanism introduced by the IA 1986 to attempt to save a financially struggling company from insolvency. When a company enters administration, an administrator, who is a qualified insolvency practitioner, is appointed to try to rescue the company. The twofold purpose of administration is:

To rescue the company as a going concern and protect it from its creditors while introducing a restructuring plan. To achieve a better result for creditors than would be achieved by immediate winding up of the company.