Shareholders

Shares

  • Share = legal interest of shareholder in the company.

  • Shareholder = person registered on the share register as the holder of shares.

  • Rights of Shareholders

    • Distribution;

    • Distribution of assets on liquidation

    • Attendance at meetings

    • To sell your shares

  • Rights of shareholders can be prescribed in a constitution and between shareholder in a shareholders’ agreement.

  • When creating company, should discuss an exit strategy, i.e. how to get rid of shares.

The share register

  • Every company must maintain a share register - evidence of the legal owners of the company’s shares.

  • How do you become a shareholder?

    • BY subscription or incorporation;

    • Transmission on death or bankruptcy;

    • By transfer

  • Note: Between the contract o sale and registration of the transfer, the vendor holds legal title to shares in trust for purchaser.

Transfer of Shares

  • Pre-emptive rights. (Controls who gets rights to shares if someone dies, as in if you really don’t want someone’s child to get the shares you can put in the constitution or shareholders agreement that existing shareholders get pre-emptive rights to shares).

  • Refusal to Register Transfer s84:

    • Board must withing 30 days of receipts pass a resolution saying why registration of the transfer is refused;

    • Notice of resolution (including reasonings) must be sent to transferer within 5 working days;

    • Constitution must permit refusal.

  • Refusal must be bona fide (common law principle).

  • Legal restriction on transfers to minors and bankrupted persons.

Nature of Shareholding

  • Share certificates - no longer issued.

  • Number and Identity of Shareholder.

  • Liability of shareholders:

    • Limited Liability, they are limited to the capital they have agreed to pay to the company.

      • Company is expanding, you agreed to $200,000 shares now, and another $200,000 in 12 months time, you are bound to the full $400,000.

    • Unlimited liability is very uncommon (as almost all companies are called “Company Name Ltd”

      • One company: “Nike” does not have Ltd, and has unlimited liability.

      • Shareholders have unlimited liability, shareholders “fully back the company”.

    • There are also “no liability” company’s (designated by NL at the end of company name). In them you are not liable for any future agreed capital if they go bankrupt.

Personal Action Section 169

  • Duties owed to shareholders include duty:

    • to supervise the share register

    • to disclose interests

    • to disclose share dealings.

No Personal Right of Action

  • Duties not owed to shareholders personally (i.e. not grounds for a personal action):

    • the duty of directors to act in good faith and in the best interest of the company

    • the duty to exercise powers for a proper purpose

    • the prohibition on reckless trading

    • the duty not to agree to a company incurring certain obligations

    • the use of company information   

      • i.e. sections 131, 133, 135-137 and 145.

Other Actions

  • Representative Action, s173

  • Derivative Action, s165.

  • Problem with Ratification, s177:

    • s177 allows ratification/approval by shareholders of powers exercised by a director/board of a power exercisable by others

    • Common law rights of ratification survive

Derivative Action

  • Court has broad discretion to:

    • grant leave to a shareholder to bring proceedings in the name of the company; or to

    • intervene in proceedings to which the company (or a related company) is a party.

  • Leave only granted if:

    • company does not intend to bring or defend the proceedings;

    • not in interests of company that the matter is left to directors or majority shareholders to determine.

  • Regard is given to:

    • likelihood of proceedings succeeding;

    • cost in relation to likely return;

    • any action already taken.

Thorrington v McCann

Operator of pub was told lease was not likely to renew.

Operator went and asked to get the lease under a new company, but the other equal shareholder was like hey wtf? That was our company and you’ve screwed it, so court ordered derivitive action.

Injunction

Shareholder can ask court to supply injunction to either stop or force a director to carry out an action that either contravenes or force them too follow the Companies act, or the Financial Reporting act, or the constitution

Indemnity and Insurance

  • Directors should have insurance.

Prejudiced Shareholders