Unit 3 chapter 2 Company Decision-making, the Company’s Officers and Shareholders
1. The Relationship Between Directors and Shareholders
1.1 Why Directors and Shareholders Have Different Roles
Companies Act 2006 distinguishes between:
Shareholders (members): Provide capital and hold certain high-level decision-making powers, such as altering the company’s constitution or approving certain transactions that carry special risks.
Directors: Manage the day-to-day operations and make most routine decisions.
This division of powers is founded on the principle that shareholders are typically not involved in daily management, and directors have more direct knowledge of the company’s affairs.
Key Point
The Model Articles (MA) allocate power to manage to the directors (MA 3), while specific decisions that could significantly affect shareholder interests, or that involve potential conflicts of interest, often require shareholder approval.
2. Categories of Shareholder Decisions
2.1 Category 1: Shareholders’ Exclusive Decisions
Certain fundamental changes and structural decisions require shareholder approval alone, and once approved, directors cannot overturn them. Examples include:
Changing the Articles (special resolution under s. 21 CA 2006).
Changing the Company’s Name (special resolution under s. 77 CA 2006).
Once such a resolution is passed:
The directors must carry it out and file any necessary forms at Companies House (e.g., Form NM01 to change the company name).
They have no discretion to block it.
Example
If the shareholders pass a special resolution (75% majority) to alter the articles to increase the minimum number of directors, the board cannot refuse to implement it. They must update the articles formally and notify Companies House.
2.2 Category 2: Shareholders’ Permission for Certain Contracts
These are scenarios in which the company enters into a contract that might:
Carry particular risk for the company, or
Create a situation where directors could benefit personally or have a conflict of interest.
Shareholder approval is required to “allow” the directors to proceed, but:
The directors ultimately decide whether to enter into the contract (they have the authority to sign on the company’s behalf).
The shareholders grant permission but do not sign the contract themselves.
Typical examples (discussed more in Chapter 3 of many texts) include:
Substantial property transactions between a director and the company (ss. 190–196 CA 2006).
Loans to directors or credit transactions benefiting directors (ss. 197–214 CA 2006).
3. Decision-Making in Companies: An Overview
Understanding who makes which decision (shareholders vs. directors) is vital. If an action requiring shareholder approval is carried out without such approval, it might be voidable or could lead to personal liability for directors. Conversely, if a matter is purely within director competence, shareholder involvement might be unnecessary or even invalid if they try to overstep.
4. Directors’ Decision-Making
4.1 Board Meetings and Board Resolutions
CA 2006 and the Model Articles set requirements for holding valid board meetings.
In principle, directors make most corporate decisions collectively at these meetings.
The record of their decisions is known as board resolutions.
Delegation of Powers
MA 5 allows directors to delegate certain management functions to:
Sub-committees of directors,
Employees (for example, day-to-day tasks to an HR or Finance Director),
Managing Director (if appointed).
Thus, not every operational matter requires a full board meeting—only decisions that directors have not delegated or that are significant enough to warrant collective approval.
4.2 Notice of Board Meetings
Reasonable Notice
Per Re Homer District Consolidated Gold Mines, ex parte Smith (1888), notice for a board meeting must be reasonable in the circumstances.
“Reasonableness” depends on factors like:
Size of the company,
Directors’ geographical locations (time zones),
Urgency of the matter.
Form of Notice
Under MA 9(3), there is no strict requirement that notice be in writing, but:
The notice must specify date, time, and place (or method if via phone/video).
If the meeting is to be held remotely (e.g., Zoom, Teams), the notice should specify the means of communication so each director can fully participate (MA 10(1)(b)).
Example
A small firm with two directors both working on-site might give an hour’s notice if an urgent matter arises. A multinational might need at least 24 hours or more to accommodate directors in different time zones.
4.3 Quorum at Board Meetings
MA 11 states a quorum of two directors is required unless the articles specify otherwise.The quorum is the minimum number of directors who must be present in order for the meeting to be valid
The quorum ensures collective decision-making and reduces the risk of a single director making unilateral decisions.
Quorate Meeting
A meeting is “quorate” if at least the minimum number of directors (usually two) is present (physically or via an accepted remote method) throughout the entire meeting.
4.4 Directors’ Personal Interests
Obligation to Declare Interests (s. 177 CA 2006)
If a director has a personal interest (direct or indirect) in a proposed transaction or arrangement with the company, they must declare:
The nature of the interest,
The extent of the interest.
This duty is mandatory and cannot be overruled by the articles.
Exceptions (s. 177(6)) allow no declaration if:
The interest cannot reasonably be regarded as likely to give rise to a conflict,
Other directors are already aware of it,
It involves terms of the director’s own service contract being considered at a board meeting.
MA 14: Impact on Voting and Quorum
MA 14 says a director cannot count in the quorum or vote on any board resolution concerning a transaction in which they are interested.
Rationale: Avoid decisions motivated by personal gain rather than company benefit.
However: Many companies disapply or modify MA 14 in their articles, especially small companies with few directors. If they didn’t, in a 1 or 2-director company, the meeting might never be quorate if the sole or both directors had an interest.
Disapplying MA 14 does not remove the duty under s. 177 to declare the interest. Those are two separate issues:
s. 177: Always must declare, unless an exception applies.
MA 14: May prevent voting/quorum—but can be changed by the articles.
Example
If a company has 3 directors, and one director owns a property that the company intends to buy:
Under s. 177, that director must declare the interest (e.g., “I own this property, so I will personally benefit from the sale”).
Under MA 14, normally that director can neither form part of the quorum nor vote on the decision.
But if the articles disapplied MA 14, the director could vote and be part of the quorum (though the disclosure is still mandatory).
4.5 Voting at Board Meetings
Rule (MA 7)
Board resolutions are passed by a simple majority, which means that over half of those present must vote in favour in order for the board resolution to be passed
Show of Hands: Each director has one vote.
Chair’s Casting Vote: If the board has appointed a chairperson (MA 12), that chair has a casting vote to break any tie. If the chair is not in favour of the resolution, it fails.
Example
If 4 directors are present and the vote is 2–2, the chair can use the casting vote—meaning effectively the chair’s vote can tip the resolution to pass or fail.
4.6 Unanimous Decisions Without a Meeting
MA 8 allows directors to pass resolutions without holding a physical or virtual board meeting, so long as:
All eligible directors agree unanimously,
Their agreement is clearly indicated to each other (e.g., by signing a written resolution, or an email chain confirming unanimous agreement).
This approach (often called a Directors’ Written Resolution) streamlines decision-making when a meeting is unnecessary.
5. Practical Takeaways
Identify Who Has Authority:
For day-to-day decisions, typically directors act collectively or by delegation.
For special or high-risk transactions, check if shareholder approval is required (e.g., substantial property transactions, loans to directors).
Check the Articles:
Companies often amend the Model Articles.
See if MA 14 is disapplied (allowing an interested director to vote).
Confirm any changed rules on quorum, notice, or chair’s casting vote.
Ensure Proper Notice & Quorum:
Notice must be reasonable under the circumstances, specifying how and where directors will meet.
Usually two directors must be present for a valid meeting (MA 11), unless amended.
Manage Conflicts of Interest:
Directors must declare interests under s. 177 if the transaction is proposed (or s. 182 if the transaction is already in place).
Check whether MA 14 applies or has been disapplied regarding voting rights.
Document Everything:
Keep records of board resolutions, whether passed at meetings or by unanimous written consent (MA 8).
Accurately record any director disclosures of interest in the board minutes or resolution.
6. Examples and Scenarios
Small Startup with 2 Directors
If the company wants to buy a laptop from one director, that director must declare the interest under s. 177. If MA 14 is not disapplied, that director can’t vote or count in the quorum—thus no meeting can happen.
So many small companies modify or remove MA 14 so the interested director can still vote (otherwise, they’d be stuck with no quorum).
Large Company with 5 Directors
A board meeting is called with 2 days’ notice—sufficient because directors are in various offices but can attend a Zoom call.
On the day of the meeting, 4 directors attend, which is quorate (since 2 is the minimum, 4 easily meets the threshold).
They vote on awarding a contract to a supplier. If one director has shares in that supplier, they must declare it. If the articles do not disapply MA 14, they can’t vote nor count toward the quorum for that specific resolution.
Changing the Company Name
This is exclusively a shareholder decision, requiring a special resolution (s. 77 CA 2006).
Once passed, the directors cannot refuse; they must file Form NM01 at Companies House within the required timeframe.
1. Types of Shareholders’ Resolutions
Under the CA 2006, shareholders pass resolutions in two main forms:
Ordinary Resolution (s. 282 CA 2006)
Requires a simple majority (more than 50%) of the votes cast in favor.
Used for routine decisions (e.g., re-appointing auditors in a private company, granting authority to allot shares, etc.).
Special Resolution (s. 283 CA 2006)
Requires a 75% (or more) majority of the votes cast in favor.
Used for more significant decisions (e.g., altering the articles (s. 21), changing the company name (s. 77), reducing share capital, etc.).
Key Distinction:
While board resolutions (i.e., decisions by directors) also often require a simple majority, the term “ordinary resolution” applies only to shareholders’ resolutions, never to board decisions.
2. Methods of Passing Shareholders’ Resolutions
A shareholders’ resolution can be passed in one of these ways:
At a General Meeting (GM)
By Written Resolution (for private companies only; s. 288 CA 2006)
Either method is valid, and the board of directors typically chooses how the resolution will be proposed, depending on practical circumstances.
3. Passing a Resolution in a General Meeting
3.1 What Is a General Meeting?
A General Meeting is any meeting of the shareholders convened under s. 302 CA 2006.
Annual General Meeting (AGM) is mandatory only for public companies (s. 336 CA 2006).
Private companies are not required to hold AGMs unless their articles expressly provide for it.
In practice, private companies often hold general meetings on an ad hoc basis for important shareholder decisions.
How to Call a GM
Board resolution calls the GM (s. 302 CA 2006).
Sometimes the shareholders themselves request the directors to call a GM (see s. 303 CA 2006 if the shareholder threshold is met).
3.2 Notice Requirements (s. 301 & s. 307 CA 2006)
A GM is only valid if proper notice is given:
Standard Notice Period: 14 clear days (s. 307(1) CA 2006).
“Clear days” (s. 360 CA 2006) means excluding:
the day the notice is deemed received, and
the day of the meeting itself.
Example: If notice is received Monday 1st, the earliest the GM can be is Tuesday 16th (14 whole days in between).
Short Notice (s. 307(4)–(6) CA 2006)
A GM can be held on short notice if:
A majority in number of shareholders (i.e., over 50% by headcount)
Holding at least 90% of the total voting rights (95% if a public company)
consent to the short-notice meeting.
This allows urgent decisions without waiting 14 clear days.
How Notice Is Given (s. 308–s. 311 & s. 502 CA 2006)
Must be sent to every shareholder, every director, and the auditor (if any).
Can be in hard copy, electronic form, or by website.
Must specify:
Date, time, and place of the meeting (s. 311(1)).
General nature of the business (s. 311(2)).
Exact wording of any special resolution (s. 283(6)(a)) if applicable.
Statement that each shareholder has the right to appoint a proxy (s. 325).
Deemed Delivery (s. 1147 CA 2006)
If sent by post or email, notice is deemed received 48 hours after posting/sending.
This 48-hour period effectively extends the time before the 14-day countdown can begin.
Example of Calculating Notice
Notice posted/emailed on Monday 1st. Deemed received on Wednesday 3rd (48 hours later).
The earliest the meeting can be is 14 clear days after Wednesday 3rd, i.e., Thursday 18th.
3.3 Quorum (s. 318 CA 2006)
Rule (s 318 CA 2006)
Subject to the company’s articles, the quorum of a general meeting is two
Default: Two shareholders, unless the company’s articles specify a different number.
If the company has only one shareholder, the quorum is one.
A meeting with fewer than the required number is inquorate and cannot validly pass resolutions.
3.4 Voting at a General Meeting
3.4.1 Show of Hands (Default)
MA 42: Each shareholder present in person (or by proxy) has one vote on a show of hands.
A simple majority (for an ordinary resolution) or 75% majority (for a special resolution) is based on number of votes in favor out of votes cast at the meeting.
shareholders are generally not prevented from counting in the quorum or voting if they have a personal interest in the matter. This is because the shareholders own the company and their interests are seen as being the same as the company’s interests: if the company performs well, the shareholders get more of a return on their investment in the company, by way of increased dividends or an increase in the value
of their shares
Potential for Distortion
A shareholder with 1 share has the same “1 vote on a show of hands” as a shareholder with 10,000 shares, unless a poll vote is demanded.
3.4.2 Poll Vote
A poll vote is where the shareholders vote in a general meeting on the basis of one vote
for each share that they own, instead of the usual one vote per person. This means that the more shares a shareholder has, the greater power they may have when voting at a general meeting.
MA 44(2): A poll can be demanded by:
The chair,
The directors,
Two or more persons having the right to vote,
A person or persons representing at least 10% of the total voting rights.
If a poll is demanded, each share carries one vote (s. 284 CA 2006).
This can significantly change the outcome compared to a show of hands, especially if one shareholder owns a large majority of shares.
Example of Poll Vote Changing the Outcome
ABC Ltd. has 1,000 shares total:
Anna owns 500,
Ben owns 200,
Chiara owns 300.
If they vote on a special resolution (75% needed) by show of hands:
Anna + Chiara vs. Ben might yield 2 vs. 1 in favor = ~66.7% – not enough for 75%.
If a poll is demanded:
Anna + Chiara have 800 shares combined (80%), which exceeds 75%. The special resolution passes.
3.5 When Shareholders with a “Personal Interest” Cannot Vote
Generally, shareholders can vote even if they have a personal interest (the logic being they own the company and want it to succeed).
Exception: Certain specific resolutions under CA 2006 disregard the votes of interested shareholders. For instance:
Buyback of Shares from a shareholder (s. 694–s. 700).
Ratification of a director’s breach of duty (s. 239 CA 2006) – the director-shareholder’s votes cannot make the difference in passing the resolution.
In all other scenarios, a shareholder’s personal conflict does not bar them from voting as a shareholder.
4. Short Notice Recap
Rule (s 307(5)–(6))
For a general meeting to be validly held on short notice:
a majority in number of the company’s shareholders;
who between them hold 90% or more of the company’s voting shares must consent.
This percentage is increased to 95% for public companies.
If urgent, the company can hold the GM on short notice if a majority in number of shareholders holding at least 90% of the voting rights agree (s. 307(5)–(6) CA 2006).
For a private company: If shareholders hold only 80% in total, short notice cannot be used.
5. Written Resolutions (Private Companies Only)
5.1 Overview
s. 288 CA 2006: Private companies can pass ordinary or special resolutions in writing, without holding a general meeting.
Public companies cannot use written resolutions.
with written resolutions each shareholder has one vote for each share that they own (ss 282(2) and 283(2) CA 2006). This means that whether a resolution is passed or not can sometimes depend on whether it was proposed as a written resolution or a resolution at a general meeting.
5.2 Procedure for Written Resolutions
Circulation (s. 291)
The resolution is sent (handed, posted, emailed, or placed on a website) to every eligible member.
“Eligible member” = those shareholders entitled to vote on the resolution on the date of circulation (s. 289).
Contents (s. 291(4))
Must explain how to signify agreement (e.g., sign and return)
Deadline (lapse date) for agreeing (28 days by default, s. 297 CA 2006), unless the articles specify a different period.
Voting Mechanics (ss. 282(2), 283(2))
Each share = one vote.
An ordinary written resolution requires >50% of all eligible votes in favor.
A special written resolution requires ≥75% of all eligible votes in favor.
Note: This differs from a general meeting, where the threshold is a majority of the votes actually cast at the meeting. With a written resolution, the threshold is a percentage of all eligible votes, even if some shareholders do not respond.
Deadline
If a shareholder returns the resolution after the 28th day (or the specified lapse date), it’s invalid.
5.3 Contrast with GM Voting
At a GM, only the votes of those present (in person or proxy) are counted.
With a written resolution, the percentage is calculated against all eligible shares, not just those that “turn up.”
This can yield different outcomes.
Example
ABC Ltd. with 4 shareholders: Anna, Ben, Chiara, Deya, each owning 500 shares (2,000 total).
A special resolution requires 75% = 1,500 shares (of 2,000) to be in favor if it’s a written resolution.
If only Anna and Ben show up to a GM, that is 2 out of 4 shareholders – on a show of hands, they have 100% of the votes cast. They can pass the special resolution (2–0) at the meeting.
However, if the same resolution is circulated by written resolution:
Anna + Ben together have 1,000 shares out of 2,000 (only 50%). They do not meet the 75% threshold; the resolution fails.
Hence, the procedure chosen (GM vs. written resolution) can be decisive.
6. Summary of Model Articles References
MA 7 – Decision-making by directors usually requires a simple majority at a board meeting. (This excerpt parallels the note that “board resolutions are passed by a simple majority,” but the same phrase “ordinary resolution” does not apply to directors’ decisions.)
MA 42 – Default rule that, at a general meeting, voting is by show of hands with each shareholder having one vote. (Note: the exact numbering can vary in different versions of Model Articles, but in many teaching references, MA 42 is the standard reference used for show-of-hands voting.)
MA 44(2) – The procedure for demanding a poll vote, listing who can demand it (chair, directors, two shareholders, or 10% of voting rights, etc.).
7. Practical Takeaways
Identify Resolution Type
Check if an ordinary (simple majority) or special (75%) resolution is required.
The CA 2006 dictates which decisions require which threshold (e.g., s. 21 changes to articles must be special; s. 551 authority to allot shares is typically ordinary).
Decide on GM vs. Written Resolution
GM: Only votes cast by attendees (in person or proxy) count.
Written resolution: The percentage is measured against all eligible shares – can be more challenging if some shareholders do not respond.
Observe Notice Rules
Standard is 14 clear days, but short notice is possible (90% + majority in number).
Must include all statutory details (time, place, business, exact wording for special resolutions, etc.).
Check Quorum
Typically two for a private company, unless the company has one member or the articles change it.
Poll Votes
If a shareholder with large share ownership is outvoted on a show of hands, they may demand a poll to leverage their shareholding.
Watch for Conflicts
Generally, shareholders can vote even if they have an interest. But for share buybacks or ratifying a director’s breach of duty, the CA 2006 imposes special rules on counting votes.
How can I tell who is responsible for making a decision?
Determining Who Makes a Decision: Directors or Shareholders
1.1 General Principles
Default Position:
The directors are responsible for running the company’s day-to-day affairs (Model Articles 3).
If the CA 2006 provision states “the company may decide,” it typically defaults to board (director) decision-making, since the directors exercise the company’s powers (unless there is a specific provision to the contrary).
When the CA 2006 Specifically Mentions Resolutions
If the CA 2006 says a special resolution is required, then it is a shareholders’ decision requiring a 75% majority (s. 283).
If the CA 2006 says a resolution of the members is required but does not specify the type, then it is an ordinary resolution (s. 281(3)) unless the articles demand a higher threshold.
Articles May Elevate Threshold
Even if the Act only calls for an ordinary resolution, the company’s articles can require a higher majority. Check the articles to see if they impose stricter requirements than CA 2006.
2. How Can Shareholders Force a Decision if Directors Don’t Act?
2.1 Written Resolution Circulation (s. 292 CA 2006)
Usually, directors decide whether to circulate a proposed written resolution to shareholders.
But if 5% (or more) of the total voting rights in the company want a written resolution circulated, they can require the board to do so (s. 292(1)–(2)).
The 5% threshold can be lowered in the company’s articles (but not raised above 5%) (s. 292(5)).
Accompanying Statement (s. 292(3))
Those same shareholders can insist the company circulates a statement of up to 1,000 words about the resolution’s subject matter along with it.
The requesting shareholders bear the cost of circulation (s. 294).
Timeline
The company must circulate the resolution (and statement) within 21 days after receiving the request (s. 293(1)).
2.2 Requisitioning a General Meeting (s. 303–s. 305 CA 2006)
5% Threshold
Shareholders holding at least 5% of the paid-up capital with voting rights can require the directors to call a general meeting (s. 303).
Contents of the Requisition
Must state the general nature of the business to be dealt with (s. 303(4)).
Board’s Obligation to Call the Meeting
The directors must call the GM within 21 days of receiving the requisition (s. 304(1)(a)).
The meeting must be held on a date not more than 28 days after the notice of the GM is sent out (s. 304(1)(b)).
Combined, this caps the maximum waiting period at around 7 weeks (21 days to call + 28 days for the meeting to take place).
If Directors Fail to Call the Meeting (s. 305)
The shareholders themselves (or any of them representing more than half of the voting rights of those who requested the meeting) can call a GM. They can then recover any reasonable expenses from the company.
3. Post-Decision Requirements
Once a decision is validly made (either by directors or shareholders), there are two main categories of compliance:
3.1 Filing at Companies House
Certain decisions must be notified to the Registrar of Companies for the public record.
All special resolutions must be filed (ss. 29–30 CA 2006).
Some ordinary resolutions must also be filed (e.g., to allot shares under s. 551, to approve a share buyback under s. 694, etc.).
The company generally uses Companies House forms (see Appendix 1 references in your text) to comply with these filings.
Failure to file can result in criminal fines for the company and its officers.
Example Filings
Change of Company Name: Must file a NM01 form within 15 days of passing the special resolution (s. 78 CA 2006).
Alteration of Articles: Must send a copy of the new or amended articles to Companies House within 15 days (s. 26(1)).
3.2 Internal Administration (Statutory Books and Minutes)
Statutory Registers
Register of Members (s. 113 CA 2006),
Register of Directors (s. 162),
Register of People with Significant Control (s. 790M), etc.
Minutes
Directors’ meetings (board minutes) must be kept for 10 years (s. 248(1)–(2)).
General meeting minutes or written resolutions outcome must be retained for 10 years (s. 355).
Where Records Are Kept
At the company’s registered office or a Single Alternative Inspection Location (SAIL).
Moving records to/from the SAIL is notified on AD02, AD03, AD04 forms as needed.
Alternatively, the company can opt to keep some records on the central register at Companies House (s. 1088).
4. Companies’ Annual Responsibilities
Though not specific to one-off decisions, remember:
Adequate Accounting Records (s. 386) – Offences for non-compliance (s. 387).
Annual Accounts (s. 394–s. 396) – Directors ensure they show a true and fair view.
Directors’ Report (s. 415) – Required unless the company is small or micro (s. 382–384A).
Filing of Accounts (s. 441–s. 442) – Typically within 9 months of financial year-end for private companies.
Confirmation Statement (s. 853A) – Form CS01 once a year within 14 days from the confirmation date (the anniversary of incorporation). Late or non-filing is a criminal offence.
5. Key Takeaways in Practice
Check the CA 2006
If the Act expressly says “a special resolution,” shareholders with a 75% majority.
If it says “resolution of members” with no specification, an ordinary resolution (s. 281(3)).
If it simply says “the company may do X,” it’s typically a board decision unless the articles say otherwise.
Review the Articles
Model Articles or bespoke articles might increase a threshold for certain shareholder decisions.
Some articles might reserve additional matters to the shareholders.
Shareholder-Driven Action
If directors do not convene a meeting or circulate a written resolution, shareholders holding at least 5% of voting rights can:
Force circulation of a written resolution (s. 292), or
Requisition a general meeting (s. 303).
Post-Decision Compliance
File certain resolutions with Companies House, e.g., special resolutions always.
Update statutory registers and minutes.
Retain minutes for 10 years.
Criminal fines can ensue if the company and its officers fail to comply.
6. Putting It All Together: Example Scenario
A Certain Provision in the CA 2006 says “the company may decide to do X.”
This is presumably a director decision. The board meets, passes a board resolution (simple majority under MA 7).
No shareholder input is necessary unless the articles say so.
Another Provision says “a resolution of members is required” but no mention of ordinary or special.
This triggers s. 281(3): An ordinary shareholder resolution (simple majority > 50%) unless the articles demand a higher threshold.
Shareholders Want to Pass the Resolution, But the Board Won’t Call a GM
If they have ≥5% voting rights, they can request the GM under s. 303 or require a written resolution under s. 292.
Directors must act promptly (21 days to issue notice of GM, meeting to be held within 28 days of notice, etc.).
Resolution Passed
If it’s a special resolution, file it with Companies House (s. 30). Possibly also file forms for any effect it has (e.g., name change, articles amendments).
Update relevant statutory registers, record the minutes or the written resolution outcome, and keep them for 10 years.
The company’s officers
Company’s Officers: An Overview
Under s. 1121 CA 2006, the officers of the company include:
Directors (discussed in detail in Chapter 3 of many textbooks)
Company Secretary
Auditor (if one is required or appointed)
Directors are responsible for running the company (Model Articles 3). This section focuses on the company secretary and auditor – who they are, what they do, and how they’re appointed/removed.
2. Company Secretary
2.1 Mandatory Secretary?
Private Companies: No requirement to have a company secretary (s. 270(1) CA 2006).
Public Companies: Must appoint a qualified company secretary (s. 271 CA 2006).
In practice, many small private companies (especially formed under the CA 2006) do not have one.
2.2 Role of the Company Secretary
Typically handles legal and administrative duties:
Overseeing filings at Companies House,
Maintaining and updating statutory registers (if applicable),
Drafting minutes of board meetings and general meetings,
Ensuring compliance with the CA 2006 regarding corporate governance.
Depending on the size of the company:
A large company might have a full-time secretary leading an administrative department.
In a small company, the secretary may also be a director, simply taking on the secretarial duties alongside their director duties.
No Specific Qualifications are required for a private company secretary. In contrast, a public company secretary must have certain qualifications or experience (s. 273 CA 2006).
2.3 Appointment of a Company Secretary
First Secretary: Often named on the IN01 (incorporation) form (if one is appointed at all).
Subsequent Appointment: Made by board resolution.
The Model Articles for private companies do not provide an explicit clause for this, assuming many small private companies won’t have one.
Nevertheless, directors can rely on their general power under MA 3 to appoint a secretary if desired.
2.4 Removal or Resignation (s. 276 CA 2006)
The company secretary can:
Resign by giving notice, or
Be removed from office by a board resolution (directors’ decision).
If there is an employment contract or service agreement, removal might lead to potential compensation claims or other remedies for breach of contract or under employment law.
2.5 Filing and Notification Requirements
Appointment:
AP03 (for a human secretary) or AP04 (for a corporate secretary) must be filed at Companies House within 14 days (s. 276(1)(a)).
Register of Secretaries (s. 275 CA 2006):
Must be kept if a company has a secretary.
Must include particulars (s. 277 for individuals; s. 278 for corporate secretaries).
If the company chooses, it can keep this info only on the central register at Companies House instead of a physical internal register (s. 279A).
Removal/Resignation:
TM02 must be filed within 14 days (s. 276(1)(a)).
Update the internal register of secretaries accordingly.
Changes in Secretary Details:
CH03 (human) or CH04 (corporate) filed within 14 days, if, for example, the secretary changes their address.
2.6 Powers of the Company Secretary
Often has apparent authority to enter into administrative contracts (e.g., ordering office supplies, dealing with filings) but not typically major commercial or financial agreements (e.g., borrowing money).
Apparent authority means third parties can rely on the secretary’s usual administrative authority unless they have reason to believe otherwise. (See also s. 40 CA 2006 for directors’ powers, and the concept of corporate capacity.)
3. Auditor
3.1 Who Needs an Auditor?
Private companies generally must appoint an auditor unless they qualify for an exemption.
Small companies (s. 477 CA 2006) – those under certain size thresholds – are exempt from a statutory audit.
Dormant companies (s. 480 CA 2006) are also exempt.
Thus, if a private company is small or dormant, it doesn’t need an auditor by law. Otherwise, it must appoint one.
3.2 Auditor’s Role (s. 495 CA 2006)
The auditor is typically a qualified accountant independent of the company (ss. 1212–1215).
They prepare a report on the company’s annual accounts to be delivered to the shareholders (s. 495(1)).
The report states whether the accounts:
Have been prepared properly in accordance with CA 2006,
Give a true and fair view of the company’s financial position (s. 495(3)).
This reassures shareholders that they are not being misled by the directors about the company’s performance or finances.
3.3 Appointment of the Auditor
First Auditor: Appointed by the directors (s. 485(3)).
Subsequent Appointments: By ordinary resolution of the shareholders (s. 485(4)).
Automatic Reappointment: Under s. 487, the auditor is automatically reappointed each year unless:
They were originally appointed by the directors (meaning an initial appointment post-incorporation but pre-next general meeting),
The company’s articles or the shareholders decide otherwise,
The auditor expressly declines reappointment or is no longer eligible.
3.4 Auditor’s Liability
An auditor can be sued by the company for negligence if they fail to detect or report improper financial conduct.
Case law suggests no direct duty of care to individual shareholders or prospective shareholders unless there is sufficient proximity.
Criminal Offences under s. 507 CA 2006 for:
Knowingly/recklessly including misleading info in the auditor’s report,
Omitting required statements from the report.
3.5 Removal of the Auditor
By Ordinary Resolution at any time (s. 510 CA 2006).
Requires special notice (s. 511) – i.e., 28 days’ notice before the GM at which the resolution is proposed.
The departing auditor must submit a statement of circumstances to the company (s. 519) explaining any issues they see in the company’s affairs.
The auditor can also resign voluntarily at any time by giving notice in writing to the company (s. 516).
4. Practical Summary
Company Secretary:
Mandatory? Only for public companies. Optional for private companies.
Appoint/Remove: Typically by board resolution; must file AP03/AP04 or TM02 as needed.
Main Duties: Overseeing corporate filings, maintaining statutory books, drafting minutes, assisting with compliance.
Auditor:
Mandatory? Generally yes, unless the company is exempt (small or dormant).
Appoint: First auditor by directors, subsequent auditors by ordinary resolution.
Remove: Ordinary resolution with special notice.
Duties: Ensure accounts give a true and fair view, protect shareholders from financial misstatements.
Filing Requirements:
Changes in secretaries or auditors must be notified to Companies House promptly (usually within 14 days).
The company must keep the register of secretaries updated (if one is in place) or rely on the central register.
The appointment or removal of an auditor does not typically require the same forms as for secretaries, but the outcome is often documented in the company’s minutes and the register of auditors is updated if kept.
Liabilities & Offences:
Failing to notify Companies House of changes can lead to fines against the company and its officers.
An auditor can be criminally liable under s. 507 for misleading statements or omissions.
Key Takeaway
Directors run the company; a company secretary (if appointed) handles administrative compliance and corporate filings; an auditor (if required) checks the accuracy of financial accounts.
Knowing the rules on appointment, removal, and filing ensures smooth corporate administration and compliance with the CA 2006.
Shareholders
1. Becoming a Shareholder
1.1 Initial Subscribers (s. 112 CA 2006)
The first shareholders in any new company are the two or more individuals (or corporate entities) who sign the memorandum of association (the “subscribers”).
They automatically become members (shareholders) when the company is formed and must be entered onto the register of members.
1.2 Ways to Acquire Shares After Formation
After the company is up and running, a person or company can become a shareholder in one of two main ways:
Acquiring Existing Shares
Transfer: Buying or receiving existing shares from a current shareholder (e.g., purchase or gift).
Transmission: If a shareholder dies or is declared bankrupt, their shares pass to a personal representative or trustee. The recipient can elect to be registered as the new shareholder.
Allotment of New Shares
The company creates new shares and issues them to new or existing shareholders, often to raise more capital.
Note: The legal mechanics of transfer, transmission, and allotment are covered in detail in Chapter 4 of many textbooks. The key point is that the register of members must reflect any change in ownership or number of shares held.
2. Register of Members
2.1 Obligation to Maintain a Register (s. 113 CA 2006)
Every company must keep a register of members listing its shareholders.
Alternatively, a company may elect to keep these details on the central register at Companies House (s. 128B).
The register must contain each member’s name and address, plus details of the shares they hold.
2.2 Updating the Register
A new shareholder must be entered on the register of members (or the allotment or transfer reflected for existing shareholders) “as soon as practicable,” and in any event within:
Two months of the transfer being lodged with the company (s. 771),
Two months of the allotment (s. 554).
If the company has elected to keep the info at Companies House (central register), then the company must notify the registrar of the new share registration similarly within two months.
2.3 If Only One Member
A company with one sole member must include a statement to that effect in the register (s. 123).
It is a criminal offence for the register to be incomplete or inaccurate, including failing to state if it is a single-member company.
2.4 Inspection Rights
If the register is kept at the company’s registered office or SAIL (Single Alternative Inspection Location), shareholders can inspect it free, and non-shareholders can inspect it for a fee (s. 116).
Refusing inspection when required is a criminal offence (s. 118).
3. Share Certificates
3.1 Right to a Certificate
Every shareholder is entitled to a share certificate (s. 769(1)(a) and s. 776(1)(a) CA 2006).
A certificate is prima facie evidence (s. 768) of that person’s title to the shares.
3.2 Timing Requirements
If new shares are allotted, the company must issue a certificate within two months of the allotment (s. 769).
If a shareholder transfers shares and lodges them with the company, the company has two months to issue a new certificate to the transferee (s. 776).
4. The PSC (Persons with Significant Control) Register
4.1 Rationale and Purpose
A PSC register aims to show who ultimately controls or significantly influences the company (i.e., who holds more than 25% of shares or voting rights).
This applies to all private companies and non-traded public companies.
4.2 Who Appears on the PSC Register?
Any individual or relevant legal entity (e.g., another company that meets certain conditions) owning over 25% of shares or voting rights.
Even if there are no such persons, the PSC register is still required, but noted that there are “no PSCs or registrable RLEs.”
4.3 Privacy Options
Individuals can apply for their residential address to remain private.
They can also, in certain circumstances, apply to keep their name off the public record, so that the register simply states that a person with significant control exists but has withheld personal details.
4.4 PSC on the Central Register
Under s. 790 CA 2006, a private company can opt to keep PSC information on the central register at Companies House instead of maintaining a separate PSC register internally.
4.5 Filing Requirements When PSC Details Change
Various Companies House forms must be filed within 14 days of the change being made in the PSC register (s. 790VA):
PSC01: Adding an individual to the PSC register for the first time.
PSC02: Adding a relevant legal entity (RLE) to the PSC register for the first time.
PSC04: Updating a change in details for an individual PSC already on the register.
PSC05: Updating a change in details for an RLE on the register.
PSC07: Removing someone who ceases to be a PSC.
Example: If a shareholder’s interest drops from 30% to 20% (no longer a PSC), the company must file PSC07 within 14 days of updating its PSC register.
5. Key Takeaways in Practice
Track All Changes:
If someone buys or receives shares, or the company allots new shares, make sure the register of members is updated within two months.
Issue Certificates Promptly:
Whether via allotment or transfer, new share certificates must be out within two months, reinforcing the transferee’s legal title.
PSC Updates:
Maintaining an accurate PSC register is critical for transparency. File PSC forms within 14 days of each relevant change (s. 790VA).
Criminal Offences:
Not maintaining correct registers (members or PSC), not allowing inspection, or failing to note a single-member company can lead to fines or prosecution.
Central Registers Option:
Companies can elect to keep the register of members or the PSC register (or both) at Companies House instead of a physical book. Nonetheless, the same deadlines and accuracy requirements apply.
Shareholders’ rights
1. Statutory Contract and Shareholder Rights (s. 33(1) CA 2006)
1.1 The Company’s Constitution as a “Statutory Contract”
s. 33(1) CA 2006 states that the company’s constitution (primarily its articles of association) forms a contract between:
Each shareholder and the company, and
Each shareholder and every other shareholder.
This means a shareholder can sue for breach of contract if:
Another shareholder, or
The company itself
fails to comply with the articles. Examples often relate to voting rights or dividend entitlements.
1.2 Effect of the Statutory Contract
Since the articles bind every shareholder (current and future), each member can enforce their rights (e.g., the right to vote, the right to receive dividends) against others who are subject to the same articles.
Key Point:
A shareholder typically only has standing to enforce membership rights (things that relate to them in their capacity as a shareholder, such as voting and dividend rights). They generally can’t use s. 33(1) to enforce rights unrelated to membership.
2. Shareholders’ Agreements
2.1 Nature and Advantages
A shareholders’ agreement is a private contract among some or all shareholders (and sometimes the company itself) setting additional rules about how they will exercise their rights.
Only those who sign it are bound. Future shareholders are not automatically bound unless they also sign or otherwise consent.
Advantages
Privacy: Unlike the articles, which are publicly available on Companies House, a shareholders’ agreement remains private.
Protection of Minority Shareholders: Allows provisions giving smaller shareholders more influence than the articles might – for example, requiring unanimous consent for certain major decisions.
2.2 Common Clauses in Shareholders’ Agreements
Restrictions on Transferring Shares: e.g., requiring other shareholders’ approval or giving them pre-emption rights.
Bushell v Faith Clauses: Weighted voting rights preventing a shareholder from being removed as a director by a simple majority (see Bushell v Faith [1970]).
Non-Compete Clauses: Barring shareholders from engaging in competing businesses.
2.3 Limitations
A shareholders’ agreement cannot force a director to vote a certain way in board meetings if doing so would conflict with directors’ duties (ss. 171–177 CA 2006).
It cannot bind shareholders who don’t sign it.
3. Voting Rights of Shareholders
3.1 Default Voting at General Meetings
By default, voting is on a show of hands (one vote per shareholder), but a poll vote can be demanded (often by 10% or more of voting rights, or as the articles allow) where each share has one vote (s. 284 CA 2006).
The shareholder has these rights regarding general meetings:
Proxy (2.3.2): The right to appoint someone else to attend and vote on their behalf.
Poll Vote (2.3.5): Demanding a poll to have votes proportional to shares held.
Receive Notice: The right to be notified of any general meeting (2.3.2).
Requisition a GM: If they hold 5% or more of voting rights, they can force the board to call a meeting (s. 303).
Court-Called Meeting (s. 306): They can ask the court to call a GM if it’s impracticable to do so otherwise (e.g., no quorum possible).
Written Statement at GM: 5% or more (or 100 shareholders with an average of £100 or more paid up) can require the circulation of a statement up to 1,000 words about a resolution.
Circulation of a Written Resolution (5% or more) (2.5.1).
3.2 Show of Hands vs. Poll
Show of Hands: Each shareholder has one vote, no matter how many shares they hold.
Poll Vote: Each share is one vote – can drastically change the outcome if a single shareholder owns a large stake.
4. Other Shareholder Rights
4.1 Dividends (s. 830 CA 2006; MA 30(2))
Entitlement: If there are profits available, the directors recommend a dividend amount and the shareholders approve it by ordinary resolution (unless articles say otherwise).
A shareholder can only receive dividends if they are lawfully declared. If the company has insufficient distributable profits, paying dividends is illegal and can lead to personal liability for directors or shareholders.
4.2 Winding Up (s. 122(1)(g) Insolvency Act 1986)
Just and Equitable: A shareholder may petition the court to wind up the company if it’s “just and equitable” (e.g., deadlock in management, breakdown in mutual trust in a quasi-partnership).
4.3 Removal of Directors (s. 168 CA 2006)
Shareholders can remove a director by ordinary resolution, subject to special notice. (See more detail in Chapter 3 references, “Removing a Director.”)
4.4 Removal of Auditor (s. 510 CA 2006)
Similar process, an ordinary resolution with special notice (at least 28 days), as explained in 2.6.2.3.
4.5 Inspection Rights
Without charge, shareholders can inspect:
Minutes of general meetings and passed shareholders’ resolutions,
All statutory registers (e.g., register of members, PSC register if not on central register),
Directors’ service contracts,
Any contracts relating to purchase of own shares by the company.
They also have a right to annual accounts (s. 423 CA 2006).
Non-shareholders typically can also inspect certain registers but may pay a fee.
4.6 Injunction (s. 40(4) CA 2006)
Shareholders can seek an injunction to restrain the company from acting outside its constitution or violating restrictions within the constitution.
5. Types of Shareholders
5.1 Corporate Shareholders (s. 323 CA 2006)
A company can hold shares in another company.
If a corporate shareholder attends a GM, it can authorize an individual to represent it and exercise its voting rights.
5.2 Groups of Companies (s. 1159 CA 2006)
Holding (Parent) Company: One that owns or controls a majority of the voting rights in another.
Subsidiary: If a holding company:
Holds a majority of its voting rights, or
Is a member and can appoint/remove a majority of its board, or
Is a member and controls majority voting rights by agreement with other members,
Or it’s a subsidiary of another subsidiary (the “chain” concept).
Wholly-Owned Subsidiary: 100% of the shares are held by the parent or its other wholly-owned subsidiaries.
Practical Example:
A Ltd owns 60% of B Ltd → B Ltd is a subsidiary of A Ltd.
B Ltd owns 100% of C Ltd → C Ltd is a wholly-owned subsidiary of B Ltd.
B Ltd owns only 33% of D Ltd → not a subsidiary, since B does not have majority control or voting power in D.
5.3 Single-Member Companies (s. 123 CA 2006)
If a company has only one shareholder, this fact must be entered in the register of members.
Failing to note single-member status is an offence.
If additional shareholders join, the register must reflect the change from being a single-member company.
5.4 Joint Shareholders
Two or more individuals can own the same share(s) jointly.
The register must show all joint holders’ names but only one address (s. 113(5)). Failing that is an offence.
6. Public Companies (Brief Note)
Public companies grant additional rights and responsibilities to shareholders, particularly if listed on a stock exchange.
These are beyond the scope of this text, which mainly focuses on private limited companies.
7. Conclusion
Core Rights from the Constitution: s. 33(1) CA 2006 makes the articles a binding contract among shareholders and the company.
Supplement via Shareholders’ Agreement: A private, flexible contract among specific shareholders, often used to protect minorities or keep certain provisions confidential.
Voting and Decision-Making:
Default show of hands or poll.
Requisition rights for significant shareholdings (5%).
The ability to remove directors and auditors.
Other Rights:
Dividends (if declared out of profits),
Petitioning to wind up on just and equitable grounds,
Inspection of statutory records,
Injunctions to prevent ultra vires or constitutional breaches.
Structures:
Single-member companies are common for sole entrepreneurs.
Complex groups use holding-subsidiary relationships to structure liability and control.
By combining the statutory protections (like s. 33, s. 168 for removing directors) with private agreements (shareholders’ agreements), shareholders can shape the internal governance of a company to meet various needs, balance minority/majority interests, and maintain clarity in their respective rights and obligations.
1. Types of Shares
1.1 Ordinary Shares
Default/Most Common Type: Companies often have only ordinary shares at formation.
Voting Rights: Typically carry a right to attend and vote at GMs.
Dividends: Ordinarily have the right to dividends (if declared) but not guaranteed – amounts can vary depending on the company's distributable profits.
Variations: A company may issue multiple classes of ordinary shares (e.g., A shares, B shares) to differentiate dividend rights or other conditions among groups of shareholders. The specific rights are spelled out in the articles of association.
1.2 Preference Shares
Enhanced (Preferential) Rights: May carry priority in dividends, often at a fixed rate (e.g., 5% of the share’s nominal value).
Voting: Typically, no voting rights; or limited voting rights, unless specifically provided.
Return on Investment: Preference shareholders receive dividends before ordinary shareholders. If there are insufficient profits to pay both, the preferential dividend is paid first, and then any remainder goes to ordinary shareholders.
Types of Preference Shares (Terminology):
Cumulative: If a dividend is missed in a previous financial year, it accumulates and must be paid out in a later year before ordinary dividends are paid.
Non-cumulative: Missed dividends are forfeited and do not carry over.
Participating: In addition to the normal fixed dividend, they may share in surplus profits or assets if ordinary shareholders receive dividends beyond a certain threshold.
Example: If an investor provides $100,000 in exchange for 5% cumulative preference shares, they are entitled to $5,000 each year if there are profits. If in one year the company cannot pay the $5,000, the unpaid amount accumulates (for cumulative shares) and is paid in subsequent years when profits allow.
2. Protection of Minority Shareholders
Majority shareholders can typically pass or block resolutions (especially with over 50% or 75% ownership). However, minority shareholders do have legal remedies:
2.1 Unfair Prejudice Petitions (s. 994 CA 2006)
A shareholder can apply to court if the company’s affairs are conducted in a way that is unfairly prejudicial to them (or to the interests of some of the members).
Examples of unfair prejudice:
Diverting business opportunities to another entity controlled by the majority shareholder.
Paying excessive director remuneration.
Excluding a shareholder from management, contradicting an earlier understanding that they would be involved.
Removal of Auditor Exception
Removing an auditor on certain grounds (divergence of opinion on audit procedures) can also be deemed unfairly prejudicial (s. 994(1A)).
Likely Court Order: The most common remedy is for the majority or the company itself to buy out the aggrieved shareholder’s shares. Other possible orders include restricting changes to the articles without court permission or granting permission for a derivative action.
Practical Considerations: Unfair prejudice actions can be expensive, requiring extensive evidence (e.g., forensic accounting). Courts use an objective standard, asking if a hypothetical reasonable bystander would consider the conduct unfair.
2.2 Derivative Claims (ss. 260–264 CA 2006)
Definition: A claim brought by a shareholder “on behalf of” the company for a wrong done to the company (e.g., breach of duty by a director), where the board refuses to sue.
Permission of the Court: The shareholder must apply for court permission to continue the claim. The court will dismiss if there’s no prima facie case or if a director acting in good faith (s. 172) would not continue the claim.
Authorization/Ratification: If the wrongful act has been authorized or subsequently ratified, the court typically refuses permission to proceed.
Costs: If permission is granted, the company usually pays the legal costs (both sides). If permission is denied, the shareholder bringing the claim bears the cost.
1. What Is a Derivative Claim?A derivative claim is a legal action brought by a shareholder on behalf of the company in respect of a wrong done to the company. Although the company is the victim (e.g., of a director’s breach of duty), often the board fails or refuses to pursue a claim – possibly because the directors themselves are the alleged wrongdoers. A derivative claim allows a shareholder to step in and initiate proceedings to protect the company’s interests.
Key statutory references:
ss. 260–264 CA 2006.
1.1 Nature of the Wrong
A derivative claim can only be brought regarding:
Actual or proposed acts or omissions by a director involving:
Negligence,
Default,
Breach of duty (e.g., fiduciary duties under ss. 171–177),
Breach of trust (s. 260(3)).
Although commonly aimed at directors, the defendant can be another person if the wrongdoing is so closely connected to a director’s breach that the company’s claim against them is effectively part of the same cause of action.
1.2 Statutory vs. Common Law
Under the CA 2006, derivative claims replace much of the older common-law derivative action framework. Some common-law principles (e.g., “fraud on the minority” or “wrongdoer control”) may still inform the court’s discretion but the statutory procedure is now controlling.
2. Key Reasons Why a Shareholder Might Bring a Derivative Claim
Board Inaction: The directors refuse to sue (or are themselves the alleged wrongdoers).
Preventing Further Loss: The company may be suffering or will suffer economic harm if a director’s misconduct (e.g., misappropriation of assets) is not halted or remedied.
Protecting the Company: A majority of shareholders might be complicit or might have ratified the misconduct – leaving no internal remedy for a wrong done to the company.
Contrast: If the alleged misconduct directly harms a shareholder’s personal rights, the more appropriate route is typically an unfair prejudice petition under s. 994 or a personal claim (e.g., breach of shareholder agreement). A derivative claim is specifically about harm done to the company.
3. Step-by-Step Procedure
3.1 Stage One: The Claim and Prima Facie Case (ss. 261–263)
Issue the Claim: The shareholder files a claim in the company’s name (the “company” is the formal claimant). The defendant(s) is usually the director(s) alleged to have breached duty.
Court Application for Permission: Promptly after filing, the shareholder applies for permission to continue.
Prima Facie Assessment (s. 261(2))
The court, without a hearing, reviews the statement of case and any evidence the claimant presents.
If there is no “prima facie case,” the court dismisses the application right away.
3.2 Stage Two: The Permission Hearing
If the prima facie threshold is met:
Directions: The court may order additional evidence (often from the company or the alleged wrongdoers).
Full Permission Hearing:
The court examines whether a person acting in good faith to promote the company’s success (s. 172 standard) would pursue the claim.
The court must refuse permission (s. 263(2)) if:
A hypothetical, diligent director acting under s. 172 would not continue the claim,
The act/omission has been authorized before it occurred, or
It has been ratified or is likely to be ratified by the company (s. 239) after it occurred.
The court also considers (s. 263(3)):
Good faith of the shareholder making the claim,
Importance a notional s. 172 director would attach to the matter,
Whether a majority of disinterested shareholders support or oppose the claim,
Any other remedy (e.g., the shareholder might have a personal remedy).
Outcome:
If permission is granted, the claim proceeds to trial with the shareholder effectively directing the litigation, but the company remains the formal claimant.
The court may impose conditions (e.g., the claimant may need to keep certain records or limit the scope of the claim).
If permission is denied, the derivative action ends.
3.3 After Permission: Conduct of the Claim
The shareholder runs the litigation (since the board either refused or is conflicted).
If successful, damages or other remedies go to the company, not the individual shareholder. The shareholder benefits indirectly (e.g., through increased share value).
4. Costs and Funding
If Permission Is Denied: The claimant-shareholder typically must pay their own legal costs and any other costs ordered (though the court might use discretion).
If Permission Is Granted:
Generally, the company (as claimant) will be liable for the costs of the litigation, including any adverse costs if the case is lost.
This is one reason courts are cautious about granting permission, as it can effectively force an unwilling company to bear litigation risks.
5. Potential Outcomes or Remedies
Damages/Compensation: The company is awarded monetary damages from the director or third party.
Account of Profits: A director who breached fiduciary duty by profiting can be made to disgorge those profits to the company.
Rescission: If a transaction was set up by a director in breach of duty, the court might order it unwound.
Injunction: The court may restrain the director from continuing wrongful acts.
6. Relationship to Other Shareholder Remedies
Unfair Prejudice (s. 994): Focuses on personal harm to shareholders. The remedy often is a buyout of the petitioner’s shares.
Derivative Claim: About redressing wrongs to the company.
Winding Up on Just & Equitable Grounds: A final remedy if the business relationship has irretrievably broken down (s. 122(1)(g) Insolvency Act 1986).
6.1 Strategic Considerations
If the shareholder’s main complaint is “I personally have lost out,” an unfair prejudice petition might be more appropriate, with a potential buyout remedy.
If “the company was harmed and the directors refuse to act,” a derivative claim is the typical route.
8. Practical Tips and Observations
Evidence Gathering: The shareholder must show a prima facie case of director wrongdoing. This often requires some access to the company’s records – not always easy if the board is hostile.
Board’s Position: If the board has already ratified or authorized the director’s conduct, continuing a derivative action becomes difficult.
Costs Risk: Because derivative litigation can become expensive, minority shareholders must carefully assess prospects of success before proceeding.
Potential Settlement: Often, these cases settle if the board or majority shareholders decide it’s simpler to buy out the minority or rectify the wrongdoing rather than endure court proceedings.
9. Summary of Derivative Claims
Core Principle: A shareholder sues on the company’s behalf for a wrong done to the company.
Statutory Basis: ss. 260–264 CA 2006.
Procedure:
Claim filed in the company’s name.
Court permission sought via two-step approach (prima facie + full hearing).
Court weighs whether a notional s. 172 director would continue the claim and whether the alleged breach is unratified.
Remedies flow back to the company.
Costs typically borne by the company if permission is granted, and by the shareholder if permission is refused.
A derivative claim is therefore an important minority protection tool in UK company law, ensuring directors can be held accountable even if the majority are unwilling to sue. However, the procedure and cost risk make it a last resort
3. Summary Chart of Shareholder Powers by Ownership Threshold
Below is a simplified list of what shareholders can do at various percentage holdings, along with the general rights any shareholder has (even below 5%).
Shareholding | What Shareholders Can Do |
|---|---|
100% | - Pass any resolution (ordinary or special). |
75% | - Pass or block a special resolution. |
Over 50% | - Pass (or block) an ordinary resolution (e.g., remove a director). |
50% | - Exactly 50% can block an ordinary resolution, but does not pass it alone. Typically “over 50%” is needed to pass an ordinary resolution. |
Over 25% | - Block a special resolution (since 75% is required to pass). |
10% | - Demand a poll vote (under many articles). |
5% | - Requisition a general meeting (s. 303). |
Any Shareholder | - Vote (if they hold voting shares). |
*Note: Whether shareholder approval is required for dividends depends on the company’s articles and any relevant directors’ resolutions. Many private companies rely on directors to decide interim dividends.
4. Key Takeaways
Ordinary Shares:
Standard default share class, typically with voting rights and a dividend right proportionate to profits.
Preference Shares:
Provide a fixed or priority dividend, often at the cost of voting rights.
Can be cumulative, non-cumulative, or participating.
Minority Protection:
Unfair Prejudice (s. 994) for wrongful or discriminatory conduct that harms shareholder interests.
Derivative Claims (ss. 260–264) to sue on behalf of the company if directors breach duties and the board fails to act.
Ownership Thresholds:
75% (supermajority) → control over special resolutions (e.g., changing articles).
Over 50% → pass ordinary resolutions, remove directors, etc.
5% → significant procedural rights (requisition GMs, written resolutions).
Any shareholder → can vote, receive dividends, inspect registers, bring certain legal actions, etc.