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The Life of a Company

Shareholder Powers, Right and Agreements

Shareholders Powers and Duties

Directors are normally responsible for the day to day running of a company. However, it is vital that shareholders, as investors in the business have some means by which they can influence a business. The Companies Act 2006 lays down some provisions whereby directors require shareholders’ approval e.g. where a directors loan must be approved by shareholders in order for it to be lawful.

Usually the articles of a company will lay down further provision where shareholders approval is required, often for appointment or removal of directors or share transfers or allotments. Commonly these issues should be approved on an ordinary or special resolution of the shareholders.

Shareholders are bound by the constitution of a company. S33 of the Companies Act 2006 states that “the provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions”.

The constitution of the company is defined in s17 of the Companies Act 2006 as including the articles and any special resolutions of the shareholders. For companies formed prior to the 1985 Act the Memorandum will also continue to exist as part of the constitution.

This binds the company to each of its members and crucially, binds members to each other.

Shareholders’ Rights and Other Rights

The obligations imposed on a company and its members by the constitution are only enforceable where they relate to membership rights.

Clearly, membership rights include:

  • The right to lawfully declared dividends;
  • The right to share in surplus capital on a winding up;
  • The right to vote at meetings.

A member’s primary obligation to the company is to pay for the shares issued to him.

Obligations imposed by the constitution which are not strictly membership rights are not enforceable under s33 and may leave members without a remedy. Eley v Positive Government Security Life Assurance Co.(1876) 1 ExD 88 concerned a provision in the company’s articles that Mr Eley be appointed as the company’s solicitor. This role failed to materialise whereupon Mr Eley who was a member of the company instigated legal action. It was held that his right to be appointed as solicitor under the articles was not a membership right and so he had no capacity to sue as a member on this complaint.

Shareholders Powers

Shareholders powers are exercised when they pass a resolution either at a general meeting, or by signing a written resolution. Ordinary resolutions are passed by a simple majority, but significant decisions often require a special resolution of 75% to be in favour. A shareholder therefore who holds 75% or more of a company’s shares could overrule all other shareholders in any decision not requiring unanimity. Similarly, a shareholder with over 25% of the shares could block any decision requiring a special resolution.

A minority shareholder therefore usually has little power to exert over decisions. He is however protected by a number of rights and remedies in law.

Shareholder Agreements

Where shareholders wish to regulate their dealings with each other, this is generally done by way of a shareholders’ agreement, rather than in the articles. Shareholder agreements will differ according to the structure and differing circumstances of each business.

Typical issues that may be considered in a shareholders agreement include:

  • Representation of shareholders on the board of directors;
  • Appointment and removal of directors;
  • Procedural matters e.g. frequency of board meetings, how notice of board meetings is to be given, how a quorum is to be constituted for board meetings, identification of the chairman and his powers;
  • Arrangements as to how and when dividends may be distributed;
  • Restrictions on the transfer of shares, permitted transfers of shares;
  • Directors’ service contracts where the shareholders are also directors;
  • Confidentiality agreements .

Clearly any agreement binds only the shareholders who are party to it.

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