4.2 Shareholders, Meetings, Filings and Minority Protection

Appointment and removal of directors

A private company must have at least one director; a public company must have at least two. At least one director must be a natural person, and a director must be at least 16. The articles (usually the Model Articles for private companies limited by shares, unless amended) say how directors are appointed. Typical routes are: an ordinary resolution of members; appointment by the existing directors to fill a casual vacancy or as an additional director, often subject to later member confirmation; and any special mechanism in a shareholders' agreement that has been written into the articles. The appointment takes effect when the person consents to act. The company must notify the registrar of a new director. Identity verification of individual directors is now part of the Companies House filing process under the Economic Crime and Corporate Transparency reforms: a new appointment cannot be filed until verification is complete. Failure to file is a criminal offence for the company and every officer in default; the appointment itself can still be valid as between the company and the director.

Removal is a statutory member power. CA 2006 s.168 says the company may by ordinary resolution at a meeting remove a director before the end of the director's term, notwithstanding anything in any agreement between the company and the director. Special notice is required (s.168(2) and s.312): the persons proposing the resolution must give the company at least 28 days' notice of their intention to move it, and the company then gives notice of the meeting to members. The director has a right to be heard and to have written representations circulated (s.169). Two exam traps sit on top of that clean rule. First, s.288(2) says a resolution to remove a director under s.168 cannot be passed as a written resolution. The meeting is mandatory so the director can protest. Second, s.168 does not take away compensation or damages for breach of a service contract, and it does not destroy a Bushell v Faith clause that gives a director-shareholder weighted votes on a resolution to remove that director. Weighted voting is a share right, not a prohibition on removal; if the weighted votes defeat the ordinary resolution, the director stays.

Directors can also resign, retire by rotation if the articles say so, be disqualified under the Company Directors Disqualification Act 1986, or vacate office automatically under the articles (for example bankruptcy or mental incapacity). Board minutes should record the change; the registrar must be notified of a departure.

Shareholders, meetings and written resolutions

Members own the company. Their core rights are: to vote (usually one vote per ordinary share on a poll), to receive dividends if declared, to a return of capital on a solvent winding up after creditors, to inspect certain registers, to receive accounts, and to requisition meetings and propose resolutions. Holders of at least 5% of paid-up voting capital can require the directors to call a general meeting (s.303). Private companies are not required to hold an annual general meeting unless their articles say otherwise. Public companies must hold an AGM.

Notice of a general meeting is at least 14 days for a limited company (s.307). A public-company AGM needs 21 days. Short notice is possible if the required majority of members agree (90% of voting rights for a private company, 95% for a public company, unless the articles set a higher figure up to 95%). Notice must say the time, date and place and the general nature of the business. Special-resolution business must be identified as such.

Quorum under the Model Articles is two qualifying persons, or one if the company has a single member. Members may appoint a proxy. A vote is first taken on a show of hands (one person, one vote) unless a poll is demanded; a poll reflects shareholdings. Members with at least 10% of voting rights can demand a poll.

An ordinary resolution is passed by a simple majority of votes cast (or, as a written resolution, by a simple majority of the total voting rights of eligible members). A special resolution needs a majority of not less than 75% (s.283). Special resolutions are used to amend the articles (s.21), change the name, reduce capital (with the supporting solvency or court process), wind the company up voluntarily, and other constitutional acts listed in the Act. A private company may pass almost any resolution as a written resolution circulated to eligible members; it lapses if not passed within 28 days of circulation unless the articles set a different period. The two famous exceptions are removal of a director under s.168 and removal of an auditor.

Class rights (for example a separate class of preference shares) can usually be varied only with the consent of 75% of that class, plus any extra article protection. A variation that is in substance an expropriation of a class will attract both the class-consent rules and, often, an unfair-prejudice claim.

Documents, records, filing and disclosure

The board exercises the general management power in the articles, but it must be able to prove what it decided. Board minutes must be kept for at least ten years (s.248). Minutes of general meetings and records of written resolutions must be kept (s.355). The company must maintain a register of directors, a register of members, and a PSC register (people with significant control — typically those holding more than 25% of shares or voting rights, or who otherwise exercise significant influence or control). Event-driven filings at Companies House include director and PSC changes, allotments, and copies of special resolutions (and certain ordinary resolutions). Those resolutions must reach the registrar within 15 days of being passed. Periodic filings include the confirmation statement and the accounts. Public companies and larger private companies have additional strategic-report and directors'-report disclosure. None of this is optional housekeeping: late or false filing is a criminal offence, and a missing minute book is how a later unfair-prejudice or misfeasance claim is proved.

Minority shareholder protection

A member who cannot command 50% or 75% is not powerless. The two FLK1 remedies are unfair prejudice and just and equitable winding up. They are often pleaded in the alternative on the same facts.

CA 2006 s.994 lets a member petition if the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of members generally or of some part of the members (including the petitioner), or if an actual or proposed act or omission would be so prejudicial. Both unfairness and prejudice are required. Prejudice is usually financial or a denial of a membership right. Unfairness is judged against the bargain: the articles, any shareholders' agreement, and — in a quasi-partnership — equitable constraints of the kind recognised in Ebrahimi v Westbourne Galleries and O'Neill v Phillips. Typical successful patterns are: exclusion from management in a company that was in substance a partnership; payment of excessive directors' remuneration while refusing dividends; diversion of a corporate opportunity to a new company owned by the majority; improper allotments that dilute the minority; and refusal to provide information that the member is entitled to see. A genuine, non-discriminatory commercial disagreement is not enough. The usual remedy under s.996 is an order that the respondents (or the company) purchase the petitioner's shares at a fair value. Courts often refuse a minority discount in a quasi-partnership buy-out. Other orders (regulating future affairs, requiring or restraining an act) are available but less common.

Insolvency Act 1986 s.122(1)(g) lets the court wind a company up if it is just and equitable to do so. Classic grounds are: deadlock; justifiable loss of confidence in management because of a lack of probity; breakdown of a quasi-partnership where the excluded member was promised participation; and failure of the company's substratum. Winding up kills the company. The court will refuse the order if the petitioner has another adequate remedy — almost always a s.994 buy-out — and is acting unreasonably in seeking a winding up instead. Use s.122(1)(g) when the relationship is beyond repair and a share sale is not a realistic alternative (for example there is no clean valuation, or the majority will not be able to pay).

A derivative claim (CA 2006 Part 11) is a different tool: the member sues in the company's name for a wrong done to the company (typically a breach of ss.171–177). The member needs the court's permission. It is not a personal minority remedy and does not produce a buy-out.

Worked scenario. Three friends incorporate a private company in England on Model Articles. Each holds one-third of the ordinary shares and all three are directors. There is no shareholders' agreement. After a row, two directors exclude the third from board meetings, stop paying her a salary, pay themselves increased remuneration, and refuse a dividend. She cannot pass an ordinary resolution to remove them. Functioning analysis: the exclusion in a three-founder company is classic s.994 unfair prejudice; the court is likely to order a buy-out of her shares at an undiscounted fair value. Section 168 is not available to her alone. Section 122(1)(g) is a fallback if a buy-out cannot work. The two remaining directors also need to revisit s.172 (fairness between members; employees) and s.174 (process). If the company is approaching insolvency, s.172(3) and later wrongful-trading rules enter the picture as well.