Company minority shareholders URGENT HELP PLEASE

How can company directors ensure no outsiders gain ownership of the company and the implications on them If it was possible to establish?

- question is in relation to minority shareholders voting rights etc..

Reply 1

Mimir

20

Original post by Manishyy123

How can company directors ensure no outsiders gain ownership of the company and the implications on them If it was possible to establish?

- question is in relation to minority shareholders voting rights etc..

This is VAST! Do you have sight of the Companies' Act (2006)?

If the Company has Model Articles, was incorporated under CA 2006 then the following should be considered:

- Are the Directors also Shareholders? If so, what are their percentage shareholdings? Do they all have Ordinary Shares?
- Is there a Shareholders' Agreement? What does it say about issuance of equity finance? The SHA will 'trump' the CA and Articles of Association.
- Is it a plc or private?
- What are the rights of preemption? Do they need to be lifted? What is the shareholding capital?

For issuance of shares, there are very strict requirements, especially if the company is private, on which there is a general prohibition of obtaining equity finance from the public. Floatation on AIM or LSE etc is very complex and has different rules.

You will also need to consider FSMA.

I don't know the in's and out's of this scenario so cannot really offer any further things to think about. In short, to your question:

Company Directors can ensure no outsiders gain ownership [majority control] of the company by enshrining the rights of the subscriber shareholders in a shareholders' agreement. This should include rights of preemption, voting rights, and any provisions to give preferential voting rights to the subscriber shareholders in the event they become by percentage equity, minority shareholders.

That's the simple answer, but no doubt won't answer your question.

Go through the Companies' Act (2006) and the Model Articles in Butterworth's using the index - make sure you aren't looking at the 1985 Act or Table A - and you will find the area of statute which will help you figure this out. Case law is pretty useless, stick to statute.

Remember, for Minority Shareholders to bring derivative actions, the Company is the proper plaintiff (Foss v Harbottle). There is more case law, but the principle remains exactly the same.

Reply 2

Manishyy123

OP

Original post by Mimir

This is VAST! Do you have sight of the Companies' Act (2006)?

If the Company has Model Articles, was incorporated under CA 2006 then the following should be considered:

- Are the Directors also Shareholders? If so, what are their percentage shareholdings? Do they all have Ordinary Shares?
- Is there a Shareholders' Agreement? What does it say about issuance of equity finance? The SHA will 'trump' the CA and Articles of Association.
- Is it a plc or private?
- What are the rights of preemption? Do they need to be lifted? What is the shareholding capital?

For issuance of shares, there are very strict requirements, especially if the company is private, on which there is a general prohibition of obtaining equity finance from the public. Floatation on AIM or LSE etc is very complex and has different rules.

You will also need to consider FSMA.

I don't know the in's and out's of this scenario so cannot really offer any further things to think about. In short, to your question:

Company Directors can ensure no outsiders gain ownership [majority control] of the company by enshrining the rights of the subscriber shareholders in a shareholders' agreement. This should include rights of preemption, voting rights, and any provisions to give preferential voting rights to the subscriber shareholders in the event they become by percentage equity, minority shareholders.

That's the simple answer, but no doubt won't answer your question.

Go through the Companies' Act (2006) and the Model Articles in Butterworth's using the index - make sure you aren't looking at the 1985 Act or Table A - and you will find the area of statute which will help you figure this out. Case law is pretty useless, stick to statute.

Remember, for Minority Shareholders to bring derivative actions, the Company is the proper plaintiff (Foss v Harbottle). There is more case law, but the principle remains exactly the same.

Thank you for your response!

When Holmes, Watson and Moriarty set up New Blooms Ltd, the company operated from land in Old Town that Holmes had personally acquired. On formation of the company, on the 1st September 2015, all parties agreed to transfer the land to the company at a shareholders’ meeting. As a result, Holmes made a £10,000 profit on the transfer.
In July 2015, Watson entered a contract with Oakwood Ltd to purchase Christmas trees and signed a contract stating that, on incorporation, New Blooms Ltd would pay the bill. A month later, Moriarty also entered a separate contract with Oakwood Ltd, to buy holly, telling them that New Blooms Ltd, when incorporated, would pay the bill.

In late November, when Oakwood Ltd tried to deliver the Christmas trees as originally agreed, New Blooms Ltd declined delivery, having sourced a cheaper supplier. It is now December 2015 and Oakwood Ltd are unhappy about this and now refuse to deliver the holly, which New Blooms Ltd do want for the Christmas trade.
Moriarty had long since owned land in Old Town, through a company he owned, Safe-Soil Ltd, which grew specialist, organic carrots on local farmland. It was run for Moriarty by an independent board of directors. Around 18-months ago, Hypershop plc, a large supermarket chain, purchased 100% of Safe-Soil Ltd shares. The management structure of Safe-Soil Ltd remained unchanged although, from that point, the company mainly supplied to Hypershop plc and shared some central resources with them. After the acquisition, Safe-Soil Ltd lost considerable amounts of money and, frustrated by their inability to control such a specialist business, Hypershop plc wound-up Safe-Soil Ltd three months ago. Recently some former workers have contracted chronic skin diseases as a result of negligent practices at Safe-Soil Ltd over a number of years.
Back at New Blooms Ltd things are going well but Holmes, Watson and Moriarty recognise they have not always got on in the past, personally or professionally. As a result they want to know:

a) If they get into a dispute, can they avoid the dispute being taken to court?b) If it is legally valid to enter into an agreement so as to prevent them being individually removed as a director?c) How they can ensure no outsiders gain any ownership of the company, and the implications to each of them if this was possible to establish?
Using relevant case law and statute, in respect solely to company law, discuss and advise on the legal issues arising from the scenario above. (Exclude from your answer issues relating to duties of directors).

For section a) I have explained that Holmes' act can be absolved through ratification by the shareholders. Watson would be held personally liable on the pre-incorporation contract and that Moriarty could possibly sue for the benefit of the contract and also due to limited liability neither him nor hypershop plc could be pursued by the employees for the skin disease

For section b) I have answered by stating that they could put an entrenched provision in the articles, adopt a weighting provision and also a quorum provision too which would bind them in ensuring that they will not be dismissed as directors.

However I am struggling with section c), I do not wish to repeat myself with content from section b) however do you think I have included too much for the second section then as my course does not cover much more in regards to this topic

Reply 3

Mimir

20

Original post by Manishyy123

Thank you for your response!

When Holmes, Watson and Moriarty set up New Blooms Ltd, the company operated from land in Old Town that Holmes had personally acquired. On formation of the company, on the 1st September 2015, all parties agreed to transfer the land to the company at a shareholders’ meeting. As a result, Holmes made a £10,000 profit on the transfer.

In July 2015, Watson entered a contract with Oakwood Ltd to purchase Christmas trees and signed a contract stating that, on incorporation, New Blooms Ltd would pay the bill. A month later, Moriarty also entered a separate contract with Oakwood Ltd, to buy holly, telling them that New Blooms Ltd, when incorporated, would pay the bill.

In late November, when Oakwood Ltd tried to deliver the Christmas trees as originally agreed, New Blooms Ltd declined delivery, having sourced a cheaper supplier. It is now December 2015 and Oakwood Ltd are unhappy about this and now refuse to deliver the holly, which New Blooms Ltd do want for the Christmas trade.

Moriarty had long since owned land in Old Town, through a company he owned, Safe-Soil Ltd, which grew specialist, organic carrots on local farmland. It was run for Moriarty by an independent board of directors. Around 18-months ago, Hypershop plc, a large supermarket chain, purchased 100% of Safe-Soil Ltd shares. The management structure of Safe-Soil Ltd remained unchanged although, from that point, the company mainly supplied to Hypershop plc and shared some central resources with them. After the acquisition, Safe-Soil Ltd lost considerable amounts of money and, frustrated by their inability to control such a specialist business, Hypershop plc wound-up Safe-Soil Ltd three months ago. Recently some former workers have contracted chronic skin diseases as a result of negligent practices at Safe-Soil Ltd over a number of years.
Back at New Blooms Ltd things are going well but Holmes, Watson and Moriarty recognise they have not always got on in the past, personally or professionally. As a result they want to know:

a) If they get into a dispute, can they avoid the dispute being taken to court?

b) If it is legally valid to enter into an agreement so as to prevent them being individually removed as a director?

c) How they can ensure no outsiders gain any ownership of the company, and the implications to each of them if this was possible to establish?

Ok. I've highlighted parts of the scenario that are relevant in my opinion.

For section a) I have explained that Holmes' act can be absolved through ratification by the shareholders.
Yes. But what does it mean if an individual contracts 'on behalf' of a company before its incorporation - who is liable and why?

But this question may also be asking about internal disputes between the Shareholders/Directors. You need to consider the Shareholders' Agreements etc. Including quorums (three SH will mean for all resolutions one of them will effectively have a 'casting vote'. Whilst this is a good thing it might lead to conflict. How can this be rectified.

Consider their shareholdings. If in equal proportion, are any of them Minority Shareholders? Would a derivative action be appropriate? Is the Court likely to interfere with a Company's internal matters? What are the only two possible outcomes a Court will award if a derivative action is brought against Shareholders by a Shareholder?

Ratification occurs for ultra vires actions by Directors. Is this relevant to the question?

Watson would be held personally liable on the pre-incorporation contract correct - you need a statutory reference here and that Moriarty could possibly sue for the benefit of the contract you need an authority for this but again, who were the parties to the contract and who would be the 'proper claimant' and also due to limited liability neither him nor hypershop plc could be pursued by the employees for the skin disease We haven't been told there is limited liability for negligence (or have we - I couldn't see that). Who do employees sue? Remember that incorporated companies are bodies corporate and separate legal persons. To bring a personal claim, this has different requirements.

For section b) I have answered by stating that they could put an entrenched Define what you mean by 'entrenched' provision in the articles, adopt a weighting provision and also a quorum provision too which would bind them in ensuring that they will not be dismissed as directors. Care is needed - a Company cannot 'fetter its statutory rights' IE: you cannot put anything in the articles which are contrary to the CA 2006 or too onerous for the Company to fulfil (95% vote share required to pass a Special Resolution would not be allowed, for example).

This could be included elsewhere. The AA are a contract between the Shareholders and the Company. A Shareholders' Agreement however, is a contract between the Shareholders as individuals. Consider this document instead.

However I am struggling with section c), I do not wish to repeat myself with content from section b) however do you think I have included too much for the second section then as my course does not cover much more in regards to this topic

I don't understand section (c)! New Blooms is a Limited company which cannot therefore be offered to the public for equity securities. This therefore is not an issue.

I outlined possibilities in my first post. Beyond that, I'm out of ideas for it!

Remember to include authorities. This reads as an LLB level question - you may have case law, which you will need to include.

(edited 7 years ago)

Company minority shareholders URGENT HELP PLEASE

Quick Reply

Related discussions

Latest

Trending

Trending

Articles for you