THE ISSUES AND RIGHTS IN THE LIMITED COMPANIES

THE ISSUES AND RIGHTS IN THE LIMITED COMPANIES

INTRODUCTION

A company is a place where each person working in it is important, each opinion valuable and each decision life changing. In such a place one group of important people you would always come across are the shareholders. They provide finance and hence could be called the owner of the companies. As a result they benefit from great rights in the company. But at the same time there is often a discrimination between the majority and minority shareholders which leads to conflicts between themselves.

Shareholders have some rights over the company. Some of these rights are the voting power on major decisions, ownership upon a portion of the company, the right to transfer the ownership and many more. They are also legally entitled to recieve dividends and profits from the company. Other rights to sue or inspect corporate books and records also apply but these are only some common rights and they tend to differ from company to company.

Company law rules generally provide that the directors of the company are responsible for the handling of the business and making maximum decisions. Only a few matters are discussed with the shareholders even though they have important rights to intervene. One such is the right to appoint and remove directors. Thus directors are like the right hands of the shareholders.

Shareholders can be divided into two major divisions – the majority and the minority shareholders. As the name suggests the majority shareholders hold more shares compared to that of the minority and hence have a tendency to see the company as their own and do what they like giving the minority less opportunity. Even though the company law tells us that both the majority and minority shareholders are important but they are still not given full attention. If done it would help in the smooth functioning of the company.

THE ISSUES AND RIGHTS IN THE LIMITED COMPANIES

In a company the basic principle is such that ‘the will of the majority prevails or majority is supreme’. It is the general rule that the minority are bound by the rules set by the majority shareholders. This leads to a situation of oppression of minority by the majority. Oppression in company law occurs when the ownership rights of a person are violated or he is not given fair play towards his right. However the minority is not completely incapacitated as the Companies Acts have always contained provisions giving a minority shareholder leverage to curb the excesses of the majority.

In a limited company the greater the shareholding of an individual, the greater are his/her rights and the greater is his/her power within the Company i.e more shares, more power.This is so not only because the larger the shareholding the more likely it is to represent a controlling interest, but also because the Companies Act affords greater rights and power to an individual as the size of his/her shareholding increases. For example, a shareholder owning 5% of a company has the right to have an item placed on the Agenda for discussion at a General Meeting and, once the shareholder’s ownership reaches 10% of the company, he/she has greater rights including the right to force a formal audit of the annual accounts.

In the great majority of Limited Companies, a shareholding in excess of 50% of the issued share capital will be enough to control the company, dictate the makeup of the Board of Directors and to be able to do most of the acts necessary to run the company in its everyday business.

It is possible for those owning less than 50% of a company to protect themselves from being at the mercy of those holding over 50% of the shares in the company and this is one reason why shareholders should give serious consideration to agreeing a shareholders’ agreement or adopting professionally drafted Articles of Association.

The percentage rights of the shareholders in a private limited company:

100% shareholders right is that they can do anything they want. They can pass an election resolution which is passed by all the members of a private company entitled to attend and vote at the general meeting. Not less than 21 days notice specifying the intention to propose an elective resolution must be given to shareholders. An elective resolution by a private Company must be made by resolution of the Company in a general meeting and may be made for the purposes of Election to grant authority to directors to allot shares for an indefinite period or for a fixed term greater than 5 years.

95%  shareholders have the right to hold a General Meeting on short notice (i.e less notice to the members than would normally be required)

75%[1] shareholders can pass a special resolution which is passed by 75% of the members present in person or by proxy and entitled to vote at a general meeting. Not less than 21 days notice specifying the intention to propose the resolution as a special resolution must be given to the members. The following are examples of matters for which a special resolution:

  • alteration of the articles
  • change of name
  • reduction of share capital
  • authority for allotment of equity securities by the directors without restriction or subject to modified restrictions
  • re-registration of:

    an unlimited company as a limited company

  • a private company or an unlimited company as a public company; or
  • a public company as a private company
  • approval of certain off-market purchasers by a company of its own shares
  • resolution of a company for winding up by the court; or

for voluntary winding up

50+[2]% shareholders can pass an ordinary resolution which is not defined by Companies Act 2006 but is one passed by a simple majority (i.e 50.01%) of the votes cast by the members entitled to vote and present personally or by proxy at the meeting.

Decision made by the ordinary resolution are:

  • any item of routine business requires approval of the matter by members in general meeting
  • exercising authority to alter (but not reduce) the authorised share capital
  • provide or renew the directors’ authority to allot relevant securities
  • payment of a final dividend
  • capitalisation of reserves
  • approval of transactions between the Company and “connected” persons
  • removal of a director (providing special notice of the resolution has been given).

25+% shareholders are not allowed special resolution.

10% shareholders have the right to have the Company’s Annual Accounts audited.

5+% shareholders have the right to refuse to consent to short notice, to circulate a written statement and to call a General Meeting.

Any% shareholders have

  • The right to ask the court to call a General Meeting
  • The right  not to be unfairly prejudiced
  • The right to have the company wound up provided that it is just and equitable to do so
  • The right to vote
  • The right to receive notice of general meetings
  • The right to a dividend if one is declared
  • The right to a share certificate
  • A members right to have his name entered on the Register of Members
  • The right to a copy of the Annual Accounts
  • The right to an AGM
  • The right to inspect Minutes of General Meetings
  • The right to vote
  • The right to inspect the register of members and index of members’ names without charge
  • The right to require a copy of the register of shareholders within 10 days of the request subject to a charge
  • The right to inspect the register of directors service contracts without charge[3]

RIGHTS OF MINORITY SHAREHOLDERS

The problems related to a director’s fiduciary duty to act in the best interests of the company, whether they consider the company as a separate legal entity, or do they consider the shareholder’s interests may lead to mismanagement in the company. However this can be resolved by asking for a petition in the court.

A minority shareholder is not entirely powerless. The Companies Acts have always contained requirements giving a minority shareholder leverage to control the excesses of the majority. However, generally these requirements are small use against a majority shareholder determined to carry out their plans. In these circumstances, the minority shareholder will need to apply to the court for protection and assistance. They are:

v     Derivative Claims

In many circumstances, a minority shareholder may be affected by a wrong done, not to them personally but to the company by the majority. For example: diversion of contracts from the company to the directors personally. The minority shareholder faces an impossible task in attempting to force directors into bringing an action against themselves. In some circumstances the courts will allow a minority shareholder to bring a claim in the company’s name. The minority shareholder has no greater right to relief than the company would have were it to bring an action itself. Any financial award accrues to the company itself.

v     Personal Claims

All shareholders have rights that they can enforce against the company and other shareholders whether or not a formal shareholders’ agreement has been reached. These include objection to alteration to the Memorandum and Articles of Association, the variation of class rights, the giving of financial assistance and the enforcement of directors’ duties, prevention of ultra virus transactions and in relation to certain take-over offers.

The Memorandum and Articles of Association represent a statutory agreement between the shareholders and the company as to how the company is to be run. The court will enforce a breach of that agreement. An otherwise proper attempt to vary the articles can be actionable if it affects rights already in existence or the majority has not acted in good faith.

v     Unfair Prejudice

The most important protection that a minority shareholder has is the right to petition the court for an order under S459 of the Companies Act 1985. This action is founded on an allegation that the affairs of the company are being conducted by the majority in a manner unfairly prejudicial to the interests of members generally, or to some part of its members (including the applicant).

The relief sought is normally an order that the other shareholders (or the company itself) purchase the minority shareholding at fair value. An order providing for a ‘clean break’ will be preferable.

However, the court has complete discretion and, if the circumstances warrant, can even order the minority shareholder to purchase the shares of the majority.The court can, and will, make orders to adjust the unfair prejudice that the minority shareholder has suffered. For example, the court may order the company to be valued on the basis that the benefits taken by director/shareholders in breach of fiduciary duty be repaid. The court will also decide at what date the company should be valued and whether there should be any discount to reflect the minority shareholding.The court can also make an order regulating the conduct of the company’s affairs in the future; require the company to do or refrain from any act and authorise civil proceedings to be brought in the name of the company.

WHAT DOES IT MEAN BY THE SMOOTH FUNCTIONING OF THE COMPANY?

Smooth functioning of a company is where the level of conflicts between people working in it and also people running them are minimal and each individual is pleased to work there. As a result it leads to higher productivity of each person in the complany causing the company to function smoothly without any hamper in growth of the company. Generally smooth functioning is where one hire workers properly, build a strong team and reward each person for their work, delegate tasks to everyone properly, communicate openly and encourage innovation and creation.

There are certain ways thorough which this smooth functioning of a company can be encouraged. There should be regular meetings of shareholders other than the statutory meeting, annual general meeting, extraordinary general meeting and class meeting. This would cause shareholders to gain more knowledge of what is going on in the company and hence make better decisions – whether it be the majority shareholder or minority.

The shareholders have the sole right to choose the board of directors and hence they are able to choose the right hands who would control their company. Thus if majority and minority shareholders have a proper balance of rights among themselves they can choose these important people together. If the majority shareholders are given higher priority in these matters then there maybe impartiality in choosing the board of directors. They may choose people who are not eligilble for the post but are preferred by the majority shareholders. Thus if both majority and minority shareholders are able to choose it would be a fair choice.

In a close corporation shareholders owe to one another a duty of utmost good faith and loyalty. The majority often at times use their power and violate this duty when they “freeze out” the minority. Freeze outs have been defined as including where the squeezers:
• Refuse to declare dividends.
• Drain off the earnings in high salaries and bonuses to the majority shareholder officers and perhaps to their relatives.
• Drain off the earnings in high rent by the corporation for property leased from majority shareholders.
• Deprive minority shareholders of corporate offices and of employment by the company.
• Cause the corporation to sell its assets at an inadequate price to the majority shareholders.

In such a case the minority could file a case against the majority shareholders. The proper remedy of a freezeout is to restore the minority shareholder as closely as possible to the position s/he would have been if there had been no wrongdoing. As the wrongdoing is mostly a denial by the majority’s reasonable expectations of benefit, the remedy should restore to the minority shareholder those benefits s/he reasonably expected but was not able to receive due to the breach by the majority shareholders.

HOW SHAREHOLDERS DISRUPTS ARE RESOLVED AS IT IS ESSENTAIL FOR THE SMOOTH FUNCTIONING OF THE COMPANY?

Some minor disputes can be resolved informally, without consuming any resources, and in relation to such disputes there should be no requirement for the intervention of a Shareholders’ agreements. However, the more serious disputes, and those involving a number of shareholders will require a structure that forces a conclusive outcome.  A common way that this might be dealt with in a Shareholders’ agreements is by providing a mechanism by which shareholders can resolve potential disputes.  A Shareholders’ agreements can also provide an exit procedure that can be called upon where an amicable agreement cannot be reached, and this has the effect of enabling shareholders to get out of the company with as little disruption as possible.  This kind of procedure is only effective if it is well drafted.

Shareholders’ Conflict with Managers

Some managers argue that without their leadership and managerial ability, the corporation would not have been as profitable. The shareholders on the other hand argue that without their money, the corporation would not have been able to invest in its growth, and therefore, would not have reached that level of prosperity. Hence, conflict of interest arises,managers tries to seek benefits for themselves instead of the overall stakeholders and shareholders wants to maximise their share price.

Conflicts may also arise when the managers are also shareholders. This may lead a particular manager to push the opposite way of his/her position. For instance, if a shareholder manager would get more money from a stock dividend than from a bonus, this shareholder manager might vote in favor of a stock dividend, not because he/she believes that stockholders should be rewarded for their investment, but because it will mean more money for that particular manager. What if only that one manger is a stock holder?

This issues do not particularly have any answers but however for the smooth functioning of the company, principle of management is necessary as these principles serve as guidelines for decisions and actions of managers. They are derived through observation and analysis of events which managers have to face in practice. Like, if you do not give a dividend to the shareholders, you may find your stock undervalued by dissatisfied stockholders and your stock as a less attractive purchase. If you do not give your managers a bonus, managers may leave your company or not work as hard as they normally do. Usually, managers are under contract, therefore their job performance is linked to their continued employment,

CONCLUSION

The Companies Act of 1994 provides satisfactory protection for minority shareholders, especially in Section 233. However, the main problem is that most shareholders are unaware of Section 233 and othe minority shareholders rights. This recommends increased minoroty shareholder participation in the company and have a number of provisions for their protection. One as such is that minority shareholders with atleast 10 percent of shares may take court action against the company. These have tremendous power for the minority shareholders which are most oblivious about.

The majority shareholder frequently acts as administrator of the company.  This usually leads to conflicts involving majority and minority shareholders (minority shareholders hold at least 5% of a company’s shares, unless the articles of association provide for a lower percentage). Minority shareholders are interested in preventing the shareholder administrator from conducting financially profitable transactions which may disadvantage the company.

As shareholder administrator can vote against its dismissal creates difficulty in that minority shareholders are unable to dismiss the shareholder administrator by way of decision of the general assembly. As per the new law, minority shareholders may not approach the courts for dismissal of the administrator after such dismissal has been rejected by the majority shareholders in the general meeting

However the law was created that whenever a shareholder administrator requires approval for transactions that are financially or otherwise advantageous to it, the shareholder administrator will be excluded from the vote and will not be calculated in the quorum of the shareholders’ meeting. This rule strengthens the position of minority shareholders, giving them the opportunity to block the transaction where they deem that it is not in the company’s interest for the smooth functioning of the company.

BIBLIOGRAPGY

1. Dr Rosanna C.( 2005). HOW DO YOU PROTECT YOUR SHAREHOLDING? BENEFITS OF A WELL-DRAFTED SHAREHOLDERS AGREEMENT.

2. (2010). Conflict of interest involving shareholder administrators.International Law Office.

3.      Iman A. & Lynn S.(2009). Fiduciary Duties for Activist Shareholders. Stanford Law Review.

4.      (2004).Misconduct of directors is good ground for winding up of a company. Dhaka: The Daily Star.

5.      Rights of shareholders. Dhaka: Beximco Pharma

6.      Scott I. U.(2010). Minority Oppression: Conflicts of Interest: New Jersery Law Blog.

7.      Caroline H(n.d). THE PROTECTION OF MINORITY SHAREHOLDERS. University of Hong Kong

8.      Retrieved from http://www.shareholdersdisputes.com/groundsfordispute.html

[1] Pass an Extraordinary Resolution

An ‘extraordinary resolution’ is a resolution passed by a majority of not less than 75% of members entitled to vote in person or, where proxies are allowed, by proxy at a general meeting. Notice specifying the intention to propose the resolution as an extraordinary resolution must be given.

An extraordinary resolution is required for the following:

(a) all resolutions proposed at class meetings, as required by the articles;

(b) the variation of class rights in certain cases;

(c) a resolution for voluntary winding up of a company to the effect that it cannot by reason of its liabilities continue its business and that it is advisable to wind up;

(d) the grant to a liquidator in a members’ voluntary winding up of authority to compromise certain claims.

[2] Ordinary Resolution With Special Notice

Special notice of the intention to propose certain ordinary resolutions must be given to the company. These resolutions requiring special notice include those proposing:

(1) The removal of a director

(2) The appointment as auditor of a person other than the retiring auditor

(3) The removal of an auditor before the expiration of his term of office

[3] Affected shareholders may not vote at shareholders’ meetings to decide on issues such as:

  • the shareholders’ activities;
  • the shareholders’ release from obligations;
  • the company’s pursuit of a claim against a shareholder; and
  • new benefits for shareholders.

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