14. Business Law - Company Shareholders

Sections 168(1) and 510(1) of the CA 2006 - Removal of director and auditor, respectively

Section 168(1) of the CA 2006 permits the company's shareholders to remove a director of their company by passing an ordinary resolution (over 50% votes in favour) at a shareholders' general meeting, regardless of any agreement to the contrary. Section 510(1) of the CA 2006 sets out a parallel provision allowing the company's shareholders to remove the auditor of their company by passing an ordinary resolution at a shareholders' general meeting, regardless of any agreement to the contrary. The auditor, if required, has a crucial role regarding approval of the company's accounts. It is therefore important that the owners of the company have confidence in the auditor and that they can take action if they do not.

Statutory contract created under s 33 of the CA 2006

Section 33 of the CA 2006 creates a special contract between the shareholder on the one hand and the company on the other, and also between the shareholders themselves on the basis of the company's constitution. We noted that 'membership rights' only, such as the right to vote or to a dividend (share of profit), were enforceable by a shareholder. The contract also imposes the obligation on the shareholder to observe the terms of the constitution, particularly the company's articles. The articles may set out partially or fully the rights which attach to shares in a company.

Court proceedings

Shareholders of the company have the right to go to court under the CA 2006 in relation to certain of the most important transactions which affect its share capital. For example, under s 721(1), any shareholder may apply to court to cancel a resolution approving the buy-back of shares out of capital.

Section 314(1) of the CA 2006 - Written statement

Shareholders of the company have the right under s 314(1) of the CA 2006 to circulate a written statement of up to 1,000 words about a proposed resolution or other business of a shareholders' meeting. In contrast to the written resolution in 5.6.3.7 above, this is not an attempt by the shareholders to have a decision taken but to have their views circulated among all shareholders. This right is available: (a) to shareholders holding at least 5% of the total voting shares in the company; or (b) to at least 100 shareholders who hold at least an average of £100 of paid-up share capital (CA 2006, s 314(2)). The second option will in practice be relevant only to much larger public companies, particularly those which are publicly traded, where 100 shareholders may not jointly own the required 5% of the company's shares.

Section 790M of the CA 2006 - Person with Significant Control (PSC) Register

The 'PSC register' sets out details of persons with significant control (PSC) in the company, to increase transparency about who actually owns the company, with the aim of increasing trust for third parties dealing with it. A 'person with significant control' is defined in s 790C of and Sch 1A to the CA 2006. Broadly, it means any individual who: (a) owns or controls more than 25% of the voting rights in the company; or (b) has the right to appoint or remove a majority of the board of directors of the company; or (c) has the right to exercise, or who actually exercises, significant influence or control over the company.

Burberry Group plc v Richard Charles Fox-Davies - 'not for a 'proper purpose'

The Court of Appeal held that a request to inspect the register was not for a 'proper purpose' in this case. In doing so it stated that the onus was on the company to show that the request was made for an improper purpose, and that the courts could take account of a guidance note from the Institute of Chartered Secretaries and Administrators (ICSA), which gives examples of proper and improper purposes, although this does not bind the court. The Court of Appeal also held the request to be invalid because the request (by a company seeking to trace missing shareholders for a fee) did not include all the required details, such as the shareholder's name.

Enlightened shareholder value

The concept of "enlightened shareholder value" requires directors to have regard to: - the likely long term consequences of any decision; - the interests of the company's employees; - the need to foster the company's business relationships with suppliers, customers and others; - the impact of the company's operations on the community and the environment; - the desirability of the company maintaining a reputation for high standards of business conduct; - the need to act fairly as between members.

Promoters - Responsibilities

The promoter is in a special position with regard to the as yet unformed company, as she will direct and oversee the initial stages of the formation of the company. The primary fiduciary duty of the promoter is not to make a 'secret profit' when forming the company. This might arise if, for example, the promoter bought property for the new company in her own name (or purportedly in the new company's name) before it was formed and then sold it at a profit to the company once it was formed, without disclosing the fact that she has made a profit.

Sections 116 and 117 of the CA 2006 - Request Inspection - 'either to comply with the request or to apply to the court to disallow the request (if it thinks the request is not for a 'proper purpose') and thus prevent inspection or copying of the register'

The register must be available for inspection to any shareholder free of charge and to any other person on payment of a fee (CA 2006, s 116(1)), and any person may make a copy in return for payment of a fee (s 116(2)). A request must be made to the company for inspection or copying in accordance with the requirements of s 116(4), including giving the person's name, address and the purpose for which the information is to be used. The company has five working days under s 117(1) of the CA 2006, either to comply with the request or to apply to the court to disallow the request (if it thinks the request is not for a 'proper purpose') and thus prevent inspection or copying of the register. The reason for these restrictions on access to the register is to protect the privacy of shareholders of a company if that company is involved in controversial work, such as that likely to provoke the ire of animal rights campaigners or antiabortion campaigners.

Ratification - Minority Shareholders

The right of the majority to pass an ordinary resolution to ratify wrong-doing in the company cannot be exercised where the approval of that action would be illegal or requires a special resolution under the CA 2006. For example, approving a dividend payment out of capital is prohibited by s 830 of the CA 2006, and amending the articles must be done by a special resolution under s 21 of the Act.

Voting Rights

The right to vote at shareholders' general meetings is an extremely important right for shareholders of a company, as this is the way in which they exercise their powers and take decisions affecting the company. Whilst a company has some flexibility to regulate their meetings in its articles, the CA 2006 provides a number of protections for the shareholders. For example, instead of attending general meetings and voting in person, a shareholder has the right, under s 324(1) of the CA 2006, to send a proxy (a stand-in) to attend, speak and vote (both on a show of hands and a poll) in his place.Shareholders may vote at general meetings in one of two ways: (a) on a show of hands; or (b) on a poll vote.All shareholders with at least 10% of the company's shares have the right to demand a poll vote (CA 2006, s 321(1)).

Foss v Harbottle - 'what should happen if the directors breach their duties to the company'

The rule in this case answers this question. The rule has two elements to it. First, it is for the company itself, rather than an individual shareholder, to bring a claim for a wrong done to the company (the 'proper claimant rule'). Secondly, the courts will not interfere with the internal management of the company acting within its powers, so where a wrong is alleged against the company, it is for a majority of the shareholders to decide whether to make a claim on behalf of the company or to ratify that wrong by passing an ordinary resolution (the 'internal management rule'). Although the principle of majority rule and the rule in Foss v Harbottle bring advantages to the running of a company, in practice they can also give rise to unfairness. For example, if the wrong-doing director is also a majority shareholder who ratifies his wrong-doing by passing an ordinary resolution. The director in this case has used his majority power as a shareholder unfairly to right a wrong. The same applies where a number of directors together constitute a majority shareholding at general meetings. Protection is therefore available to the minority shareholder in certain situations.

Introduction

The shareholders of a company are the owners of that company. In return for buying shares in the company (and therefore investing their money in it) the shareholders acquire certain rights. We saw that an entrepreneur may use a private limited company to run her business and that she may become a shareholder in order to take advantage of limited liability. In other words, as owner of and investor in the company, she is liable to pay only for her shares in full and not the debts of the company. As owners and investors the shareholders play a very important role in the life of a company, and so we shall now look at their role in greater detail.

Section 303 - Shareholders ability to call a general meeting

The usual way for general meetings to be called is by the directors. However, shareholders of the company holding at least 5% of the company's shares have the right to require the directors to call a general meeting of the shareholders (CA 2006, s 303(1)) by depositing a written request at the company's registered office. This right protects minority shareholders in a company, particularly where the directors and majority shareholders hold opposing views to the minority. It allows the minority to force a shareholders' meeting to be held which the directors would otherwise not call and, if desired, to have a resolution (decision) of their choosing voted upon.

Shareholders - Joining the Company

There are two requirements as regards becoming a shareholder of a private company limited by shares and sharing in the potential risks and rewards of being its owner. Under s 112 of the CA 2006: (a) the person must agree to become a shareholder of the company; and (b) his name must be entered in the register of members

Section 263 of the CA 2006 - sets out the rules which a court must take into consideration at the full permission hearing, in deciding whether or not to allow the shareholder to bring the derivative claim'

These include: (a) whether or not the shareholder is acting in good faith in bringing the claim; (b) the importance a director (who is under a duty to promote the success of the company under s 172 of the CA 2006) would place on continuing the claim; and (c) whether authorisation or ratification of the wrong by the company would be likely. The court must also have particular regard to any evidence put before it as to the views of shareholders who have no personal interest in the matter (CA 2006, s 263(4)). The court must refuse permission under s 263(2) if: (a) a person acting in accordance with the director's duty under s 172 of the CA 2006 (duty to promote the success of the company) would not seek to continue the claim; or (b) the act or omission forming the basis of the claim has been authorised or ratified by the company. Under s 239 of the CA 2006, the ratification must be passed by the shareholders without the votes of the director concerned (assuming he is a shareholder) or a person connected to him (eg, his wife or civil partner).

Sections 16(5) and 112(1) of the CA 2006 - The subscribers to the memorandum

Those persons who signed the memorandum of association as 'subscribers' automatically become the first shareholders of the company when the Registrar of Companies issues the certificate of incorporation. Their agreement to become shareholders is deemed given, and their name or names must be entered in the register of members. In a small new company, the subscribers will be the entrepreneurs who have registered their private company limited by shares in accordance with the procedures set out in order to run their business. On registration they become the owners of the company.

Sections 307 to 311 of the CA 2006 - Notice of general meetings

Under ss 307 to 311 of the CA 2006, all shareholders must be given proper notice of a shareholders' general meeting; and if this is not done, any business transacted at the general meeting is invalid.

PSC, cont.

Under the Register of People with Significant Control Regulations 2016 (SI 2016/339), there are three different levels of significant control which need to be notified and which need to be included in the PSC register: (1) where the person holds more than 25% but not more than 50% of the shares in the company; or (2) where the person holds more than 50% but less than 75% of the shares in the company; or (3) where the person holds 75% or more of the shares in the company.

Shareholders' agreement - Minority Shareholders

We have seen that shareholders may enter into a shareholders' agreement and, by so doing, will be bound contractually to act in accordance with the terms of that agreement. This can be used to give minority shareholders protection they would not otherwise have at a shareholders' general meeting

Section 113(1) of the CA 2006 - Register of Members

We have seen that, irrespective of the method by which a person acquires shares, and having agreed to become a shareholder, it is only on entry of a person's name in the register of members that he becomes a shareholder of the company. Every company must therefore keep a register of those persons who own shares in it.

Section 292(1) of the CA 2006 - Written Resolution

(1)The members of a private company may require the company to circulate a resolution that may properly be moved and is proposed to be moved as a written resolution. (2)Any resolution may properly be moved as a written resolution unless— (a)it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the company's constitution or otherwise), (b)it is defamatory of any person, or (c)it is frivolous or vexatious. (3)Where the members require a company to circulate a resolution they may require the company to circulate with it a statement of not more than 1,000 words on the subject matter of the resolution. (4)A company is required to circulate the resolution and any accompanying statement once it has received requests that it do so from members representing not less than the requisite percentage of the total voting rights of all members entitled to vote on the resolution. (5)The "requisite percentage" is 5% or such lower percentage as is specified for this purpose in the company's articles. (6)A request— (a)may be in hard copy form or in electronic form, (b)must identify the resolution and any accompanying statement, and (c)must be authenticated by the person or persons making it.

Benefits, cont.

(b) A shareholders' agreement can help protect a minority shareholder. Under the usual contractual principles, all contracting parties must agree to amend the agreement. Each shareholder therefore has an equal say. By contrast, under the CA 2006, shareholder power is determined by the proportion of voting rights in the company, eg the articles of the company may be changed by special resolution under s 21 of the CA 2006, which requires a 75% majority vote. The shareholders' agreement, however, might include a provision that all shareholders must vote to change the articles. In other words, the shareholders have agreed amongst themselves to raise the threshold from 75% to 100%. (c) The shareholders' agreement being a private contract does not need to be made publicly available.

Key company documentation

A company must send copies of certain important documents about the constitution and finances of the company to its shareholders. These include up-to-date articles and the certificate of incorporation. This ensures that the shareholder has access to the key rules governing the running of the company.

Section 112(2) of the CA 2006 - Buying shares from the company

A company will often seek to raise money by issuing new shares to shareholders in return for money or money's worth (such as property). The company might decide to issue these new shares to the existing shareholders, or it might wish to bring in outsider investors and therefore new shareholders. The procedure for buying new shares from the company is called the allotment of shares. The allottee (the purchaser) agrees to become a shareholder by formally applying to the company to buy the new shares, and becomes a shareholder when his name is entered in the register of members

Share certificate

A shareholder must receive from the company a share certificate within two months either of allotment (if new shares are being issued) under s 769(1) of the CA 2006, or of lodging the transfer with the company (if existing shares are being transferred from an existing shareholder) under s 776(1) of the Act. Under s 768(1), this document, which states how many shares the shareholder owns, is prima facie evidence of title to the shares (ie ownership). As such, it is crucial that the shareholder be given a copy of it by the company.

Section 51 of the CA 2006 - Promoters - Pre-incorporation contracts

Another potential problem which arises for the promoter is incurring expenses and liabilities on behalf of the company before it has been set up. For example, someone must pay the costs of registration, or the investors might wish to enter into a contract straight away before the company is formed. Prior to incorporation, of course, the company does not exist. Any attempt to act on behalf of the company before the date stated on the certificate of incorporation has no legal effect as the company may ultimately never be formed. A person (the promoter) cannot act as agent of a company which does not yet exist. The company, when it is incorporated, has no obligation under any contract purportedly made on its behalf before its registration. These contracts, if made, are known as 'pre-incorporation contracts'.

Section 306 - Court-ordered general meeting

Any shareholder (and also a director) may apply to the court under s 306 of the CA 2006 for an order that a general meeting be held, if for some reason it is impracticable for one to be held otherwise (eg, where other shareholders are refusing to attend general meetings and it is therefore impossible to hold one which is quorate, ie with the minimum required for valid decisions to be taken).

Section 122(1)(g) of the Insolvency Act 1986 - Winding up the company

Any shareholder may make an application under s 122(1)(g) of the IA 1986 to have the company wound up on the ground that it is 'just and equitable' to do so, provided he can prove that he has a 'tangible interest', ie that the company is solvent and he will therefore get back some or all of the money originally invested. The court has granted such applications in a wide variety of situations, for example where the management is in deadlock, where the shareholders have no confidence in the management, where the company can no longer carry on the business for which it was formed and, in a quasi-partnership situation (eg a company owned 50:50 by two shareholders who are also the only two directors) where one of those involved is being excluded from management.

Corporate shareholder

As a separate legal person it is perfectly possible for a company to own shares in another company. In fact it is very common in practice for a group of related companies to come into being as a business grows, and also for certain companies to invest in other unrelated companies in order to make money. The key difference between a corporate shareholder and a human shareholder is that a company cannot, of course, take decisions on its own and cannot turn up to shareholders' general meetings. In order to get round these difficulties, the CA 2006 requires a corporate shareholder to appoint a human to act on its behalf at general meetings. This may either be a proxy or a corporate representative. A corporate representative is appointed under s 323(1) of the CA 2006 by a resolution of the board of directors of the company owning the shares. The representative will then be allowed to exercise the same powers the company could exercise if it were an individual shareholder (CA 2006, s 323(2)), including the right to speak, vote (on a show of hands or poll) and appoint a proxy.

Joint shareholders

As with other types of property, it is possible to own a share jointly. In other words, more than one shareholder may own one shareholding, be that one or more shares. Under s 113(5) of the CA 2006, the register of members must state the names of each joint holder, but need set out just one address which will be valid for all the shareholders.

Typical clauses in a shareholders' agreement

Examples of what a typical shareholders' agreement might contain include the following: (a) An undertaking that the company will not amend its articles without the consent of all parties. (b) Similar undertakings regarding changes in capital or share capital structure. (c) Requirements on unanimity among shareholders for major decisions (eg the sale of the business). (d) Restrictions on borrowing and offering security over the company's assets. (e) Agreements regarding further financing for the company. (f) Agreement on dividend policy (ie sharing profit). (g) Any disputes between shareholders to be referred to arbitration. (h) The right for each party, or specific parties, to be a director and/or be employed or take part in management, or the right to nominate a specified number of directors. (i) Agreement not to compete with the company's business. (j) Agreement on treatment of intellectual property rights (if relevant). (k) Provisions dealing with the departure of a shareholder. (l) Provisions for the resolution of deadlock in decision-making. Note that there is no reason why a shareholders' agreement cannot include a non-shareholder as a party, for example a director of the company who is not a shareholder in it.

Section 994(1) - Unfair prejudice - 'complaint may be based on past, present or even anticipated future events, and the conduct may be unfairly prejudicial to all of the members or to only some or one of them' - Re a Company

If any shareholder feels that the company's affairs are being conducted in a manner which is 'unfairly prejudicial' to him, he has a right under s 994(1) of the CA 2006 to petition the court for a remedy. The complaint may be based on past, present or even anticipated future events, and the conduct may be unfairly prejudicial to all of the members or to only some or one of them. Whether what has happened, is happening or will happen amounts to 'unfair prejudice' is judged on an objective basis, from the perspective of an impartial outsider. The conduct must be both unfair and prejudicial. For the petition to be successful, the shareholder must also prove that he has been affected in his capacity as a shareholder, although this has been given a very wide interpretation (Gamlestaden Fastigheter v Baltic Partners Limited [2008] 1 BCLC 468). In order to establish unfair prejudice, it is not necessary to prove that the value of the shareholder's shares has been adversely affected, although frequently this will have happened.

VB Football Assets v Blackpool Football Club Ltd and Others - Unfair Prejudice

In this case, the court found that on the facts improper payments out of the company, a failure to pay dividends and deliberate exclusion from company decisions were unfairly prejudicial to a minority shareholder whereas changes to the articles of association were not.

Twycross v Grant - Promoters - Definition

Individuals who decide to set up the company are known as 'promoters' before their company has been established. A promoter is not defined in the CA 2006 but in guidelines set out in case law, such as in the above case: [A] promoter ... is one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose. A promoter therefore includes both those who take the steps to register a company under the CA 2006 and those who start or operate the business that the company will run. It does not, however, include solicitors or accountants, or other professionals who act for the promoter in the setting up a company.

Section 113(2 - 8) of the CA 2006 - Content and form of the Register

It must show: (a) each shareholder's name and address (s 113(2)(a)); (b) the date of entry into the register of each shareholder (s 113(2)(b)); (c) the number of shares owned by each shareholder (s 113(3)); (d) the class of share (if there is more than one) (s 113(3)(a)(ii)); and (e) the amount paid up on each share (s 113(3)(b)). The register must be updated whenever necessary to reflect any changes in the membership of the company, for example when a new shareholder joins the company or when an existing one leaves. If a shareholder leaves the company then the date the shareholder left the company must also be included on the register (s 113(2)(c)). The register of members is a very important document, as it records the past and current ownership of the company. It is therefore a criminal offence by the company and any officer of the company in default, punishable by a fine, if the register of members does not contain the correct information (CA 2006, s 113(7) and (8))

Section 112(2) of the CA 2006 - Inheriting shares

Shares may be bequeathed under a will (or, if none exists, will become subject to the rules of intestacy). The shares will, on the death of the shareholder, automatically vest in the personal representatives of the deceased. This is known as a transmission of shares (where the change occurs by operation of law). If this happens, the personal representatives may or may not be the same people as the ultimate beneficiaries of the shares (depending on the terms of the will or the intestacy rules). Therefore the transmittees (here the personal representatives) will either become the shareholders if they are the ultimate beneficiaries of the shares, or transfer the shares on to the ultimate beneficiary who will become the shareholder.

Section 77(1) - Entering information "as soon as is practical"

Assuming that any rights available to the directors under the company's articles to refuse to register a new shareholder are not exercised, the directors should ensure that the new shareholder's name and other details are entered on the register as soon as possible to allow him to take up his rights as an owner of the company. Section 771(1) of the CA 2006 states that a company must register a transfer as soon as is practical, and in any event within two months after the date the transfer is submitted to the company. The prospective new shareholder's status between the date on which he acquires the shares and the date on which his name is entered on the register of members, is that he is beneficially entitled to the shares but is not the registered legal owner of them.

Examples of Unfair Prejudice

Examples of potential unfair prejudice are: (a) non-payment of dividends; (b) directors awarding themselves excessive remuneration; (c) directors exercising their powers for an improper purpose (eg to 'freeze out' a minority shareholder); and (d) exclusion from management in a small company (eg one formed on the understanding that all those involved will share the running of the business and the profits).

Section 112(2) of the CA 2006 - Insolvency of the shareholder

If the shareholder is an individual and goes bankrupt then the bankrupt's property, including his shares, will automatically vest in a trustee in bankruptcy. This too is known as a transmission of shares (because the change occurs by operation of law).

Derivative claim - Minority Shareholders - Two stage process

In certain limited circumstances under the CA 2006, a minority shareholder is permitted to bring a 'derivative claim' in the company's name for a wrong committed against the company. This right is available, for example, where wrong-doing directors control the board and refuse to take action on behalf of the company. The minority should in this case have the right to take action on behalf of the company to protect the company. Such a claim is thus an exception to the rule in Foss v Harbottle. A claim may be brought by any shareholder under s 260(3) of the CA 2006 for an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director. There is no need to demonstrate any actual loss suffered by the company, or indeed any benefit gained by the directors.A derivative claim will comprise two stages: (a) a preliminary stage to decide whether the applicant is entitled to bring a derivative claim; (b) then, if successful, the hearing of the claim itself.

Re CF Booth Ltd (sub nom Booth v Booth) - Unfair Prejudice

In this case, it was held that there had been unfairly prejudicial conduct by a company's majority shareholders and directors maintaining a policy of paying no dividends while the directors were excessively remunerated

Sharafi v Woven Rugs Ltd - Unfair Prejudice

In this case, the conduct of a director in making payments to his personal company at the expense of the original company and its minority shareholders was held to be unfairly prejudicial under s 994.

Shareholders' agreement

It is also common for shareholders of a company to enter into a private contract with one another as to how they will behave in relation to their company (a shareholders' agreement). It is for each shareholder to enter freely into the contract if he decides it is in his interests to do so. Ideally, all shareholders would enter the agreement so that they are all bound by its terms, but they cannot be compelled to do so.

Single member company

It is possible to form a limited company with just one shareholder under s 7 of the CA 2006. This type of company is called a single member company.

Statutory protection

Minority shareholders have little direct power within the company, as they cannot be certain of passing any resolutions at a general meeting without the backing of other shareholders. But these minority shareholders are by no means powerless. They have all of the rights of shareholders (subject to minimum shareholdings in certain cases), and these may be useful in protecting the position of a minority shareholder within the company.

Inspection of company information

Minutes of all general meetings must be kept at the company's registered office or at its SAIL (if specified under s 1136 of the CA 2006). The company's shareholders must be permitted to read those minutes if they so wish (CA 2006, s 358(1)). The various company registers (eg the register of members, directors, secretaries (if applicable) and charges must be made available for inspection by the shareholders at the company's registered office or SAIL. In addition, other key information regarding the company must be made available for inspection by the shareholders, including the directors' service contracts, instruments creating charges and contracts relating to the buy-back of shares.

Limited liability

One of the greatest advantages of being a shareholder of a limited company is that the shareholder's liability is generally limited to paying the agreed price for his shares. Generally shareholders have no personal liability for the company's debts, however great those debts may be. This is because the company is a legal person in its own right. Any debts owed by the company are the responsibility of that company and not of any individuals involved in it.

Majority Rule

Power amongst the shareholders of a company is determined by voting rights, which in turn depends on the type of shares owned (see 5.9 below). Put simply, usually, the more shares owned, the more power a shareholder has. Shareholder power is exercised in a company on the basis of what is known as 'majority rule'. If there is a disagreement among the shareholders then the owner or owners of a majority of the voting shares will decide the outcome.The reality, however, is that most decisions affecting a company are taken by the directors who manage it on a day-to-day basis. The directors are subject to a raft of legal duties owed to the company.

Shareholder's Role

Shareholders provide some or all of the financial backing for the company. The money produced by the sale of the shares from the company to its shareholders enables the company to commence and continue in business. In exchange for leaving his money with the company (having bought the shares), a shareholder may receive an income payment from the company (a dividend) and may benefit from the capital appreciation of the value of his shares. Equally, a shareholder's shares may decrease in value if the company is not successful. Normally it is the directors who make the day-to-day decisions affecting the company (eg, art 3 of the model articles for a private company), and they will involve the shareholders and call them to a meeting only when the need arises under the CA 2006, for example because it is required under s 21 of the Act in order to change the company's articles or under s 188 to authorise a service contract for a director which gives him job security for more than two years.

Section 112(2) of the CA 2006 - Receiving a gift of shares

Shares, being property, may be given away instead of being sold. In such a case, the existing shareholder may choose to gift some or all of his shares. In either case, the recipient or recipients of the shares will become a new shareholder or shareholders in the company.

O'Neill v Phillips - essential elements of Unfair Prejudice - 'breach of the agreement between shareholders as to how the company is to be run'

The essential element of 'unfairness' is breach of the agreement between shareholders as to how the company is to be run.

The benefits of a shareholders' agreement

The importance of entering into the agreement is that it will bind all the parties to the terms, and the usual remedies for breach of contract will be available if any of the parties breaches the terms. A shareholders' agreement might typically include provisions as to what business the company can do, what matters require the shareholders' (rather than just the directors') consent, the transfer of shares, the issue of new shares and holding a directorship of the company. Some of these matters will also (or alternatively) be dealt with in the company's articles, and in that case any requirements would apply to all shareholders (including future ones). This may be advantageous, but there may be greater benefits from including them in a shareholders' agreement, depending on the circumstances of the particular company and shareholders involved, for the following reasons: (a) A shareholders' agreement can deal with matters which are personal to the shareholders. Including such personal rights in a shareholders' agreement means that they become contractually enforceable, whereas this would not be the case if they were included in the company's articles and reliance placed on the contract under s 33 of the CA 2006.

Shareholder's Contractual Rights

The shareholders of a company have contractual rights which flow from two main sources. The first is the statutory contract created under s 33 of the CA 2006. The second are rights arising under a shareholders' agreement made between the shareholders.