Company law: how many votes do you need?
by Roderick Ramage, solicitor, www.law-office.demon.co.uk
first published in New Law Journal (firstname.lastname@example.org) on 10 October and 7 November 1997
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
The holder of shares in the capital of a company carrying in aggregate over 50% of the voting rights, in normal circumstances, has control of that company. The pattern of control may differ from company to company where there are several classes of shares each with different voting rights. This article is not however concerned with such differences. Its purpose is to identify provisions in the company law legislation relating to:
The examples of the exercise of minority rights, mentioned in this article are set out here under 39 headings, so far as is practical, in the order of the size of minority capable of exercising them, starting with non specific minorities (from just one member up to just under 50%) and continuing with specific minorities from 5% to 25%. This order is not strictly adhered to, however, where logic requires a different arrangement. No attempt is made to analyse the rights of the minority in detail: all that is done is to summarise them and refer to the relevant sections of the Companies Act 1985 ("the Companies Act"), the Companies Act 1989 ("the 1989 Act"), the Insolvency Act 1986 ("the Insolvency Act") and Table A (in the Companies (Tables A to F) Regulations 1985, SI 1985/805). References to section numbers are to the Companies Act unless otherwise stated. References to "meetings" mean meetings of the company and not directors or creditors.
1 change of status from limited to unlimited (one member or more)
Section 49 of the Companies Act sets out the manner in which a limited company may be re-registered as unlimited. Amongst the documents to be lodged with the Registrar of Companies is the prescribed form of assent to the company being registered as unlimited subscribed by or on behalf of all of the members of the company: s49(8)(a). A minority no matter how small, can prevent re registration of a limited company as unlimited. A former member at the time of the application for re-registration is protected under s78(2) of the Insolvency Act.
2 quorums at meeting (one member or more)
A minority (or for that matter majority) of shareholder can paralyse or at least delay the proceedings of a company by refusing to attend its meetings, if by so doing it is impossible for the remainder of the members to form a quorum. Section 370(4) states that, so far as the articles of the company do not make other provision, two members personally present shall be a quorum, and by s370A one person present in person or by proxy shall be a quorum if the company has only one member, notwithstanding anything to the contrary in the articles. Table A reg 40 states that no business shall be transacted at any general meeting unless a quorum of members is present and that two persons entitled to vote, being a member, a proxy for a member or an authorised representative of a corporation shall be a quorum.
3 meetings called by the court (one member or more)
If for any reason it is impracticable to call or conduct a meeting of the company in the manner prescribed by the company's articles or the Companies Act, the court may order a meeting to be called and conducted in such manner as the court thinks fit (inter alia) on the application of any member of the company who would be entitled to vote at the meeting: s371.
4 meeting called by the secretary of state (one member or more)
If default is made in holding a meeting, the secretary of state may, on the application of any member, call or direct the calling of a meeting: s367.
5 elective resolution (one member or more)
An elective resolution under s379A is not effective unless 21 days’ written notice is given of the meeting and it is agreed to by all the members entitled to attend and vote at the meeting.
6 winding up because it is just and equitable to do so (one member or more)
Section 122(1) of the Insolvency Act states that a company may be wound up by the court if "(g) the court is of the opinion that it is just and equitable that the company should be wound up". The petition for winding up may, by Insolvency Act, s124(1), be presented by (inter alios) any contributory except those excluded by ss(2). There is a number of circumstances in which this ground for winding up has been applied, but for the purpose of this article it is sufficient simply to state that one of the circumstances is that a majority shareholder has acted oppressively to a minority, who is entitled to petition the court for a winding up order. A winding up on just and equitable grounds may not be available if another remedy is available to the petitioner, who in the court’s opinion is not acting reasonably is seeking a winding up instead of the other remedy: Insolvency Act, s125(2).
7 protection of members against unfair prejudice (one member or more)
Winding up a company may mean the loss of a company's goodwill, know how or even its business, with the result that the individual assets of the company would be worth less than the company as a going concern, so that winding up will not be in the interests of either a majority or the minority and therefore the Companies Act supplies an alternative remedy, which, unlike s210 of the Companies Act 1948, is not linked to the right to petition for winding up, except indirectly by s125(2) of the Insolvency Act. Part XVII of the Companies Act (ss459 to 461) enables the court to make such an order as it thinks fit for giving relief, including an order to regulate the conduct of the company's affairs in the future or for the purchase of the shares of any member of the company by other members or the company itself or otherwise, if the court is satisfied that the company's affairs are being or have been conducted in a manner, which is unfairly periodical to the interests of its members generally or some part of them. Whilst the corresponding part of the Companies Act 1948 was headed "minorities", this term is nowhere mentioned expressly in that or the current legislation, except ss429 and 430A (see item 19 below). Thus strictly this remedy may be available to a majority shareholder if in the circumstances he is being oppressed by those in actual control. For example special voting rights as to the election of directors coupled with the holding of the chairmanship and a casting vote could put a minority shareholder in effective control of the company's affairs.
8 rights of contributors in insolvency (one member or more)
The Insolvency Act contains numerous instances in which any one or more, creditor, contributor and other person interested may (in appropriate circumstances) take or institute various steps or matters. Those in which a member may act are listed briefly below by section number:
s27(1) to present a petition to the court on the ground that the administrator’s management is or has been prejudicial to the interests of the creditors or members;
s92(2) to convene a general meeting to fill a vacancy in the office of liquidator;
s111(2) to dissent from a distribution in kind under Insolvency Act s110 and require to liquidator to abstain from carrying the resolution into effect or to purchase his interest;
s112(1) to apply to the court to determine questions and exercise powers of the winding up;
s116 to cause a company in voluntary winding up to be wound up by the court;
s124(1) to present a winding up petition to the court;
s126(1) to apply for a stay of proceedings;
s139(4) to apply to the court for an order the person nominated by the contributors or some other person instead of the person nominated by the creditors;
s147(1) to apply to the court after the order for a stay of proceedings;
s167(3) to apply to the court in a winding up by the court with respect the exercise of the liquidator's powers;
s170(2) to apply to the court in respect of a liquidator's default in making returns etc;
s201(3) to apply to the court to defer the date of dissolution;
s212(3) to apply to the court to examine the conduct of delinquent directors, liquidators etc.
s218(1) and (6) to apply to the court in respect of criminal offences of any officer or member of the company;
In addition under s195(1) the court may regard to the wishes of creditors or contributories and call meetings to ascertain them.
9 declaration that dissolution is void (one member or more)
Where a company has been dissolved, the court may at any time within two years, on an application made by (inter alios) any person who appears to the court to be interested, make an order declaring the dissolution to have been void: s651.
10 application for restoration to register (one member or more)
Any member or creditor who feels aggrieved by a company having been struck off the register may apply to the court within 20 years for an order that the name of the company may be restored to the register: s653.
11 short notice at annual general meetings (one member or more)
Section 369 (and s378 for meetings at which a resolution is to be proposed as a special resolution) of the Companies Act sets out a minimum length of notice to be given of meetings of a company. Section 369(3)(a) states that an annual general meeting may be called with shorter notice if all members entitled to attend agree to the short notice. Thus any minority however small can prevent an annual general meeting being called on less than 21 days' notice
12 short notice at other meetings (5% or 10%)
Section 369(3)(b) of the Companies Act states that a meeting other than an annual general meeting may be called by shorter notice if it so agreed by the "requisite majority", which by s369(4) is a majority holding not less than 95% in nominal value of the shares giving the right to attend and vote at the meeting. Section 378(3) gives a similar right where a resolution is to be proposed as a special resolution. By the same subsections a private company may by an elective resolution substitute not less than 90% for 95%. Here a minority of over 5%, or up to 10% if an appropriate elective resolution is in force, can prevent a meeting being called by less than the statutory period of notice.
13 members' resolutions (5%)
Section 376 of the Companies Act enables a minority of members on a requisition to require a company to give notice of the next annual general meeting, of any resolution intended to be moved at that meeting and circulate a statement about it. The number of members necessary to make such a requisition is either:
14 meetings requisitioned by members (10%)
A minority of members, holding at the date of the deposit of the requisition not less than 1/10th of such paid up capital of the company as at the date of the deposit carries the right of voting at general meetings of the company, may under s368, by requisition to the directors, require the latter to convene an extraordinary general meeting of the company, and if the directors fail to convene the meeting within 21 days, the requisitionists, or any of them representing more than one-half of their voting rights, may themselves convene the meeting. This applies notwithstanding anything to the contrary in the company’s articles.
15 meetings called by members (10%)
Unless the articles of the company make other provision, two or more members of the company holding not less than 1/10th of the issued share capital of the company may call a meeting: s370(3). Table A makes no other provisions.
16 meetings called by liquidator on request of members (10%)
Where a company is being wound up by the court, one tenth in value of the creditors or contributories may request the liquidator in writing to summon a general meeting for the purpose of ascertaining their wishes: s168(2) of the Insolvency Act.
17 the right to demand a poll (five members or 10%)
Section 373 of the Companies Act makes void any provision in the articles of the company making ineffective a demand for a poll at a general meeting of a company on any question other than the election of the chairman of the meeting, if the demand is made by one of the following categories of members of their proxies each of which may be a minority:-
This section is reflected by regulation 46 in Table A.
18 maximum non-cash transfer to plc (10%)
During the two years from the issue of its certificate to do business, a public limited company formed as such may not agree for the transfer to it of non-cash assets from a subscriber to its memorandum if the consideration to be given by the company is equal in value to 10% or more of the company’s nominal share capital. In the case of a company re-registered as public, the two years runs from the sate of re-registration and the restriction applies to every person who was a at the date of re-registration.
19 acquisition of shares (10%)
Part XIIIA of the Companies Act headed "takeover offers" states in s429 that, where on a takeover the offeror has acquired or agreed to acquire not less than nine tenths in value of the shares to which the offer relates, he may give notice to any non-accepting shareholder (being the remaining 1/10th or less) that he desires to acquire those shares, and, unless on an application made by dissenting shareholder under s430C the court thinks fit to order otherwise, shall be entitled to and bound to acquire those shares on terms on which the shares of the approving shareholders are to be transferred. Section 430A gives a reciprocal right to the non-assenting shareholders to require the acquiring company to acquire the shares in question on the same terms. In this section the proportion of 9/10ths acquired or agreed to be acquired by acceptances of the offer can be with or without other shares, which the offeror has acquired or contracted to acquire.
20 investigation into person interested in shares (10%)
Members holding not less than one tenth of the paid up capital may require a company to exercise its powers under s212 to investigate whether a person is or within the last three years has been interested in shares in the company’s capital: s214(1).
21 Secretary of State investigation (10% or one fifth)
The Department of Trade and Industry) may, under s431 appoint one or more inspectors to investigate and report on the affairs of a company on the application of not less than 200 members of the company or the holders of not less than 1/10th of its issued shares. In the case of a company without a share capital the application shall be by not less than 1/5th in number of its members on the company's register of members.
22 rights of creditors in insolvency (10%)
Under the Insolvency Act 1986, one tenth in value of the creditors have the rights listed below:
s17(3) to require an administrator to summon a meeting of the company’s creditors;
s141(2) to require the liquidator to summon a separate general meeting of the companies creditors and contributories to determine whether to establish a liquidation committee (s142(3) in Scotland);
23 significant holdings in undertakings (10%)
Schedule 5 (s231) specifies the information about related companies to be disclosed in a company’s accounts. Part I deals with companies not required to prepare group accounts and Part II to those required to do so. In both parts particulars of a significant holding must be given. A holding is significant if it amounts to 10% or more of the nominal value of any class of shares in the undertakings or the amount of the holding exceeds one tenth of the company’s assets: paras 7(2) and 23(2)
23A audit of dormant companies accounts (10%)
A dormant company is automatically exempt from the audit requirement unless holder of not less than 10% of a company’s issued shares, or 10% of the number of members if it has no share capital, by notice to the company require it to obtain an audit of its accounts: s249B(2) inserted by Companies Act 1985 (Audit Exemption) Regulations 1994, SI 1994/1935.
24 merger accounting (90% and 10%)
The conditions for accounting for an acquisition as a merger include that at least 90% of the nominal value of the relevant shares in the company acquired are held by the parent company and its subsidiaries and the value of the consideration other than the issue of equity shares by the parent company and its subsidiaries did not exceed 10% of the nominal value of the shares issued: schedule 4A, para 10(1).
25 change of memorandum of association (15%)
26 variation of shareholders' rights (15%)
If the rights attached to any class of shares are at any time varied in accordance with a company’s the memorandum and articles of association of, the holders of not less than 15% of the issued shares of that class may apply to the court to have the variation cancelled: s127. The necessary conditions are that the capital of the company is divided into different classes, its memorandum and articles of association provide for the variation of the rights of any class, the applicants are persons who did not consent to or vote in favour of the variation and that the application is made within 21 days after the consent was given or the resolution passed.
27 director’s association with body corporate (one fifth
For the purposes of Part X of the Companies Act (enforcement of fair dealing by directors), s346(4) enacts that a director of a company is associated with a body corporate if he and the persons connected with him are interested in equity shares of a nominal value equal to at least one fifth of that capital or control more than one fifth of the voting power at a general meeting. See also Schedule, 13 Part I.
28 "associated" for the purpose of group accounts (20%)
By schedule 4A para 20, an associated undertaking, to be included in consolidated accounts although it is not a subsidiary of a company, is one over whose operating and financial policy the company exercises a significant influence. A significant influence is assumed of the company holds over 20% of the voting rights in the other undertaking unless the contrary is shown.
negative control (25%)
Where an extraordinary or a special resolution, which will be referred to in the next two paragraphs, is necessary for any purpose, a minority of over 25% is sufficient to prevent the resolution from being passed. This is sometimes called "negative control".
29 extraordinary resolutions (25%)
A resolution shall be an extraordinary resolution when it has been passed by a majority of not less than three quarters of such members as, being entitled to do so, vote in person or by proxy at a general meeting of which the notice specifying the intention to propose the resolution as an extraordinary resolution has been duly given: s378(1). The only circumstances in which an extraordinary resolution is required are under the following sections:
Companies Act 1985
s125 (at a separate meeting of members of a class of shares) to sanction a variation of rights attached to that class of shares otherwise than by the memorandum and the articles contain no other provision for alteration;
s84 to resolve that it cannot by reason of its liabilities continue its business and that it is advisable to wind up;
s165 to permit the liquidator to exercise certain powers under Part I of Schedule 4 of the Insolvency Act in the case of a members' voluntary winding up; and
Table A, Companies (Tables A to F) Regulations 1985 (SI 1985 No 805)
reg 117 to sanction the division by the liquidator of a company of the whole or part of its assets among the members in specie.
30 special resolutions (25%)
By s378(2) of the Companies Act a resolution shall be a special resolution where it has been passed by such a majority as is required for the passing of an extraordinary resolution and at a meeting of which not less than 21 days notice has been given. The Companies Act requires a company to pass a special resolution for the following purposes.
s2(2) to alter its memorandum, if its registered office is in Wales, to state that its registered office is to be situated in Wales;
s4 to alter its articles with respect to its objects;
s9 to alter its articles;
s17 to alter any condition in its memorandum, which could have been in its articles;
s28 to change its name;
s35(3) to ratify action by the directors which, but for s35(1), would be beyond the capacity of the company;
s43(1)(a) for a private company to re-register as a public company;
s48(2) modification of ss 43 to 47 in their application to unlimited companies re-registering as public companies;
s51(1) to re-register an unlimited company as limited;
s53(1)(a) to re-register a public company as private;
s95(1) to authorise the directors to allot shares as if s89(1) (pre-emption rights) did not apply or applied with modifications as determined by the directors;
s95(3) to renew an authority under s96(1);
s120 to determine that any part of a company’s capital not already called up shall not be called up except on a winding up (reserve liability);
s135 to reduce its capital (alternative provisions may be made in its articles);
s155 to approve the giving of financial assistance by a private company for the acquisition of shares;
s164(2) to authorise a contract for an off-market purchase by a company of its owns shares;
s165(2) to approve a contingent contract by a company for the purchase of its own shares;
s167(2) to approve an agreement by a company to release its rights under a contract to purchase its own shares;
s173(2) to approve a payment by a company out of capital to redeem or purchase its own shares;
s250(1) if a dormant company, to make itself exempt from the obligation to appoint auditors;
s307 to make the liability of its directors unlimited;
s308 to approve an agreement enabling a director or manager to assign his office;
s322A(6) to ratify a transaction involving directors, which would otherwise be voidable (but may be capable of being ratified by ordinary resolution or otherwise);
s690(1) to enable such a company to alter its form of constitution by substituting a memorandum and articles for a deed of settlement;
sch 21 6(2) to enable a company, not formed under the Companies Act but registered under s680 of it, to adopt Table A;
Table A, Companies (Tables A to F) Regulations 1985 (SI 1985 No 805)
reg 34 to reduce its share capital, capital redemption reserve and share premium account;
reg 70 to give directions to the directors about the management of the company’s business;
s84(1)(b) to wind up the company voluntarily;
s110(3)(a) in a members' voluntary winding up to authorise the liquidator to receive, for distribution amongst members shares, policies or other like interests in another company acquiring the whole or part of the business of the company being wound up;
s122(1)(a) to cause the company to be wound up by the court; and
Companies Consolidation (Consequential Provisions) Act 1985
s4 for an old public company not to be re-registered under s2 as a public company.
31 arrangements and reconstruction (25%)
A majority of 3/4th in value members (or creditors or class of members) present voting either in person or by proxy the meeting where the matter is moved may agree to any compromise arrangement under s425(2) of the which, if sanctioned by the courts be binding on all the members creditors or class of members). A majority refers to those present and voting as opposed to those entitled attend and vote.
32 companies not formerly under Act ((a) 25% (b) any)
Part XXII of the Companies Act contains provisions for the registration under the Companies Act companies not formed under it.
33 powers of creditors in a liquidation (one quarter)
Under the Insolvency Act one quarter in value of the creditors:
s136(5)(c) may request the official receiver to summon a meeting to appoint a person to be liquidator in his place; and
s168(2) request the liquidator to summon a general meeting to ascertain their wishes.
On the request of 25% in value of the creditors the liquidator must summons a meeting under s171(2)(b) of the Insolvency Act for the removal of the liquidator: Insolvency Rules, r4.114(1).
34 resolutions in insolvency requiring majority of three fourths (25%)
This category applies mainly to creditors or a class of creditors and is measured in value debt. These are not described as extraordinary or special resolutions.
s192(2)(b) to release trustees of a debenture from liability;
s192(4) to extend a pre 1 July 1948 limitation on a debenture trustee’s liability to other trustees;
s425(2) to agree to a compromise between a company and its creditors or members or a class of either of them;
s681(2) to enable an unlimited company, not formed under the Companies Act but registered under s680 of it, to be registered as limited; and
sch15B 1 to agree to a compromise or arrangement under s425(2).
35 relating to floating charges in debentures (one-third or one-half)
By s466(3)(c), which applies only to Scotland, an alteration of a floating charge may be made, where there are no trustees, by an instrument executed by or on behalf of:
By s70(2)(b)(ii) of the Insolvency Act, where a series of debentures has been issued and no trustees have been appointed, references in Chapter II of Part III (Receivership) to the holder of a floating charge shall be construed as a reference to the same majorities as are mentioned in the Companies Act s466. NB, s70 is not limited to Scotland.
36 director’s control of a body corporate (one-half)
For the purposes of Part X of the Companies Act (enforcement of fair dealing by directors), s346(5) enacts that a director of a company is deemed to control a body corporate if he and the persons connected with him can control any voting power at a general meeting and are interested in more than one half of its equity shares or control more than one-half of that voting power. See also Schedule, 13 Part I.
37 requesting a meeting in winding up (over 50%)
In a members’ voluntary winding up a meeting shall be summoned for the purpose of replacing a liquidator appointed by the court on the requested by members holding not less than 50% of the voting rights of all members: s171(3)(a) of the Insolvency Act.
38 public examination of officers of company in liquidation (one-half, three-quarters)
The liquidator must apply to the court for the public examination of officers of a company in liquidation of requested t do so by one-half in value of the company’s creditors or three-quarters in value of its contributories: s133(2) of the Insolvency Act.
39 requisite majorities at creditors’ meetings (three-quarters)
A majority in excess of three-quarters in value of the creditors present in person or by proxy and voting on the resolution is required to approve any proposal made by the directors, the administrator or the liquidator or modification under Part I (Company Voluntary Arrangements): Insolvency Rules, r1.19(1).
These examples of minority rights show, as might be expected, that minorities have in general no say in the day to day running and control of a company. Although they may cause meetings to be called and resolutions to be put forward their rights are largely negative and relate to basic questions such as the constitution of the company. It is when a company is in liquidation that minorities however small have the largest opportunity to take the initiative.
A final point to be aware of is that in certain cases the prescribed majorities are based on the numbers actually present and voting, whereas in other cases they are based on the numbers entitled to attend and vote whether or not they actually do so.
The article, which originally appeared in the NLJ for 4 March 1971 under the title "Protection of minority shareholders", has been updated by its original author, Roderick Ramage, a solicitor in private practice: www.law-office.co.uk. The number of itemised paragraphs has grown from 21 to 38, but the author is unsure how blame for the growth should be allocated between more complex legislation, the extension of the article to include creditors and the research powers of Lexis.
Some precedents based on this article are can be found under my list of articles - see below.
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