Limitation on Members Authority to Freely Exercise Voting Rights for an Establish Company in UK

05 Dec

For a fast company formation UK it is effective to appoint members quickly and assign the right ones the authority of directorship timely. However, a major topic of conflict is the distribution of authorities between the members and the directors in any new company formation UK. This article gives an understanding and limitations on the voting authorities given to the members and the relevant cases of it.

Limited Authority of Members to Freely Exercise Voting Rights

Member’s power to freely exercise voting rights may be subjected to certain limitations. In general meetings for a establish company in UK the decisions are taken by majority of votes. Ordinary resolutions may be passed in the meetings for general matters. However, for special matters, such as, alteration of articles, special resolutions may be required. In both the cases, the minority that disagrees with the resolution, will have enforce the rules upon them. The case is not like this under the rules of regular contracts. Members are well aware of the fact that the rights being given to them will be subjected to the rule of majority, when they acquire the shares. In such situations, it becomes a requirement to provide protection to the rights of the minorities, whose interests can be easily overridden by the group holding majority shares in the company. In the following scenarios, complaints may be made by the members to secure their rights:

  • When the resolution that has been challenged cannot be effective as a utilisation of authority by the members that is disagreeable. This reason can form the basis for a complaint in situations when there is equitable authority over how will the power of voting rights be utilised by the members. These authorities can be more vigorously implemented in certain scenarios. For instance, alteration of articles and rights of classes. And may be used leniently in other matters.
  • As Insolvency Act 1986 Section 122 (1) (g) states, the basis for winding up a company should be fair and impartial.
  • If there is any prejudice done by the majority on the minority then the court is allowed to give an order of a solution to encounter the unfairness done to the minority. Such solutions may include necessarily buying the shares of the complainant.

Voting Right as Member’s Property

The voting right of a member belong to the member only. And it must be apparently, exercised by the member in his interest and as seems suitable to him. If a member utilises his power in such a manner then, he is not liable to any fiducial responsibility towards his company. The same is applicable on a director when he votes as a member.

Northern Counties Securities Case

This case study is elaborating the fact that voting right is a property of the member. In this case, the defendant company had pledged in front of the court that it would try its best to acquire a quotation of Stock Exchange in relation to its shares and make allotment of some shares to the plaintiffs. Following the rules of Stock Exchange, it was necessary that the defendant company had given its consent for the issuance of shares at a general meeting. For over more than a year the company had failed to abide by its pledge. Hence, the plaintiffs took action against the directors of that company and the company itself. The following orders were moved:

  • The required meeting should be called by them.
  • A circular should be sent to the members obliging them to vote in support of the resolution and make them aware that failure in passage of the resolution may lead to a contempt of court.
  • Preventing the directors from utilising their authority of voting as members at the meeting against the resolution.

The first two orders were given as it is by the court, however, the third order was overruled by the court. The court stated that both the members and the directors will not go against the court if they choose to vote against the resolution.

It was held by Walton LJ that:

  • The council for the plaintiffs, who is Mr. Price, has presented the argument that effectively the power of activating the company rests between two groups. He further added that the company was merely a fable of jurisprudence and did neither have a soul that could be damned nor a body that could be kicked.
  •  It may be presumed from this statement that the company had some persons who acted on behalf of the company and the actions taken by them may be for every reason construed as the actions of the company. The board of directors is such a body representing the company.
  • Delegates have been expressively given the task of managing the company. Hence, their acts are construed as the acts of the company. And if they do not lead the company to act accordingly the undertakings given by the court then the company is liable to the disobedience of the court.
  • This has been acknowledged by RSC. Ordinance 45, r 5(1), according to which, if any corporate body acts against an injunction, then, a writ of sequestration will be issued against any director. For the present case, it is evident that injunction has the same context as an undertaking. For elaboration consult note 45/5/5 in The Supreme Court Practice (1973).
  • In fact, this is a well-recognised law and Mr. Instone did not argue about it. Rather his first proposition stressed on this fact. But according to Mr. Price, this is not the full story. There are certain matters, where the directors may not be capable enough to act as representatives to the company, making use of their relevant authorities in general meeting of the members.
  • Hence, in relation to all the matters that lie within the capacity of competence, at any rate those that are exclusive of the capacity of competence, the actions taken by members will be regarded as the actions of the company in the same manner as the actions taken by directors are considered as the actions of the company.
  • For this purpose, if any shareholder votes against the resolution for issuing shares to the plaintiffs, the it may lead him to the disobedience of court. The reason is that this may be done by the shareholder while being well-aware of the fact that failure of passing the resolution may lead the company to act against the order of the court. It was agreed by Mr. Price that there was no direct authorisation providing support for his argument. However, he was at the same time stressing on the point that there was no rule that precluded his argument.
  • Mr. Instone criticised the views of Mr. Price by entitling them as nominalist fantasy. He presented his argument in the following words: Directors are given special powers to act as the executive representatives of the company at defense just for the sake of ensuring that the company does not disobey the court. Whereas at the same time, when a shareholder who has been entitled to vote, decides to vote against the resolution at the time of voting, will not be considered as disobeying the court himself.
  • According to my views, the proposition given by Mr. Instone is right. In a nutshell, I believe, the two authorities can be distinguished in the following manner:
  • When a director chooses to vote as a director in a matter of the company in support or against the resolution, at a meeting of the directors, his action may be construed as an action under the fiducial responsibility towards the company, for the purpose of deciding any action that has to be taken by the company.
  • Whereas, when a shareholder has to vote either in favour of or against the resolution, his vote will be considered as the vote of a person who has no fiducial responsibility towards the company, and who utilises his power of property according to his interest.
  • Hence, just because the decision to be taken will be a binding on the company, no change can be made in the position of the shareholder which is that while voting he is simply utilising his own power.
  • In simpler words, another perspective of the fact would be that the director is a representative to the company, whose vote is casted to take the decision about how the board of directors should collectively act as an agency.
  • When a shareholder casts his vote in any general meeting, it cannot be considered as voting as agents of the company. Therefore, any action taken by the shareholder according to his interests cannot be regarded as the actions of the company.
  • Proceeding towards the last argument which states that the directors of the company should be refrained from utilising their power to vote against the resolution. According to Mr. Price, as the directors are authorised as the administrant representatives of the company, they should recommend the shareholders to use their power of voting in support of the resolution for issuing shares.
  • And for the same purpose, it is an obligation on the directors to use their personal vote in favour of the resolution. By doing so, the directors will help the company at defense to save it from the contempt of court.
  • If, while playing the role of administrant officers of the company, there is a binding on the directors to bring about a particular result, then, how can they as separate persons take any decision to impede the result.
  • I cannot agree with Mr. Price’s proposition regarding this matter. For according to my belief, a person who has fully complied with his duties as a director of a company by keeping the actions of the company into conformity with the bindings on that company, has the right to independently enjoy his right to vote as an individual shareholder at any general meeting of the company and in the same manner as he would have enjoyed the right of voting, when he was not a director.

Halton International Inc. Case

Another case study may help in by giving an elaboration of the facts presented in the previous case. In this case, the judgement given supported the finding of the previous case. The defendant, who was a company’s member, was authorised to make use of the votes conferred to all the members of the company in any manner that was suitable for the purpose of generating fresh finance. A resolution was passed by the member at defense, to suspend the rights of pre-emption given to other members of the company which were inscribed in the constitution of the company. Hence this brought an increment in the rights of voting in selecting the investors. It was held by the court, that the agreement of voting did not on the behalf of acting member confer any fiducial responsibilities. Hence the court supported his actions.

Members are given certain authorities that help to govern a sound working of the company leading towards its best company formation UK. However, this does not mean that giving the members their due rights, frustrates the rights of the directors. The right of voting is a property of shareholders and members in any established company or new company formation UK and the proper exercise of this right results in a fast company formation UK.

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