Regulations on the Members Voting Rights and Minority Shareholders in a Company having UK Incorporation with relevant Case Study

04 Jan

A step of setting up a business UK is to gather members and allot them shares and appoint directors. It becomes a requirement to divide the authorities of the company between the legal persons of the company after registering a new business UK. This article discusses some exceptional cases where a member is given favour over a director in terms of voting rights despite the fact that he/she holds minor shares in the company having UK incorporation.

Dividing Authorities between Members and Directors

The rights given to members regarding the voting procedure at a meeting, prove very essential in taking some very crucial decisions of the company after founding a company in UK. However, they may be subjected to certain limitations as well. Because it is equally necessary to maintain a balance between the members and the directors while distributing powers between them. Although, majority of the authorities lie within the capacity of directors, yet some of the powers given to the members prove sufficient to protect their rights.

Binding on a Member while Voting

If there is a contract signed by a member that requires him/her to vote in a specific manner or according to the directions of some other person then, it will bind the member and may be implemented via a compulsory injunction. The case study of Puddephatt is presented in the text below to elaborate this rule.

Puddephatt Case

The defendant had been mortgaged the company’s shares by the plaintiff and they had been transferred in his name. And simultaneously via a letter, it was pledged by the defendant that he would vote for his shares as per the directions of the plaintiff. It was ordered by the court that the defendant had to abide by the undertaking.

After Sargent J stated the facts of the case and termed the undertaking of the defendant as a collateral agreement binding on him, it was held by Sargent J that:

  • According to my views, there is a right that has been conferred clearly upon the plaintiff. The only point of argument is that whether the plaintiff has the authority to go for a mandatory injunction for the implementation of her right or not.
  • There is no disagreement in this point that the plaintiff is authorised for a prohibitive injunction and per my point of view, the plaintiff is also ratified to a mandatory injunction. Apparently, there is a binding on the court…to make the right clearly given to the plaintiff, effective via a mandatory injunction.
  • Undoubtedly, there are certain exceptional cases that may not comply with this rule. For instance, the service contract, because in these situations it is impossible for the court to make an effective order. However, in the case under consideration, there is one thing that should definitely be done. I have the view that I am obliged to confer a prohibitive as well as a mandatory injunction to the plaintiff. And I give an order in accordance to my view.

General Rule of Voting Rights of Mortgaged Shares

In UK after registering a new business UK general rule regarding the voting rights of mortgaged shares is that the person who mortgaged the shares is independent of any influence or dictation of the mortgagor while casting the votes of those shares. As in the case of Siemens Bros and Stablewood Properties. However, the case mentioned above is an exception to this ruling.

Another case is that a shares’ unpaid vendor who is in the register of shares is also entitled to freely make use of his/her rights without any influence of the purchaser. For instance, in the case of Musselwhite v CH. Although, in cases where there is a contract that can be enforced in particular, such rights may be restrained by a fiducial restriction, for regarding the interests of the purchaser. For instance, in the case of Michaels v Harley. However, in situations where the full price has been paid by the purchaser, the shares are held by the vendor as a trustee only, as in Hawkes v McArthur, and is under an obligation to vote according to the will of the purchaser. For example, in the case of Re Piccadilly.

Cases concerning Several Shareholders

The case of Puddephatt included only one shareholder. There may be situations where more than one shareholders are present in a company. And they have signed an agreement between them. The agreement obliges all the contracting shareholders to coordinate their votes. Or such contracts may also require them to entrust their voting powers to one of the contractors. This phenomenon is known as “Voting Trust”. And it is legitimate. This phenomenon has a wider following in the United States than in the United Kingdom and can be used powerfully to focus the control behind the administration or use as a counter power against it.

Protection of Minorities

Minorities are those shareholders who do not hold the major number of shares of the company. After founding a company in UK, there is always a threat to their rights because normally the decisions are taken by voting and the majority’s decision usually gets implemented. Hence the minorities have to implement upon themselves the decisions that are at times not per their will. However, there is an exception to this general practice:

“When a majority takes a decision via voting that is enforcing oppression upon the minorities then that decision can be set aside”.

For a clearer understanding, consider the next case study:

Clemens Case

The defendant company’s shares were divided in the following ratio between the plaintiff and her aunt, Miss Clemens. 45% of the shares were held by the plaintiff and the rest were held by her aunt. The current members of the company were conferred a right of pre-emption in situations where any other member willed to make a transfer of his shares. It was hence expected by the plaintiff that she would have a full control over the company after demise of her aunt and she also believed that she would enjoy an authority of negative control which is a power to impede a special resolution while her aunt was alive. The directorship of the company was conferred upon four persons who did not hold any shares in the company and the aunt. A proposition was made by the directors that an increment should be brought in the capital of the shares by making an issuance of 200 ordinary shares to each of the four non-shareholder directors and 850 shares should be issued to a trust of employees. The aunt had passed the resolutions that presented these proposals at a general meeting. A claim was made that the goal for this proposition was the benefit of the company, the opinion of the court was that the real goal for such a proposition was to keep the plaintiff away from making use of her control to the full extent and henceforth, the resolutions were considered void.

It was held by Foster J that:

  • In regard to the authority given to the plaintiff, the resolutions were oppressing her extent of control to veto any decision taken by the special or extraordinary resolution and also was undermining her authority to buy the shares of Miss Clemens under the 6th article.
  • Whereas, it was argued by the defendants, that when the two shareholders who had differing views, the will of the shareholder holding majority of the shares of the company must be prevalent. And in any general meeting it is the basic right of the shareholders to vote according to their will and in a manner that may seem to be best in the interests of the company to them.
  • Many cases have been discussing the role of a director. A director is entitled to act within the capacity of his powers and is obliged to act sincerely in the best interests of the company. The directors are given fiducial responsibilities. However, is there any similarity in restrictions upon the shareholders when they exercise their power of vote during a general meeting?

His Lordship then continued by reading some excerpts from the verdict given in cases like Greenhalgh etc. and then continued:

  • One point that is raised by the cases that I have consulted is that in cases like the present case, Miss Clemens does have the freedom to utilise her power of voting in the way she likes. There is impediment in defining a rule, and words like sincerity towards the interests of the company, defrauding minority and oppression do not help in defining the rule.
  • Conclusively, as the situation of the cases varies from case to case, no general principle can be devised that suits all the cases. I believe, Miss Clemens does have the power to make use of her majority voting rights as a regular shareholder in any way that suits her interests.
  • I am not doubting this point that Miss Clemens supports the resolutions and is not unaware of the claim made by the resolutions and the results that the resolutions may lead to. I am also not doubtful about the point that Miss Clemens would not like to share the shares of the company with other directors of the company and may not support the idea of creating a trust for the employees having long years of service.
  • However, I cannot ignore the fact that the resolutions were specifically designed to shift all the control of the company within the hands of Miss Clemens and her fellow directors and the intention was to keep the plaintiff who held more than 25% of the shares in the company away from her rights of pre-emption.
  • The resolutions have been structured carefully, for the deprivation of the plaintiff from her right of negative control and also to make sure that the control never returns to the plaintiff. Whether the resolutions are termed by me as oppressing the plaintiff or it is stated by me that no one would believe that the resolutions in any way benefit the plaintiff. I believe a Court of Equity will consider these justifications as enough to stop Miss Clemens from making use of her majority voting rights in a manner that she has used them. And any such action taken by the court would be fair for the prevention of the consequences arising from the decision of Miss Clemens.

Inference from the Case

The case under study resulted in a fair verdict, although the verdict was doubted because in past the niece had not cooperated much with her aunt. But the judgement was given in contrast to past cases. The reference given to the case of Greenhalgh, defines certain rules that are related to special resolutions for changing the articles, which had never been applicable to resolutions previously. Foster J commented, after citing the paragraph of Greenhalgh in which the idea of a test of individual hypothetical shareholder was given, that:

  • The question that instantly arises if this is true is that, was Miss Clemens honestly believing that the resolutions would benefit the plaintiff, while voting upon the resolutions? It should be observed that the plaintiff held the status of hypothetical shareholder just like Miss Clemens. If the test was taken in context of Greenhalgh, the case would have gone in favour of Greenhalgh, thus proving how non-assisting can the concept of hypothetical shareholder test may be to such cases especially to small scale companies. And by quoting the words of Lord Wilberforce, the judge is borrowing from the cases of liquidation a borrowing that contradicts Bentley-Stevens’ ruling.
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