Legal Analysis and Solutions for Shareholder Issues

In connection to the abovementioned Client, Groves Play Structures Ltd, the legal issues in relation to the issuance of share and the right of the shareholders have been discussed in this memorandum in detail. This memorandum shall also strive to provide with specific solution in regard to the shareholder’s resolution and whether such shareholder’s resolution is needed in the existing issues of the client herein. At the onset, we shall briefly discuss on the concept of shareholder’s resolution as it has been mentioned and categorized under part 13 of the Companies Act, 2006 and then each of the legal issues that has been raised in the given memorandum shall be discussed.

FACTS AND INSTRUCTIONS

In this given case study involving the interest of the Groves Play Structure Ltd, the client herein has planned of expanding his business in a new location, Chester of Chesire in North Wales and for the purpose conducting the business from Chester, the client herein contacted one Logan who is an existing shareholder in the company and he shall be managing and operating the business of the client in Chester. Also, the client is willing a buy an office and warehouse property from Lily, who is an existing shareholder in the company.

The reported legal issues of Groves Play Structure Ltd. are as follows:

Does the company need to issue a shareholder resolution for the purpose of allotment of share to an existing shareholder? If not, why? Also, how does the company allot new shares as per the procedural form under the Companies Act, 2006?

Does the company need to issue a shareholder resolution for the purpose of having a service contract or employing a shareholder into the company?

Does the company need to issue a shareholder resolution for the purpose of purchasing a warehouse property from one of the shareholders? What are the procedures for doing so under the norm of the Companies Act, 2016?

BRIEF OUTLINE OF SHAREHOLDER’S RESOLUTION

As it has been set out by you in the given memorandum, the three part issues concerning the client herein, Gloves Play Structures Ltd., has been considered and detailed research has been conducted in favor the Client’s concern in relation to their proposed plan. For the purpose of better understanding of the issue that the Client is facing the legal background of such issues, a brief discussion of shareholder and shareholder’s right shall be held first.

In the terms of the layman, a shareholder resolution can be defined as the proposal submitted by the shareholders of a company to be voted on at the Annual General Meeting or AGM. The issue of shareholder’s resolution is generally necessary in case the shareholders are willing to direct the boards of a company to take some direct action in the nature of political donation or transaction, directly involving the director of the company.

According to the Companies Act, 2006, Part 13, section 281 to the shareholder’s resolution can be divided into two main categories – ordinary and special. Also, if a specific company’s article of association demands so, there can be a specific ordinary resolution, passed by a specific majority.

SHAREHOLDER’S RESOLUTION: LEGAL ISSUES AND ADVICE

As per the given memorandum provided by you, the client herein expresses three main scenarios in the context of shareholders and shareholdings. In reference to each of the issues faced by the Client Company, the related legal provisions and advice to such effect has been provided hereunder.

Allotment of Share to Shareholder

In the first scenario, the client herein issues 1,000 ordinary shares of £1 each to Logan Brayshaw who shall operate a part of the Client’s business in a particular locality or region. It is to be mentioned that this allotment of 1,000 ordinary shares to Logan is in addition to 5,000 shares that he already owned.

Legal Analysis

As per section 550 of the Companies Act, 2006, if a company is incorporated under the Companies Act, 2006 and the company has only one class of shares, the board of directors shall not have the need to have prior approval from other shareholders of the company, unless and until the same has been expressly mentioned by the Article of Association of the Company.

Applying the abovementioned provision of Companies Act, 2006, section 550 in the given scenario of allotment of new 1,000 ordinary shares of Logan, it can be said that no shareholder’s resolution is needed to such effect as the Client’s company has one class of shares according to Document A attached with the given memorandum. (Glynn v. Own, 2007, IEHC 452)

The Article of Association of the Client’s company also specifically excludes Regulation 14 of the Companies Model Article Regulations 2008. Thus, the question of conflict of interest of other shareholders who owns the majority shares shall not be valid herein. Hence, it can be said that the Client’s company being incorporated under the Company Act, 2006, does not need to issue shareholders resolution in order to allot new shares.

Service Contract with Shareholder

As Logan shall run the business on behalf of the abovementioned Client herein from Chester, a service agreement shall be drafted for such purpose. Also, as per ‘Document A’ attached with the given memorandum herein, Logan is also a director of the company herein.

Section 188 of the Companies Act, 2006 deals with Director’s service contracts and how such employment of the directors are to be dealt in a company. As per section 188 of the Companies Act, 2006, if the service contract of the director is more than 2 years or 24 months at a time, it must need the approval of the shareholders of the company. The case of Harben v. Phillips, (1883) 23 Ch.D. 14, 35-36, talks about the statutory duty of a company to execute a contract in favor of its employee, whether director or any other person herein.

In this given case, it can be noted that Logan shall be acting as an employee of the Client’s company to run and manage the business of ‘Groves’ in Chester. Also, Logan acts in the capacity of a director in the Groves Play Structure Ltd. as well. Also, to terminate the service contract, Logan is needed to provide the company with a notice period of 24 months. Thus, by default the director’s service contract is more than 2 years and section 188 of the Companies Act, 2006 shall be applied herein.

Hence, for the purpose of drawing up Logan’s service contract, an ordinary resolution of the shareholder is absolutely necessary.

Purchasing of Property from one of the shareholders

Currently, Groves Ltd. has four shareholders as per Document A which has been attached with the given memorandum herein. According to the Document C i.e. the balance sheet of dated 31st March, 2021, amongst the four shareholders, Logan owns 5% of the company’s shareholding and rest of the shareholders own more than 25% but less than 50% of the company’s shareholding herein. Thus, the shareholders of the company is given the right by the Companies Act, 2006 under section 284 to vote at the general meeting and to be notified of a general meeting under section 310 of the Companies Act, 2006.

Even though a Company limited by share does not have any legal obligation to draw up a shareholder agreement with the existing shareholders herein, the shareholders shall have default rights set out by the Companies Act, 2006. In the case of Bushell v Faith [1970] AC 1099, the importance of ordinary resolution of upheld by the Judge and it was said that the Shareholders possess enormous rights under the Companies Act, 2006, even at the absence of any Shareholders agreement herein.

Section 190 of the Companies Act, 2006 states that when a company aspires to acquire a substantial amount of non-cash asset from one of the directors of the company, the transaction shall and must need the approval of the shareholders. Again, section 1163 of the Companies Act, 2006 defines what would be the definition of substantial amount. According to 1163, if the non-cash assets as mentioned under section 190 of the Act of 2006, is greater than £5,000 and more than 10% of its share capitals or is greater than £1,00,000, shareholder approval would be necessary. (Thompson v. Secretary of State, [2007] EWCA Civ 289)

In the given case, Lily Homes is a shareholder and a director of the Groves Play Structure Ltd. and the limited company herein aspires to buy an office building and a warehouse from Lily in the outskirts of Chester and the purchase price of such property is £2, 00,000. Thus, the given case problem section 190 of the Companies Act, 2006 shall be applied and an ordinary resolution of shareholders shall be required to conduct a general meeting under section 284 of the Companies Act, 2006.

In connection to the abovementioned advice and the analysis of the legal issues, it is therefore mentioned that for the purpose of the client’s three-course plan to expand its business herein, the issue of shareholder’s resolution is essentially needed in two of such plans. The same has been legally analyzed and explained in the Part- I of the memorandum herein. In the Part – II of this memorandum, a reflection shall be held on the procedural form of such legal analysis.

PROCEDURAL PLAN TO ENSURE THE THREE-COURSE PLAN

For the purpose of the ensuring the three-course plan as has been set out in the given memorandum herein, Groves Play Structure Ltd. must need to adhere to two procedural plan to execute the proposed plans of theirs. Herein, we shall discuss the whereabouts and other details of such procedural plan for the perusal of the Company herein.

1. Allotment of New Shares

Logan Brayshaw is an existing shareholder and director of Groves, who were to acquire 1,000 ordinary shares of £1 each. As per the given memorandum, Logan Brayshaw is an existing shareholder of the company and the total shareholding of Logan Brayshaw is 5%, according to Document A & Document B attached with the given memorandum.

As per the Companies Act, 2006, section 561 provides with the existing shareholder with a right of pre-emtive offer which essentially means that when in case of a limited company registered under the Companies Act, 2006, the shareholders shall reserve pre-emtion right over the allotment of new shares as such the existing shareholders must be offered with the allotment of the new shares first before appointing a new shareholder of the company. As Logan Brayshaw is an existing shareholder with the position of director, there is no need to be concerned with the pre-emtive right.

Also, it has been stated in Part – I that according to section 550 of the Companies Act, 2006, no prior approval of the shareholders is needed for the purpose of one class of shares. Thus, a shareholder resolution is not needed in the case of allotment of new shares to Logan Brayshaw.

Once the directors of the company settle the issue whether shareholder’s resolution is needed or not, they can proceed for the administrative procedure of creating new allotment of shares that are as follows:

The directors need to submit SH01 form or the return of allotment share to the Companies House within one month of such allotment or issuance of such share.

Under section 769 of the Companies Act, 2006, every shareholder must be given a shareholder certificate once new shares are allotted and issued in name of a shareholder herein. It is to be noted that in absence of such issuance of certificate, the company officers are liable to be treated under criminal offence, if they omit or deny executing it.

The company is therefore liable under the Companies Act, 2006 to issue a letter to each of the shareholders to intimate about the allotment of the new shares herein and therefore issue the shareholder certificates to other shareholders as well.

For the purpose of allotting new shares where only one class of share exists, only the directors are needed to act accordingly herein and a board meeting shall suffice in that matter.

2. Issuance of Ordinary Resolution of Shareholders for the purpose of Director’s service contract and purchasing of non-cash asset of substantial amount from a director

The course of ordinary resolution has been mentioned under section 281 of the Companies Act, 2006 and as per Part – I of this memorandum, Groves Play Structure Ltd. shall be in need of ordinary resolution of Shareholder’s for the purpose of his proposed plan of executing director’s service contract of more than 2 years and purchasing warehouse and a office building from one of the directors, Lily Holms that means purchasing of a non-cash asset of substantial amount which is worth at £2, 00,000. Hence, as per section 188 and 190 of the Companies Act, 2006, Groves shall need to pass an ordinary resolution of shareholders to avail the shareholders approval to execute the abovementioned course of action.

Procedures to be followed for the issuance of Ordinary Resolution of Shareholders

As per section 310 of the Companies Act, 2006, the Shareholders are to be notified of a general meeting, which needs to be held in order to obtain an ordinary resolution of the shareholders. Thus the procedures to be followed in such course of action are as follows:

Under section 310 of the Companies Act, 2006, the shareholders must be notified of the General Meeting or shareholder’s meeting.

The shareholders shall have the power to cast vote in proportionate to the shares they own under section 284 of the Companies Act, 2006. An ordinary resolution shall deemed to be passed in favor of the company’s proposed plan of work as mentioned above if 50% of the votes are cast in favor of the resolution.

The shareholders shall reserve the right to inspect the meeting of the general meeting where the ordinary resolution has been passed under section 358 of the Companies Act, 2006.

Also, in case of passing a director’s service contract, the shareholders shall be given the rights to inspect such contract for free under section 229 of the Act of 2006. If the shareholders are not given to inspect the said contract, it shall be considered as a criminal offence on part of the Company’s officer.

After all of the abovementioned procedures and norms are followed, a resolution in written form shall be passed.For the purpose of passing ordinary resolution of the shareholder’s, all the directors and the shareholders of the company must be included in the general meeting.

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PRIMARY SOURCES

Company’s Act, 2006

Companies Model Article Regulations 2008

Other Relevant cases cited and referred to in the cases above

Harben v. Phillips, (1883) 23 Ch.D. 14, 35-36

Bushell v Faith [1970] AC 1099

Glynn v. Own, 2007, IEHC 452

Thompson v. Secretary of State, [2007] EWCA Civ 289

COMMENTARY

I have used the following commentary to support my research and ensure that it was up to date.