Section 994 of the Companies Act 2006 - Essay Example

The Companies Act 2006 § 994 Number Department Introduction Section 994 of the Companies Act 2006 (CA) aims to regulate disputes arising from shareholder relationships particularly those which harm or have the potential to harm minority shareholders. The provision gives priority to the Companys Memorandum as the first document of reference and proceeds to compliment the Company’s constitution where the document has imitations with regard to resolving such shareholder disputes. The most important part of the statutory provision empowers any shareholder to petition the court for direction on the basis that the company’s practice has the potential to or has been precipitated a situation that is unfairly detrimental to the welfares of particular shareholders or all members. The Companies Act 2006 § 994 The provision empowers any shareholder to petition the court for any intervention regarding perceived mismanagement of the company, provided one has adequate grounds for seeking legal proceedings (McVea, 2012). Article 1(a) of the provision defines such grounds as the running of companys affairs in a way that is unreasonably detrimental to the common or individual interests of the shareholder(s) or (b) that a real or proposed activity or oversight of the organization is or has the potential of be so prejudicial. In addition, Article (1A) provides for the impeachment of the companys auditor if the grounds can support the conditions of Article 1(a). Specifically, the auditor would be impeached if: (a) his or her act(s) constituted a departure from the accounting actions or audit procedures expected of a reasonable person working under the same conditions, or (b) on any other indecorous grounds, that may be construed as being unlawfully harmful to the welfares of all or part of the shareholders (McVea, 2012). Article (2) of the provision extends acts of impropriety to parties who are not shareholders but who have legally benefitted from the company’s shares as is applicable to original shareholders of the company in question. Article 3(a) and (b) provide for a wide definition of “company” by extending the meaning of such organizations to those that are under the Statutory Water Companies Act 1991 (c.58) (McVea, 2012). The Unfairness Threshold By granting “any” aggrieved shareholder or a few of them, for that matter, the authority to petition the court concerning an irregular activity which may jeopardize their interest, parliament’s primary aim was to protect minority shareholders in situations where their majority counterparts seek to aid or abet resolutions which are unfairly detrimental to their shareholding (Hansmann, & Pargendler, 2014). Acts which may be prejudicial to the minority shareholding are many depending on the facts surrounding such cases; therefore, it would be impractical to accurately specify the diverse legal conditions that meet the unfair prejudice test provided by the law (McVea, 2012). In light of this, Payne (2011) notes courts are invited to investigate what the minority shareholders’ interests are on a case by case basis and establish whether the majority shareholder(s) managed the company in an inappropriate manner that diminished or has the potential to diminish the value of their shareholding. In most cases, courts may explore the misappropriation or restriction of Company assets to the benefit of the minority shareholders as one of the sufficient grounds. Granted, potential claimants have a duty to be positive about the running of the company and seek legal redress when they are sure the complaint is not vague or inconsequential (Mukwiri, 2013). Credible complaints must surpass mere, subjective perceptions that the company is being run in an unfair manner (Tricker, 2011). In addition, acts which are unfairly prejudicial to minority shareholders may not constitute breaches of the company’s constitution. Unfairly Prejudicial Conduct As Mukwiri (2013) has indicated, common cases that courts may construe as unfairly prejudicial include those involving: exclusion of minority shareholders from the running of the company’s affairs particularly where there are reasonable grounds for their involvement; the diversion of the company to another one whose ownership the majority shareholders have an interest in; the channelling of unreasonably high financial benefits to the majority shareholders; and abuses of office such as unreasonable violations of the Memorandum of a company in question. According to McVea (2012), the endorsement of a special resolution to amend the constitution may be deemed as unfairly prejudicial activity if such changes have the potential to negatively influence the shareholders’ legitimate hope that they would be involved in the running of the company’s. In addition, constant failures to convene annual general meetings (AGMs); postponement of financial reports, and denying the shareholders access to important company documents detailing its running may be singly or conspire to constitute unfair prejudice of the shareholder’s interests. In resolving such disputes, the behaviour of the shareholder-claimant is also relevant, since the alleged case of misconduct may meet the prejudicial test but because it is applicable to all of the shareholders, the "unfair" aspect of it may remain unproven (Hansmann, & Pargendler, 2014). The claimant’s conduct may impact on the relief allowed by the court especially where they are seen as having acted objectively and having attempted to resolve the disputes through the internal resolution mechanisms. Despite the parliamentary intent to give minority shareholders a voice over their investment, courts have in the recent past served to limit the degree to which it orders relief for unfair prejudice claims (Payne, 2011). The claimants must generally show a real violation of the terms spelling out how the running of the company should be executed; and prove that the alleged instances of misconduct were being or intended to be employed in a manner that jeopardizes equitable considerations. Authorities In Re Saul D Harrison plc., [1995] 1 BCLC 14, [1994] BCC 475 the court discounted ‘unfair prejudice’ as deliberately inaccurate definition of minority shareholder woes because an earlier attempt to introduce in The Companies Act 1948 § 210 to serve the purpose of protecting minority rights did not yield appropriate outcomes due to its limited application (Payne, 2011). The earlier laws had defined inappropriate acts targeting minority shareholders as oppressive, which led the House of Lords to interpret such acts in Scottish Co-operative Wholesale Society v. Meyer [1959] AC 324 as taxing, punitive and inappropriate. The verdict subsequently spawned some confusion as to whether the handing of minority interests in a ‘wrongful’ way required real illegality or a breach of the legal rights of the relevant parties. According to Sheikh (2013), the controversy prompted Jenkins Committee, a taskforce whose aim was to streamline English Company Law, to recommend that a wrongful act under similar conditions did not necessarily point to an illegality. The 1962 taskforce coined the term unfairly prejudicial, which the legislature later incorporated in The Companies Act 1980 § 75. This provision was repeated under the subsequent Acts like The Companies Act 1985 § 459, and the current CA 2006 § 994. In light of these provisions, the remedy in unfair prejudice was adopted as a tacit nod to the courts to give it a wider meaning that would be exploited by minority shareholders to press for more of their rights. Conversely, courts have largely distanced themselves from the affairs of companies, and instead given primacy to the internal organizational systems for resolving disputes raised by minority shareholders. In the case of Fulham Football Club (1987) Limited v Sir David Richards and The Football Association Premier League Limited [2011] EWCA Civ 855, the verdict reaffirmed that where an organization and its shareholders have reached a consensus that any internal grievances between them are to be settled by arbitration, courts of law would be obliged to support that agreement. And that any petition(s) by shareholder claiming unfair prejudice under the CA 2006 § 994 shall not suffice. In making that definition, the Appellate Court underscored the significance of the independence of parties in arbitration processes (Tricker, 2011). Despite the limited role of courts in Fulham Football Club, the CA 2006 § 994 is seen as taking the cue in the decision of Donahue v. Rodd Elctrotype Co of New England (1975) 367 Mass 578. In the both cases, majority shareholders are depicted as lacking the legal rights to buy the shareholders of a member when the minority members are not given the same treatment prior to or during the sale of a shareholder’s shares. In Re Judicial Dissolution of Kemp & Beatley, Inc. (1984) 64 NY 2D 63 concerning the “just and equitable winding up” test, the court decided that it was faced with modest remedies prior to a wind-up. In light of this, the court defined oppression as any conduct that materially defeats the logical expectations of the minority shareholders in their investment in a company (Trivun & Mrgud, 2012). A member who reasonably had the expectation that majority shareholders would reward them with an employment opportunity, a portion of corporate proceeds, a role in the management of the company or any other material earning, would be impaired in an actual sense when other parties with a greater level of say conspire to defeat those hopes and the aggrieved parties have no proper way of keeping the value of investment intact. In the case of Meiselman v. Meiselman (1983) 309 NC 279, the court held that the reasonable expectations of a shareholder are determinable by exploring past activities of the party within the company. The history should encompass the reasonable expectations: envisaged at the point forming part of the relationship; as an evolving issue; and as it may come up during the course of the shareholder relationship within the company. These tests have so far been explicitly and implicitly codified under Section 994, Article (1A) of CA 2006 (Tricker, 2011). Part II: Case Study A. Cathy’s Case I. A Sole Trader A sole trader is any business organization whose ownership and management is at the hands of an individual (Sheikh, 2013). The proprietors may hire some employees. Individuals, who render specialist services like barbers, plumbers or electricians, also fall within the category of sole traders. As a sole trader, Cathy and her business are like legal entity. As a consequence, she is individually liable for the company’s debts, and would have to settle them from her personal savings. Cathy should, therefore, consider joining forces with other traders in a partnership or look in the direction of small private company to limit her liability to the business; manage the expanding assets in a better way; and find some leave. II. Partnerships Partnerships are business organizations owned by two or more persons (Sheikh, 2013). Partnerships require the crafting of a deed of partnership, which basically defines the kind of partnership which the parties have established, the total amount of capital contributed by each party, and how proceeds and liabilities will be divided. Physicians, dentists and lawyers are some of the experts who may join partnerships. Under such arrangements, the members have the potential to share professionalism (Sheikh, 2013). However, the professional bodies draw several parallels to sole traders on the basis of unlimited liability. Partnerships have also witnessed sleeping investors who channel their capital towards the success of the business but do not directly engage in its management. Unlike Cathy’s sole trader business, a partnership would provide her with a greater level of opportunities for success. As Tricker (2011) had indicated, under a partnership Cathy would enjoy shared losses and obligations that come with management. This provides room for division of labour, where the skills and competencies of one partner can shore-up anothers. For instance, if the professional businesswoman in Cathy teamed up with an accountant and a solicitor, the accountant would streamline the financial statements while Cathy and the attorney see to the running of the business and the business’ conformity to the relevant legal documents and or representation in the legal proceedings (Sheikh, 2013). More partners are also bringing in more capital, which allows for a higher level of scalability in the operation of the business. Members of a partnership would limit the time pressure on each party since there is always someone to seek the advice from over corporate issues. This lowers the risks of poor decisions. In spite of the advantages, Sheikh (2013) said partnerships have some demerits, which Cathy and other sole traders should be aware of before they arrive at the final decision regarding the form they want the business to take. The main demerit of a partnership is inherent in the shared responsibility. Disagreements may arise over important decision-making processes or over disparities in inputs among the partners (Tricker, 2011). In addition, the sharing of profits can create disputes, with those who put in more effort wanting more than what they are entitled to under the deed of partnership. In light of these challenges, Cathy should enjoy the protection under the corporate veil by turning her business into a Limited Liability Company. III. Limited Liability Company Cathy’s choice of small limited liability company (LLC) would be the best option if she intends to be regarded a legal entity that is separate from the business (Sheikh, 2013). An LLC essentially means if the company becomes insolvent, the proprietor’s personal assets will be unaffected. The investor’s total losses can just be commensurate to the value of the investment; meaning Cathy would only forfeit her investment in the business. However, the management of such companies does not always enjoy unfettered power, since any illegal acts may prompt the lifting of the corporate veil to allow for individual liability. Nonetheless, Cathy’s small company would have more clients including big corporations, which is a greater opportunity for more profits. For such high profile clients the payment is just business dealing and they avoid the challenges that come with tax remissions, and avoidable National Insurance levies (Sheikh, 2013). In fact, a number of large companies that Cathy has not had the opportunity to supply with her items would be more obliged to consider building stronger business relationships with her company as a distinct legal entity. Cathy’s private company would open the opportunity for greater level of profitability. As a Sole Trader, Cathy is being taxed on her income. Tricker (2011) noted that this implies she is remitting Income Tax and National Insurance Contributions on the income. With her fledging business, a closer analysis of her accounts would reveal that the taxman in reaping more than is necessary from her revenue. By turning a sole trader business into a Limited Company, Cathy would remit Corporation Tax amounting to 20 percent for businesses that generate less than £300,000 annually, and can set aside her salary through an amalgam of low wage to limit the company’s Pay as You Earn (PAYE) and NIC remittances well as dividends (Sheikh, 2013). Sheikh (2013) said this will culminate in less of the revenue being taken by Her Majestys Revenue and Customs (HMRC), implying more income for running the business and funding expansion programs. With an LLC, Cathy would be entitled to claims arising from business expenses such as losses on equipment for the business and mileage allowances. By contrast, even though, Sole traders also have the rights to claim business-related expenses, their leverage is normally limited because they have fewer employees (Sheikh, 2013). In addition, they may not have the right business premises and addresses required as prerequisites to claiming the moneys. As a sole trader, Cathy is dependent on her own personal credit capacities. However, an LC could establish its own credit score against which the management can obtain loans (Tricker, 2011). This way, Cathy would also be better-placed to raise money by selling part of the business at a reasonable price. In addition, Cathy would find it easier to exit the business world whenever she so wishes. As an LLC is a separate legal entity, the proprietor would not experience any technicalities when she eventually decides to sell her entire business including customers, assets and employees. This can be more challenging for her now, since most of the equipment which she uses to run the business may be her personal belongings (Sheikh, 2013). And many of her clients and suppliers are most likely to be her personal, former classmates or family relations. B: Incorporating Private Companies I. Incorporating Private Companies Limited by shares Most of the applications for incorporation in the United Kingdom involve private companies limited by shares because they meet the business needs and activities of many entrepreneurs. As Sheikh (2013) has said, each shareholder of this kind of enterprises is only obligated to invest in the company the sum which is due on their unsettled shares. In light of this, if a shareholder has no outstanding balance on his or her shares, that particular shareholder is exempt from liability in the amount which the company owes its suppliers and creditors. The applicants are not under the obligation to meet any minimum thresholds of share capital. Regardless, the company must have between one and 50 members; two or more directors and a company secretary. In Northern Ireland, the company must place an indemnity bond of up to €25,394.76 for at least two years or enlist a tax resident from a Member State of the European Economic Area (EEA) to the board of directors in order to secure the approval. The EEA covers all of the European Union members (Freedman, 2010). In addition, the companies must impose a limitation on the share transfer rights. However, the shares must not be offered to the public. The purpose(s) for which the enterprise is to be incorporated must be to carry out business activities in the country of incorporation (Tricker, 2011). An oath to this effect must be signed by any of the directors or the secretary to the company. The business address in the country must also be clearly indicated in the incorporation documents and bond applications delivered at the Registrar’s II. The Incorporation Procedure The procedure of incorporating a company in the United Kingdom requires the filing of: Form IN01, the articles of association and the memorandum of association with the Registrar of Companies upon the payment of £40 registration fee (Sheikh, 2013). The memorandum of association should contain the name of the company, the registered office and the company’s objectives. Then the mission of the company should also just be indicated in the documents, with many companies indicating commercial activities in the relevant field. The memorandum filed at the Registrar’s office must be authenticated by each member in the presence of witness who has to verify the signature. As Cowton (2011) has stated, the articles of association regulate the companys internal operations. In light of this, the companys documents delivered to the Registrar have to bear the signature of subscriber and be verified by a witness. A duly filled Form IN01 will contain the names of the initial directors and secretary to the company as well as the registered location of the head offices. Each director must indicate their name, occupation and other relevant personal details on the form. Each officer nominated and subscribers (or their proxy) are under the obligation to sign and indicate the date on the form. In other countries, the company applicants must file similar documents to the concerned registrar. In the United Kingdom, online applications for incorporation of companies have been made easier by the Company Registration office. In light of this, willing applicants can now achieve their company’s incorporation online without necessarily filing hard copies of documents containing the signature (Cowton, 2011). At a cost of £18, the Companies House uses a cheaper, more efficient business link, which can be accessed from anywhere within the country to incorporate more firms that meet these preconditions. In conclusion, Sole Traders have fewer resources at their disposal, which tend to limit their capacity to expand their businesses. Partnerships pull more resources together but fail to cushion the investors from liabilities. LLCs guarantee the investors a greater level of resources for more profitability. Incorporating private companies limited by shares is a long process regulated by the Registrar’s Office and is normally due upon the completion of the relevant documents such as the Memorandum, director’s details, the company’s name and mission among others. References Cowton, C. 2011. Putting Creditors in Their Rightful Place: Corporate Governance and Business Ethics in the Light of Limited Liability. Journal of Business Ethics, 102, pp.21-32. Freedman, J. 2010. Limited Liability: Large Company Theory and Small Firms. Modern Law Review, 63(3), p.317. Hansmann, H., & Pargendler, M. 2014. The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption. Yale Law Journal, 123(4), pp.948-1013. McVea, H. 2012. Section 994 of the Companies Act 2006 and the Primacy of Contract. Modern Law Review, 75(6), pp.1123-1136. Mukwiri, J. 2013. Takeovers and Incidental Protection of Minority Shareholders. European Company & Financial Law Review, 10(3), pp.432-460. Payne, J. 2011. Minority shareholder protection in takeovers: A UK perspective. European Company & Financial Law Review, 8(2), pp.145-173. Sheikh, S. 2013. A Guide to The Companies Act 2006. New York: Routledge. Tricker, B. 2011. Re-inventing the Limited Liability Company. Corporate Governance: An International Review, 19(4), pp.384-393. Trivun, V., & Mrgud, M. 2012. Protection of minority shareholders in transition economies: lessons for B&H. Conference Proceedings: International Conference of the Faculty of Economics Sarajevo (ICES), pp.963-980. Read More