In brief
- In a significant development for corporate governance and minority shareholder rights, the High Court has confirmed that shareholders have an enforceable right to require the circulation of written resolutions under the Companies Act 2006 (the Act).
- This ruling, delivered in the case of Webster, marks a departure from the previously held view that this route was not available to a disgruntled member.
- The ability for shareholders to apply to court to compel a company to circulate written resolutions where the board has refused to do so may in the right circumstances provide a helpful route for shareholders to enforce their rights.
The decision in Webster
The dispute arose from a breakdown in relations between two shareholder factions in ESMS Global Ltd (the Company). Mr and Mrs Webster served as directors of the Company and together controlled 47.6% of its shares. The remaining shares were held by the remaining directors, the Soods (47.6%), and a trustee holding 4.8% of the Company's employee benefit trust.
The relationship between the Websters and the Soods had broken down and the Company found itself in deadlock. Under the terms of the trust deed, the trustee shareholder was unable to vote at any general meeting of the Company, but there was no such restriction on voting by written resolution. The Websters therefore made a request under section 292 of the Act, requiring the Company to circulate a proposed written resolution for the appointment of an additional director to break the deadlock. When the Company and the Soods refused to comply, the Websters issued proceedings seeking a declaration and an injunction compelling the Company to circulate the written resolution.
The High Court granted the relief sought by the Websters, making several important findings.
- Recognition of private rights: The judge held that sections 292-293 of the Act create private rights for members, forming part of the bundle of rights which attach to share ownership. Crucially, the court concluded that members possess a private remedy to enforce these rights, notwithstanding the imposition of a criminal penalty under section 293(5) for a company's failure to comply with its obligations under section 293.
- Availability of injunctive relief: The Court confirmed that where directors refuse to circulate a resolution following a valid request under section 292, the Court may grant both injunctive and declaratory relief. In Webster, the Court ordered a mandatory injunction compelling the Company to circulate the written resolution. The judgment specifically notes that there is no reason why, if an injunction is available under section 996 of the Act, it should not also be available in these circumstances.
- Ancillary relief: The Judge granted an order permitting Mr Webster to circulate the written resolution on the Company's behalf should the Company fail to comply with the injunction, ensuring that the rights could not be frustrated from non-compliance.
The Court refused permission to appeal and awarded the Websters' costs of the application, including a proportion on the indemnity basis.
Impact on shareholder rights
- Solution for deadlock: This decision provides a valuable tool for resolving deadlock in companies where the usual mechanisms for decision-making have broken down. It may also open up the possibility of other remedies being available to enforce shareholders' statutory rights.
- Strengthening minority protection: The decision provides clarification that members may obtain injunctive relief to compel a company to circulate a written resolution to its eligible members. The decision made clear that if a company refuses, the court is prepared to enforce members' rights by means of injunction and, if necessary, ancillary relief.
- An alternative to requisitioning a general meeting: Previously, members who made requests under section 292 may have been required to requisition a general meeting under section 303 of the Act. This decision now provides the alternative option which is particularly useful where:
- There is an element of urgency.
- It is impractical to convene a meeting, for example, issues of quorum.
- It is impractical for shareholders to attend or vote at a general meeting, as in Webster, where the trustee was prevented from voting at a general meeting.
Practical considerations
Written resolutions were introduced when the Act replaced the Companies Act 1985 and allow shareholders of private companies to pass resolutions without the need to call a general meeting.
The ability for shareholders to compel a company to circulate a written resolution where the board has refused to do so could offer a useful remedy in the right circumstances. It is not, however, a "self-help" remedy allowing a member to circulate a proposed resolution themselves; it still requires court proceedings, which can be both costly and time-consuming. Whilst an injunction is likely to be heard relatively quickly as far as the court is concerned, in Webster, the decision was not delivered until November 2024, some eight months after the section 292 request was first made, and six months after the claim was issued.
If an application is successful, it is likely that the shareholder will be able to recover at least a proportion of its costs from the Defendant(s), although this cannot be guaranteed, and injunctions are expensive to bring.
There are specific requirements for sections 292-293 to apply, including that the request must be made by member(s) representing at least 5% of the total voting rights of all members entitled to vote on a resolution, or such lower percentage as may be specified in the articles of association. The resolution must be one which may "properly be moved" and cannot be defamatory, frivolous or vexatious or proposed for improper purposes. Expenses relating to the resolution must be covered by the requesting member(s). This does provide a company some protection if member(s) are seeking to abuse the process and the Act expressly provides that the Company may refuse a request in those circumstances.