Saul Sender, Partner
So welcome to, uh, the latest episode of Mishcon's Disputes Nightmare Scenario. I'm Saul Sender, I'm a partner in the corporate team here at Mishcon's. I'm delighted to be joined by my colleague and partner Shona Koffer, uh, from our litigation team, uh, and also Daniel Lightman KC, uh, who has kindly, uh, joined us and is an expert in this area. Um, before, before we kick off, there is a Q&A function at the bottom of the screen. Uh, if you can't see it, you click on more and then the Q&A comes up. Um, if you want to ask a question, hopefully we'll have a little bit of time at the end. This is quite a short session, but hopefully we may have time to answer a question or two. Um, and, and let me set the scene, uh, to what we're going to talk about. So, so we're talking, we act for a company, the company has a shareholder who, who isn't part of the management team. This shareholder is disgruntled and he or she has, uh, sent a requisition of a, of a meeting for the board to propose the appointment of new directors and the removal of some of the current directors. Uh, before we talk about the law and how it works in this topic, we do need to kind of set some facts about this company because the level of shareholding, uh, is quite relevant. In this case, the one shareholder has a significant minority interest, so they have a 40% interest, but they don't have board representation, and there's no shareholders agreement, uh, that sits behind this. The articles are model articles and don't provide any specific provisions. It would appear that this particular shareholder has fallen out with the other shareholders and the board. Uh, we don't quite know whether the, uh, 60% shareholders support the resolution were it to be proposed, but we've got a good sense that maybe they don't, uh, and the document that's landed on your desk is a requisition for an EGM to report, uh, to, to, as I mentioned, uh, change the board. What should you do?
So let me kick off by talking a bit about where this right comes from, and it comes from the Companies Act. Two sections of the Companies Act are relevant here. Section 168, which is the inalienable right of shareholders to remove a director by ordinary resolution. This provision cannot be contracted out by, by the company itself. That doesn't mean you can't have weighted voting rights, what's called Bushell and Faith clauses, or the ability to re-appoint a director who's been removed by, by the shareholders. But you cannot change the fact that this is a right that shareholders have.
How do shareholders force the company to put, uh, a resolution to, to the shareholders to consider this, because generally it's the directors who put resolutions to shareholders. This is provided by Section 303 of the Companies Act that gives shareholders the right, if they tick certain boxes, to call a general meeting. The threshold for that is 5% of the paid-up capital carrying voting rights of the company. And the procedure is that the request must state either the general nature of the business or the wording of a specific resolution. It must be signed by the members speaking for the 5% or more. It must call a meeting, um, that is deposited at the company's registered office, or that can be done electronically. Upon receipt of this notice, and we'll talk about the various options, on the face of things, having received a valid request, the directors have 21 days to send out a notice of the meeting, and that meeting must be held on no more than 28 days after the notice was given. So you're looking at, uh, at the most, a meeting that's 51 days because you need to consider clear days. What happens if you fail to act?
Well, we're going to talk about some of the options for the, for the director, for the board. On the face of things, if the directors fail to call a meeting there is a power for the members requisitioning the meeting. In fact, 50% of those members, uh, requisitioning the meeting to call the meeting themselves. So almost reach over the board and, and send the resolution to, to the other shareholders to be, to be considered. That, uh, kind of reaching over has to take place no more than 3 months after the date the directors received the requisition. And it's a meeting in the same, the same way. But we're going to talk about some other consequences of, of a decision not, not to follow the requisition. The company must pay the reasonable costs of the members if they requisition the meeting themselves. And finally, it's worth noting, and we're talking so far only about private companies, that there is another separate right in the Companies Act, uh, for 5% of the voting rights of the company or 100 members holding on average £100 of the paid-up share capital to call a, uh, to, to, to ask for a resolution to be put to the AGM of a, of a listed company.
Which doesn't apply to, to private companies. And, and that, that's quite a relevant provision, uh, not least because last week we, we advised somebody who, uh, has, has sought for a resolution to be proposed at the AGM of BP that's actually been, been rejected. And, and that was in the FT last, last week. So that's a very live issue.
Shona Coffer, Partner
But rejected, and you would say unlawfully, Saul.
Saul Sender, Partner
Well, that's a great link, Shona, because the, the company say that they had every reason to reject that resolution. Maybe you could talk about what they were possibly considering.
Shona Coffer, Partner
Um, hello everyone, I'm Shona. I'm a litigation partner at Mishcon's and have the pleasure of sharing a room with Saul, um, as I specialise in corporate, corporate disputes. Um, where are we now? So we're at a position where we've received a requisition notice that on its face is a valid request. It's ticked all of Saul's various thresholds that have to be met, and it's landed on the board and the board's desk. And the board says, okay, it ticks the boxes, but do we have to call this meeting? I don't know if I want to call this meeting. I think this shareholder is doing this for nefarious purposes. I think - and I'm going to say he throughout only because, as my children have identified, most of my clients are difficult men - but it could easily be a woman. But as we go through, this has landed. We think he's doing this just to cause a fuss. We think that he is stirring and do I actually have to call this meeting? Well, well, the answer is yes, you, you do have to call the meeting unless one of the three exclusions or conditions are not met in Section 3035.
So the board could say, I'm not going to call the meeting if one, it would be ineffective. The business that the shareholder is bringing to that meeting would be ineffective. It's quite narrow. It comes up in Saul's example of removing or appointing. We had a case where somebody requisitioned a meeting to remove, under 168, the chairman. But we said, well, we're not going to call that meeting because it would be ineffective. Yes, you can remove him if you've got the votes, but the board can just re-appoint him because there is a right under the underlying agreement for the board to appoint the chair. So it would be ineffective, we will just replace it. So we didn't call that meeting. The second ground is if the request is defamatory. I haven't come across those, um, but they should be relatively simple to bat back. And then the third is if the request is frivolous or vexatious, and that, that's what I'm going to focus on here and to explain to you how it works, I'll take a current case that I'm working on, um, and hopefully that will give you a good sense of how, when, and why you might reject the notice.
So former founder, well, founder and former CEO and 25% shareholder is upset about the way in which the company is now being managed by its private equity overlords. He thinks that he is magnificent and that if only they listen to him, the business would be great, and he feels he's been marginalised and excluded. So he has, in the course of one year, sought to requisition 5 general meetings because he says, I've lost all confidence in the management. He says, I want visibility. He says, there are serious questions for the board to answer. So, our response to him is, well, yes, okay, that's very interesting that you're very upset about all of these things and you're very exercised about the way in which the management is running this business, but the power to manage the affairs of a company is vested in its board. It is not for the shareholders to usurp that function. We say, he's calling the meetings because he wants to effectively share his own views, he wants a platform, he wants to cross-examine the board, and/or he's trying to extract information that he's not otherwise entitled to. So in this particular case, of the 5 requisitions, we did accept the first because we thought, okay, we'll give him the space to air and share his views, and it gives us an opportunity to counter those. Requests 2, 3, 4, and 5 we rejected on the basis that they were frivolous, vexatious, and/or, in certain of them, ineffective. That was, I would say, the right move, but it is a bold move because it does expose the board to criticism by that shareholder, which may or may not then be actioned on. And so I want to hand over to Daniel, who will talk you through the exposure to the board if they make that decision to refuse to comply with the request and to reject it.
Daniel Lightman, KC
Thank you very much, Shona. Hi, I'm Daniel Lightman. I'm at Serle Court Chambers. I have a general chancery commercial practice, but I have a particular interest both academically and in practice in company law and minority shareholder litigation. Now, as, uh, Shona has indicated, the board of the company has to consider carefully how to respond to a requisition request. Its response may have a significant impact on the options which are or become available to the minority shareholder. The board may have solid arguments, but it is not required within the meaning of Section 3032 of the Companies Act to call an EGM for shareholders to consider the proposed resolution. On the facts of the case, there may be strong arguments that this particular resolution would, if passed, be ineffective or frivolous or vexatious. But the board should bear in mind that if it refuses to call a meeting, there will be potentially adverse consequences. The right of shareholders under Section 168 of the Companies Act, um, which Saul mentioned earlier, to remove a director is, as Palmer's Company Law notes, one of the most important rights given to shareholders. Whereas in English company law the balance of power is normally with the directors, the power to remove directors enables the shareholders to assert themselves against the directors if necessary, and makes it clear that the ultimate control is in the hands of the proprietors of the company.
So if it refuses to call an EGM, the board will be choosing proactively to prevent shareholders from considering a resolution which concerns the exercise of an important right of its shareholders. It may consider, the court may consider, it's not required to call an EGM, but equally it is not required not to do so. And if a board refuses to comply with a requisition on what may be perceived to be an unmeritorious basis, this can create or reinforce the impression that the board, even if it includes directors supposedly independent of the majority or the dominant shareholder, is institutionally biased against the 40% shareholder. The divergence between management and ownership can be shown to be stark. And if it spends money getting advice from expensive lawyers as to how to fight off a requisition, the board may appear to be expending company monies to promote the interests of one shareholder or one group of shareholders or the board itself at the expense of a substantial shareholder in the company. Behaviour of this nature by the board can provide or add to grounds for the 40% shareholder to present an unfair prejudice petition and the actions or omissions of the board may later end up being analysed in minute detail by the court and be the subject of a detailed judgment.
If a shareholder does present or just threatens to present an unfair prejudice petition, the company needs to be careful to avoid the temptation of fighting the majority shareholder's corner or spending company monies to justify what it has done. And the behaviour of a board can also impact on the remedy which a shareholder is granted. Directors often fail to appreciate that the petitioner is able to rely on actions of the company or the board or the other shareholders after the petition has been presented. As Mr Justice Paton noted in Grace v Biagioli, the prospective nature of the jurisdiction is reflected in the fact that the court must assess the appropriateness of any particular remedy as at the date of the hearing and not at the date of presentation of the petition, and may even take into account conduct which has occurred between these two dates. So, in a case in which I represented the petitioner, Arrow and Edwardian, the board took umbrage at the petitioner's allegation that it was being paid excessive directors' remuneration and wanted to file a defence to this petition to counter that allegation. But that was contrary to the long-standing principle that company money should not be expended on behalf of one side to a shareholders' dispute.
So I applied for an injunction to restrain the company from filing a defence. The board strongly opposed the application. Mr Justice Ferris granted the injunction. I then amended the petition, um, to add a further allegation that by seeking to file a defence and by strenuously opposing the injunction application, the board showed that it was institutionally prejudiced against my client. This significantly weakened the majority shareholders' defence to the petition, which settled shortly afterwards. And if unfair prejudice is established, and the court makes a share purchase order, the basis on which it makes such an order may be impacted by the behaviour of the board. In the present scenario, an important issue will be whether the court should order the petitioner's shares to be valued subject to a minority discount, which may be substantial in this case. The petitioner is a 40% shareholder but has no rights under any shareholders' agreement and no seat on the board. It's not a quasi-partnership. So he or she will need to develop arguments and a narrative to support the argument but there should be no minority discount. For example, by trying to show that they are an unwilling seller forced out by the unfairly prejudicial conduct of which they complain from a company in which they'd otherwise have preferred to remain involved, and/or that the majority shareholder would enjoy a windfall from and would be unjustly enriched by cynically driving petitioner out and then acquiring their shares subject to a minority discount. By its conduct, the board may inadvertently feed such a narrative, leading to the majority shareholder having to pay a premium for the petitioner's shares.
Shona Coffer, Partner
So what I would say here is that Daniel's example and the sort of, which I think from a board's perspective could seem relatively alarming, is, is in the context, I think, of a situation where the board is the majority. They are majority reps as opposed to any degree of, um, non-executive independent directors. And I think that for the audience - and we have no idea where you're coming at it from, examples or situations that you find yourselves in - it hugely depends if you are in a family-owned, family-run business, and there is a majority and a minority and a fight between them, and it is in fact one and the same between the shareholders and the board who are resolving whether or not to respond to a request for this requisition, all the points that Daniel has brought in and the relatively sort of scary consequences of refusing, um, to call the meeting may come into play. In, in my mind, in the case that I'm currently working on, I think we're at a slightly different end of the spectrum where there is a former CEO chunky shareholder, but there are lots and lots and lots and lots of other shareholders as well as the private equity holder who control the management. There are independent directors. The board is diverse and relatively broad, and collectively that board think that the minority founder shareholder is off on a bit of a jolly trying to cause trouble. So you've always got to ask yourself as a board, if you're advising the board or if you are in fact a board member, what is my problem with this requisition? What am I worried about and why? What is the issue we're trying to guard against? Because, and then in whose interests is the board, you know, advancing the position? Um the one thing we would not want you going away from this thinking is you shouldn't take advice as a board. You must. That advice might be from Daniel. Do you know what, as a board, you should not be getting involved in this because this is ultimately a dispute between the shareholders and if you keep going and if you keep taking a strong position, there will be consequences. In a different setup with a different board with different shareholdings, it may well be the company does need its own advice and to take a relatively active step in managing and dealing with this situation. It will always depend on the composition of the particular company, but also how claims are being run.
Um, so I think as always, and not very helpfully, it depends on the underlying facts, and Saul set a purposefully prescriptive set of facts for this.
Saul Sender, Partner
Yes, so thank you, Shona. So, two points from me. Firstly, um, the Q&A is open, and we will answer any frivolous or vexatious questions if you want to put those to, to us. And then secondly, a question really for Daniel: is there a difference between kind of the obligation of the board to facilitate the asking of the resolution to the shareholders versus, you know, the fact that the board can take this personally. I mean, it's obviously a very kind of personal thing that, that a shareholder wants to remove a, a director, and you can't ignore that. And also, it is possible for the board to have a view, to have a recommendation, you know, like in a public company context, which is different than rejecting the resolution, the requisition. How, how does a board navigate that?
Daniel Lightman, KC
Yes, so well, as Shona has emphasised, it is important that the board does take legal advice. I'm not advocating, um, that it shouldn't, it's just it needs to be careful what steps it takes or doesn't take, doesn't inadvertently make the situation worse. Um, what the board has to have regard to is the fact that it owes statutory duties under the Companies Act. For example, Section 171, acting for proper purposes. Section 172, they have to act in good faith to promote the company's success for the benefit of its members as a whole, and in doing so, to have regard, inter alia, to the need to act fairly as between members of the company. So not, um, allowing a. a, um, resolution to be put to the shareholders, it needs to be justified in accordance with, with that duty. And, um, as you pointed out, Saul, it's open to the board to make recommendations. It could put forward a, call an EGM, but then say for various reasons they don't consider this resolution should be passed, and give information and allow the shareholders to make an informed decision.
Saul Sender, Partner
Thank you. Um, so we've had a question, a vexatious, a question about vexatiousness. Um, is there any kind of test for what is considered vexatious versus what's simply disliked by the board but reasonable? And that's from Beth. Thank you, Beth.
Shona Coffer, Partner
I mean, Daniel, I'll hand over to you in a minute, but when we dealt with this, we went and took advice from counsel on, you know, sort of, have we hit that threshold? Is what he is doing vexatious? And as always, a bit like my earlier fence-sitting comment, it depends. In that case, we were looking at the number of times the requisitions are being made, the manner in which they're being made, the scope of the resolutions that are being requested, or in fact, not even resolutions, they were, they were sort of rants. But it, I would say threshold is pretty high for a request to be vexatious, and we were treading very carefully to make sure we felt we had reached that threshold. We were trying very hard to rely on other limbs to reject it before we got to the, and also it's vexatious and therefore we're not going to call the meeting. I mean, Daniel, do you have a view?
Daniel Lightman, KC
I agree. I think it's quite a high threshold. I think what you may be referring to also, Shona, is that you can sometimes look at a resolution in context, not in and of itself, but also if it's like, if they've been requisitioning 5 or 6 or 7, um, um, EGMs already that, that month or that year, then, and they're trying to call the same resolution again, or similar resolution to one which has, which has already been rejected, um, um, clearly in the past, one could look at it in context as well.
Shona Coffer, Partner
And I think the latter point for us was the most compelling when we finally took the decision to rely solely on rejecting it because it was vexatious. We said that this has already been before the shareholders and resoundingly rejected. We're not doing it again. Which was why, and I think Saul, when we were preparing for this talk, one of the questions Saul would say to me is, you know, what can I give you to take away on this? How do you avoid this problem? You know, my experience, and we have so many of these and they're increasing, I suspect probably because ChatGPT is telling people, oh, you can do this, and why don't you requisition a meeting, and here's the request. Um, a lot of these are driven by somebody who feels, the requisitioner is invariably someone who feels they're on the outside. They're outside the tent, they're feeling vulnerable, they feel like they're a victim, and they're upset. And the natural reaction of a board, particularly if the resolution being put is, I want to get rid of you because I think you're rubbish, is to be defensive. Is to shut down, is to pull the drawbridge up.
I'm not sure that's necessarily always the right course of action, because as Saul said, in this set-up we have no shareholders agreement, model articles. This 40% shareholder, notwithstanding that they own 40%, has access to absolutely nothing, um, under the Companies Act or underneath the model articles at all. Bare minimum, see the accounts. And there's a temptation to say, well, you're not entitled to information, so jog on. But that does feed the beast. They're upset, they're worried, they don't know what's going on and you do need to think carefully rather than just thinking, well, I'm going to reject your request and I'm going to bring the drawbridge up. I'm not telling you anything, you don't have a right. You do want to, I think, consider whether there's a way of bringing them into the tent to try and defuse the bomb and start sharing a bit more, start being a little bit more visible, giving them a bit more of a platform. Perhaps not a general meeting with all the shareholders, but with the board, maybe an observer right, whatever it might be, to, to diffuse this before it turns into a drama.
Saul Sender, Partner
Bring them into the tent. Thank you, Shona. Daniel, any final words?
Daniel Lightman, KC
I think just echoing what Shona has just said. Um, um, however sorely the board may be tempted to take steps to defend itself or the majority shareholder against the actions or allegations of an irritating minority shareholder, the Board should be careful at all times not to take any steps which will make the situation worse or make their position more difficult.
Saul Sender, Partner
Thank you, Daniel. Thank you, Shona. I think that is definitely the takeaway. I think you need to know your legal rights, um, but applying them without understanding the consequences or, or seeing the wider business purpose is, is going to be difficult here. So, um, we hope that everyone found this webinar useful. Thank you, Daniel. Thank you, Shona, and have a great day.