Corporate Law Update

In this week's update: clarification of a chairman's power to adjourn a meeting where there is uncertainty about an attendees entitlement to vote and an unfair prejudice petition was rejected for lack of prejudicial action by the company.

This week:

Chairman entitled to suspend meeting due to question over shareholder

The High Court has said that it was arguable that the chairman of a general meeting had the power to adjourn the meeting where there was a dispute over whether one of the attendees was a shareholder and so entitled to vote.

What happened? Limited v Howe concerned a company that ran a payment protection insurance (PPI) claims business.

The directors of the company convened a general meeting to consider resolutions to appoint two further directors. One of those proposed directors (H) had previously been involved in the business for a short period and claimed to hold two-thirds of the company’s shares.

However, H’s claim to be a shareholder had previously been rejected by the company’s board. The board informed H of this and told him he was not entitled to attend or vote at general meetings of the company.

When the general meeting took place, H nevertheless attended with his lawyer. The chairman of the meeting reminded H that the board had determined he was not entitled to attend and asked him and his lawyer to leave. When H refused to leave, the chairman informed the meeting that it could not continue and he adjourned it.

H and his lawyer did not leave. Instead, a proxy for a friendly shareholder purported to re-open the meeting. H, that proxy and another friendly shareholder then proceeded to pass resolutions to appoint new directors to the board, including H himself. Immediately after the general meeting closed, the proxy purportedly called a board meeting, at which the new directors passed resolutions to appoint H as the company’s standing chairman and to add him (and others) to the company’s bank mandate.

The original chairman (through the company) applied to court for an injunction to prevent the “new directors” from acting or representing themselves as directors of the company. He argued that he had been entitled to adjourn the general meeting, because it was not possible to proceed with business while it was unclear whether H held a bloc of voting rights allowing him to affect the result of any resolutions passed at that meeting. Because the meeting had been validly adjourned before any resolutions were passed, the resolutions to appoint the “new directors” were invalid.

The "new directors" argued in response that there was no question that H was a shareholder, and so the original chairman had no right to adjourn the meeting. They also argued that the chairman had the power to adjourn the meeting only if the company’s constitution did not provide for what was to happen, but here the articles did exactly that. They were therefore entitled, under the company’s constitution, to step in and continue the meeting themselves.

What did the court say?

The judge agreed with the original chairman. He said it was sufficiently arguable that the chairman of a general meeting has a power at common law to discontinue a meeting if there is a question of whether someone does or does not hold a “determinative” vote, and this means the “views of the meeting” cannot be obtained.

In this case, there was no point in going on to put the resolutions to the meeting, given that H supposedly had a “swing vote”. He rejected the idea that the original chairman could simply have continued the meeting and disregarded H’s votes.

He also rejected the idea that he could have permitted the votes to continue on the assumption that H was a shareholder, then used his own casting vote to defeat the resolutions. This would have led to challenge and would not have resolved the underlying question of whether H was entitled to vote.

The judge therefore granted the injunction.

What does this mean for me?

The decision is useful for anyone acting as the chairman of a general meeting. It reinforces the chairman’s power to adjourn a meeting where it is impossible to ascertain the sense of the business at the meeting, even if the company’s constitution does not expressly permit this.

It is important not to extrapolate too much from this judgment. The judge here was merely considering an application for an injunction. He was being asked to decide whether there was a “serious issue to be tried”, and not to reach a definitive conclusion on whether the original chairman was in fact entitled to adjourn the general meeting. However, the decision does provide a useful indicator of the approach the courts will now take to the powers of the chairman at a general meeting.

It is also important to bear in mind the particular circumstances of this case. Here, the individual claiming to be a shareholder would have held a large enough vote to affect the outcome of the resolutions at the meeting. In this kind of scenario, it is logical to conclude that the business of the meeting cannot proceed, as it would not be possible to tell whether resolutions have been passed.

However, where a person claiming to be a shareholder holds only a small number of votes, it is much less likely that their vote will affect the outcome of resolutions. In that case, it may be more prudent for the chairman to continue the meeting and either provisionally to disregard that person’s votes, or to adjourn the meeting only if and when that person’s vote becomes determinative and it is impossible to continue the meeting without resolving the matter.

Petition for unfair prejudice based on “future harm” fails

The High Court has dismissed a petition in unfair prejudice by a shareholder and former director and company secretary, who was removed from her role and replaced by a new board.

Odutola v Hart and others concerned a residents’ association company which was incorporated as a company limited by shares. The shareholder in question complained that her dismissal was unfair, that the incoming directors had failed to circulate minutes of board meetings, and that they were incapable of acting in the company’s best interests.

The judge rejected her petition. She said that remedies for unfair prejudice can be granted only if the company acts in some way that prejudices the shareholder. However, the shareholders’ complaints about the new directors’ likely behaviour reflected only some “unspecified harm in the future”. The behaviour she complained of had not yet occurred and so could not be said to be acts of the company.

The dismissal and the failure to circulate minutes, by contrast, were acts of the company. However, they had not in fact prejudiced the shareholder in any unfair way and so there was no claim.

We report frequently on successful unfair prejudice cases where a director-shareholder has been marginalised from their company. (See, for example, our update last week.)

However, it is important to remember that not every instance of a director-shareholder being removed will amount to unfair prejudice. To establish a claim, a shareholder must show three things:

  • The allegedly improper behaviour is in fact an act of the company, and not merely of its shareholders. Shareholders are generally free to act in their own interests and (with some exceptions) actions they take cannot be challenged by a minority.
  • The behaviour has prejudiced the shareholder in some way. The fact that the shareholder may disapprove of the way the company has conducted its affairs is not sufficient to mount a claim if, in reality, the shareholder is no worse off for the conduct.
  • That prejudice must be unfair. Normally this means that the company must have acted unlawfully or in some way that goes against the shareholder’s legitimate expectations.