Corporate Law Update: 10 - 16 February 2024

This week:

Shareholders unable to circulate written resolution without board involvement

The members of a private UK company were unable to pass a shareholder resolution using the statutory written resolution regime in the Companies Act 2006 because the company’s board had not resolved to circulate the resolution.

What happened?

Under the Companies Act 2006 (the Act), the shareholders of a private company can pass a resolution in one of two ways: in general meeting or as a written resolution. (Public companies cannot pass shareholder resolutions by way of written resolution and must convene a general meeting.)

If passing a written resolution, the company must follow the statutory procedure set out in Part 13 of the Act. This requires the company’s board of directors to circulate the written resolution to all “eligible members” of the company (broadly, those members who are entitled to vote on it). The resolution is passed if eligible members who hold sufficient votes agree to it within 28 days of its circulation.

Under section 292 of the Act, members holding at least 5% of the voting rights in a private company have a statutory right to require the company to circulate a written resolution. However, if the company fails to do so, the Act does not give the members an explicit right to circulate the resolution themselves.

(This is in stark contrast to the position for general meetings. Members holding at least 5% of the voting rights in a company have a statutory right to require the company to call a general meeting. If the company fails to do so within a specific time, the members can convene the meeting themselves.)

In this case, a shareholder in a private company sent the company’s board a letter requiring the company to circulate a written resolution to appoint two new directors to the board.

One minute later, a second shareholder sent the board copies of the written resolution, signed by himself and the first shareholder, who together held sufficient voting rights to pass the resolution.

The two directors then purported to act on the basis that the resolution had been validly passed.

The company’s sole director did subsequently circulate a revised written resolution to appoint the two directors to the company’s board. However, none of the shareholders signed that revised written resolution.

The company’s other director, as well as several other shareholders, applied to court for a declaration that the original written resolution had not been validly passed because it had not been approved and circulated by the company’s board, and the revised resolution has not been passed because the required number shareholders had not signed it within the 28-day period.

What did the court say?

In short, the court held that the original written resolution invalid because it had not been circulated by the board.

The court noted that the High Court had previously considered the same issue (Re Sprout Land Holdings Ltd (in administration) [2019] EWHC 806 (Ch)) and came to the same conclusion.

The appropriate remedy for the aggrieved shareholders was to require the board to convene a general meeting and, if it failed to do so, convene it themselves. They had no power to pass the written resolution themselves.

The court also rejected an argument that, by signing the original written resolution, the shareholders in question had effectively “pre-agreed” to the subsequent revised written resolution.

What does this mean for me?

The decision is not surprising. The previous case law (Re Sprout Land Holdings) has shown that there is no “self-help” remedy for shareholders under the written resolution regime.

Instead, shareholders who wish to force a resolution of a company will need to go through the formal process of requisitioning a general meeting under section 303 of the Act.

That can be quite time-consuming: a board has 21 days to respond to a request for a general meeting and can call the meeting on up to 28 days’ notice. This means the process of tabling resolutions can take up to seven weeks.

A first step, therefore, is for aggrieved shareholders to engage with the company’s board and attempt to resolve any issues by negotiation. This can happen before or after requisitioning a general meeting.

Alternatively, if all of a company’s shareholders are in agreement, they may be able to utilise the so-called “Duomatic procedure” to pass a shareholder resolution.

This principle (which can be used for both public and private companies) treats a resolution as effectively passed if all of the company’s members informally assent to it.

However, the Duomatic principle is not available in all circumstances or for all types of resolution and is usually regarded as a last resort.

Access the court’s decision on written resolutions in Kamenetskiy and others v Zolotarev and others [2023] EWHC 2619 (Ch).

FCA publishes guidance on trading by organised crime groups

The Financial Conduct Authority (FCA) has published Market Watch 77, in which it sets out some observations on trading by organised crime groups (OCGs) and how firms can mitigate the risks of being used to facilitate their trade.

The bulletin sets out certain typical behaviours that are indicative of trading by an OCG, including patterns of trading before M&A announcement and press speculation, as well as feeding stories about mergers and acquisitions, both true and false, to major financial media outlets.

Although aimed at executing firms, the bulletin also contains useful information for advisory firms. These include remaining alert to the risk that members of their staff with access to inside information may be approached by members of OCGs with a view to disclosing that information.

The FCA has also set out measures that advisory firms may consider to guard against this risk, including limiting which M&A advisory staff are identified in social media profiles.

Read the Financial Conduct Authority’s Market Watch 77