10 March 2003

KEEBLE HAWSON

www.keeblehawson.co.uk

E-MAIL UPDATE

Company Law - decisions of shareholders

In a recent Court of Appeal case it was held that a decision of a company which has not been formally authorised by way of a shareholder's resolution in a general meeting, even when the articles require it, may still be binding.

In the case of Monecor (London) Ltd -v- Euro Brokers Holdings Ltd, both parties were equal shareholders in a joint venture company. The dispute arose in respect of the regulation of company's affairs. The Shareholder's Agreement stated:

"If at any time further funding shall be required by the Company.....the Board shall issue a notice to each Shareholder.....If either Shareholder does not respond to the Capital Call...the other Shareholder shall have the right to provide the whole of the funding itself and if it does so, it may require the Declining Shareholder to sell to it its entire shareholding in the Company".

No board was constituted in accordance with the Articles of Association or under the terms of the shareholders agreement, as there were no directors appointed by Monecor (London) Ltd at the time. Consequently, no notice was issued to the shareholders. An email was sent by the Finance Director which was to be treated as a "Capital Call". Monecor failed to pay in full the amount requested in the Capital Call, therefore giving Euro Brokers the right to purchase Monecor's shareholding in the company. Monecor appealed on the grounds that the email was not a Capital Call within the terms of the agreement.

The Court of Appeal upheld that what is important is ultimately that the members who exercise their power over the affairs of the company by attending and voting at a general meeting, have reached an agreement. As long as it is shown that it had been agreed then that agreement was as binding as a resolution would have been in following the correct procedure. They cannot claim that they are not bound merely because the formal procedure was not used. Therefore the fact that the only two shareholders in the company received a Capital Call, without notice being issued by the Board, was as binding as if notice had been issued.

It is a sensible principle that any such agreement will be binding irrespective of whether a formal procedure was followed, which would only exist for the benefit of those who do not wish to comply.

Although this principle has been upheld, it should never be assumed that it will always be relied upon. The best solution will therefore be to always have it clearly written in the shareholders' agreement.

For more information please contact
Derek Rodgers
0114 272 2061
www.keeblehawson.co.uk

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