Division 4 of Part VII of the Companies Act 1997 gives a dissenting shareholder an exit rather than a veto.
Section 91 — the three conditions
(a) a shareholder is entitled to vote on the exercise of a power set out in — (i) section 88(1)(a) and the proposed alteration imposes or removes a restriction on the activities of the company; or (ii) section 88(1)(c) or (d); and
(b) the shareholders resolved to exercise the power; and
(c) the shareholder (i) cast all the votes attached to shares registered in their name and having the same beneficial owner against the exercise of the power; or (ii) where the resolution was passed under section 103, did not sign it, or refrained from signing it in respect of all such shares,
that shareholder is entitled to require the company to purchase those shares in accordance with section 92.
| Resolution | Buy-out right? |
|---|---|
| Constitutional alteration imposing or removing a restriction on the company’s activities | Yes — s 91(a)(i) |
| Any other constitutional alteration | No under s 91 — but see section 99 if class rights are affected |
| Major transaction — s 88(1)(c) | Yes |
| Amalgamation under s 234 — s 88(1)(d) | Yes |
| Change of name — s 88(1)(b) | No |
| Putting the company into liquidation — s 88(1)(e) | No |
| Alteration of shareholder rights affecting an interest group — s 98 | Yes — under s 99 |
Paragraph (c) requires the shareholder to cast all the votes attached to shares registered in their name and having the same beneficial owner against the power. Splitting the vote, abstaining, or failing to attend defeats the right.
Where the resolution was a written resolution under section 103, the equivalent is not signing it — or refraining from signing in respect of all those shares.
Section 92 — the one-month notice, and the board’s four options
A shareholder entitled under section 91 or section 99 may give written notice to the company requiring it to purchase those shares — (a) within one month of the passing of the resolution at a meeting; or (b) where it was passed under section 103, before the expiration of one month after notice of the passing is given to the shareholder.
(a) agree to the purchase of the shares by the company; or
(b) arrange for some other person to agree to purchase them; or
(c) apply to the Court for an order under section 95 or section 96; or
(d) arrange for the resolution to be rescinded in accordance with section 88, or decide in the appropriate manner not to take the action,
and give written notice to the shareholder of the board’s decision.
Faced with a buy-out demand it cannot afford, the board may simply abandon the transaction — rescinding the resolution under section 88(2), or deciding not to proceed. That is why the right is an exit rather than a veto: it makes the majority price in the cost of the minority’s departure before pressing ahead.
Note that a resolution to put the company into liquidation can never be rescinded (s 88(3)) — but that resolution does not trigger a buy-out right in any event.
Section 93 — nominating and challenging the price
(1) On giving notice under section 92(2)(a), or within seven days, the board shall nominate a fair and reasonable price and give notice of it to the holder.
(3) The shares are deemed to have been purchased by the company upon receipt by the shareholder of that notice.
(2) A shareholder who considers the price is not fair or reasonable shall forthwith give notice of objection.
(4) If no objection within one month — the company shall forthwith pay the nominated price and the shareholder shall forthwith deliver any share certificate.
(5) If an objection is received within one month — the company shall within seven days (a) apply to the Court to appoint an arbitrator to determine a fair and reasonable price, and (b) pay a provisional price equal to the price the board nominated.
(6) On payment of the provisional price, the shareholder shall forthwith deliver any share certificate.
The shares are deemed purchased when the shareholder receives the price notice — not when the price is agreed or paid. From that point the dissenting shareholder is out; what remains is the amount.
And the company must pay the provisional price even while the price is disputed. A minority who objects is therefore not kept waiting for its money, only for the balance.
Section 93(7) requires the arbitrator to expeditiously determine a fair and reasonable price. Under section 93(8), if the determined price exceeds the provisional price the company forthwith pays the balance; if it is less, the shareholder forthwith repays the excess. Under section 93(9) the arbitrator may award interest on the balance or excess at such rate as he thinks fit, having regard to whether the provisional price paid, or the reference to arbitration, was reasonable.
A board that nominates an artificially low provisional price risks an interest award against the company. A shareholder who objects to a perfectly fair price risks paying interest on the excess. Section 93(9) directs the arbitrator to look at exactly that.
Section 94 — purchase by someone else
(1) Section 93 applies, with necessary modifications, to a purchase by a person with whom the company has arranged a purchase under section 92(2)(b) — as if references to the board and the company were references to that person.
(2) Every holder of shares to be purchased under such an arrangement is indemnified by the company in respect of loss suffered by reason of the failure by that person to purchase them at the price nominated or fixed by arbitration.
So the company can pass the obligation to a purchaser — commonly the majority shareholder — but it cannot pass the risk. If the nominated buyer fails to complete, the company indemnifies the seller.
Practical points
- Vote, and vote everything against. Section 91(c) is unforgiving; abstention loses the right.
- Diary one month from the resolution — or from notice of a section 103 written resolution — for the section 92(1) notice.
- Object promptly. Section 93(2) says “forthwith”, and the objection must reach the company within one month of the price notice.
- Prepare valuation evidence before the arbitration — and note that under section 90A you may require a statement of the total shares of your class on issue.
- Boards should model the buy-out cost before proposing a major transaction or amalgamation. If the company cannot fund it, the practical choices are option (b), a section 95 or 96 application, or abandoning the transaction.
- Remember solvency. A purchase under sections 91 to 93 is one of the permitted routes under section 56(1), and section 96 exists precisely because the purchase may fail the solvency test.
Sources
- Companies Act 1997 — ss 56, 88, 90A, 91–96, 98, 99, 103, 110, 234
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.