INTRODUCTION

A shareholder denotes a person who holds or owns the shares in a company. On the other hand, a member denotes a person whose name appears on the register of members. For all practical purposes the words �shareholder� and 'member' are used interchangeably because under normal circumstances a shareholder will also be a member and a member will be a shareholder. 

But looked at from a close point, we may come across a few exceptional circumstances where a shareholder may not necessarily be a member and a member may not be a shareholder. For example

i)              Companies limited by guarantee or unlimited companies having no share capital (without share capital) will only have members and not shareholders.

ii)            A holder of a share warrant is a shareholder but not a member as his name is removed from the register of members immediately on the issue of the share warrant. 

iii)          Similarly a transferee or the legal representative of the deceased member may be a shareholder but he may not be a member until his name is entered in the register of members. 

iv)          The transferor of the deceased person is a member so long as his name is on the register of members, whereas he cannot be termed a shareholder. 

v)            A person who has forfeited his shares ceases to be a shareholder of the company but he remains a past member for purposes of winding up. 

However, in this chapter we will give the terms the same treatment. 

WAYS OF BECOMING A MEMBER 

There are various ways of becoming a member of a company as discussed below;

1)  By allotment

Normally a person would become a member of the company by applying for the shares and being allotted them directly by the company. 

However, it was held in Nicol's case that the membership commences from the moment the name is entered in the members' register. If the company wrongfully refuses to enter the name in the register, the allottee must take rectification proceedings for a court order directing the company to enter the name in its members' register

2)  By subscribing to the memorandum 

Section 10 of the Act provides that "the subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company and on its registration, shall be entered as a member in its register of members". Thus every subscriber to the memorandum of association of the company becomes a member "ipso facto" on the incorporation of the company and is liable as the holder of whatever number of shares he has subscribed for. In the case of the subscribers of the memorandum no allotment is necessary and no entry on the register of members is necessary to constitute membership. 

3)Agreement to become a member and entry on the Register 

In cases of membership other than subscription to the memorandum, two essential conditions must be satisfied:

(a) An agreement to become a member and  (b) Entry on the register. 

These conditions are cumulative: unless they are both satisfied the person in question has not acquired the status of membership; it is a condition precedent to the acquisitions of such status that fie shareholder's name should be entered on the register. Conversely, the company is not entitled to place a person's name on the register without, is consent. A person improperly registered without his consent is not bound thereby and may have his name removed from the register. 

4)  By agreeing to take qualification shares 

All persons who have signed an undertaking for their qualification shares, for acting as a director of the company and delivered to the registrar of companies are also in the same position as subscribers to the memorandum. As such, they are also deemed to have become members automatically on the registration of the company. 

N/B This method is only possible in public companies with/having a share capital or private company. 

5)  By transfer 

A person also gets registered as a member if he buys the shares in the open market. This is possible in the case of a contract of sale or other transaction. There is no difference between a contract to take shares and any other contract. A formal contract is not necessary.

A transferee also acquires his membership by virtue of sub�section 2 of s.28, being a person who has agreed to become a member. The principle in Nicol�s case applies to transferees as well, and a transferee becomes a member from the moment his name is entered in the register of members.

6) By transmission 

A person may become a shareholder by transmission of shares through death, lunacy or insolvency of a member. Transmission is different from transfer in that it is an involuntary transfer. It takes place by operation of law to a person who is entitled under the law to succeed to the shares of the deceased or lunatic automatically and does not require an instrument of transfer. Here, the company is not entitled without his consent to place the name of the person who may become the shareholder in consequence or by reason of the death or bankruptcy of member or any other event constituting transmission on the register of members.

7)  By estoppels 

If a person's name is improperly placed on the register and he knows and assents to it, attends company meetings, accepts a dividend, he shall be deemed to be a member. Under this principle if a person holds himself out as being in a position of membership, which is not true, he will be estopped from denying that he is a member.

8)  Transmission on bankruptcy of Member

A bankrupt member's shares in a company will be transmitted to his trustee in bankruptcy according to the principles of bankruptcy law. The company's articles may give the trustee an option of being personally registered as a member, as is provided for by Table A, Article 30. If the trustee elects or decides to be registered as the holder of the shares the election constitutes the agreement to be a member and the provisions of sub�section 2 of s.28 become applicable�ie. the trustee in bankruptcy will become a member from the moment his name is entered in the register of members.

9) Compliance with s.182 (2)

A person who has consented to be a director, and has given the statutory undertaking to take and pay for his qualification shares, is declared by s.182(2) to be, "in the same position as if he had signed the memorandum."

The provisions of s.28 (1) accordingly apply to him, and he becomes a member of the company at the moment the memorandum of association is registered.

Member and Shareholder

 In companies having a share capital, a shareholder is also a member of the company. In companies, not having a share capital, there are members but no share� holders. "The terms 'member' and 'shareholder' are synonymous, apart from the now exceptional case of the bearer of a share warrant who is shareholder but is not a member because he is not registered in the register of members." 

The words, "member," "shareholder", and "holder of a share" have been used interchangeably in the Companies Act. The expression, "holder of a share" denotes, in so far as the company is concerned, only a person who, as a shareholder, has his name entered in the register of members.

Who May Become A Member? 

All persons who are competent to contract may in general become members of a company. There are however some special considerations to the following:

1. Company as member of company 

A company may become a member of another company.The authorization would be made by a resolution of its directors or other governing body under s.139(1)(a).

Section 29(1) provides that a body corporate cannot be a member of a company, which is its holding company. Any allotment or transfer of shares in a company to its subsidiary shall be void except�

Where the subsidiary is concerned as personal representative or trustee, unless the holding company or its subsidiary is beneficially interested under the trust and is not so interested only by way of security for the purposes of a transaction entered into by it is in the ordinary course of business which includes the lending of money.

This somewhat lengthy provision may be explained with the aid of some examples.

i. M, who is a member of Z Bank Ltd, appoints its subsidiary, Z Bank (Executor & Trustee) Ltd, as his executor. On M's death, the subsidiary may be registered as a member of the holding company in respect of M shares. ii. M transfers his shares to the subsidiary (in the above example) on trust for a beneficiary B, who borrows money from the holding company and secures repayment by mortgaging his interest in the shares to the company.

Where the subsidiary was a member of the holding company at the commencement of the Act on 1st January, 1962. Such a member would have no right to vote at meetings of the holding company or any class of members thereof except in respect of shares it holds as personal representative or trustee..

2. A Firm 

A partnership firm cannot become a member of a company, as it is not a legal person having a separate entity from that of partners. Partners may be registered as joint holders in which case each of them becomes a member. A company may however be a partner in a firm. 

3. Minor 

An infant is any person who has not attained the age of 18 years (the Age of Majority Act 1974). He has a common law right to enter into a contract to buy shares in a company, and thereby become a member of the company. The contract is however voidable at his option, and he may avoid it at any time during his infancy or within a reasonable time after attaining the age of 18 years. A transfer to a minor is good provided that the company registers the transfer, which it has power to refuse. Until repudiation either by the company or the minor he has the full powers of membership.

 However, it was explained in Steinberg v Scala (Leeds) Ltd that although the infant has a right to repudiate the contract he would only be entitled to get back the amount already paid if there has been a total failure of consideration because the shares have become valueless. In this case, Miss Steinberg, an infant, purchase 500 �1 shares from the defendant company.  She paid 10 shillings on each share and, being unable to meet some calls, repudiated the contract while she was still a minor and claimed 

(a) rectification of the register of members to remove her name therefrom, and thereby relieve her from liability on future calls; and (b) recovery of the money already paid.

The court held that:

(a)    She was entitled to rescind and so was not liable for future calls, but

(b)    She was not entitled to recover the money already paid because there had not been a total failure of consideration.  She had got the thing for which the money was paid, namely, the shares.  Although she had not yet received any dividends on the shares, the shares had some value.

A company's articles may however restrict membership of the company to adults only, in which case an infant would not become a member of the company.

4. Bankrupt 

A bankrupt individualmay be a member of a company; as long as he is on the  register of members, he is entitled to vote and to make use of the right  of a minority shareholder. 

5. Foreigners 

A foreigner can be a shareholder, but in times of war (where he  becomes an alien enemy) his powers of voting and his right to receive  notice is suspended.

6.       Personal Representatives

On a shareholder's death, ownership of the shares previously held by him is transmitted to his personal representative, who may be an executor or administrator. The personal representative would be entitled to be registered as a member of the company unless the company's articles provide otherwise.

7.       A person upon whom shares have devolved pursuant to the Provisions of Bankruptcy Act, may become a member of the company

Legal protection of Minors

According to decisions of English courts, companies are democratic organisations whose affairs are to be managed by the directors according to the provisions of the Companies Act, the company's memorandum and articles of association and, where a decision of the members is required, according to the decision of the majority of the company's members expressed as an ordinary or special resolution.  The minority of members who have been outvoted during the passing of the relevant resolution must be prepared to abide by the decision of the majority of the company's members.

There are however a few but significant instances in which the Companies Act and the general law prescribe certain legal limits on the power of the majority to bind the minority of the company's members.  In particular, a resolution passed by the majority would not be allowed to prevail in certain circumstances if it is unfair or prejudicial to the minority, such as a resolution which �

i)           requires a member to take or subscribe for more shares than the number held by him at the date on which the resolution was passed 

ii)         alters the company's objects;

iii)       reduces the company's capital in a way which is not "fair and equitable" between the different classes of shareholders;

iv)        empowers the company to embark on or continue with, a course of trading which was not contemplated by the minority at the time the company was being formed (in which case the court would be prepared to make an order for the winding up of the company on the ground that it is "just and equitable" to do so); or 

v)         constitutes "a fraud on the minority".

Statutory Provisions

Variation of Class Rights

Article 4 of Table A permits a company to vary the rights attached to any class of shares if the proposed variation is consented to in writing by the holders of three�fourths of the issued shares of that class or is sanctioned by a special resolution passed at a separate general meeting of the holders of the shares of the class.

The purpose of this article is to protect the minority members in a company against the majority members in the company by ensuring that they do not hold a joint meeting in which the majority class could pass a resolution for variation of the minority's rights despite their opposition.  Such a resolution would not be a fair one as it would effectively enable the majority forcibly to modify or appropriate to themselves some rights of the minority.  However, the fundamental flaw in the article is its failure to make provision for the protection of the minority members in the minority class.  This omission has been compensated for by Section 74 of the Act which entitles the holders of not less in the aggregate than fifteen per cent of the issued shares of the class being varied to apply to the court to have the variation cancelled, provided that they did not consent to or vote in favour of the resolution for the variation.

Where any application is made pursuant to this provision, the variation shall not have effect unless and until it is confirmed by the court.

An application under the section must be made by petition within thirty days after the date on which the consent was given or the resolution was passed.  It may be made on behalf of the applicants by such one or more of their number as they may appoint in writing for the purpose.

Section 74(3) provides that on any such application the court, after hearing the applicant and any other persons who apply to the court to be heard and appear to the court to be interested in the application, may disallow the variation if it is satisfied, having regard to all the circumstances of the case, that the variation would unfairly prejudice the shareholders of the class represented by the applicant.

The following are some of the relevant English cases.

(a)  Re Holders Investment Trust Ltd (1979)

The company proposed to reduce its share capital by repayment of the 5% 1 pound Cumulative Preference Shares (which were entitled to repayment of capital in priority to ordinary shares)  and to effect repayment by the allotment to the holders an equivalent amount of 6% unsecured loan stock, repayable 1985/90.  The trustees of trusts which held 90% of the issued preference shares voted at a class meeting in favour of the scheme because they had been advised that as holders of 52% of the company's ordinary stock and non�voting ordinary shares they would derive overall benefit from the change.

The court held that the resolution passed at the class meeting was invalid since the trustees who provided the majority of votes cast were not concerned with benefit to holders of the preference shares as a class.  They had instead considered what was best in their own interests, based on their large holding of stock and ordinary shares.  Although this case came to the court for approval of the reduction of share capital and not as an objection to variation of class rights, it is in fact the leading case on the principles which the court will apply in dealing with the objection to a variation of class rights approved by a majority of the class.

(b) Carruth vs. I.C.I. Ltd (1973)

There was a sequence of general and class meetings to approve the successive stages of a capital re�organisation.  Out of 1,600 members present only 565 were holders of deferred shares.  But only the holders of shares of each class were invited to vote (as a class) at their class meeting.  The others present took no part.

The court held that there was no irregularity of procedure in conducting a class meeting in the presence of non�members of the class.  A class meeting is one at which only members of a particular class vote.  It does not matter that others who are not members of the class are present.

It is only necessary to follow the variation of class rights procedure (and a dissenting minority can only apply to the court for cancellation) if what is proposed amounts to a variation of the class, right of itself.  It is not a variation of class rights:

(a)    to issue shares of the same class to allottees who are not already members of the class (unless the defined class rights prohibit this); In White vs. Bristol Aeroplane Co the company made a bonus issue of new ordinary and preference shares to the existing ordinary shareholders who alone were entitled under the article to participate in bonus issues.  The existing preference shareholders objected that by reducing their proportion of the class of preference shares the bonus issue was a variation of class rights to which they had not consented. The court held that this was not variation of class rights since the existing preference shareholders had the same number of shares (and votes at a class meeting) as before.

(b)    to subdivide shares of another class with the incidental effect of increasing the voting strength of that other class. In Greenhalgh vs . Arderne Cinemas case the company had two classes of ordinary shares, i.e. 50p shares and 10p shares.  Every share carried one vote.  A resolution was passed to subdivide each 50p share into five 10p shares, thus multiplying the votes of that class by five. The court held that the rights of the original 10p shares had not been varied since they still had one vote per share as before.

(c)    to return capital to the holders of preference shares which carry no right on a winding up to share in surplus assets but merely a right to prior repayment. In the Re Saltdean Estate Co. Ltd case a company had ordinary shares and preference shares.  The preference shareholders were entitled to the prior return of capital on a winding up but nothing more.  The company proposed to repay the preference shareholders with the court sanction and return their capital to them so that the class of preference shareholders would be eliminated.

The court held that this was not a variation of class rights of the preference shareholders.  The company could resolve to go into liquidation at any time and the preference shareholders would then only receive a return of capital and this they had been given.

(d)    to create and issue a new class of preference shares with priority over an existing class of preference shares. In Underwood v. London Music Hall case by analogy an improvement in the rights of existing preference shares, e.g. by raising the rate of preference dividend from, say, 6% to 8%, is not a variation of the rights of ordinary shareholders although it diminishes the residual profits available for distribution to the latter as ordinary dividends.

The cases cited in (a) to (d) illustrate the principle that without a "literal variation" of a class right (as defined by the memorandum or articles) there is no alteration of rights to which the safeguards of the variation of rights clause (e.g. Table A, Article 4) apply.  Dr. Rice contends that the instances constitute a variation of the enjoyment of the class rights rather than a variation of class right itself.

In the Bristol Aeroplane case it was said of the issue of additional preference shares that:

"the existing preference shareholders will be in a less advantageous position on such occasions as entitle them to register their votes whether at a general meeting of the company or at separate meetings of their own class.  But there is to my mind a distinction, and a sensible distinction, between an affecting of the rights and an affecting of ... the capacity to turn them to account".

It is a sensible or practical distinction because many decisions taken in the course of the company's business might affect the value of the shareholders' rights. For example, suppose that a company has two businesses: one is a dependable source of profits sufficient to provide for the preference dividend but those profits are a poor return on capital employed.  The directors then decide to sell that business at a high price in order to reinvest the proceeds in expanding the company's other business which offers prospects of long�term capital growth but very little immediate profit.  The position of preference shareholders would be affected since there may no longer be sufficient profits to cover their dividend.  But it would not be appropriate that they should have a veto (under variation of rights procedure) or an opportunity to apply to the court for a veto on what is essentially a question of commercial strategy.  It would probably be better to limit the constraint of variation of rights procedure to clear�cut and direct alteration of class rights, e.g. a reduction in the rate of preference dividend from, say, 8% to 6%.

In making this approach the courts have nonetheless kept the door open for action to deal with discrimination against a class by indirect means.  In the Bristol Aeroplanecase it was said (as an obiter dictum) that if the ordinary shareholders had passed a resolution simply to double the votes attached to the ordinary shares this would have been a variation of the voting rights of preference shares (to which the safeguards described above would apply).

A class of shares may carry different rights in one respect (e.g. a preference dividend) but the same rights as other classes in other respects.  Because of the difference it ranks as a class to which the safeguards apply.  This is so even when the class right to be varied is shared with the other class.  Suppose, for example, the articles give one vote per share to both ordinary and preference shares.  A proposal to reduce the votes of preference shares to, say, 1 vote for 10 preference shares is a variation of a class right since it is enjoyed by that class (and also by the ordinary shareholders).

Section 74(4) provides that the decision of the court on any application shall be final. The company must deliver a certified copy of the court order to the registrar within thirty days after the making of the order.

Oppression of Minorities

Section 211 of the Act provides that any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members, including himself, may make an order under the section.  The court is empowered to make such order as it thinks fit with a view to bringing to an end the matters complained of if, on any such petition, it is of the opinion that:

a)    the company's affairs are being conducted as alleged by the applicant, and

b)    to wind up the company would unfairly prejudice the applicants but the proved facts would have justified the company's winding up on the "just and equitable" grounds.

An order made by the court may�

a)    regulate the conduct of the company's affairs in future

b)    Order the purchase of some members shares by other members, 

c)    order the purchase of some members' shares by the company itself and a consequent reduction of the company's capital.

Meaning of "Oppression"

The Section does not define the word "oppression" or what constitutes "oppressive conduct".  However, the Cohen Committee's Report (1947) gave the following as examples of oppressive conduct envisaged by the Section.

(a)     Where controlling directors unreasonably refuse to register transfers of the minority holdings so as to force a sale to themselves at a low price.

(b)    Where the controlling directors take excessive remuneration so as to leave virtually nothing for distribution by way of dividend.

To these, the Jenkins Committee added the following:

(a)     The issue of shares to directors and others on advantageous terms.

(b)    The passing of non�cumulative preference dividends on shares held by the minority.

In Scottish Co-operative Wholesale Society Ltd v Meyer (1958) Lord Denning observed that "the section gives a large discretion to the court" which would be "well exercised in making an oppressor make compensation to those who have suffered at his hands.

In Re H.R. Harmer Ltd (1959) Jenkins, L.J. stated:

"Prima facie, therefore, the word `oppressive' must be given its ordinary sense" 

Conditions for Relief

In H.R. Harmer Ltd (1959) Jenkins L.J. summarised the conditions which must be met before relief under the section can be granted by the court when he stated that:

(1)  The oppression complained of must be complained of by a member of the company and must be oppression to some part of the members (including himself) in their or his capacity as a member or members of the company as such.

(2)  The facts of the case must not only be those that would justify the making of a winding�up order under the `just and equitable' rule but must also be of a character which have in them the requisite element of oppression

(3)  The phrase "the affairs of the company are being conducted" suggests prima facie a continuing process and is wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jare.

(4)  The word "oppressive" must be given its ordinary sense and the question must be whether in that sense the conduct complained of is oppressive to a member or members as such.  The strict application of these conditions by the English courts rendered the section largely ineffective as a minority protection section and culminated in its repeal by the English Companies Art 1980. 

Only the following cases had been successfully brought under the section�

(i)Re.  H.R. Harmer Ltd(1947):� Harmer senior ('the father') formed a private company to take over the stamp�dealing business which he had founded many years earlier; and although as a result of a succession of gifts and purchases the majority of shares in the company were now owned by his sons, the father retained his voting control. The father and sons were appointed life directors by the articles of association, which also constituted the father 'governing director'� an office not defined as carrying any distinctive powers. The sons petitioned for relief under s.210, alleging that th