If someone is a shareholder, holds a share certificate and is registered as a shareholder in the company’s books, it is clear that he will be regarded as a shareholder. However, what is the position of someone who has paid money to buy shares from another shareholder and holds a signed stock transfer form confirming the transfer of those shares to him? At what point does he become a shareholder of the company?
The answer is provided by section 112 of the Companies Act 2006 (“CA 2006”) which states as follows:
The subscribers of a company’s Memorandum are deemed to have agreed to become members of a company, and on its registration become members and must be entered as such in its register of members.
Every other person who agrees to become a member of the company, and whose name is entered in its register of members, is a member of the company.
(In this context the term “member” includes “shareholder”).
Based upon this definition, we quickly realise that an individual who has recently purchased shares but has not yet been registered as a member in the company’s records, is not to be regarded as a member of the company until such time as that share transfer has been effectively recorded in the register of members.
The company has an obligation to maintain a register of the members (section 113 CA 2006) and if a company makes a default in complying with this section, an offence is committed by the company and every officer of the company who is in default.
Does this make any difference?
The answer is that it may make a difference, particularly in circumstances where the number of shareholders is relatively small and there are issues about the serving of notice and/or whether or not a shareholders’ meeting is quorate.
Section 116 CA 2006 provides that the register and index of members’ names must be open to the inspection of any member of the company without charge. If a member finds that their details are not appropriately registered in the register of members, it is possible for him to apply to the Court to rectify the register under section 125 (CA 2006).
Pursuing claims for wrongdoing
However, there are certain situations in which the CA 2006 provides that it is not necessary for an individual to be a member in order to initiate a claim which would normally be restricted to members. For example, section 260(1) introduces the power on the part of a “member of a company” to pursue proceedings by way of a “Derivative Action” in respect of a cause of action vested in the company and seeking relief on behalf of the company. Section 260(5) expressly states that references to a “member of the company” include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.
Similarly, section 994 and subsequent sections of the CA 2006 outline the basis upon which a “member of a company” may apply to the Court by petition for an Order that the Company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or of some part of its members (including at least himself).
Section 994(2) indicates that the provisions of that section apply to a person who is not a “member of a company” but to whom shares in the company have been transferred or transmitted by operation of law as they apply to a member of the company.
Sometimes you are regarded as a shareholder and sometimes not…