In order to operate a company, it needs finance. Thus, by selling shares to the public is one way where a company can raise their capital. During this process, the one who buy the shares will automatically be the members of the company.
Generally speaking, members are the pillars of the company as they are the person who constitutes a company into a corporate entity. Therefore; the members of a company are those people who, having agreed to be members, have their name entered on the register of members. Similarly, those who subscribe to the memorandum of association when a company is incorporated, thereby they agree to become members when the company is incorporated.
Private and public companies must have a minimum of one member and there is no maximum number which is stipulated as in section 7 Companies Act 2006.
Ways of becoming a member
The law defines the members of a company in Section 112 Companies Act 2006 as compromising as; (a) the subscribers to a company’s memorandum and (b) any other person who agrees to become a member.
In going into further details of the subscribers to a company’s memorandum; it is realized that they are the people who are deemed to have agreed to become members and on registration his details must be entered on the register of companies. Thus, such a person is bound to take and pay for the number of shares written opposite his name although if he subsequently, applies for and receives allotment of an equal or greater number of shares, this then may be treated as a satisfaction of his obligation under the memorandum . As I have said earlier, he becomes a member on registration of the company only and thereby, he doesn’t turn out to be a member even if there is an entry in the register of member.
Dealing with the 2nd aspect of being a member which is entry in the register of members, it is a vital factor to realize that a person who has agreed to become a member of the company doesn’t actually become one until his name is registered in the register of members unlike a subscriber as he can automatically becomes a member when the company is first incorporated, whether or not they are entered in the register.
It is recognized that every other person who agrees to become a member of a company and whose name is entered in its register of members might not make him as a member if he have never agreed to become one, and his name then can be removed in the same way it was registered. Hence, in the course of dispute with respect to removal of the name; it is likely that the court may intervene and it is possible there by for the court to make an order for removing his name retrospectively in order to free him from any liability which is that if that name has remained on the register when it should have been removed. Nevertheless, even if they are not registered if there is a complete mutual agreement between members of the company and the company, subject to the possibility of that agreement being rescind by mutual consent they will not escape liability, for the register in this circumstances can be amended under section 125 CA 2006 while the company is a going concern.
A director is also deemed to be a member of the company if they have entered their names on the register which their signatures must be present and there shall also be an understanding to take and pay for their qualified shares. Failure to do this will not enable him to escape any liability for calls on the qualified shares which he has signed in the memorandum.
Who can be a member?
The very next question to be imposed this very moment is; who are eligible to be members of a company then? Basically, subject to any contrary provisions in the company’s articles, any person who has legal capacity to be a member of a company can be a member. Also any member who holds a Share certificate is understood as a person authorized to be a member as it shows that a member has title of shares in that business. With respect to any untrue statement in the certificate through the doctrine of estoppels, the bone fide purchaser of that share will be protected and the company will have to award damages to the one who suffers loss. However, with respect to the forge certificate the company is under no pressure to compensate.
Similarly, a minor can be a member in a company. However, a minor’s contract to share is voidable by him before or within a reasonable time after he attains the age of majority. A minor may become a member of a company and hold shares either by subscribing to the memorandum of association or by taking or transfer of shares, but it’s under the discretion of the company to accept or to refuse those shares. On reaching the age of majority, the minor can rescind the contract and avoid liability for future calls. However, he cannot recover the money he paid for the shares unless there has been a total failure of consideration. In the case of Steinberg v Scala (leeds) Ltd it was held that the P was entitled to repudiate the contract and thus she wasn’t liable for future calls but there was no total failure of consideration and hence she wasn’t able to recover the money already paid as she had got the thing for which the money was paid; a thing for value.
Personal representatives and Trustees in bankruptcy may also be eligible to be members of the company. Ownership of the shares of a deceased member is transmitted to his executors or administrators. Thus, the representatives and trustees must produce to the company the grant of the probate of the will etc…This doesn’t make them as the members of the company yet . The representatives must be registered as members to take effect on which they become liable personally for calls, although they have a right to indemnify against the deceased estate. In the case of a trustee, he may be a member although the beneficial interest in his shares will be vested in his trustee in bankruptcy as from the time when he is declared bankrupt. Unless, the articles provide to the contrary, a shareholder doesn’t cease to be a member of the company on becoming bankrupt.
Another company can also be a member in one company provided that the holder is given power in memorandum to own shares . However, the general rule is that a company cannot be a member itself, either directly or through a nominee . Partnerships may also be registered as a member under the partnership name though they are not separate entity .
Register of members
It is an important element to register the members on the register of members in order to make them as legalized members in a company. With the exception of the subscribers, no person will become a member of the company until his name is registered in the register of members. Thus, every company is required to keep a register of its members and such that section 113 CA 2006 illustrates that following information has to be recorded in the register such as; the name and address of the members, the number of shares held by each member, the amount paid or agreed to be considered as paid on the shares of each member, the date on which the member was entered in the register and the date on which each member ceased to be a member precisely.
Under section 113(5) CA 2006 it compromises that for the purpose of the register, joint holders of a share fall to be treated as a single member with a single address to be shown against their entry, although all their names are to be mentioned in the register.
In order to register there is no particular procedure besides filling a form. However, in the given circumstances, if a company has more than 50 members in their company then an index have to be kept . Generally, the register must be kept in the registered office of the company; however, if the register is kept elsewhere, the registrar must be notified of the place . If needed, the register must be available for inspection during the working hours .
Under section 125 CA 2006, the court has the power to order a rectification of the register of members if; the name of any person is, without sufficient cause, entered in or omitted from the register, or a default is made, or unnecessarily delay takes place, in entering the fact that any person has ceased to be a member. Thus, a member who faces with difficulty with respect to this may apply for damages to get a rectification on the register. The court will order a rectification only in the case if the company has not altered the register within 2 months of the fact being aware about the wrong.
Duties, powers and liabilities of members
As I have mentioned earlier that, members play an important role in a company hence, it is very significant to see what are their powers and to what extent the company could thereby make them liable. The more a member holds share in a company, the more extension of his rights and liabilities to the company. Those powers which cannot be delegated to directors can be exercised by a member in their general meetings which is governed by the articles of the company. The members have a right to alter the company’s articles, appointment and removal of directors and auditors and winding up of the company. These powers cannot be negated unless it is restricted in the articles. However, no member has any right to any item of a property owned by the company for he has no legal or equitable interest in it as the company’s assets are its own property not the property of the members.
Since the members are given so much of delegated powers, the company has to make sure that they make decisions in the best interest of the company or not. Unlike a director, a member doesn’t owe any fiduciary duty to the company, nevertheless; a member should not commit a fraud in voting or exercising their right if not an alteration to the articles will be invalid. But the general rule is that, a member may exercise his individual right to vote in any way he prefers, hence he can take account of his own interest to take exclusion of any conflicting interest of other members .
The members have liabilities as well owing to the company. It is their liability to compensate any outstanding amounts or calls on his shares as required by the company. Furthermore, in the event of winding up, its member’s duty to contribute to the assets of the company in respect of any amounts unpaid on shares . With respect to a subscriber, the director has no power to release him from his duties and obligations to take shares and the only way he could escape liability is by only taking up and transferring the shares. As illustrated in Migottis , it was held that P was liable for the shares for which he had signed in the memorandum.
By virtue of section 33 CA 2006, by memorandum and articles as a contract, it is regarded as a contract between company and the members and the members themselves . Hence, if the members or the company acted outside the given scope then, they should be responsible.
Cessation of membership
Termination of membership is complete when the name of a former member is removed from the register either through forfeiture of shares or transfer or surrender or sale under a lien or by death of a member.
Forfeiture of shares occurs when a member fails to pay the agreed amount on which the company tries to get back their shares in lieu of that. To authorize this procedure, the directors must have the power to forfeit the shares which should be mentioned in the related articles of the company. In exercising the power of forfeiture, the company at 1st must issue a notice to the defaulted member within 14 days of it. The notice must be included with; the payment due, day at which default is made and maximum 14 days period for the member to undo his due payment. If the member failed to pay after the given date, the company could bring legal actions to forfeit the shares. On the other hand if the member paid his debts then the forfeiture should not be carried out. Before bringing a legal action, the directors would be able to pass a resolution to forfeit which in fact has to be in the best interest of the company and in good faith. Even after a resolution if the majority votes are not in line for forfeiture, the company can present the matter before the court. Once the shares are forfeited, the member would no longer be a member and thus, he would be ceased to be a member, although he would still owe the company the amount due by him.
With respect to surrendering of shares, it could be by a member himself voluntarily surrendering or he might be asked to do so by a director due to particular circumstances a company at that moment might be facing. By surrendering shares it means that the member is giving up his right to be a shareholder and getting his money back which is the case in fully paid shares. If the shares are paid in half, the member has to pay the full amount and then surrender; thereby he ceases to be a member. If a director compels shareholders to surrender, the reasons given by director must be reasonable excuse to operate so and he should have gotten the power to do so in articles. Normally, this situation arises when a company is winding up and during this the court might appoint an administrator to see whether the company could persist to exist or not. Hence, to avoid any further loss, the shareholders might be requested to surrender his share. Shares which have been validly surrendered can be re-issued in the same way as forfeited shares if the articles authorize the issue. It is also possible for a fully paid shareholder to exchange his shares with another company to the same value on the present company. However in Bellerby v Rowland & Marwood Steamship Co Ltd , the court held that P’s surrender was an invalid surrender as it amounted to a purchase by the company of its own shares.
To carry out the power of lien, the articles must mention so. Articles generally give a company a lien on the shares of a member for the calls or any debts that are due to the company from him. Such a lien is valid as far as a private company is concerned . Lien on shares can be enforced by sale or forfeiture of the concerned shares. A public company may only have a lien on such shares for an unpaid call or installment of these shares as section 670 CA 2006 restricts the right to take lien. A shareholder against whom a lien is to be enforced can compel the company to assign its lien to his nominee who is willing to pay the amount of lien. When a 3rd party advances money on security of shares, a question arises as to whether the 3rd party has priority over the company’s lien. In such a case if the notice of security to the company is given before the liens arises, the 3rd party will have priority, otherwise not.
If any of the cessation is carried out unprejudicedly the members can go before the court to gain justice. The permitted exceptions to Foss v Harbottle a member can sue to remedy a done to the company where the majority exercises their votes to defraud the minority shareholders, or when the company is proposing to act ultra vires and where the court decides that an action by a member is in the interest of justice. Thus the same way they are given powers and duties, the court protects their rights too. Hence, every company needs members to constitute it and without them a company wouldn’t be a company.