The rights and liabilities of members are regulated principally under Parts III and IV of the BVI Business Companies Act, 2004 (as amended,1 the Companies Act). Statutory provisions relating to members’ remedies based on unfair prejudice and derivative actions are addressed in Part XA of the Companies Act.
- Types of members
The seven different types of companies capable of being incorporated under the Companies Act fall within three broad categories: companies limited by shares, companies limited by guarantee (whether or not authorised to issue shares) and unlimited companies (whether or not authorised to issue shares). Corresponding to these, the Companies Act recognises three categories of members:2 shareholders, guarantee members and unlimited members. The key difference between them relates to their liability in relation to debts and obligations of the company (see below).
A company must have at least one member at all times,3 and in the case of a guarantee company (whether or not authorised to issue shares),4 at least one of the members must be a guarantee member, while in the case of unlimited companies (whether or not authorised to issue shares), at least one member must be an unlimited member.5 However, the requirement to have at least one member does not apply during the period from incorporation to the appointment of the first directors.6 Some companies can have more than one type of member; for example, a company limited by guarantee that is authorised to issue shares could have shareholders as well as guarantee members.
Where a guarantee company is authorised to issue shares, a guarantee member may also be a shareholder.7 Where an unlimited company is authorised to issue shares, an unlimited member may also be a shareholder.8 This provides great flexibility in relation to corporate structuring under the Companies Act.
- Register of members
A company must keep a register of members in which the names and addresses of shareholders who hold registered shares,9 guarantee members10 and unlimited members,11 as the case may be, must be entered. In the case of shareholders who hold registered shares, the number of each class and series of registered shares held must also be entered in the register.12
Where a shareholder holds bearer shares, the register must state the total number of each class and series of bearer shares held.13 The shareholder for these purposes will be the custodian with whom the bearer share certificates must be deposited as opposed to the beneficial owner of the shares for whom the custodian holds the certificates, and the custodian will therefore be the company’s member. The name and address of the custodian,14 together with details relating to the bearer shares (such as the identifying number of the certificate, the number of each class or series of shares specified in the certificate and the date of issue of the certificate) must also be entered in the register of members.15
The date when the name was entered16 and the date when a person ceased to be a member must also be recorded in the register.17 The company must keep either the original or a copy of the register of members with the registered agent.18 If the registered agent only has a copy, then the company must notify the registered agent within fifteen days of any change in the register.19
- Becoming a member
The definitions of shareholder, guarantee member and unlimited member under the Companies Act20 provide that: (i) a “shareholder” is a person whose name is entered on the register of members as the holder of one or more shares; (ii) a “guarantee member” is a person whose name is entered in the register of members as a guarantee member; and (iii) an “unlimited member” is one whose name is entered in the register of members as a member who has unlimited liability for the liabilities of the company. A person does not become a member until his name is entered on the register of members.21
An agreement to become a member does not confer membership rights, and where a shareholder holds shares on trust for beneficiaries, the beneficiaries are not themselves members. In the case of registered shares, the company may treat the person named in the register of members as the holder of the shares as the only person to exercise any voting rights in relation to the shares or to receive notices or distributions in respect of the shares.22
The position of personal representatives (i.e. executors or administrators, trustees in bankruptcy or guardians for incompetent members) is that these persons are not members unless and until their names are entered on the register, and in general they are not able to exercise the rights, or be subject to the obligations of the member until they become members.23 This is subject to two statutory exceptions in the case of personal representatives:
- the personal representatives of shareholders may transfer shares even though the personal representative is not a shareholder at the time;24 and
- under section 200 of the Insolvency Act, 2003 personal representatives are liable to contribute out of the member’s estate to the assets of the company in liquidation to the same extent as the member.
- Rights of members
Members have the rights granted to them under the memorandum of association (memorandum) and articles of association (articles) of the company and under the Companies Act.25 In the case of shareholders, the Companies Act specifies three default rights that a share confers on a member:
- the right to one vote,
- the right to an equal share in any dividend paid in accordance with the Companies Act, and
- the right to an equal share in any distribution of surplus assets of the company.26
The company may by amending its memorandum issue shares in which such rights are negated, modified or added to where expressly authorised by its memorandum,27 but if it does not do so then the default rights will apply.
The Companies Act contains provisions for statutory pre-emption rights that the company can “opt into” (so they only apply if the memorandum or articles expressly provide that they will apply).28 The memorandum or articles can adopt the statutory provisions with or without modification.29 The statutory pre-emption rights provide that before issuing shares that rank equally with or prior to existing shares in respect of voting and/or distributions, the directors must offer them to existing shareholders in such manner that the existing voting and/or distribution rights of the existing shareholders is maintained.30 The offer should be on the same price and terms as they would be to other persons,31 and the offer must remain open for a reasonable period.32 In practice, it is unusual for companies to utilise the statutory provisions without modification as the Companies Act provides complete freedom to include bespoke pre-emptive rights in the memorandum and articles.
Members are entitled to inspect the memorandum and articles, register of members and directors and minutes of meetings and resolutions of members and of those classes of members of which they are a member.33 Members are also entitled to take copies or extracts of the documents and records.34 However, subject to the memorandum and articles providing otherwise, these rights are qualified (except in relation to the memorandum and articles) in that the directors can refuse permission to inspect or limit the inspection or taking of copies, if satisfied that it would be contrary to the company’s interest to allow a member to inspect the documents or part of them.35 Members can apply to court for inspection if the company fails or refuses to permit them to inspect36 or if the inspection permitted is limited, and the court has a broad discretion to make such order as it considers just.37
- Class rights in respect of shares
The definition of a class of members38 in the Companies Act makes clear that (i) it applies only in relation to shares, and (ii) it is the rights, privileges, limitations and conditions attaching to the shares as specified in the memorandum that delineate a class. The rights, privileges, restrictions and conditions attaching to each class of shares must be specified in the memorandum.39
The definition of class rights under the Companies Act contrasts with the position in the United Kingdom where shareholders who have rights in the memorandum or articles, but which were not specifically attached to shares, would still be considered a class,40 whereas under the Companies Act they would not be considered class rights.
There are no specific provisions in the Companies Act protecting class rights from variation by the members as a whole or by the other members. However, it is possible to provide in the memorandum that the rights of a class of shareholders may not be varied unless certain conditions are satisfied, for example, the consent of a majority of members of the class has been obtained in a meeting or by a written resolution,41 and in practice this is commonly done.42
- Liabilities of members for the debts and obligations of the company
Two separate issues may arise in relation to members’ liability:
- whether a member is liable as a member to third parties for the debts and obligations of the company; and
- as between the member and the company, the extent to which a member is liable to contribute to the assets of the company.
These issues depend upon the type of company and the type of member.
7.1 Limited companies
The general rule for limited companies (whether limited by shares or limited by guarantee) is that a member has no liability as a member for the debts and obligations of the company.43 This statutory provision means that third parties cannot ordinarily sue a member for the company’s debts.44 Under the Companies Act, as between the company and a shareholder, the shareholder’s liability to the company is limited to the amount unpaid on his shares,45 any liability expressly provided for in the memorandum or articles46 and any liability to repay a distribution made in breach of the solvency requirements.47 A guarantee member’s liability to the company is limited to the amount that is specified in the memorandum48 as his liability to contribute to the company’s assets in liquidation,49 any other liability expressly provided for in the memorandum or articles50 and any liability to repay a distribution made in breach of the solvency requirements.51 There may however be specific situations where a member may be separately liable for the company’s debts, such as where the member has personally guaranteed those debts, or where the courts are prepared to “pierce the corporate veil”.52
7.2 Unlimited companies
Whether or not it is authorised to issue shares, an unlimited company must have at least one member who is an unlimited member.53 Such a member has unlimited liability for the liabilities of the company.54 At first sight this definition appears to be wide and is not expressly stated to be a liability to the company (as is the case with the definition of shareholder’s liability55 and guarantee member’s liability56). However, the definition has to be read together with certain provisions of the Insolvency Act, in particular section 195 of that Act, which clarifies that the liability of unlimited members is intended to be a liability to the company to contribute to its assets on liquidation rather than any direct liability to the company’s creditors. This accords with the general principle enshrined in the Companies Act that an incorporated company (even an unlimited company) has separate legal personality from its members,57 with the consequence that its debts and liabilities are not in general those of its members.58 However, as the Companies Act does not expressly restrict the liability to when the company goes into liquidation,59 the memorandum could provide for the member to contribute to the assets of the company while it is a going concern.
The liability of shareholders in an unlimited company appears to depend upon whether the shareholder can also be an unlimited member. If he is an unlimited member, then he can also have unlimited liability for the company’s debts. If he is not an unlimited member, it would appear that as he is only a shareholder and he has limited liability in the same way as any other shareholder of a limited company.60 Liability under the Companies Act depends upon the type of membership rather than upon the type of company.
- Members’ resolutions
A members’ resolution can be passed either at a meeting of members or as a written resolution61 (which can be by fax or other written electronic communication, such as e-mail), and the resolution can consist of several documents each signed by one or more members.62
Under section 81(2) of the Companies Act, a resolution (whether passed at a meeting or as a written resolution) is passed if it is approved by a majority (or a higher majority if specified in the memorandum or articles) of those entitled to vote and voting on the resolution.63 So if, for example, a company has 10 members and only four actually vote on a written resolution, with three voting in favour and one against, it would appear that the resolution is passed.
An argument to the contrary can be made that section 81(2), by referring to voting, is intended to be confined to the passing of resolutions at meetings and does not deal with written resolutions. If that is correct, then the Companies Act has a serious omission by failing to define the requisite majority for written resolutions,64 and this will have to be rectified in the memorandum or articles. In practice, most companies specifically define requisite majorities for passing resolutions, either in writing or at a meeting, in their articles.
Where shares are divided into more than one class or series, the Companies Act does not contain provisions relating to resolutions of a class or series of shares and instead only specifies that a resolution is passed if approved by the requisite majority “…of those members entitled to vote and voting on the resolution.”65 Thus, there is no statutory requirement of a vote of other members where a resolution concerns a class or series of shares, and the issue of who else is entitled to vote on the resolution will depend upon the memorandum or articles. Shareholders have the number of votes attached to the shares held by them,66 and guarantee members and unlimited members have one vote each unless the memorandum or articles specify otherwise.67
- Alteration of members’ rights
The Companies Act does not contain any special procedure for the alteration of members’ rights, and instead these fall within the general provisions for the alteration of the memorandum and articles.68 In general, members’ rights in the memorandum or articles may be amended by a majority of members69 or, if authorised by the memorandum, by the directors.70 However, members’ rights can be protected from alteration in the memorandum if the memorandum is amended to specify:
- that certain provisions may not be amended;
- that a greater majority than 50% is required to amend; or
- that specified provisions may be amended only if certain conditions are met.71 Further, there are limitations on the directors’ powers of amendment as they cannot:
- restrict the powers of members to amend;
- change the percentage of members required to pass a resolution to amend; or
- amend in circumstances where members cannot amend the memorandum or articles.72
- Members’ remedies
The Companies Act has significantly extended the remedies available to a member under British Virgin Islands law. Prior to the introduction of the Companies Act, the principal statutory remedy was presentation of a winding up petition on the “just and equitable” ground. In most cases, however, the ability of a shareholder to bring proceedings on behalf of a company of which he was a member was governed by common law.
10.1 Derivative Actions
The Companies Act provides minority shareholders with statutory rights to take derivative actions in exceptional circumstances.73 These circumstances include where a company or a director of the company engages in, or proposes to engage in, conduct that contravenes the Companies Act or the memorandum or articles of the company.74
A member must obtain the leave of the Court before commencing a derivative action.75 The Court must take into account and be satisfied as to a number of matters in determining whether to grant leave, for example, whether the member is acting in good faith,76 whether the derivative action is in the interests of the company (taking account of the views of the directors on commercial matters),77 whether the proceedings are likely to succeed,78 the costs of the proceedings in relation to the relief likely to be awarded79 and whether an alternative remedy is available.80 If leave is granted the Court may make an order directing the company or director to comply with, or restraining the company or director from engaging in conduct that contravenes, the Act or the memorandum or articles.81 No proceedings brought by a member or in which a member intervenes with the leave of the Court may be settled, compromised or discontinued without Court approval.82
If the Court grants leave to a member to bring or intervene in proceedings, it must on the application of the member order that the costs of the proceedings be met by the company unless it considers it unjust or inequitable for the company to bear those costs.83 The Court may also appoint a member to represent all or some members having substantially the same interest where that member brings proceedings against the company and other members have substantially the same interest in the proceedings.84
10.2 Unfair prejudice
Whilst it is still possible to appoint a liquidator on “just and equitable” grounds, there are limitations to this remedy:
- an application to the Court for appointment of a liquidator is a fairly drastic procedure that could, in itself, seriously damage the company, and
- the applicant would have to establish a special relationship with other shareholders with an understanding that all shareholders will participate in management, that relationship has broken down.
A member who feels the affairs of the company have been or are likely to be conducted in a manner that is likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him as a member may apply to the Court for an order.85 The Court may, if it considers it just and equitable to do so, make one or more orders including, in the case of a company limited by shares, requiring the company or another person to acquire the shares of the applicant,86 requiring the company or another person to pay compensation to the applicant,87 regulating the future conduct of the company’s affairs,88 amending the memorandum or articles,89 appointing a receiver or liquidator,90 directing rectification of the corporate records91 or setting aside any decision or action taken by the company or its directors in breach of the Companies Act or the memorandum or articles of the company.92
A member may apply for the liquidation of the company under the Insolvency Act, and the Court should not refuse such an application merely because there would be no assets to distribute to him.93 Members can also by resolution appoint a liquidator under the Companies Act if the company is able to pay its debts as they fall due94 or under the Insolvency Act if the company is insolvent.95