The voting rights of shareholders in companies generally depend on the provisions in the Companies Act and in the company’s articles of association. The litigation in Sugarman v CJS Investments LLP [2014] EWCA Civ 1239; [2014] PLSCS 255 concerned the voting rights of the shareholders in a management company of a residential development comprising 104 flats.
The owners of each flat were entitled to one share in the management company. The investor owned 66 flats in the development – but was this enough to enable it to control the management company? The answer to this question turned on whether each member was entitled to one vote, regardless of the number of shares held, or whether members were entitled to exercise one vote for each share held.
If the company was structured on the basis of “one member one vote”, the investor was liable to be outvoted, even though it held the majority of the shares in the management company. Importantly, this would mean that the minority shareholders could vote for heavy expenditure and would only have to bear a small part of the cost compared with the investor, who would be powerless to prevent this.
Section 284(2) of the Companies Act 2006 provides for one vote per member on a show of hands at a meeting, while section 284(3) provides for one vote per share on a poll (which takes into account the number of shares that voters actually have). These rules were also reflected in the corresponding provision in the specimen articles of association in Table A when the company was incorporated. However, they can be displaced by bespoke provisions in the articles of association adopted by a company.
The articles of association of the management company were tailor-made. They disapplied the provision in Table A and made no distinction between votes taken on a show of hands and by a poll, stating only that “every member … shall have one vote”. The Court of Appeal decided that that the language of the voting provision was clear and unambiguous and that it was bound to apply it, even though Lord Justice Briggs described other parts of the tailor-made provision as a “drafting shambles”.
Lord Justice Briggs agreed that it was bizarre to think that the promoters of the management company meant to confer power on two flat owners to control the management policy for the block, even though all the remaining flats might all be owned by a single investor. However, His Lordship accepted that it was unlikely that the promoters had given any thought to the possibility of one person owning all but two of the flats or, for that matter that as many as 66 flats would come to be owned by a single investor. It would be wrong to construe the meaning of the voting provision by reference to extremes and a “one member one vote” structure was not an absurdity, even though many would regard it as unreasonable, uncommercial and/or undemocratic.
The decisions highlights the importance of thorough due diligence on all aspects of an acquisition when acquiring flats in a development together with a shareholding in the company that manages it.
Allyson Colby is a property law consultant
