Company Register is Primary Evidence of Shareholding Despite Potential Fraud
Company’s Register of Members Held to be Conclusive Evidence of Shareholding Despite an Unauthorised Transfer of Shares.
A landmark Court of Appeal judgement has highlighted the importance of ensuring that your company’s registers are up to date when selling a business.
The recent case of Bland and Anor v Keegan involved a private limited company, JDK Construction, with a share capital of 100 ordinary shares. The family business was run by an individual (Darren), but the shares were held 50% by his mother (Jeanette) and 50% by his wife (Julie).
The relationship between Jeanette and Darren broke down and in 2019 Julie executed a stock transfer form transferring 50 shares from Jeanette to herself. The relevant forms were filed at Companies House and Jeanette was terminated as a director.
Two years later Julie unilaterally passed a special resolution to wind up the company.
Jeanette challenged the resolution claiming that Julie had forged her signature, and that the resolution was, therefore, not validly passed (because Julie only held 50% of the shares rather than the required 75%). The matter then proceeded to court.
What did the court decide?
The Court of Appeal upheld the High Court’s decision and referred to a case of Enviroco Ltd v Farstad Supply, in which the Supreme Court stated that “Except where express provision is made to the contrary, the person on the register of members is the member to the exclusion of any other person, unless the register is rectified”.
The Court of Appeal stated that this principle should apply when determining who a company’s members are for the purposes of voting on a shareholder resolution, “even … where a member’s name has been wrongly removed from the register as a result of forgery”.
The Court further held that “the entries on the register of members are presumptively valid and the members of a company are taken to be those shown on the register unless and until the register is rectified”.
On this basis, Julie was held to be the sole member of the company.
It is important to note that the company books could not be located, and the Court assumed that the register of members reflected the filings that had been made at Companies House.
What does this mean for you?
Although cases of forgery are rare, disputes do arise over whether one person was authorised to sign on behalf of another. For example, a company’s articles of association may contain drag-along provisions that require minority shareholders to transfer their shares to a third party when the majority agree to the share sale. If a minority shareholder does not sign a stock transfer form, the majority may be able to sign on their behalf. Provided that the company’s register of members is completed to reflect any such transfer, the company and its members can rely on that register when passing any future resolutions.
Further, this case highlights the importance of good record-keeping and the value in ensuring that a company’s registers are correct and up to date. This is true for all company matters but is of more importance when you come to sell your company. Amending an inaccurate company register or completing an empty company register during a share sale can be time consuming and expensive, further completion could be delayed until the register is up to date.
At Mogers Drewett we have a dedicated team who can review and update your company’s register in preparation for a potential share sale. So, if you are thinking of selling your company, Mogers Drewett can assist you with this and ensure your records are in order.
Harry Durston – Trainee Solicitor