FLK1 · Multiple-choice practice

FLK1 Business Law — Question 10

Question

A company has a provision in its articles of association which allows the board to issue new shares, subject to the approval of the shareholders. The board decides to issue new shares to a group of investors without seeking the approval of the shareholders. Which of the following statements best describes the legal position of the company?

The company is not required to obtain shareholder approval because the provision in the articles of association is discretionary.
The company is not required to obtain shareholder approval because the board has the authority to issue new shares.
The company is required to obtain shareholder approval for the issuance of new shares, and the board is in breach of its duty for not doing so.
The company is required to obtain shareholder approval for the issuance of new shares, but the board is not in breach of its duty for not doing so.
The company is not required to obtain shareholder approval for the issuance of new shares, but the board is in breach of its duty for not doing so.

Answer and explanation

Correct answer: C. The company is required to obtain shareholder approval for the issuance of new shares, and the board is in breach of its duty for not doing so.

Under s.550 Companies Act 2006, the issuance of new shares by a company requires shareholder approval unless the articles of association provide otherwise. In this scenario, the provision in the articles of association allows for the issuance of new shares subject to shareholder approval, therefore the board is in breach of its duty for not seeking shareholder approval.

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