Register of members determines eligibility to vote, even if fraud occurs

A recent Court of Appeal decision highlights the importance of the register of members in determining membership of a company. Those registered will be those eligible to vote unless and until the register is rectified.

A surprisingly common issue in M&A due diligence is the target's register of members, especially in fast-growing companies: with the register sometimes being not up to date, not matching the Companies House records or being missing altogether. 

A recent Court of Appeal decision, in Bland and Mayo v Keegan, highlights the importance of the register of members in determining membership, and not relying solely on the records at Companies House. The entries on the register of members are presumptively valid and the members of a company will be taken to be those shown on the register - even in the case of potential fraud - unless and until the register of members is rectified. 

Background facts

The facts of the case were unusual and centred on a family dispute. 

Jeanette and Julie Keegan (who was married to Jeanette's son, Darren) were the two shareholders and directors of JFK Construction Ltd, each holding 50 ordinary shares. Following a breakdown in her and Darren's relations with Jeanette, Julie executed a stock transfer form purporting to transfer Jeanette's 50 ordinary shares to herself, signing "J. Keegan" in the transferor's signature box. Details of the share transfer and termination of Jeanette's directorship were filed at Companies House. 

After Darren and Julie subsequently started divorce proceedings, Julie signed a written resolution, as sole member, resolving to wind up the company and appoint Bland and Mayo as liquidators. Jeanette disputed the share transfer and argued the written resolution was invalid.

The liquidators sought a declaration that their appointment was valid. Jeanette also brought a claim, arguing the stock transfer form was forged and seeking rectification of the register of members. The court ruled the liquidators' appointment was valid; Jeanette appealed.

Court of Appeal judgment

The Court of Appeal dismissed the appeal, ruling the liquidators' appointment was valid: 

• A 'member' of a company is defined in section 112 of the Companies Act 2006. A person may be a member either by subscribing to its memorandum or by agreeing to become a member and being entered as a member on the register of members. 

• This definition reflects a fundamental principle of UK company law: unless express provision is made to the contrary, the person on the register of the members is the member to the exclusion of any other person, unless and until the register is rectified. 

• That fundamental principle should apply when determining the validity of members' resolutions, even in a case where a member's name has been wrongly removed from the register as a result of forgery or fraud. 

• A person claiming their name has wrongly been taken off the register of members must apply for a court order that the register be rectified, putting them back on the register in place of the person whose name wrongly appears.

• If a member's name has been wrongly removed, the law does not simply disregard the entries on the register. Instead, 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".

• Therefore, in this case, unless and until an order for rectification was made, the identity of the members (for determining the validity of the written resolutions appointing the liquidators) was to be determined by the entries in the company's register of members at that time.

• The rectification application did not request retrospective effect. As a result, when considering the validity of the written resolutions, Julie was the only member of the company at the relevant time, the written resolutions were valid and effective, and the liquidators were validly appointed

What to take away

The register of members is a critical document, determining legal title to shares and eligibility to vote. 

It is essential that companies keep their register of members accurate and up to date at all times.

Companies preparing for sale should take extra care to ensure that the register of members is correct and not merely rely on filings having been made at Companies House.