Meaning
Allotment of shares that is technically flawed or performed in breach of director duties, making it liable to be set aside by a court. A voidable share issuance differs from a void one because it remains valid and effective until a legal challenge successfully overturns the board resolution. This status allows the company to rectify the mistake or for the shareholders to ratify the act if the underlying transaction is beneficial.
Legal Grounds
Breach of the duty of proper purpose or a failure to follow the pre-emption rights in the articles of association can lead to a claim. When a voidable share issuance occurs, the affected shareholders must act promptly to seek a remedy before the new shares are traded to an innocent third party. Delay in bringing a claim may result in the court refusing to unwind the transaction due to the prejudice caused to others.
Ratification Process
Shareholders can often vote to approve a defective allotment after the fact to cure the legal uncertainty. This vote cleanses the transaction and prevents future litigation regarding the validity of the shares. It is a common step during the due diligence phase of an acquisition or a major funding round when past corporate secretarial errors are discovered.
Remedy Scope
Courts have the discretion to order the cancellation of the shares and the return of the subscription funds to the investor. Alternatively, the court may order a compensatory payment to the shareholders whose interests were diluted by the voidable share issuance. The goal of the legal intervention is to restore the balance of power and value within the corporate structure.
This protection preserves the integrity of the share register.
