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SQE1 - Business > 04. directors > Flashcards

04. directors Flashcards

1
Q

what are some of the decisions reserved for shareholder approval?

A
  • change of name (unless Articles provide otherwise)
  • amending Articles
  • removing directors
  • removing auditors

a Board with MA is usually free to make all other decisions (MA 3)

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2
Q

what is MA 5?

A

allows the Board to delegate particular decisions and responsibilities for the day-to-day running of the company to one of the directors or to a committee.

e.g., An HR Director might be delegated decision-making with regards to the HR decisions of a
company.

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3
Q

how can directors be legally held to account?

A

civil and criminal actions under the Companies Acts

found guilty of criminal actions and sentenced under:
- Fraud Act 2006
- Theft Act 1968
- insider dealing under Criminal Justice Act 1993
- money laundering under Proceeds of Crime Act 2002

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4
Q

can a company have a corporate as its only director?

A

no, every company must have at least one
director who is a natural person

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5
Q

maximum no of directors in MA

A

no maximum

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6
Q

age restrictions on directors

A

at least 16 years old

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7
Q

de jure director

A

director who has been validly appointed at law

fiduciary duties and liabilities apply

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8
Q

de facto director

A

someone who assumes to act as a director but who has not been validly appointed as such

fiduciary duties and liabilities apply

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9
Q

shadow director

A

‘a person in accordance with whose directions or instructions the directors of the company are
accustomed to act’; ‘behind the scenes’

fiduciary duties and liabilities apply

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10
Q

who cannot be a shadow director?

A

a professional advisor

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11
Q

executive director

A

generally spend the majority, if not all, of their working time on the business of the company

✅officer
✅employee

Examples include a Finance Director, Managing Director, Marketing Director.

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12
Q

non-executive director

A

✅officer
❌employee

Non-executive directors do not take part in the day-to-day running of the company.

generally provide independent guidance and advice to the board and to protect the interests of shareholders.

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13
Q

alternate director

A

usually either a fellow director of the company or
someone who has been approved by a resolution of the board of directors

same voting powers as absent director

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14
Q

company secretary

A

officer of the company who deals with the
company’s legal administrative requirements.

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15
Q

do public and private companies need to have a company secretary?

A

✅public
❌private

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16
Q

appointment of a director for companies with MA (two options)

A
  1. ordinary resolution of the shareholders (more than 50%)
  2. board resolution of the directors (more than 50%)

in practice, board resolution

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17
Q

can rules on appointment of a director be altered?

A

yes, Articles can be amended

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18
Q

are all directors entitled to payment for their services?

A

no, only directors who are also employees with service contracts are

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19
Q

can an individual be a director/officer, shareholder and an employee?

A

yes

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20
Q

in relation to directors, what registers must the company maintain?

A
  • register of directors
  • register of secretaries
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21
Q

who should be notified of a change to directors?

A

AP01 - Companies House

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22
Q

who should be notified of a change to company secretary?

A

AP03 - Companies House

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23
Q

The information kept at Companies House is available for inspection by who?

A

the public

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24
Q

the register kept at a company’s registered office must be open for inspection by who?

A
  • any member of the company - without charge
  • any member of the public - for a free
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25
Q

what personal information does a director / company secretary need to include on the register for public inspection?

A

service address, which does not need to be residential (can be the registered office)

resi address must be provided for a separate, secure register

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26
Q

will residential addresses already on the register be removed automatically?

A

no

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27
Q

what info must be provided re directors and past directors remuneration in the annual accounts?

A

includes:
* The directors’ salaries, bonus payments and pension entitlements; and
* Compensation paid to directors and past directors for loss of office.
- any payments made to, or receivable
by, a person connected to such a director or a body corporate controlled by a director.
- disclosure of information on advances and credits given by a company to its directors or guarantees entered into by a company on behalf of its directors (applies to any person who was a director during the applicable financial year)

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28
Q

other than removal by shareholders, how can a director leave office?

A
  1. resignation by notice
  2. automatic termination
  3. disqualification
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29
Q

how does resignation by notice take place?

A

director will tender a letter of resignation (MA 18(f))

usual, but not obligatory, for the Board to pass a Board resolution accepting the letter of resignation

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30
Q

when will a director be automatically terminated?

A

Under MA 18 a person ceases to be a director as soon as:

  • The director becomes disqualified from being a director;
  • The director becomes the subject of an IVA (or similar);
  • The director becomes bankrupt; or
  • A registered medical practitioner who is treating the director states in writing to the
    company that the director has become physically or mentally incapable of acting as a
    director and will remain so for more than 3 months    .
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31
Q

when might a director be disqualified?

A

Company Directors Disqualification Act 1986 (CDDA)

the court may make a disqualification order against a person preventing them, unless they
obtain leave of the court, to be a director, liquidator, receiver or in any other way directly or
indirectly involved in the promotion, formation or management of a company

maximum 15 years period of disqualification

criminal offence to participate in mgmt of company without leave of the court

  • fraudulent trading
  • wrongful trading
  • persistent breaches of company law
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32
Q

what is retirement by rotation?

A

The MA for public companies require retirement and reappointment of directors by the
members every three years.

All directors of listed companies are subject to annual re-election.

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33
Q

who can remove a director under MA?

A

only shareholders

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34
Q

how could the Board remove a director?

A

only if Articles are amended to provide for this

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35
Q

how can shareholders remove a director?

A
  • by ordinary resolution
  • on special notice (28 clear days)
36
Q

filing requirements for termination of a director

A
  1. update the company’s internal register of
    directors
  2. file TM01 at Companies House
37
Q

list of directors’ duties

A
  • Duty to act within powers (s171);
  • Duty to promote the success of the company for the benefit of the members as a whole (s172);
  • Duty to exercise independent judgment (s173);
  • Duty to exercise reasonable care, skill and diligence (s174);
  • Duty to avoid conflicts of interest (s175);
  • Duty not to accept benefits from third parties (s176); and
  • Duty to declare any interest in a proposed transaction (s177).
38
Q

what is the duty to act within the company’s constitution and exercise powers for the purposes for which they are conferred (s171)?

A

act within the constitution: company’s Articles and decisions taken in accordance with the Articles (ie shareholder resolutions). A director is in breach of this duty if they act without authority, (eg commit the company to borrow more than the Articles allow without prior shareholder approval)

exercise powers for the purposes for which they are conferred: must not use their powers for improper purposes (eg for personal gain).

39
Q

what is the duty to promote the success of the company for the benefit of the members as a whole (s172)?

A

success: should normally mean a long-term increase in value

the duty is owed to the company and its shareholders ABOVE ALL ELSE

40
Q

in exercising its duty under s172, a director is required to have regard to the following range of non-exhaustive matters at s172(1)

A
  • The likely consequences of any decision in the long term;
  • The interests of the company’s employees;
  • The need to foster the company’s business relationship with suppliers, customers, and others;
  • The impact of the company’s operations on the community and the environment;
  • The desirability of the company maintaining a reputation for high standards of business
    conduct; and
  • The need to act fairly as between members of the company.
41
Q

what should companies do to ensure they are compliant with s172?

A

ensuring board minutes clearly note that consideration has been given to the s172 CA 2006 duty when taking board decisions, in particular the matters in s172(1) CA 2006

42
Q

what is the duty to exercise independent judgment (s173)?

A

Directors cannot blindly follow others’ views without considering the interests of the company - the duty has an individual nature

Section 173(2) states that this duty is not infringed by his acting:
(a) In accordance with an agreement entered into by the company that restricts the future
exercise of discretion by its directors; or
(b) In a way authorised by the company’s constitution.

43
Q

what is the duty to exercise reasonable care, skill and diligence (s174)?

A

The general knowledge, skill and experience:
- that may reasonably be expected of someone in their role (at a minimum); AND
* of that director (if relevant)

44
Q

what is the duty to avoid conflicts of interest (s175)?

A

avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company

‘in particular to the exploitation of any property,
information or opportunity’

45
Q

what is the duty to avoid conflicts of interest (s175) not infringed?

A

‘if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest’

OR

if the conflict arises:
* In relation to a transaction with the company (eg a transaction between the director and the
company - subject to the duty of
disclosure in s 177 CA 2006 for transparency purposes but are not prohibited.); or
* In relation to a matter which has been authorised by the directors

46
Q

what is the duty not to accept benefits from third parties (s176)?

A

a director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing (or not doing) anything as a director.

47
Q

when will the duty not to accept benefits from third parties (s176) NOT APPLY?

A

if the acceptance of the benefit cannot reasonably
be regarded as likely to give rise to a conflict of interest

48
Q

what is the duty to declare any interest in a proposed transaction (s177)?

A

Any director who is interested in
a proposed transaction with the company must declare the nature and extent of their interest to
the other directors, direct and indirect

direct:
- proposed transactions
- existing transactions

indirect:
- where the director is not party to the transaction e.g., relative or spouse or another company

49
Q

procedurally, how must a direct declare their interest (s177)?

A
  • before the transaction is
    entered (subject to anything different expressed in the Articles).
  • declaration can be at a BM or in writing in advance of the BM or a one-off general notice of their interest. Best practice suggests that an interested director will declare that interest at BM1.
  • If disclosure is by written notice, the notice must be sent to all directors either electronically (if
    agreed) or in paper form.
  • general notice = they are always to be considered interested in any transaction or arrangement with a specified party. This will be if a director has an interest in a specified body corporate or firm, or is
    connected to a specified person.
50
Q

when does a director NOT have to declare any interest in a proposed transaction (s177)?

A
  • The director is not aware of the interest or transaction or arrangement in question (a director is treated as being aware of the interest or transaction/arrangement if it is a matter of which
    they ought reasonably to have been aware);
  • The interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the
    other directors know about or ought to have known about the conflict of interest; or
  • If the conflict arises because it concerns their service contract and their service contract has
    been or will be considered by the Board, or a committee of the Board, of directors.
51
Q

link between Section 177 CA 2006 and MA 14

A

MA 14 specifies that a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for Board resolutions in respect of that transaction or arrangement

52
Q

when can a director count in the quorum and vote in relation to a transaction or arrangement with the company?

A
  • The company disapplies MA 14(1) by ordinary resolution;
  • The director’s interest cannot reasonably be regarded as likely to give rise to a conflict of
    interest; or
  • The director’s conflict arises from a permitted cause (defined in MA 14(4)).

OR

by removing MA 14

53
Q

what remedies are available for a breach of directors’ duties?

A

s174: damages

s171, 172, 173, 175, 176 and 177:
- injunction
- setting aside the transaction
- restitution and account of profits
- restoration of company property
- damages

54
Q

what can shareholders do to support a director’s breach of duties, even if it would otherwise represent a breach?

A

support and approve in advance

unless unlawful or full disclosure has not been given

55
Q

what types of conduct can shareholders ratify (approve after breach)?

A
  • Negligence;
  • Default;
  • Breach of duty; and
  • Breach of trust.

by ordinary resolution, subject to anything in the Articles requiring a higher majority or unanimity

56
Q

what three transactions require shareholder approval by way of ordinary resolution?

A
  • Directors’ long-term service contracts (ordinary resolution)
  • Substantial property transactions (ordinary resolution)
  • Loans, quasi-loans and credit transactions (ordinary resolution)
57
Q

when will a company be exempt from the requirement to obtain shareholder approval?

A

when the company is a wholly-owned subsidiary of another company

58
Q

what is the definition of a guaranteed term?

A
  • A period during which the contract is to continue other than at the instance of the company (ie a contractual term of more than two years or where the director is in control of how long the contract continues), and during this time the company either cannot terminate the contract or can only terminate it in specific circumstances; or
  • The period of notice to be given by the company.
  • An aggregate of any periods covered by the above two scenarios.
59
Q

if the director is also a director of any
holding company, who else must give approval?

A

shareholders of the holding company

60
Q

what happens if a company does not obtain shareholder approval for directors’ long-term service contracts?

A
  • The provision will be void; and
  • The contract will be deemed to contain a term entitling the company to terminate it at any
    time by the giving of reasonable notice.
61
Q

does the director need to disclose their interest in the long-term service contract?

A

no

but best practice: directors declare their interest under s177

62
Q

can the director vote or count in the quorum on any Board resolution relating to the contract?

A

no

63
Q

Where the ordinary resolution is to be passed at GM, a memorandum setting out the proposed terms of the contract must be made available for inspection by members of the company both:

A

(a) At the company’s registered office for not less than 15 days ending with the date of the meeting; and
(b) At the meeting itself.

64
Q

What are two procedures for obtaining approval of the long-term service contract?

A
  1. normal (minimum 15 days notice before GM)
  2. Written resolution
65
Q

Unless the written resolution procedure is used, how much notice of the GM to approve the contract must be given to shareholders (even if short notice procedure)?

A

Minimum 15 days

66
Q

What is required to approved long-term service contracts under the written resolution procedure?

A

the memorandum setting out the proposed contract terms must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.

67
Q

What is the definition of the substantial property transaction?

A

an acquisition or disposal by a director of a company or a director of the company’s holding company (or a person connected to such directors) of a substantial non-cash asset from or to the company.

68
Q

For a substantial property transaction, when can shareholder approval be given?

A

either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained

69
Q

What is a non/ cash asset?

A

Any property other than cash

70
Q

What is the meaning of substantial?

A
  • more than £100,000; or
  • more than £5,000 and not more than £100,000, only if it is worth more than 10% of the company’s NAV
71
Q

What is a connected person?

A
  • Members of the director’s family:
    ✅spouse or civil partner
    ✅parents
    ✅children
    ✅step-children
    ❌siblings
    ❌grandparents
    ❌grandchildren
    ❌uncles and aunts
  • Bodies corporate
    ✅companies in which the director holds at least 20% of the shares
    ✅companies in which connected persons hold at least 20% of the shares.
  • A business partner
    ✅of the director
    ✅those persons connected with them
  • Trustees of a trust, the beneficiaries of which include:
    ✅the director
    ✅persons connected with them (s 252(2)(c))
72
Q

Other than the shareholders, who else needs to approve the transaction?

A

if the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by an ordinary resolution of its shareholders.

73
Q

What are the exceptions for approval by shareholders of a substantial property transaction?

A
  • wholly owned subsidiary
  • s192 CA 2006 exceptions (eg director who is also a shareholders sells their shares back to the company, not a SPT because it is a transaction between the company and the shareholder in their capacity as a member)
74
Q

What happens if an SPT is entered without shareholder approval?

A

VOIDABLE unless:
(a) Restitution is no longer possible;
(b) The company has been indemnified for the loss or damage suffered by it; or
(c) Rights acquired in good faith by third party would be affected by the avoidance.

Directors involved + connected persons are liable to give an account of profits and indemnify the company for losses incurred

OR

Affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period.

75
Q

which loan transaction requires ALL COMPANIES to obtain shareholder approval?

A

s197 loans:
- loans to directors
- loans to directors of its holding company
- give guarantees
- enter into security
without the transaction first being approved by the shareholders by ordinary resolution.

76
Q

for private companies not associated with a plc, which is the only transaction for which shareholder approval is required?

A

s197

77
Q

which four transactions require shareholder approval?

A
  1. loans
  2. quasi-loans
  3. credit transactions
  4. guarantees or security for any of the above
78
Q

which types of companies require shareholder approval for:
1. loans
2. quasi-loans
3. credit transactions
4. guarantees or security for any of the above

A
  • public companies
  • private companies associated with public companies
79
Q

what are the exceptions to the requirement for shareholder approval?

A
  • Section 204: Expenditure on company business (up to a maximum of £50,000);
  • Section 205: Loans for defending proceedings brought against a director;
  • Section 206: Loans for defending regulatory actions or investigations;
  • Section 207: Minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval;
  • Section 208: Intra group transactions; and
  • Section 209: Money lending companies (where the loan is made in the ordinary course of the business of the company).
80
Q

does the wholly owned subsidiary exception apply to loans to directors etc.?

A

yes

81
Q

with loans to directors etc., does the holding company need to approve the transaction by ordinary resolution?

A

yes, if the transaction is between a company and a director of the company’s holding company; or
a person connected to a director of the holding company

82
Q

are there any defences to not obtaining shareholder approvals for loans to directors etc?

A

if a transaction is entered into with connected person, th director will not be liable if they took all reasonable steps to ensure the company complied with those sections

+

any connected person (if relevant) and any
director that authorised the transaction can show they had no knowledge of the circumstances constituting the contravention.

83
Q

are there any remedies for not obtaining shareholder approvals for loans to directors etc?

A

VOIDABLE unless:
(a) Restitution is no longer possible;
(b) The company has been indemnified for the loss or damage suffered by it; or
(c) Rights acquired in good faith by third party would be affected by the avoidance.

Directors involved + connected persons are liable to give an account of profits and indemnify the company for losses incurred

OR

Affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period.

84
Q

does a director have to make a s177 disclosure in relation to these transactions?

A

not formally, but in practice the director will disclose the nature and extent of their interest

best practice to disclose, especially with indirect transactions

85
Q

what procedure must be followed where the ordinary resolution is to be passed at GM?

A

memorandum setting out the proposed
transaction must be made available for inspection by members of the company both:
* At the company’s registered office for not less than 15 days ending with the date of the
meeting; and
* At the meeting itself.

86
Q

notice for the GM

A

minimum of 15 days notice, even with short notice procedure, unless written resolution procedure being used

87
Q
A

SQE1 - Business (20 decks)

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