5 - The board of directors Flashcards
What ultimately determines whether a person is a director?
Whether they actually carry out the functions of a director
What is a de jure director?
A person who has been validly appointed a director
What is a de facto director?
A person who acts as a director but has not been validly appointed
What has come to be the requirement for being a de facto director? (3)
Exercising real influence in the CG of the company
Undertaking functions which could properly be discharged only by a director
Participate in directing affairs of company and acting on a equal footing with the de jure directors
Example of instance which shows importance of regulating shadow directors
Directors almost always act on instruction of majority shareholder
UKCG Code, Provision 13 - NEDs additional role
Scrutinise and hold to account the performance of management and individual directors against agreed performance objectives
4 circumstances which could impair NED’s independence (there are others)
Employee within last 5 years
Close family ties with company directors, advisers, or senior employees
Represents significant shareholder
Has served on board for more than 9 years
What determines NEDs independence? & significance
The board does - directors can still be NEDs even if they meet criteria which would usually impair their independence - board should clearly explain why NED is considered independent
Are directors always empowered to appoint an alternate?
No, this must be stipulated in the Articles
Two points of note re. nominee directors
Their duty it to the company, not the person who appointed them
The person appointing the nominee can be regarded as a PSC
What is a nominee director?
A person appointed by a person with an interest in the company who has the ability to nominate a director (usually as per the Articles)
5 types of people ineligible to act as a director
- When 156a comes into force, only natural persons (with exceptions)
- Under 16
- Auditor
- Disqualification order
- Undischarged bankrupt
Role of nomination committee according to UKCG Code Provision 17
To lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession
How many directors should be NEDs according to Provision 17?
Majority
Why are there proposed plans to abolish requirement for co’s to keep own RoD?
Due to incoming ID verification requirements
What is S.161(1)?
Acts of a person acting as a director are valid notwithstanding that is is afterwards discovered:
- There was a defect in their appointment
- They were disqualified from holding office
- They had ceased to hold office
- They were not entitled to vote on the matter
3 instances where S.161 does not apply
- Where the person seeking to rely on S.161 had not acted in good faith
- Where the person seeking to rely on S.161 knew of the defect of the appt and the legal effect of this at the time
- There was no purported appt in the first place
Is a director entitled to remuneration simply by being a director?
No, and it will be deemed void if not authorised
3 sources of authorisation for director remuneration
- Approved by company’s members
- Articles provide that director is to be remunerated
- As per director’s service contract
What typically determines who decides a director’s pay?
Articles, and if these are silent, them can be decided at a GM
How many NEDs should sit on remuneration committee?
At least 3
Boards should be primarily NEDs on boards of which companies?
Those with a premium listing
4 methods by which a director can cease to act?
Resignation
Vacation in accordance with articles
Removal
Disqualification
Model articles (Art.18 private, Art.22 public) say director will vacate office if:
- Cease by virtue of provision of CA2006 or are prohibited by law
- Bankruptcy order is made against them
- Registered medical practitioner states that the person is physically or mentally incapable of acting
Is retirement by rotation required by CA 2006?
No
Article 21 of plc model articles states:
Directors must retire at first AGM and seek re-election; and
At every subsequent AGM, any directors appointed by directors since last AGM or any directors not appointed or reappointed at one of the preceding two AGMs, must retire from office and may offer themselves for reappointment by the members.
Two ways in which directors can be removed
Under CA 2006
Under Articles
S.168(1) - removal of director - brief
A company may by ordinary resolution at a meeting remove a director before the expiration of office, notwithstanding any agreement between it and him
4 rules which must be complied with for an S.161(1) removal to be valid
- Resolutions takes place at a meeting
- Special notice of the resolution is required
- Copy of resolution must be sent to director whose removal is sought
- Director has right to protest against removal, and may address the meeting and circulate written representations
Does a S.168 removal deprive director of compensation they are due?
No
Is it possible to take away S.168 power? - key consideration
No
Weighted voting rights can be inserted, such as for the director being removed
Do model articles provide for increased voting power of director being removed?
No
Case Law example - weighted voting, removal of director
Bushell v Faith - was held that weighted voting right clauses are enforceable
Bushell v Faith [1970] brief overview
Bushell and Faith were only two directors.
3 members had 100 votes each
A resolution was tabled to remove Faith, who was also a member, as a director.
The Articles 3 votes per share for the director to be removed.
Faith therefore amassed 300 votes, to the other members’ 200.
Claim by Bushell to have Faith removed was rejected.
What is common provision allowing for removal under the articles?
Director will be required to vacate office if all the other directors so require
Relevant statute for disqualification as a director
Company Directors Disqualification Act 1986
5 examples of grounds for DQ of director
- Convicted of an indictable offence
- Fraud or breach of duty during winding up
- Breaching competition law
- Being an undischarged bankrupt
- Persistent breaches of companies legislation
Effect of disqualification order/undertaking
DQ person:
- shall not be a director of a company
- shall not act as a receiver of co property
- shall not be concerned or take part in the promotion, formation or management of a company
- shall not act as insolvency practitioner
Why were DQ undertakings introduced in 2000?
Process for DQ order (by court) can take considerable amount of time
What is a DQ undertaking?
Secretary of state accepts from director an undertaking that they will not engage in prohibited activities
Two limitations of DQ undertaking
- Can only be used in relation to certain grounds, if SoS is satisfied director has taken part in DQ conduct
- SoS can only accept undertaking if it appears undertaking is ‘expedient in the public interest’
Consequences of breaching DQ order/undertaking (2)
- Criminal offence has been committed
- Personal liability for debts of company if involved in management
2 conditions to be met for compensation order/undertaking to be made
- Person subject to DQ order/undertaking; and
- Conduct to which order/undertaking relates has caused loss to creditors of insolvent company of which person has been a director
What constitutes special notice of a resolution?
28 days
Which sort of breach of company constitution can a member sue the company for?
Only re. terms that relate to membership rights
When can a member attempt to obtain a remedy in relation to a provision that affects their directorship?
If it can be argued that the company is a quasi-partnership
Why can a member not usually sue a company in respect of their rights as a director (ie. right to receive annual bonus)?
Because this is a director right and therefore an outside right - from the perspective of the member (even if member is same person as director)
