8: Companies: Management Flashcards
8 types of director?
De facto director
- anyone who acts as a director
- not specifically appointed
- becomes liable as a director due to his or her conduct
De jure director
- appointed through correct legal procedure
Shadow director
- person in accordance with those directions or instruction the directors of a company are accustomed
- not a director is only acting on advice in processional capacity
Alternative director
- appointed by director to attend and vote at board meetings
- may be another director or outsider
- might be subject to board approval
EDs
- full time employee involved in management
- normally has a specific role
NEDs
- part time
- bring outside expertise
- not an employee
- controls EDs
Managing director
- day to day management of company’s business
Chairman
- ensured procedures in meetings is followed
- Usually a NED
Appointment of directors in brief?
Appointed by existing directors or ordinary resolution
Directors of public companies should be voted on individually
Actions are valid unless appointment is defective
Company must notify registrar of changes within 14 days. Must also update register of directors
The ways a director might leave office?
Death
Winding up of company
Removal
Disqualification
Resignation
Not offering themselves for re-election
The mod articles provide that a director should leave office in what circumstances?
Prohibited from being a director by law
Bankruptcy order is made
Medical practitioner gives written opinion that they are physically or mentally incapable
Court passes order that mental health prevents them from exercising powers of director
Director resigns
The procedure for the removal of a director?
Special notice (28 days) is required of the resolution by persons wishing to remove director
Forward the copy of the resolution to the director concerned
Notice of meeting goes out, all members entitled to attend and vote
Director in question can require the company to circulate written reps to members
At the meeting, director can read out reps.
Director must be allowed to attend the meeting and to speak.
An ordinary resolution is passed to remove director
When is the power of members to remove a director limited?
Director who is also a member may validly be given weighted voting rights in decision to remove them
Shareholder agreement may state that shareholders of each class must be present for decisions to be valid. One person not attending could prevent removal!
How do director’s exercise powers?
Members delegate to directors
Directors are required to exercise their powers in accordance with company’s constitution.
Most companies have unrestricted objects, but articles may specifically restrict
Power is given to board as a WHOLE.
Members have no right to interfere in decisions by board. Directors are not agents of the members and are not subject to their instruction.
What kind of restrictions are put on directors powers?
General statutory restriction
- directors can use powers for ‘purpose for which they are conferred’
- directors using powers for any other reason is a breach
Specific statutory restrictions
- certain decisions must gain shareholder approval by way of ordinary or special resolution
Restrictions in articles
- provisions in articles can restriction directors
Restriction of powers made by members
If members are unhappy they can:
- remove director by ordinary resolution
- alter articles by special resolution
What do directors need to bind the company?
AUTHORITY!
Express
Implied
- from the persons position
- MD can bind in same way as board, has authority typical of role
Apparent/ostensible
- director is held out as having authority
- if a third party acts in good faith, company is estopped from denying truth
- third party acts in good faith until contrary is proved, like if they have knowledge of actual lack of authority
What happens if transactions are made by board outside board’s powers?
Power of directors is not limited by anything in company’s constitution, provided the other party is acting in good faith
Includes when the transaction exceeds the board’s actual authority
Other party having knowledge of the directors lack of express authority is not enough to demonstrate lack of good faith
So - any contract entered into by board is binding (although members can always restrain board members on making transactions)
BUT - if third party is a director or person associated with director, transaction becomes voidable
- anyone involved in this is then liable to compensate the company for any profit or to indemnify contract
Does not apply if reimbursement is no longer possible or company has affirmed contract
What sets the duties of directors?
Companies Act 2006 sets specific statutory duties
The ones in legislation are general duties - learn!
Individual may still be subject to duties even after they cease to be director
Directors general duties: Act within powers?
Director must act in accordance with company’s constitution
Only use powers for the purpose which they were given
If director carries out a transaction they do not have authority for, it is void, unless approved by shareholders
Directors general duties: promote the success of the company?
Directors must act in good faith, in a way which promotes the success of company and benefit of the members
Directors must have regard to:
- consequences of long term decisions
- interest of employees
- need to foster business relationships
- impact of company’s operations on community and environment
- desirability of reputation
- need to act fairly between members
Directors general duties: exercise independent judgement
Duty is not infringed by a director acting:
- in accordance with an agreement duly entered into that restrict the future exercise of discretion
- in a way authorised by the company’s constitution
Directors general duties: exercise reasonable care and diligence
Standard expected of a director is that of a reasonably diligent person with:
- general and actual knowledge, skill and experience that could be expected and is held
Directors general duties: avoid conflicts of interest
Avoid a situation where the director is in conflict with the interest of the company
Not infringed if matter has been authorised by directors, provided articles do not say otherwise
Duty does not apply to a transaction or arrangement
Relevant director does not count towards quorum on determining authorisation
Directors general duties: do not accept benefits from third parties
Director must not accept any benefit from third party
Unless acceptance will not give rise to conflict of interest
Directors general duties: declare an interest in a proposed transaction or arrangement
Director must declare the extent and nature of such an interest
Declaration can be made:
- in writing
- at a board meeting
- or by general notice
Who do the directors owe their duties to?
The shareholders as a collective - present and future
The directors owe no general duty to independent members
Breaches may be ratified
What are the consequences of a breach of duty?
Director will be required to make good any loss suffered
Contracts between company and director may be voidable
Any property taken by the director can be recovered
Property may be recovered directly from a third party, unless party acquired in good faith
Injunction when breach has not yet occurred
Any provision to exempt a director for liability, due to breach or negligence, is void
BUT if course decides directors were acting honestly and reasonably, and thinks they ought to be fairly excused, they may not be liable
Definition of fraudulent trading?
Company’s business is carried on with intent to defraud creditors
Offence may be criminal or civil
Can involve just one transaction
High burden of proof involved
Definition of wrongful trading?
Before the start of winding up, director knew or ought to have known that there was no reasonable prospect that the company could avoid liquidation
And they did not take sufficient steps to minimise any loss
Definition of wrongful trading?
Before the start of winding up, director knew or ought to have known that there was no reasonable prospect that the company could avoid liquidation
And they did not take sufficient steps to minimise any loss
Who is liable for fraudulent trading?
Any persons knowingly partly to the fraud
Can be a person taking the decisions or playing an active part of the business
Who is liable for wrongful trading?
Directors and shadow directors
Reasonably diligent director needs to take steps expected of a reasonable director, or director with higher skills (if they should have them!)
Consequences of fraudulent trading?
Contribute to the contribute’s assets
Up to 15 years disqualification under CDDA86
Fine and/or imprisonment up for 10 years
Consequences for wrongful trading?
Contribute to the contribute’s assets
Up to 15 years disqualification under CDDA86
Case law for fraudulent and wrongful trading?
Fraudulent - R v Grantham
- ordering goods knowing they would not be paid
Wrongful - Re Produce Marketing Consortium
What can a disqualified director not do? The act?
Company Directors Disqualification Act 1986 (CCD86)
Disqualified director cannot be concerned in the management of a company, directly or indirectly
OR be a liquidator, receiver or promoter
7 grounds for disqualification? And lengths of disqualification
Persistent breaches of Companies Act
- 3 convictions for default in 5 years counts
- max 5 years
Conviction of serious offence in mgmt
- max 15 years
Fraudulent or wrongful trading
- max 15 years
SoS finds the director to be unfit to be in mgmt of company
- max 15 years
Liquidator’s report finds the director to unfit to be in mgmt
- min 2 years and max 15 years
SoS feels in the public interest
- max 15 years
Breach of competition law
- max 15 years
What happens as a breach of disqualification order?
Criminal offence!
Fine/imprisonment
Disqualified is personally liable for debts of company while acting
What docs regulate members?
Articles of association set the company’s internal regulations
Shareholders agreement (optional)
- private document, contractual
- sets out members rights and duties
- gives more protection to members
What are the rights of members?
Have a right:
- to be sent a copy of annual accounts and reports
- to require directors to call general meeting
- to appoint a proxy to exercise their rights
- claiming information rights, on their funds
Can also take action to enforce their personal rights of membership
Main duty just to approve members actions
What 4 things require member approval?
Service contracts
Substantial property transactions
Loans to directors
Payments for loss of office
Members approval: service contracts?
Required if contract is for a guaranteed period of two years or more
If not approved, contract to include a term allowing the company to terminate with reasonable notice
Members approval: substantial property transactions?
Director acquires substantial non-cash asset
‘Substantial’ is value either exceeds £100,000 or 10% of company’s asset value and is more than £5,000
Failure to get approval:
- transaction voidable
- director liable to account for any gain or to indemnify it
Members approval: loans to directors?
Any loan by company to director
Or
Guarantee/security by company in connection with loan from third party to director
Written memo must be given to members
Failure to get consent results in:
- transaction voidable
- director liable to account for any gain or indemnify it
What loans to directors do not require approval from members?
Expenditure on:
- company business
- defending proceedings or regulatory action/investigation
Minor transactions in regular course of business
Intra-group transactions
When the business of company is money-lending
Members approval: payments for loss of office?
Payments or benefits to be made on loss of office or retirement
Written memo must be sent
Payments will be held on trust where approval is not sought
Any director who authorised is liable to indemnify company for loss
How can members exercise their votes?
They can do this in their own interest - they are not required to act in the benefit of the company
Remember: claimant is always the company. If minority unhappy with decision, they have no recourse as company is separate legal person
4 remedies for unhappy minority shareholders?
Any member
- can apply to court to prohibit a payment out of capital by private company
- prevent registration of limited company as unlimited company
> 5% voting rights
- force inclusion of a resolution on agenda of AGM
- can require directors to call GM
> 15% voting rights
- can appeal to court to cancel a variation of class rights
> 25% voting rights
- can defeat a special resolution to alter name or articles, reduce share capital, wind up company
What are derivative actions?
A ‘derivative’ claim can be brought against a director where there has been a breach of duty or negligence
Brought by members, needs permission of the court
Court will consider:
- was member was acting in good faith
- has company had decided not to pursue the claim
- what is the view of members with no person interest
- does the member have the ability to pursue the matter in their own right
When will the court refuse permission for a derivative claim?
When it is satisfied that:
- act was authorised or ratified
- person was acting in accordance of duty to promote success of company
Even if granted, director can lose liability if court considers that
- they acted honestly and reasonably
- they ought to be fairly excused
How does unfairly prejudicial conduct work?
Any members may apply to the court
When the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of members
Or an act or omission is or would be prejudicial
In order to claim relief:
- petitioner must be member of company
- complaint must be based on prejudice of them as a member
What can be classified as unfairly prejudicial conduct?
No statutory definition - the test is objective. These are just examples:
- shareholder dismissed as a director, prejudiced if company is quasi-partnership
- failure of pay dividends or call general meeting
- improper allotment of shares
- diverting business opportunities
What happens if a petition for unfairly prejudicial conduct is successful?
Court may make whatever order it thinks fit
Usually one of:
- requiring company to purchase shares of petitioner at fair price
- authorising court action in company’s name
- regulating future conduct in company’s name
- ordering company to perform or not perform an act
Can a minority shareholder petition to wind up the company?
Yes! On the grounds that it is just and equitable to do so.
Member must show there is not other suitable remedy available
Orders are made when:
- company was formed for illegal or fraudulent purpose
- complete deadlock in management’s affairs
- shareholders have lost confidence in company’s management
Everything about AGMs
Held once a year, within 6 months following accounting refence date
21 days notice required unless agreed otherwise by all
- must be stated as an AGM
Company and officers can be fined if not held
Private companies do not need to hold
Business includes:
- consider accounts, appoint auditors, elect directors, declare dividends
Members can force inclusion of a resolution on agenda if they:
- hold 5% voting rights
- 100 members each hold average of £100 of paid up share capital
Everything about GMs
Held whenever required
Must be held by a plc if a serious loss of capital has occured
14 days notice period
Person who requisitions the meeting sets the agenda
Everything about class meetings?
Meeting of a class of shareholders or debenture holders, normally to consider a variation of their class rights
Notice period also 14 days
At least one third of the nominal value of the issued shares must be present - at least 2 people
Everything about class meetings?
Meeting of a class of shareholders or debenture holders, normally to consider a variation of their class rights
Notice period also 14 days
At least one third of the nominal value of the issued shares must be present - at least 2 people
Who can call a meeting?
Directors
Members
- can require directors to call a GM if they hold 5% paid up voting capital or voting rights
- directors must then call meeting 21 days
- meeting takes place 28 days of notice
- if directors do not call meeting, members who requested meeting may call meeting themselves taking place within 3 months. Can recover expenses
Resigning auditor
- require directors to convene so they can explain reasons for resignation
Court
- can call meeting on application where it would otherwise be impracticable
Who can call a meeting?
Directors
Members
- can require directors to call a GM if they hold 5% paid up voting capital or voting rights
- directors must then call meeting 21 days
- meeting takes place 28 days of notice
- if directors do not call meeting, members who requested meeting may call meeting themselves taking place within 3 months. Can recover expenses
Resigning auditor
- require directors to convene so they can explain reasons for resignation
Court
- can call meeting on application where it would otherwise be impracticable
How does general notice work?
Every member and director must receive notice
Accidental failure to give notice does not invalidate the meeting
Notice must include:
- date, time and place of meeting
- general nature of business
- text of any special resolutions
The length of notice periods for meetings?
AGM - 21 days
- less if every member entitled to attend and vote agrees
GM - 14 days
- less if members holding at least 90% of the shares agree
These include ‘clear days’ - does not include day notice is given, or day of meeting
What is special notice and what is the notice period?
Required for the removal of a director or auditor
Requires 28 days notice
Person in question can submit written reps and require them to be circulated
When and how are special resolutions made?
Made when the law or articles state a special resolution should be used.
Examples:
- alter name
- wind up company
- alter articles
- reduce share capital
75% required to pass
To registrar within 15 days
When and how are ordinary resolutions made?
Used whenever special resolution not required
50% required to pass
To registrar only if required by statute
When and how are written resolutions made?
Private companies only
Can be used for any decision barring those needing special notice - so cannot be used to remove director or auditor
Members cannot revoke agreement
Date of resolution is date when majority is reached
Resolution must be passed within 28 days of its circulation
% to pass is same majority as in GM
To registrar if a majority of 75% is required
What is procedure at meetings?
Quorum - minimum number of members need to be present to validate business
If not present, meeting is described as inquorate
Voting is share of hands - one member one vote
Poll may be demanded by members holding 10% of voting rights.
- means members get the number of votes they are entitled to by their shareholding
- replaces previous share of hands
- quoted companies must publish results of poll on website
How do single member companies conduct meetings?
Can conduct business without the need for notice or minutes
They must still keep full written records of any decision which should have been taken in general meeting
Records must be retained for 10 years
