Biz Law Flashcards
1
Q
Define partnership (traditional)
A
Relationship between persons carrying on a biz in common with a view to make a profit
2
Q
Formation of a traditional and criteria of partnership
A
- no need for intention
e.g. profit sharing, all indv taking part in decision making - sufficient - The receipt by a person of a share of the profits of a business is primâ facie evidence that he is a partner in the business
3
Q
advantages of traditional partnership x4 and disadvantages x1
A
ADV
1. low cost
2. no formalities
3. no filing / disclosure requirement -> high degree of confidentiality
4. biz can start trading immediately
DISADV:
1. unlimited liability
4
Q
fiduciary duties of partners to one another x4
A
- duty of good faith - to act honestly towards each other and to act for the benefit of the partners as a whole
- honest and full disclosure
- unauthorised personal profit
- conflict of duty and interest
5
Q
contractual liability of partners
A
every partner is liable jointly with other partner for debts and obligations of the firm whilst they are a partner
6
Q
tortious liability of partners
A
joint and several
7
Q
liability of new partners
A
will not be liable to debt incurred before they joined
8
Q
liability of former partners and how to relieve + 2 types of notice
A
may still be liable for debts incurred whilst they were still partner
- can be relieved by novating the agreement and with creditor’s consent
- Need to notify change to 3P:
a) actual notice - for those who have had dealings with the partner before departure
b) constructive notice - publication of departure in London Gazette - for those who have not had dealings with partner before departure
No liability for debts to 3P who did not know they were partner before they left
9
Q
Liability for non-partners than hold themselves out as a partner (3 elements)
A
may be liable IF
1. representation made to 3P
2. 3P’s action in response
3. 3P’s state of mind (believing the representation)
10
Q
Determining whether a partnership is bound by a contract an indv has made on its behald depends on whether they are …. or ….? and what rules apply to each?
A
A. Partner
- statutory rule of agency
- common law of agency may apply
B. Non-partner
- common law only
11
Q
Deciding whether a particular contract binds a firm where an agent has made it on the firm’s behalf -> where partners is CONTENT with agent’s act and the agent is either a partner/ non-partner
A
An indv acting as a firm’s agent (partner/ non-partner) treated as giving effect to the wishes of the partnership as whole
if all parties give express or implied authority to bind firm -> firm will be bound
Even if agent had no authority at time contract was made
12
Q
Deciding whether a particular contract binds a firm where an agent has made it on the firm’s behalf -> where partners is NOT content with agent’s act and the agent is a partner
and the agent’s liability to other partners
A
may be binding provided that on an objective view:
1. the contract is the kind of business carried on by the firm
2. the contract is for carrying on such business in the usual way - i.e. the kind of contract that a partner alone would make on firm’s behalf OR contract an outsider would expect all partners to sign individually
BUT will not be bound if:
1. 3P knew that partner in Q was not authorised to enter into contract on behalf of the firm
2. 3P did not know/ believe that the partner was a partner
A partner who binds their firm w/o actual authority may be liable to other partners for breach of contract
13
Q
Deciding whether a particular contract binds a firm where an agent has made it on the firm’s behalf -> where partners is NOT content with agent’s act and the agent is a NON-partner
A
an agent with no actual authority may bind firm if he has apparent authority to enter into a contract
apparent authority arises when the firm (principal) represents (holding out) or permits a representation to be made to a 3P that the non-partner has authority to bind the firm
(e.g. employing someone under title ‘marketing manager’ confers apparent authority to bind firm on marketing decisions)
14
Q
What does ‘holding out’ a person to be a partner mean
A
making representations that a person is a partner
e.g. a firm still using old letterhead of an ex-partner’s name after they retire
15
Q
Do partners within partnerships have to pay tax
A
Partnerships are tax transparent
each partner is liable to tax 1. as an individual on their share of the income (income tax); and
2. gains of the partnership (capital gains tax on their share of profits and gains)
16
Q
Is a partnership a separate legal entity from the partners?
A
NO - partnership and firm refer to all partners collectively
17
Q
How many people to form a partnership
A
minimum 2 (a company could be a partner)
18
Q
How does a partner in a partnership pay capital gains tax
A
Capital gains tax principles apply on disposal of a capital asset
Each partner treated as owning a fractional share of the asset
The fractional share based upon
a. agreed profit sharing ratio, OR
b. if no agreed PSR - shared equally
19
Q
How to override statute (Partnership Act 1980)
A
By partnership agreement
20
Q
How to vary partner rights and obligations under an agreement or under PA 1980?
A
Unanimous consent
express or inferred from a course of dealing
21
Q
Commencement and duration of partnership -> default statutory provisions and how to amend by partnership agreement
A
commence when criteria in s1(1) satisfied but useful to set out date that partners agree on
-> before commencement date, default provisions of PA1980 will apply
Duration: Can have fixed term/ continue until terminated
- If fixed term but partners continue after expiration - presumed to be partners on same term as before
22
Q
Partnership property in (partner’s rights to property and what asset is partnership property?) of partnership -> default statutory provisions and how to amend by partnership agreement
A
each partner deemed to own share in property belonging to partnership, but does NOT have right to any particular partnership asset
whether particular asset is partnership property:
1. depends on partner’s intention at time acquired -
- all property brought into partnership on account of firm/ for purpose and in course of partnership biz = partnership property
- all property bought with money belonging to partnership = partnership asset
Can amend by partners agreeing on which assets count
23
Q
partners shares in income and capital and profits and losses of partnership -> default statutory provisions and how to amend by partnership agreement
A
ALL partners entitled to EQUAL share in capital and profits of biz and contribute EQUALLY toward losses
- useful to amend to add a profit sharing ratio
24
Q
partners drawing/ salary of partnership -> default statutory provisions and how to amend by partnership agreement
A
All partners entitled to share (‘draw’) income profits EQUALLY
-> can amend to set out specific amount
Without an agreement partner is not entitled to salary
-> can also amend so partners receive salary in addition to income profit share
25
Limits on authority of partners of partnership -> default statutory provisions and how to amend by partnership agreement
every partner MAY take part in management of the partnership business
-> can amend by setting out requirements for each partner
26
decision making of partnership -> default statutory provisions and how to amend by partnership agreement
decisions arise during ordinary course of the biz are decided by a majority,
except for the following > require unanimity
1. changes to nature of biz
2. introducing new partner
3. changing rights and duties of partners
-> can amend by expressly dealing with decision making and management
27
incoming (new) partners in partnership -> default statutory provisions and how to amend by partnership agreement
unanimous consent needed
-> can amend by e.g adding written consent
28
expulsion of partner out of a partnership -> default statutory provisions and how to amend by partnership agreement
cannot be expelled by majority vote unless ALL partners have previously agreed they can do so
KEY to agree to expulsion provisions in advance if not impossible to remove partner without dissolving partnership
29
Partner leaving a partnership -> default statutory provisions and how to amend by partnership agreement
Effect of partner leaving = dissolved partnership (automatic dissolution but a new partnership formed by remaining partners who continue ('technical dissolution')
BUT open to any partners to apply to court to have old partnership wound up (i.e. sale of assets for repayment of partnership debt and distribution of assets/ liabilities)
-> amendable by partnership agreement stating partnership will continue + details on how partner can leave w/o being wound up - mechanism to buy out departing partner's share
30
Non-compete clauses in partnership -> default statutory provisions and how to amend by partnership agreement
If partner without consent of other partners competes with the firm, they must account to firm for all profits made by them in that biz
Should add express clause preventing current partners from competing with firm
31
Restrictions on outgoing partners > default statutory provisions and how to amend by partnership agreement
No default clauses to limit powers of outgoing partners to compete with partnership after leaving
Amendable in partnership agreement
1. add non-compete clause (prevent former partners competing with biz)
2. add non-solicit clauses (prevent former partners from soliciting biz from partnership's clients)
3. non-dealing clauses (prevent former partners from entering into contract with clients/ former clients/ employees of partnership)
--> Only reasonable duration and scope for protection of a legitimate biz interest
32
7 ways to dissolve (terminate) a partnership
1. automatic dissolution (subject to contrary agreement)
2. expiry of fixed term
3. completion of specific venture
4. death/ bankruptcy of any partner
5. by notice from any partner
6. if partnership biz becomes unlawful
7. by court as last resort
33
Collecting in and distributing assets on the dissolution of a partnership -> default provisions + amended partnership agreement
when partnership wound up, once all debts and liabilities paid, any money/ assets left will be distributed so each partner paid their original capital first
If any surplus asset -> shared equally
a. or if partnership agreement has specific asset surplus ratio
34
Is LLP a separate legal entity from its members
YES
35
Formation of LLP 3 steps
1. registration at Companies House (LLIN01) - name, registered office's address, designated members
2. certificate of incorporation - given company no
3. obliged to continue filing new information with Companies House
- change of name/ office/ membership
- creation of charge
- annual confirmation statement and accounts
and maintain in-house records (registers of members and people with significant control (PSCs) with >25% interest or sig control)
36
Requirements for members of LLP - how many?
at least 2 persons, not just indv
no limit on maximum
at least 2 members must be designated members e.g. those that make filings at companies house
37
when does a member cease to be a member of LLP (x4)
1. death (indv)/ dissolution (company)
2. agreement with other members
3. giving notice
38
What governs LLP's procedures and arrangements agreed by members? (statute x11 + ??)
11 Statutory default provisions (2001 Regulations)
1. share capital and profits EQUALLY
2. LLP must indemnity its members for payments/ personal liabilities incurred in ordinary and proper conduct of biz
3. every member may take part in management
4. no member entitled to remuneration
5. no person can become member/ assign their memberships without unanimous consent
6. ordinary decisions by majority, changes to nature of biz by unanimity
7. members must give true accounts and full info of things affecting LLP
8. books and records must be available for inspection by members at registered office
9. if member (w/o consent) carries on biz of same nature and competes with LLP, must account for and pay LLP all profits made in that biz
10. members have duty to account for benefits derived from transactions with LLP and its biz or property
11. no implied power of expulsion of member by majority unless expressly provided in members' agreement
Or creating the LLP Agreement (but not obliged to do so)
No memorandum/ articles of association
39
Taxation of LLP
Tax transparent (the LLP is not taxed, but the partners are)
1. members not LLP pay income tax and capital gains tax
2. LLPA gives relief from stamp duty
3. LLP may register for VAT, not members
40
advantages of LLP x4 Disadvantage of LLP x3
ADV
1. limited liability for its members
2. company is a separate legal entity – it can enter into contracts and own property, sue and be sued.
3. Tax transparent - the LLP is not taxed, but the partners are
4. credibility - due to disclosure and regulatory requirements, creditors and lenders sometimes have more confidence dealing with a company
DISADV
1. have to file accounts at Companies House on much the same basis as companies, leading to a loss of financial privacy + cost + time
2. Ongoing formalities
3. subject to the 'clawback' rule - in certain circumstances money taken out of the LLP by members up to two years before winding up of the LLP can be clawed back into the pool of assets available to repay LLP’s creditors
41
A company's constitutional documents under CA 2006
Articles of Association
Not memorandum anymore (previous CA1985 req)
42
A company's constitutional documents under CA 1985
Articles of Association AND memorandum to include objects clause setting out purpose company formed
43
Purpose of Articles
regulate relationships between shareholders, directors and company -> i.e. company's rules
44
Relationship between CA 2006 and the Articles
Legality Test: The Articles must comply with the minimum provisions of CA 2006
A company may provide a more onerous procedure in its Articles than contained in CA 2006
(e.g. CA2006 requires min 1 director, can amend in Articles to require 3)
BUT, there are some CA2006 provisions which override anything in company's Articles
(right to demand poll vote at GM cannot be removed or varied)
45
Unamendable CA 2006 provision
The right to demand poll vote at GM cannot be removed/ varied by Articles
46
How to amend Articles and entrenched provisions
By special resolution and file at Companies House
Basic rule: any amendment must be made bona fide in the interests of the company as a whole
Entrenched provisions (those can only be amended/ repealed if specific conditions met) can be amended by unanimous agreement of all members or by court order
47
Legal effect of Articles
BINDING on both company and its members
contract...
a. between members themselves and
- members only able to enforce provisions contained in Articles through the company itself and not enforce rights against other members
b. also between company and its members
- courts can prevent company from infringing members rights by granting injunction
- member obliged to comply with articles as far as they are relevant to his capacity as a member
- e.g. right to vote or right to receive final dividend once approved by resolution
48
2 ways to form a company
1. incorporate new company from scratch
2. purchase and convert existing shelf company
49
What to deliver to Companies House to incorporate new company from scratch x4
1. memorandum
2. Articles (if not using MA)
3. fee
4. Form IN01
50
What does certificate of incorporations set out and its effect
1. Name of company - can be changed later
2. registered no. -> never change
3. date of incorporation
Company becomes legal entity from date certificate of incorporation is issued by Companies House
Until certificate issued, it is not a legal person and has no capacity to enter into contracts AT ALL.
51
How to change a company's name - 3 steps
1. special resolution by shareholders (unless provided by Articles)
2. Form NM01 filed at Companies House
3. effective once Registrar of Companies issue new certificate of incorporation
52
Changing members, directors and company secretary of a shelf company - 4 steps
1. shares held by first members (subscribers) transferred using stock transfer form - usually board meeting to approve transfer
2. the client becomes the shareholder once entered on the register of members
3. the client's representatives appointed as director and secretary forms filed at Companies House
4, the first director and secretary resign and forms filed at Companies House
Note: appoint first then resign -> company will always need at least one director to be compliant
53
Appointing new directors - what resolution?
Board resolution by directors OR ordinary resolution by shareholders
54
Appointment of secretary - what resolution?
By directors - usually board resolution (no specific req, private company not required to have secretary)
55
Resignation of existing directors - - what resolution?
1. send letter of resignation
2. effective from date set out in letter
3. no board/ shareholder resolutions needed
56
Appointment of new Chairperson - resolution needed ?
Outgoing director who was chairman ceases to be chairman automatically upon his resignation
Board resolution
57
Change of registered office - what resolution?
Board gives notice to register
Board resolution to instruct secretary to fill in form
58
Change accounting reference date - what is default position and resolution needed to amend?
Default position: accounting reference date will be the last day of the month in which the company was incorporated.
Board gives notice to register
Board resolution to instruct secretary to fill in form
59
Appointing auditors - what resolution?
board resolution and meeting
can be appointed by directors, or shareholders when directors failed to do so
60
Post-incorporation steps once new company formed x5
1. Chair person - decide whether to elect a chair and whether Chairperson should have a casting vote in event of tied board resolution
a. MA provides that chairman has casting vote -> amendable by special resolution
2. Accounting reference date - default accounting reference date is the last day of the month the company was incorporated
3. Auditor - all companies must prepare annual accounts and need to appoint auditor by Board resolution
4. Tax registrations - register for corporation tax, VAT, PAYE and National Insurance
5. Shareholder agreement - not required but useful
61
What liability does a company have if one of the directors enters a contracts before it is incorporated?
The company will not be liable as it is not yet a legal entity and cannot enter into contracts - the director will be personally liable
62
Board Resolutions (by who? where? voting? and 4 examples)
Decisions of directors by passing board resolutions at board meetings
each director has one vote on a show of hands
passed by simple majority >50%
(unless agreed that particular decision requires unanimity)
Includes
1) changing registered office address
2) resignation of existing director
3) appointment of new director
4) transferring shares to new shareholder
63
Shareholder resolutions - where?
Decisions of shareholders by passing shareholder resolutions - either
a. at General Meeting
b. in writing (only for private companies)
64
Shareholder resolutions - how many types?
Two types
1. Ordinary Resolution = simple majority (>50% of shareholders voting and present e.g. 3 out of 4 )
2. Special Resolution = majority of 75% or more
65
Shareholder resolutions - how can votes be carried out? How many votes per shareholder? and what right do shareholders have?
A. vote on show of hand
- each shareholder entitled to ONE vote (regardless of shares held)
B. vote on a poll
- each shareholder has one vote in respect of each share held by them
MA sets out that shareholders have a right to demand a poll vote either in advance of GM or at a GM (before show of hands/ after result)
-> Who can demand?
1. chairperson
2. directors
3. two or more persons with right to vote
4. Person(s) representing at least 10% of total voting rights
66
Written resolutions - who can pass? and pass what type of resolution?
only private companies may pass shareholder resolution by way of written resolution
67
Written resolution - how many votes?
one vote in respect of each share held by them
68
Written resolution - how many types and what decisions may not be passed as written resolutions (x2)
TWO
1. written ordinary resolution - passed by simple majority (taken of the total voting rights in respect of share held)
2. written special resolution - 75% or more (taken of the total voting rights in respect of share held)
Decisions that may NOT be passed as written resolution:
1. removal of director
2. removal of auditor
69
What if a shareholder abstains on a written resolution vote?
On a written resolution vote, abstaining counts as voting against
70
Board meetings - who calls? how much notice required? how many people needed in meeting?
Director or secretary can call
Reasonable notice - so if directors all in same building can be called immediately
Minimum 2 directors need to be present
71
General meetings - who calls? how many people needed in meeting?
The Board usually convenes
minimum 2 shareholders
72
General meeting - how much notice required? and what is on the agenda for the meeting
14 clear days notice required (excluding day of notice and day of meeting excluded)
- if notice posted or emailed -> deemed to be served 48h after sending
The notice must describe in sufficient detail the business to be transacted so members can decide if they want too attend or not
If special resolution proposed - notice must specify that resolution to be passed as special resolution
73
Sequence of meetings
1. BM (held on reasonable notice)
2. GM (held at least 14 clear days from BM1)
3. BM
4. PMM (post meeting matters)
Note: GM sandwich
74
How to shorten the notice for a GM from 14 clear days notice? and the effect on sequence of meetings
If agreed by:
1. majority in number of members, and
2. together hold shares of not less than 90% (may be increased up to 95% by amending articles)
BM -> GM can take place almost immediately following adjournment of BM -> BM reconvened -> PM
75
Written resolution procedure - what if company does not receive sufficient no. of responses to pass WR? does it need to be recorded?
It will lapse - MA states lapse date is 28 days beginning from circulation date
Must be recorded in minute books of company
76
What needs to be held before using written resolution? and how to proceed after?
Board meeting -> to propose and approve use and to let shareholders know when to respond by (lapse date)
Two options to proceed
1. if shareholders present -> approval of WR can take place immediately after adjournment of BM
2. if shareholders NOT present -> BM closed and WR circulated to shareholders
a. WR is passed once required level of shareholder support; or
b. lapses after 28 days
77
what documentation must be dealt with during Post-meeting matters x3
1. internal
- minutes of meetings kept for 10 years
2. filing at companies house
- special resolutions
- amended articles
3. record keeping at registered office
- eg directors service contracts
78
ADV x3 and DISADV x1 of incorporating from scratch
ADV
1. cheaper
2. faster to set up
3. carries less risk
DISADV:
1. Until received certificate of incorporation – no legal entity so you cannot make contracts (minor disadvantage but in circumstances where client in a rush to complete deal)
79
ADV x2 and DISADV x2 of converting from shelf company
ADV:
1. already incorporated -> can contract and start trading immediately
2. In situations where Companies House is closed -> and need new company urgently
DISADV:
1. alot of changes to make to make it your own -> long and costly
2. may come with risk if has trading history
80
How to transfer shares to new shareholder
Board resolution at Board meeting
81
Which is quicker board or shareholder resolution
Board resolution
82
Who are directors accountable to?
Company not shareholders directly
83
What decisions reserved for shareholder approval x3
1. changing company's name
2. amending articles
3. removing directors
84
What is a de jure director - and minimum no. of directors for private limited company and public limited company? Minimum age of director?
validly appointed at law
private limited -> at least one director
public limited-> at least 2
At least one director must be an individual - to ensure companies appointed as director held accountable
Min age = 16 yo
85
De facto director? do they have duties/ liabilities
Someone acts as director but not validly appointed
The fiduciary duties and liabilities apply too
86
Shadow director
A person who tries to exert influence over board without being appointed as director
Professional advisers NOT shadow directors (e.g. accountant)
87
Difference between executive and non-executive directors
Exec director -> is both an officer and an employee
Non-exec director -> officer but not an employee, does not take part in day-to-day running of company
88
Alternate director - what resolution needed? voting power? Is it provided by MA?
takes place of a director where one or more directors absent as approved by board resolution
Has voting power of absent director
Not provided by MA so use quite rare
89
3 duties of company secretary - requirement for secretary for private/public company
1. update company books
2. produce minutes of BM and GM
3. filings at Companies House
Private company - not required (unless Articles req)
Public company - required
90
How to appoint director (MA)
1. Usually majority of directors at board meeting; or
2. ordinary resolution (>50%) of shareholders
91
Service contract of directors - what are they? where to keep? who determines? how to approve
Written contract of employment - since executive director is also an employee
Keep at registered office for inspection by members
Board resolution - BUT shareholder resolution if entering into long-term service contracts
92
Disclosure about identity of directors and secretary -> what document? where to keep? when notice needed? disclosed to who?
1.register of directors and secretary at registered office
3. notify Companies House of changes relating to directors/secretary
4. info is available for inspection by public (for a fee) / any member (no fee)
93
What information needs to be disclosed on company's register of directors/ secretary and disclosed to who?
ONLY service address for director/ secretary
a. director's residential address; or
b. company's registered office
-> available to public
NOTE: indv directors (not secretaries) will have to provide residential address but this kept on separate register NOT open to public inspection
94
Disclosure of Annual Accounts - what is included in annual accounts? x5
1. director's salaries, bonus payments, pension entitlements
2. compensation paid to directors and past directors for loss of office
3. any payments made to/ received by person connected to director or corporate body controlled by director
4. advances and credits given by company to directors
5. guarantees entered into company by director
95
How to remove director? by who?
what resolution?
what notice needed for GM?
and after board receives notice what are 2 courses of action to proceed?
For Option 1: what notice needed for removal resolution?
For Option 2: what is shareholders' power?
by shareholders
Ordinary resolution
(cannot use written resolution)
Special notice of the GM - 28 clear days before the GM
OPTION 1: Board agrees to place the removal resolution on agenda of GM
a. need to give notice of removal resolution at same time notice of GM given -> at least 14 clear days before GM
b. if notice of GM already sent out - then notice of removal given by advertisement in newspaper/ other -> at least 14 clear days before GM
OPTION 2: NOT place removal resolution on GM agenda
-> directors are not bound to place removal resolution on agenda BUT
-> shareholders (5% of more) have general power to call GM either by requiring directors to do so or calling it themselves
-> s303 request
96
5 ways for director to leave office? and what to do when director leaves office
1. resignation by notice
- letter of resignation
- usual but not obligatory for board to pass board resolution to accept letter
2. automatic termination if indv becomes
3. Court making disqualification order
4. retirement by rotation
5. removal by shareholder-> ordinary resolution
When director leaves office -> must update company's register of directors and give notice to Companies House by filling form TM01
97
Under MA, an indv ceases to be a director (automatic termination) when they become ... x4
a. disqualified
b. subject of an indv voluntary arrangement
c. bankrupt
d. physically/ mentally incapable for > 3 months
98
Grounds of disqualification of director by court x3
Fraud/ wrongful trading/ persistent breaches of company law
99
Retirement by rotation requirement for public companies
MA requires retirement and reappointment of directors every 3 years
All directors of listed companies subject to annual re-election
100
Who does director owe their duty to? Who is liable when a director breaches their duties?
Duty of directors owed to company (unless company in financial difficulty then owed to protection of creditors)
The company is liable
101
7 general duties of directors under CA2006
1. act within powers
2. promote success of company
3. independent judgment
4. reasonable care, skill and diligence
5. avoid conflicts of interests
6. not to accept 3P benefits
7. declare any interest in proposed transaction
102
Duty to act within powers -> 2 separate duties are:
1. act within company's constitution (acting with authority)
2. exercise powers for purposes they are conferred (not improper purposes e.g. personal gain)
103
Duty to promote success of company - meaning of success,
and x6 matters to consider,
concept underlying this duty,
How to prove compliance with this duty?
duty to act in good faith
Success = long-term increase in value
Matters to consider
1. long-term consequences of decision
2. employees' interests
3. foster rs with suppliers/ customers
4. impact on community/ environment
5. maintaining reputation for high standard
6. act fairly between members
Concept = 'enlightened shareholder value"
-> the middle way between maximising shareholder interest and profits and acting in interest of wider group of stakeholders
Proving compliance:
1. req for all PUBLIC listed companies to make a statement in their accounts on how they have considered and met the duty over the year
2. board minutes noting that consideration given when taking board decisions
104
Duty to exercise reasonable care, skill and diligence -
Minimum standard
Minimum standard = objectively expected
-> may be subjectively raised if director has special knowledge/skill/ experience
105
Duty to avoid conflicts of interest is NOT infringed IF: x2
1. Conflict arises in relation to a transaction with the company e.g. between director and company
-> but still subject to duty of disclosure
-> directors are allowed to have interests in other companies provided such interests are declared and articles permit this
2. directors authorised the matter
106
Duties aimed at conflicts of interest x3
1. To avoid conflicts of interest
2. Not to accept benefits from 3Ps
3. to declare an interest in a proposed transaction
107
Duty not to accept benefits from 3P - standard? can it be authorised and by whom?
reasonable standard
other directors CANNOT authorise
- but possible for shareholders to approve
108
Duty to declare an interest in what kinds of transactions? x2
and how does duty apply to indirect interests?
Does director need to be party to transaction for duty to apply?
Must declare nature and extent of interest to other directors
-> even indirect interest
e.g. director of A is also shareholder of B, and A is entering into contract with B
Proposed transactions and existing transactions
Duty applies equally to indirect interests
- where director has interest through spouse/ relative/ another company
Director does not have to be party to transaction for this duty to apply
109
Duty to declare an interest in proposed transactions? - when to do so? where and how X2 and type of notice needed x2?
BEFORE transaction entered (subject to Articles)
At Board Meeting
OR
in writing before BM -> written notice to ALL directors electronically/ paper form
Types of notice
1. one-off general notice - for specific transaction
2. General notice - so always considered interested in ANY transaction with SPECIFIED party
110
When does director not need to declare interest in proposed transaction x3
1. if not reasonably aware of interest/ transaction
2. interest cannot reasonably be regarded as giving rise to conflict of interest / other directors know or ought to have known of the conflict of interest
3. if conflict arises because it concerns their service contract - and their contract has or will be considered by the board
111
If director has interest in transaction with THE COMPANY -> what are their voting rights in board resolutions?
CANNOT vote or count in a quorum
UNLESS:
1. disapply MA by shareholder ordinary resolution
2. director's interest cannot reasonably be considered to give rise to conflict of interest
3. director's conflict arises from permitted cause:
a. guarantee given
b. subscription for shares/ securities
c. agreements which do not provide special benefits for directors
112
Remedy for breach of directors' duties x5 and exception x1
Remedies for breach of general duties (except for breach of duty of care, skill and diligence)
1. injunction
2. setting aside transaction
3. restitution and account of profits
4. restoration of company property
5. damages
Remedy for breach of duty of care, skill and diligence
1. damages
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Who can approve a director's proposed action even if it might be a breach of their general duties? and who can't?
What is required for authorisation to be effective?
How to ratify breach of duty? (what resolution)
Shareholders - unless it is an unlawful act
(but not the director in Q even if they hold shares in the company - or anyone connected to them e.g. spouse/children/ company which they control)
Only effective if full disclosure by directors so shareholders can make informed decision
shareholder ordinary resolution to approve breach
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3 types of transactions between company and its directors which require approval of the company's shareholders to be valid
and what happens if they proceed w/o shareholder approval
1. directors' long-term service contracts
2. substantial property transactions
3. loans, quasi-loans and credit transactions
if no shareholder approval -> breach of their general duties + breach of requirements of above
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what type of approval needed for director's long-term service contract?
and what duration is considered long-term service contract?
what if director is also a director of any holding company?
ordinary resolution by shareholders
service contract > 2 years
the shareholders of the holding company also need to give approval
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The guaranteed term of a long-term service contract applies to either:
1. period of > 2 years or where director is in control of how long contract continues AND
2. during this time company cannot terminate contract/ can only terminate in specific circumstance OR the period of notice to be given by the company
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What if company agrees to provision in service contract in contravention of s188 CA 2006 (long-term service contracts) x2
1. provision will be void to extent of contravention
2. company can terminate it at any time by giving reasonable notice
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What is the exception where approval not required for long-term service contracts?
approval is not required by members of any company which is a wholly owned subsidiary of another company
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Is disclosure of interest by director in a service contract required?
Director's voting rights relating to the contract?
No - this is contract with the company
No vote or count in the quorum in any board resolution relating to contract
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Members' inspection rights of all directors' service contracts? and company's obligation? how long?
company must keep copy of ALL directors' service contracts at company' registered office
for at least ONE YEAR from date of termination of contract
for members to inspect
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Procedure for long-term service contract/ substantial property transaction/ loan-related transaction
1. How to approve and where? x2
2. what is needed to allow members of company to inspect? and where? for how long?
3. What notice needed
1. Ordinary resolution at GM
- a memorandum setting out proposed contract:
a. at company's
registered office
for not less than
15 days ending
with date of
meeting; and
b. at meeting itself
- Minimum 15 days notice of GM to approve contract (even if use short notice)
2. Written resolution
- memorandum setting out proposed contract sent to every member at or before time proposed resolution
- NO 15-day notice requirement
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What are the elements of a substantial propoerty transaction x2 - transaction by who? of what? what approval needed
1. transaction by director/ holding company director/ connected person of a
2. substantial NON-CASH asset to or from the company
shareholder approval by ordinary resolution
123
What is the value of substantial non-cash asset in substantial property transactions x2
1. >100,000
2. > 5,000 but <100,000 IF worth more than 10% of company's net asset value
124
Definition of 'persons connected with a director' in substantial property transactions
and if they are a connected person what approval needed to carry out a substantial property transaction with them?
1. members of director's family - spouse/ civil partner, parents, children/ step-children
a. NOT - aunts/uncles, brothers/sisters/ grandparents/ grandchildren
2. corporate bodies - companies in which directors hold >20% shares
3. biz partner of director
4. trustees of a trust the beneficiaries which include director
IF connected person -> shareholder approval by ordinary resolution
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If the substantial property transaction/ loan transaction is between a company and the director (or connected person) of the company's holding company -> who needs to approve transaction?
the shareholders of HOLDING COMPANY ALSO needs to approve transaction by ordinary resolution
126
What are two exceptions when approval not needed for substantial property transactions or loan related transactions?
1. a wholly-owned subsidiary of another company
OR two wholly-owned subsidiaries of same holding company
2. transactions between company and a person in his character as member of the company
e.g. director who is also a shareholder selling shares back to the company = transaction between company and person in their capacity as shareholder
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What if a substantial property transaction OR loans & related transactions with directors entered into w/o shareholder approval ?
UNLESS X4
Who is liable to remedy and remedy what?
NOTE: remedies for SPT and loan & related transaction are the same
VOIDABLE - unless:
1. restitution no longer possible
2. company indemnified for loss/ damage suffered
3. by doing so it affects rights acquired by 3P in good faith
4. it was affirmed by shareholders by OR within reasonable period
Directors involved (or connected) LIABLE to
1. account to company for any profits made
2. indemnify company for any loss
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2 defences for substantial property transactions to prevent liability
AND defences for loans & related transactions with directors
NOTE: defences for SPT and loan & related transaction are the same
1. director shows taken reasonable steps to ensure company's compliance
2. director show no knowledge of circumstances constituting the contravention
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What does the director need to disclose when entering into SPT/ loans & related transactions? what is the exception?
Disclose nature and extent of their interest
Except if other directors already aware of their interest
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What section of which statute protects membership rights and what can members do if their rights infringed + their remedy?
s33 CA 2006
If rights infringed - can sue and remedy = damages
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ANY shareholder's rights under CA2006 x10
1. receive NOTICE of GM
2. appoint PROXY to attend GM in their place
3. VOTE at GM
4. right to DIVIDEND
5. receive copy of COMPANY'S ACCOUNT
6. inspect MINUTES and COMPANY REGISTERS
7. ask court to PREVENT BREACH OF DIRECTOR'S DUTIES
8. commence DERIVATIVE CLAIM
9. bring petition for UNFAIR PREJUDICE
10. bring petition for JUST & EQUITABLE WINDING UP
130
What is the % of shareholders needed to request board to call GM
5%
131
What can a shareholder with 5% or more do? x2
1. require directors to CALL GM
2. Require circulation or circulate WRITTEN STATEMENTS regarding proposed resolutions to be considered at GM
132
What % shareholding needed to demand a poll vote
10%
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Shareholder's rights and shareholding % needed (hint: x10 x2 x1 x1 x1 x1)
ANY shareholding:
1. 1. receive NOTICE of GM
2. appoint PROXY to attend GM in their place
3. VOTE at GM
4. right to DIVIDEND
5. receive copy of COMPANY'S ACCOUNT
6. inspect MINUTES and COMPANY REGISTERS
7. ask court to PREVENT BREACH OF DIRECTOR'S DUTIES
8. commence DERIVATIVE CLAIM
9. bring petition for UNFAIR PREJUDICE
10. bring petition for JUST & EQUITABLE WINDING UP
5% shareholding
1. make directors call GM
2. require circulation/ circulate written statements
10% shareholding
1. demand poll vote
>25%
1. BLOCK SPECIAL resolution
>50%
1. Pass or Block ORDINARY resolution
75%
1. PASS SPECIAL resolution
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why does board need to give shareholders notice of removal resolution (how long?) if it was the shareholders who sent the removal resolution to the board in the first place?
14 clear days before GM
Only some of the ‘unhappy shareholders’ will have sent the proposed removal resolution to the board.
- the other shareholders may have no knowledge of this
Board need to give notice to all shareholders that GM will be held and that all shareholders will have opp to vote on removal resolution
135
what is a s303 CA2006 request ? what must it state?
what are directors' obligations on receipt of s303 request? how many days to they get to act?
What if they fail to act? then how can shareholders act and on what timeframe?
Shareholding of 5% or more can request board to call GM
Must state general nature of biz which shareholders wish to be dealt with at the GM
When directors receive notice of s303 request (Day 1) must
1. decide whether to CALL GM within 21 days (Day 22 latest)
2. must HOLD GM within 28 days from date of calling the GM (Day 50 latest)
If directors FAIL to call a GM
-> ALL/ shareholders with >50% of voting rights that submitted the s303 request can call GM themselves
IF shareholders call GM themselves
1. CALLED within 14 clear days notice
2. HELD within 3 months of s303 request
3. can RECOVER REASONABLE EXPENSES from company
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THE PROCEDURE TO HOLD A GM FOR REMOVAL OF DIRECTOR (6 steps)
1. OR by shareholder
2. special notice for GM at least 28 clear days -> best practice to send s303 request at same time
3. Once board receives special notice
…MUST
Send copy of special notice to director concerned even if the board decides not to put removal resolution on GM agenda
4. AND... can either
1. Place removal resolution on GM agenda
- need 14 days notice of removal resolution (either with notice of GM or in newspaper)
OR
2. NOT place removal resolution on GM agenda
- since directors not bound to do so, shareholders (>5% shareholding) can use general power (s303 request) to get directors to call GM/ call themselves
5. Director's obligations on receipt of s303 request
1. call GM within 21 days from request
2. hold GM within 28 days from date of calling it
6. IF director fails to oblige:
shareholders (all or those with >50% voting rights - that submitted s303 request) can....
1. call GM on at least 14 clear days notice
2. hold GM within 3 months from date of s303 request
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What are the director's rights to protest removal? X4
1. If company receives special notice that member intend to propose removal resolution -> company must immediately send copy of special notice to director concerned ... even if the board decides not to put removal resolution on the agenda of GM
2. Director has right to make representations in writing of reasonable length either
a. circulated to members of company
b. read out at GM
3. Director has right to be heard at GM to defend themselves, whether or not they are a shareholder
4. -> BUT if they are also shareholder
a. Check for Bushell v Faith clauses (Articles/ shareholder agreement) which gives a director weighted voting rights at GM (shares have voting rights of > 1 vote per share)
OR
b. Shareholder's agreement MAY provide that unanimous consent needed to pass removal resolution
- Note: this does not remove statutory right of majority shareholders to remove director under simple majority i.e. even if resolution passed by simply majority but w/o unanimity -> still valid
BUT director who is also shareholder CAN
1. claim against other shareholders for breach of shareholder agreement (claim for breach of contract; or
2. could apply to court for injunction to prevent breach of shareholder agreement
138
What is effect of Bushell v Faith clause
may give director who is also a shareholder weighted voting rights at a GM where resolution is proposed
139
What is the effect of a shareholder agreement providing that unanimous consent of all shareholders required to pass a removal resolution?
Does not remove statutory right of majority shareholders to remove director by ordinary resolution >50%
BUT if resolution passed by simple majority w/o required unanimity -> the director who is also shareholder may
1. claim against other shareholders for breach of shareholders agreement (claim for breach of contract)
2. apply to court for injunction to prevent the breach of the terms of shareholder agreement
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Directors’ entitlement to compensation for loss of office?
And if entitled how is the payment approved? UNLESS ... X3
What document needed to set out particulars of payment? and given to who? and for how long?
Company MAY decide to pay
Any payment of compensation for loss of company by company to director of its holding company must be approved by shareholder by ordinary resolution
UNLESS
1. < £200;
2. payment made in good faith
a. in discharge of existing legal obligation
b. damages
c. settlement/ compromise of claim in connection with termination of office
d. pension for past services
3. no approval required from shareholders of wholly-owned subsidiary
A memorandum setting out particulars of the payment must available to shareholders 15 days before the ordinary resolution is passed, ending with the date of the general meeting
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