BLP - Week 3 Rights, Duties and Powers of Directors Flashcards
What is the role of directors in a company?
Directors manage the company on a day-to-day basis and act as agents of the company. They owe duties to the company and take actions based on shareholder authority.
How do shareholders differ from directors?
Shareholders own the company and control key decisions via resolutions but do not manage day-to-day operations.
What decisions are reserved for shareholder approval under the Companies Act (CA) 2006?
- Changing the company name
- Amending the Articles
- Removing directors
How are directors held accountable for their actions?
Through civil and criminal proceedings for breaches of CA 2006, the Fraud Act 2006, the Theft Act 1968, and other laws.
What are the different types of directors?
- De jure: Legally appointed directors
- De facto: Individuals acting as directors without formal appointment
- Shadow directors: Influence board decisions without being officially appointed
What are executive and non-executive directors?
- Executive Directors: Involved in day-to-day management (e.g., Finance Director, Managing Director)
- Non-Executive Directors: Provide independent oversight and advice without handling daily operations
What are alternate directors?
Temporary directors appointed if a company’s Articles allow, though less common today.
How are directors appointed under CA 2006?
- By ordinary resolution of shareholders
- By decision of the existing board of directors [most common bc simpler and quicker].
What are service contracts?
Contracts that outline executive directors’ duties, pay, and terms of employment. Long-term service contracts (over 2 years) require shareholder approval.
How can a director be removed?
- Resignation: By written notice
- Automatic termination: If disqualified, bankrupt, or incapacitated
- By shareholders: Under CA 2006, via an ordinary resolution with 28 days’ special notice
- By disqualification: Under the Company Directors Disqualification Act 1986
What are the general duties of directors?
- Act within powers – Follow the company’s constitution and proper purposes
- Promote the success of the company – Consider stakeholders (employees, suppliers, customers), environment, company’s reputation, and long-term impact
- Exercise independent judgment – You can rely on advice but avoid blindly following advice, must make own judgment and consider interest of company. Not infringing if authorised by constitution or in agreement entered by company.
- Exercise reasonable care, skill, and diligence – Meet both objective (reasonably diligent person w/ knowledge, experience, skill in that role) and subjective (individual director’s specific knowledge and skills) standard of care.
- Avoid conflicts of interest – Disclose personal interests
- Not accept benefits from third parties – Prevent bribery
- Declare interests in transactions – Must inform the board of direct or indirect interests before entering into agreements. Indirect interest is interest via a spouse or another relevant or via a company in which they are a member. Director doesnt have to be a party to transaction.
Situations where a director doesn’t have to declare an interest
When:
- The director is not aware of the interest or transaction or arrangement in question;
- The interest cannot reasonably be regarded as likely to give rise to a conflict of interest
- The other directors know about or ought to have known about the conflict of interest; or
- It concerns their service contract which is being considered by the Board.
What remedies exist for breaches of directors’ duties?
- Company can pursue legal action against them personally
- Remedy for breach of duty to exercise care, skill and diligence = damages
- Remedies for breaches of other duties:
- Injunctions
- Damages
- Setting aside transactions
- Restitution
- Account of profits
Can shareholders approve breaches of duty?
Yes, through advance approval or ratification, except for unlawful acts or breaches when insolvent.
Directors’ long term contracts - What is the ‘Guaranteed Term’ under CA 2006?
If a director’s contract exceeds 2 years, shareholder approval is required.
What are the 2 types of guaranteed term?
- Contractual period: contract lasts over 2 years or if the director has control over how long the contract continues AND the company can’t terminate it/ only terminate in specific conditions.
- Notice period: if company is required to give a notice period that extends beyond two years before terminating the contract.
What are the exceptions to shareholder approval for service contracts?
- If the director is also a director of a holding company, the shareholders of the holding company will also need to give approval.
- Approval is not required by the members (shareholders) of any company which is a wholly owned subsidiary of another company.
Does CA 2006 require member approval for a wholly owned subsidiary?
No, s190(4)(b) CA 2006 exempts wholly owned subsidiaries from requiring such approval.
What if the transaction involves a director of the company’s holding company?
An ordinary resolution of the holding company’s members is also required, or the transaction must be conditional on such approval.
In the case where B Ltd (a wholly owned subsidiary of A Ltd) sells a substantial asset to Zahid, a director of both companies, whose approval is needed?
Only A Ltd’s members must approve by ordinary resolution. B Ltd’s member approval is not needed.
What happens if a company breaches the approval requirement for service contracts?
The contract term exceeding 2 years becomes void to the extent of the contravention, and the company can terminate with reasonable notice.
In the case where S Ltd (an 80% subsidiary of T Ltd) sells a substantial asset to Cecil, a director of T Ltd, whose approval is needed?
Both T Ltd and S Ltd must approve the transaction by ordinary resolution.
What are the procedural requirements for directors’ service contracts?
- Companies must keep copies available for member inspection for at least 1 year after termination or expiry of contract
- For GM approval, a memorandum must be available at least 15 days in advance
What is a ‘substantial’ non-cash asset transaction?
Where a director or connected persons (family, spouse, business partner, trustee) buys or sells a non-cash asset from or to the company. Non-cash asset:
- £5,000 or less than – Not substantial
- More than £100,000 – Substantial
- Between £5,000 and £100,000 – Substantial if over/MORE THAN 10% of the company’s net assets
Need shareholder approval OR for substantial non-cash asset.
Who are connected persons re non-cash assets?
- Members of the director’s family: spouse or civil partner, parents, children or step-children
- Brothers, sisters, grandparents, grandchildren, uncles and aunts are not connected persons under CA 2006.
- Bodies corporate ie companies in which the director (and other persons connected with them) hold at least 20% of the shares.
- A business partner of the director or those persons connected with them
- Trustees of a trust the beneficiaries of which include the director or those persons connected with them
Approval Required for Transactions Involving Holding Company Directors
- If a company enters into a transaction with:
A director of its holding company, or
A person connected to a director of its holding company, - The holding company must also approve the transaction by ordinary resolution of its shareholders.
Exception: Wholly Owned Subsidiary
No approval needed if the company is a wholly owned subsidiary of the holding company.
What are the consequences of non-compliance with substantial property transaction rules?
The transaction is voidable unless affirmed by shareholders.
Directors involved must return profits and compensate the company.
What is a defence to non-compliance with shareholder approval for substantial property transactions?
- If the director took all reasonable steps to ensure the company’s compliance with CA 2006, the director will not be liable.
- Directors or connected persons unaware of the transaction’s breach may also have a defence.
What types of financial transactions require shareholder approval via OR?
- Loans – Money lent to a director
- Quasi-loans – Company a third party on behalf of the director expenses, and director repays later
- Credit transactions – Company supplies goods/services to a director on credit
- Guarantees/security – Company guarantees a director’s loan
Financial Transaction - Private Companies (Not Associated with a Public Company) – When Shareholder Approval is Needed
- Loans to directors or directors of a holding company
- Guarantees provided to directors or directors of a holding company
- Security given to directors or directors of a holding company
Financial Transaction - Public Companies & Private Companies Associated with a Public Company - When Shareholder Approval is Needed
- Loans to directors, holding company directors, or connected persons
- Guarantees for loans of directors, holding company directors, or connected persons
- Security provided for loans of directors, holding company directors, or connected persons
- Quasi-loans (company covering director’s expenses to be repaid later)
- Credit transactions (company provides goods/services to director on credit)
Both private and public companies in this category must obtain shareholder approval.
What exceptions apply to loan approvals?
- Small loans or quasi loans: Under £10,000 (credit transactions under £15,000)
- Company business expenses: Up to £50,000
- Legal/regulatory defence costs
- Transactions in the ordinary course of a money-lending business
Wholly owned subsidiary - exception - financial transactions
- Shareholder approval does not apply where the company in question is a wholly owned subsidiary
- If the relevant director is a director of the company’s holding company, an ordinary resolution of that company’s shareholders is required
What happens if shareholder approval is not obtained for a transaction?
- The transaction is voidable unless the company has been indemnified
- Directors must return profits and compensate the company
- The transaction can be ratified by shareholders
What disclosure is required for director loans?
- Directors must declare their interest before the transaction
- Disclosure in board minutes
- Interested directors cannot vote on resolutions related to the transaction
Defences for financial transaction no shareholder approval?
Director will not be held liable if they can prove they took all reasonable steps to ensure compliance with the law
