Board Structure and Composition Flashcards
Role of directors in relation to SHs?
• Manage the company on a day to day basis • Certain actions can only be taken by directors if the shareholders have given authority • Owe duties to the company
Role of SHs in relation to directors?
Own the company • Are able to control key decisions through shareholder resolutions eg shareholders need to vote to give directors authority to change the articles, or name of the company, to vary class rights etc
What does MA 3 say on the responsibility for company management?
‘Subject to the articles, the directors are responsible for the
management of the company’s business, for which purpose they may exercise all
the powers of the company.’
Which MA states who is responsible for management of company business?
MA 3
Which MA protects SHs from a rogue director?
MA 4
What power does MA 4 give SHs?
The shareholders may, by special resolution, direct the directors to take, or
refrain from taking, specified action.
What other specific powers does the CA 2006 give to SHs
Power to control amendments to company’s articles - requires SH approval by special resolution (s21 CA 2006)
Removal of a director by ordinary resolution (s168 CA 2006)
Which case makes it clear that directors are agents of the company, not agents of the SHs?
Howard Smith Ltd v Ampol Petroleum Ltd [1974]
Directors can take decisions even against the wishes of the majority of SHs
The 3 categories of director?
- At law: de jure, de facto and shadow directors
- In practice: executive and non executive directors
The company’s articles may also provide for alternate directors
What is a de jure director?
A de jure director is a director who has been validly appointed at law
CA 2006 sets out several requirements for directors
s54 CA 2006?
Under s 154 CA 2006 a private limited company must have at least one director and a public limited company must have at least two directors. Although a company can be appointed as a director, every company must have at least one director who is a natural person (s 155(1)
s157 CA 2006?
Under s 157 CA 2006 a person may not be appointed as a director unless they are at
least 16 years old (or if so appointed, the appointment is not effective until they reach the
age of 16).
What is a de facto director ?
A de facto director is someone who assumes to act as a director but has in fact not
been validly appointed
What is the test for a de facto director?
No standard test, but Re Hyrodoam [1994] stated it must be established whether someone is part of the corporate governance
of the company and undertook decisions which would normally be taken by a director
Why is it important to recognise when someone is a de facto director?
The importance of recognising where a person is a de facto director is that the
same fiduciary duties and liabilities in insolvency apply to all directors including de facto directors
What is a shadow director?
Section 251(1) CA 2006 defines a shadow director as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act
Why do shadow directors exist?
This legislation is designed to ensure that anyone who acts as a director, even if they are
not technically appointed as one, is subject to the duties and restrictions which apply to
all directors
Which section of CA 2006 defines a shadow director?
s25 (1)
Case law example of a de facto director?
The Commissioners for HM Revenue and Customs v Holland (2010)
Ruling in The Commissioners for HM Revenue and Customs v Holland (2010)?
The court held that the basis of liability for a de facto director is an
assumption of liability together with his being a part of a company’s corporate governance structure. In this case H was not held to be a de facto director of Company B as the acts he undertook were within the scope of his duties and responsibilities as a director of Company A
Shadow directors case law?
Re Hydrodam (Corby) Ltd [1994]
Re Hydrodam (Corby) Ltd [1994] ?
Millett J said that to establish if a
person is a shadow director, it is necessary to prove:
1. The identity of the formally-appointed directors of the company;
2. That the person in question directed those formally appointed directors as to how
to act in relation to the company’s affairs;
3. That those directors acted in accordance with that person’s directions, and
4. That the directors were accustomed to act in that manner.
Which case highlighted the difference between shadow and de facto directors
Re Hydrodam (Corby) Ltd [1994]
As per Millet J in Re Hydrodam (Corby) Ltd [1994, what is the difference between shadow and de facto directors?
A de facto director is a person who assumes to act as a director. He is
held out as a director by the company, and claims and purports to be a
director, although never actually or validly appointed as such. To establish
that a person was a de facto director of a company it is necessary to
plead and prove that he undertook functions in relation to the company
which could properly be discharged only by a director… A shadow director,
by contrast, does not claim or purport to act as a director. On the contrary,
he claims not to be a director. - Millet J
What is the difference between executive and non-executive directors?
CA 2006 does not differentiate, but in practice there is a distinction
What is an executive director?
An executive director is a director who has been appointed to executive office.
Such a director will generally spend the majority, if not all, of his working time on the business of the company and will be both an officer and an employee of his
company.
Examples include a Finance Director, Managing Director, Marketing Director
What is a non-executive director?
A non-executive director is also an officer of the company, but will not be an
employee of the company. Non-executive directors do not take part in the day-to-day
running of the company. Their role is generally to provide independent guidance and
advice to the board and to protect the interests of shareholders.
What is a an alternate director?
However, some companies in their
articles provide for alternate directors to take the place of a director where one or more directors are absent.
How is a director appointed?
CA 2006 doesn’t stipulate a procedure, so it is governed by a companies articles
Which MA dictates how a director is appointed
MA 17
How does MA 17 say a director can be appointed?
Any person who is willing to act as a director, and is permitted by law to
do so, may be appointed to be a director:
(a) by ordinary resolution (of the shareholders), or
(b) by a decision of the directors.’
What is the effect of MA 19?
Terms of an individual director’s service
contract, including remuneration, are for the board to determine. As a general rule, a director’s service agreement will only require the approval of a resolution
of the board of directors. SH approval is required to enter into long-term service contracts.
What does s188 CA 2006 dictate?
Where a service contract provides for a director’s
employment to have a ‘guaranteed term’ which is, longer than two years.
If s 188 CA 2006 applies, the relevant provision of the service contract requires SH approval by ordinary resolution.
What if SH approval is not give under s188 CA 2006?
The term of directors contract is void under 189(a) CA 2006
3 ways a director will be terminated?
1) Resignation
2) Vacation
3) Removal
Case for director resignation?
Glossop v Glossop [1907]
Under MA 18, when is a director automatically deemed to have vacated office?
Where that
person becomes prohibited from being a director, bankrupt, subject to a composition
order made with creditors, or physically or mentally incapable for more than three months
Which section of CA 2006 applies to removing a director?
s168
- Director can be removed by ordinary resolution
What is a Bushell v Faith clause?
Allow a company to insert into it’s articles a clause for weighted voting rights to allow director/SHs to block attempts to remove them at ordinary resolution
What are the two types of disqualification of directors?
Discretionary
Mandatory
(CDDA 1986)
What does s1(1) of the Company Directors Disqualification Act (1986) state?
Where a person is disqualified, that person shall not,
without the leave of the court, “be a director of a company, or a liquidator or administrator
of a company, or be a receiver or manager of a company’s property, or, in any way,
whether directly or indirectly, be concerned or take part in the promotion, formation or
management of a company, for a specified period beginning with the date of the order.
How long is a mandatory disqualification order for?
2-15 years
How long can a discretionary disqualification order last for?
10/15 years depending on the ground for disqualification
When will a mandatory disqualification order be made?
When the court is satisfied that:
“(a) that he is or has been a director of a company which has at any time
become insolvent (whether while he was a director or subsequently), and
(b) that his conduct as a director of that company makes him
unfit to be concerned in the management of a company.”
Which section of the CDDA 1986 applies to mandatory disqualification orders?
s6(1) CDDA 1986
What have the courts taken s6 CDDA 1986 to mean?
Essentially that the director has
abused the privilege of limited liability in some way, either by gross negligence or
deliberate disregard of creditors’ interests
Case for court application of s6 CDDA 1986?
Secretary of Trade and Industry v
Blunt (2005)
Which 4 sections of the CDDA 1986 apply to discretionary disqualification orders?
s2
s3
s4
s8
s2 CDDA 1986?
Conviction of an indictable offence in connection with the management of
the company or company property
s3 CDDA 1986?
Persistent breaches of company legislation requiring returns or notices to be given to the Registrar (s 3)
s4 CDDA 1986?
Fraud – either fraudulent trading under s 993 CA 2006, wrongful or fraudulent
trading under s 213 and s 214 Insolvency Act 1986 or fraud in relation to the company
or its property
s8 CDDA 1986?
Disqualification after investigation of the company – this ground is used where it seems to the Secretary of State that it would be in the public interest for a
disqualification order to be made (s8)
