Business 4: Directors and shareholders Flashcards
What is a director
any person occupying the position of director by whatever name they are called
What are directors responsible for?
day to day running, entering contracts, making business decisions
What does MA 3 and MA 5 say?
○ MA3-grants board wide general management powers to run company, board has express actual authority to bind company.
○ MA5-can delegate powers as they see fit.
Does a 3rd party dealing with the company in good faith need to check the articles for restictions on the directors?
No, they can assume that the Board had power/authority to bind the company, when they executed the contract
How many directors must a company have?
All companies : at least 1 whose a natural person and at least 1 over 12
Public: at least 2
Restrictions on appointment as director?
-Disqualified
-Undischarged bankrupt/bankruptcy order
-Dr note to Co saying physically/mentally incapable and will remain so for 3mo
What are the types of directors?
- Executive director
- Non-executive director
- Shadow Director
- De facto Director
Which directors are formally appointed to the board and have service contracts?
De jure directors:
1. Executvie-formally appointed and service contract
2. Non-executive: formally appointed but no service contract
What are shadow and de facto directors?
Shadow: Person whose directions Dirs are accustomed to act, exerting real influence on a majority of the board on a regular basis
De facto: acts as Dir even though not formally appointed/appointed correctly
Which types of directors are subject to directors duties and liabilities?
All of them
What is the role of a charisperson (dir appointed to chair board meetings)?
- Runs BM
- Chairs GM if present and willing to do so
- Has casting vote in tie-can ensure res passes by simple majority
- For Plc-will act as figurehead for dealings with SH/anyone outside the co
How are the first and subsequent directors appointed?
- First: those whose names in INO1
- After incorporating: appointed in accordance with articles by board resolution or ordinary resolution of SH
Administrative requirements for appointment of directors
- Notify CH in 14 days via form AP01 (individual) or AP02 (corporate)
- Enter onto register of directors and register of directors residential addresses
Who decides on the terms/approves a directors service contract?
- Board under combo of general powers to run the company (MA 3) and specific power to decide on directors’ remuneration (MA 19).
- UNLESS long term service contract:(guaranteed/fixed term (notice period) of more than 2y)=need SH approval via OR
When SH are deciding on a long term service contract, what must be done before the meering or written resolution?
When passes OR, must keep copy of memorandum setting out the terms of the proposed service contract at RO for 15 days prior to general meeting. If written, must be circulated to SH.
What happens if SH approval isnt gained for a long-term service contract?
guaranteed term element void and contract can be terminated with reasonable notice
Admin requirements after creation of directors service contract?
- Service contracts (or a memorandum setting out their terms) must be available for inspection by SH at RO during their term and until a year after termination of contract
- SH can inspect without charge within 7days of requesting to see them
Types of authority a director may have
- Express actual: Permission from other Dirs
- Implied actual: Implied role OR acted that way in past and board aware and not stopped
- Apparent: Co represented [by words/conduct] to 3rd party, dir was acting with cos authority (=estopped form denying authority)
What happens if a director enters a contract they dont have the authority to?
Dir will be personally liable to 3rd party, Co is not party to contract
5 ways directorship can end
- Resignation
- Removal
- Bankruptcy
- Being perused for debts
- Not physically/mentally capable
How does a director resign?
- TM01 (individual) or TM02(company) to CH within 14d of resignation
Process for removing a director?
- SH passing OR at GM (NOT written res)
- Special notice: at least 28 clear days
- Once notice received inform dir forthwith and SH in same way as notice of GM where practicable OR at least 14d before GM in paper having appropriate circulation
- Dir entitled to speak/make representations at GM, and require Co to send copies of written representations they wish to make to SH
What special provisions may be in articles/SH agreements regarding removal of a director?
- Bushell v Faith clause-gives someone who is both SH and dir greater voting rights as a SH on a resolution to remove that person as a dir
- Where some/all of SH also Dirs, may inc provision in SH agreement obliging them to vote against removal of fellow SH as Dir (if do, can sue for breach of SH agreement
What registers must be kept in regards of directors and which are open for inspecition?
- Register of directors containing required particulars inc dob/address: avalible for inspection by SH free and others for fee at RO/CH
- Registers of directors residential address for individual directors: not open for inspection (can be at CH)
What happens if a Co doesnt keep a register of directors or doesnt keep it open for inspection?
Its a criminal offence
What forms are used to notify a change in particulars for natural persons/corporate directors?
CH01 and CH02
How long can a court disqualify directors for?
2-15y
8 Grounds for disqualification of directors?
- Conviction of indictable offence
- Summary conviction for failure to file a required notice or document
- Persistent breaches of companies legislation
- Breach of competition law
- Fraud on winding up
- Being an unfit director of an insolvent company
- Following an investigation and a finding of unfitness
- Fraudulent or wrongful trading
Effect of being disqualified as a director?
□ Cant (without leave of court) be dir or in any way concerned in the promotion, formation or management of a co
□ Personally responsible for debts of co if involved in management while disqualified
Effect of breach of disqualification order?
criminal offence max 2y prison
Who are directors duties owed to
Company itself (NOT shareholders/creditors)
What are directors 7 general duties?
- Act within powers
- Promote the success of the company
- Exercise independent judgement
- Exercise reasonable care, skill and diligence (negligence)
- Avoid conflicts of interest
- Not to accept benefits from third parties
- Declare interest in a proposed transaction or arrangement
What is a directors non general duty?
To declare interest in existing transaction/arrangement (s182)
What is included within a directors duty to act within powers?
(a) act in accordance with the cos consti (AoA and SRs)
(b) only exercise powers for the purposes for which they are conferred (objective)
What must dirs consider to comply with their duty to promote the success of the company?
- Long term consequences of decision
- Employees interests
- Need to foster Co’s business relationships with suppliers, customers and others,
- Impact of operations on community/environment
- desirability of maintaining a reputation for high standards of business conduct
- need to act fairly as between SH
(don’t have to give equal weight)
When can a director prevent a breach of their duty to promote the success of the company?
Subjective test:
If they considered, in good faith, that their actions were most likely to promote the cos success.
What will not infringe on a directors duty to exercise independent judgement?
Not infringed by the dir acting:
(a) in accordance with an agreement duly entered into by the co that restricts the future exercise of discretion by its dirs,
(b) in a way authorised by the constitution.
What is included within a directors duty to exercise reasonable care, skill and diligence
The care, skill and diligence exercised by a reasonably diligent person with:
(a) objective: the general knowledge, skill and experience reasonably be expected of a person carrying out the functions carried out by the dir in relation to the co
(b) subjective: the general knowledge, skill and experience that the dir has.
What is included within dirs duty to avoid a conflict of interest?
must avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company (immaterial whether the company could have taken advantage of the opportunity but decided not to do so)
When will there NOT be a breach of dirs duty to avoid a conflict of interest?
- Cannot reasonably be regarded as likely to give rise to a conflict
- Authorised by dirs before (Dir in q cant count in quorum to authorise)
- Does NOT apply to a conflict of interest arising in relation to a transaction/arrangement with the company.
What is the only directors duty that can be pre authorised?
Duty to avoid conflicts of interest
Which directors duties also apply to former directors?
- Avoid conflicts of interest
- Not to accept benefits from third parties
What is included within a dirs duty to not to accept benefits from third parties
Must not accept a benefit from 3rd conferred by reason of them either being a dir, or doing (or not doing) anything as dir
When will accepting a benefit from a 3rd party not be a breach of directors duty?
The acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
What is included within a direcors duty to declare interest in a proposed transaction or arrangement (s177)
If directly/indirectly interested, must declare nature and extent of that interest to other directors BEFORE company enters into transaction/arrangement
Does a dirs duty to declare interest under s177 still apply if company has disapplied MA 14
yes
What prevents a breach of dirs duty to declare interest in a proposed transaction or arrangement?
- Dir isnt aware of the interest/transaction/arrangement (will be ‘aware’ of matters of which he ought reasonably to be aware)
- Cannot reasonably be regarded as likely to give rise to a conflict
- Other dirs are/ought to be already aware
- concerns the terms of the dir’s service contract
- transaction NOT with company
What is included in a directors non general duty to declare interest in existing transaction/arrangement (s182)
If director is directly/indirectly interested in a transaction that has been entered into by the company, must declare nature and extent of interest as soon as reasonably practicable.
When/how must a decleration of interest in an existing transaction/arrangment be made?
- at dirs meeting
- notice in writing to all other dirs
- general notice of interest given at board meeting
Effect of faliure to comply with duty to declare interest in existing transaction/arrangement (s182)
Criminal offence punishable by a fine (contrasts with s 177, where failure to comply is a civil matter.
When will there NOT be a breach of duty to declare interest in existing transaction/arrangement (s182)
- dir has already declared the interest under s 177 .
- Dir isnt aware of the interest, transaction or arrangement (will be ‘aware’ of matters of which he ought reasonably to be aware)
- interest cannot reasonably be regarded as likely to give rise to a conflict
- other dirs already aware (or ought reasonably to be aware of it)
- it concerns the terms of the dirs service contract
Remedies for breach of directors duty
Duty to exercise reasonable care, skill and diligence: common law damages
Fiduciary duties:
○ An account of profits;
○ Equitable compensation for the loss
○ Rescission of any contract entered into as a direct or indirect result of the breach;
○ Injunction, to prevent further breaches/ a continuing breach;
○ Restoration of property transferred as a result of the breach of duty.
How can a directors breach of duty be ratified?
SH can ratify breach/potential breach via OR
When SH are voting to ratify a breach of dir duty, can the dir whos also a SH or a connected party also vote?
Yes but their votes will be disregarded if their votes resulted in the resolution passing
What duty cant be ratified?
s182 (duty to declare interest in existing transaction) bc is a criminal offence
What are directors other liabilities?
-Failure to maintain co records: fine
-Failure to file docs at CH
-Liability for financial records: civil/criminal
-Breach of health and safety legislation: max 2y prison/£20k fine/gross negligence manslaughter
-Bribery
-Making political donations without SH approval
Environmental legislation: civil/criminal
Ways someone can become a SH?
- Subscription: those who sign memorandum of association automatically subscribe for Cos first shares
- Obtain shares from existing SH by buying, gift, transmission (when SH dies/becomes bankrupt)
- Co allots new shares
What registers must the Co keep in terms of SH?
- Register of members at RO of central register at CH, inc statement if only have 1 member
- Person with significant control (PCS) register must be kept even if empty (priv cos can keep at CH)
When must a new member be entered onto the register of members?
as soon as practicable and within 2mo of transfer being lodged at co
Who can inspect the register of members?
SH for free and other for fee
Who is a person with significant control (PSC)
- Own/control OVER 25% voting rights
- Can appoint/remove a majority of the board of directors
- Have the right to exercise/ actually exercise, significant influence or control over the company
Do you have to state if theres someone wholl be a PSC on INO1?
yes
Admin requirements if PSC register changes?
To file WITHIN 14 DAYS:
PSC01: Individual on register for first time.
PSC02: Corp on register for first time
PSC04: SH details change
PSC05: corp details change
PSC07: Anyone ceasing to be PSC
Time limit for issue of share certificate?
within 2mo of the allotment of shares /of a transfer of shares being lodged with the company
What is a share certificate and who has the right to recieve one?
Is prima facie evidence of the holder’s title to the shares
All SH have the right to receive
How can SH be sued by Co/eachother for breach of contract if they dont abide by constitution?
Because the articles of association are a statutory contract between each SH and CO and between each SH
What are shareholder agreements and what can/cant they include?
○ Optional and give rise to breach of contract
○ Often include: Restrictions on share transfers, Bushell v Faith clauses, No-compete clause
○ CANT include: Restrictions on shareholders voting particular way in board meetings where theyre also a director
What are all SHs voting rights?(4)
- Attend and vote at GMs (if hold voting shares)
- Send proxy to GM
- Remove dir/auditor via OR
- Have name on the register of members
What 4 things do all SH have a right to receive?
- Notice of GM
- Dividends (if declared, profits available, dirs recommended amount and SH approved)
- Share certificate
- Copy of the company’s annual accounts/reports
What do all SH have a right to inspect without charge?
- GM minutes
- SH resolutions passed otherwise than at GMs
- All statutory registers
- Dirs service contracts/indemnities
- Contracts relating to the cos purchase of its own shares.
What do all SH have a right to apply to court to/for?
- Call GM
- Co to be wound up, on the grounds that it is just and equitable to do so
- Seek an injunction under to restrain Co doing something prohibited by its constitution.
What do SH with 5% voting rights have the right to do?
- Require co circulate WR
- Call GM
- Circulate a written statement
What can a SH with 10% voting rights do?
Demand a poll vote
What can a SH with OVER 25% voting rights do?
block a special resolution (must be over)
What can a SH with exaclty/over 50% voting rights do?
Exactly 50%: block an ordinary resolution
Over 50%: pass or block ordinary resolution
What can a SH with 75% voting rights do?
pass or block special resolution
What can a SH with 100% voting rights do?
pass all resolutions
What types of share are there?
Ordinary: right to attend/vote at GM & revieve dividends if declared
Preference: enhanced rights (will be set out in articles eg. guaranteed dividend) Include:
-Cumulative: can be paid missed dividend from prev year
-Non cumulative
-Participating: further right to receive profits or asset
What are the legal mechanisms to protect minority shareholders?
a. Unfair prejudice petitions
b. Derivative claims
Grounds for a SH to bring an unfair prejudice petition and who can bring?
ANY SH on ground:
1. Companies affairs conducted in a way unfairly prejudicial to interests of (some) members.
2. Actual/proposed act/omission is/would be so prejudicial.
(Conduct must cause harm to 1/more SH AND be unfair)
Examples of situations where an unfair prejudice petition may be bought?
- Diverting opportunities to a competing business in which the majority SH holds an interest;
- Awarding excessive pay to dirs
- Excluding SH from management of co where, when co was incorporated, the SH negotiations led to the SH believing they would participate in management
What test will the court apply in an unfair prejudice petition?
Objective test: would a hypothetical bystander believe the act/omission to be unfair
What order may the court make in an unfair prejudice petition?
*Court makes order it thinks fit
*Commonly that the other SHs/Co must buy the shares of the unfairly prejudiced SH
What is a derivative claim?
- Claim instigated by SH for wrong done to Co by act/omission of director
- Can only be brought in relation to a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director
Procedure fo a derivative claim?
a. SH apply to court for permission to continue claim (court will consider evidence without a hearing, will allow if discloses a prima facie case for continuing)
b. Full hearing to consider app for permission to continue
When must a court refuse permission to continue with a hearing for a derivative claim?
1.Satisfied that a person acting in accordance with s 172 CA 2006 (Promoting success of Co) would not seek to continue the claim
2. Act /omission already been authorised by the co
3. Was authorised before it occurred or has been ratified by the company since it occurred.
What will the court take into account when considering a derivative claim?
□ whether SH is acting in good faith in seeking to continue the claim
□ the importance that someone acting in accordance with s 172 (promote success of co) would attach to continuing;
□ whether any past or future action or omission was authorised, or if not, would be likely to be ratified;
□ whether the co has decided not to pursue the claim; and whether the act or omission gives rise to a cause of action that a member could pursue in their own right
When is a company that holds shares in another company a ‘subsidiary’ of a holding company?
- holds majority of voting rights
- other co is a member and has the right to appoint or remove a majority of its board of dirs
- other company is a member and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it
- It is a subsidiary of a company that is itself a subsidiary of that other company
When is a company a ‘wholly- owned subsidiary’ of another company?
if it has no members except that other and that other’s wholly owned subsidiaries or persons acting on behalf of that other or its wholly owned subsidiaries.
In public companies what is the difference with a SHs rights/responibilities?
SH Have additional rights/responsibilities
What must be recorded for joint shareholders?
register of members needs to record both names but only one address (breach=offence)
