Business Law - Unit 4 - Directors Flashcards
Chapter 3
How many directors must companies have?
At least 1 unless they are a public company, in which case they must have 2.
What are the requirements for a director?
Company directors don’t have to be a natural person (human being) but every company needs at least 1 director who is a human and is 16 or older.
The other directors can either be a corporate director, a natural person or a combination of the 2.
If one is a corporate director, it will send along an individual to board meetings to discharge its functions as a director.
How do directors exercise their powers?
By passing board resolutions at board meetings.
Is there any alternative if they don’t want to use board meetings?
They can exercise their powers unanimously without a meeting as long as they indicate to each other that they share a common view on the matter.
Could be through written resolution or informal means like a text message.
Do directors have to make every single decision in the company?
No, under MA 5, they can delegate any of their powers as they think fit. All employees will be aware of the scope of their authority/job description.
Can shareholders override or retrospectively alter directors’ decisions?
No but they do have prior veto over directors’ actions in specific circumstances e.g. directors entering into a substantial property transaction.
What is the meaning of a director?
Any person occupying the position of director.
Who has the power over the services that the company’s directors undertake as well as their remuneration and benefits?
The board (MA 19)
What are executive directors?
Executive directors are those who have been appointed to the board of directors and also have an employment contract with the company.
These are known as service contracts/service agreements.
This will set out the director’s job title, duties and responsibilities.
What are non executive directors?
NEDs are appointed to the board and will be registered at Companies House as directors but they will NOT have service agreements with the company.
They DO NOT receive a salary but will get directors’ fees for attending board meetings.
More common in public companies - usually because sometimes it is required by law to have NEDs to prevent poor decision-making by a board of directors who are too heavily invested in a decision to act objectively.
Also have directors’ duties.
What is a chairperson?
Directors may appoint a director to be a chairperson (can do this through passing a board resolution).
They run the company’s board meetings if they are present and willing to do so.
They also have a casting vote at board meetings - can break the tie to ensure a resolution is passed by simple majority. (Don’t need to use casting vote if they don’t agree as the resolution will not pass anyway).
Public company chairpeople are more important - they are a figurehead in dealings with shareholders and anyone outside the company.
What is a de facto director?
A de facto director is someone who acts as director even though they have never been appointed or validly appointed.
They can fall under the definition of a director (according to case law).
Will generally be carrying out the job of a director even though they are not officially appointed.
What is a shadow director?
This is a person which states directions/instructions with which the directors of the company are accustomed to act - despite them never being formally appointed as a director of the company. (Could be a major shareholder or a lender/management consultant).
The whole board doesn’t need to act in accordance with these directions/instructions - only a governing majority is necessary.
More likely to be in the background and not carrying out the normal functions of a director but they will have a great deal of influence/control over the other directors’ actions in practice.
What is the quorum for a directors meeting?
2.
However, in companies with only one director, the director can still validly take decisions because MA7(2) allows them to make decisions without calling a board meeting.
What is an alternative director?
An alternative director can be appointed to attend a board meeting in place of a director that can’t attend and vote according to their wishes.
No provision for alternative directors in Model Articles, must put in a special article into AoA to do this.
How are directors appointed?
The company’s first directors/directors will take office on the statement of incorporation being issued and will be the people listed on IN01.
Following incorporation, directors will be appointed in accordance with the AoA.
Under the Model Articles, directors can either be appointed by the board or by ordinary resolution of the shareholders. (latter is quicker).
However, if directors are circulating a written resolution or calling a general meeting so shareholders can pass other resolutions, they may wish to add the ordinary resolution to appoint a director to the list of resolutions so they can have a say on it.
What are the restrictions on being a director?
A person can’t take office as a director if they are disqualified from doing so.
Under MA 18, a person will cease to be a director if a bankruptcy order has been made against them or
a doctor gives a written opinion to the company stating they have become mentally or physically incapable of acting as a director and may remain so for MORE THAN 3 MONTHS,
What are the admin requirements when a new director is appointed?
The company must notify Companies House within 14 days of the appointment.
This is done by filing AP01 (for an individual director) or AP02 (for a corporate director).
Company must also enter the director on its register of directors and register of directors’ residential addresses (under ECCTA 2023, no longer needed).
What is the shareholder/director divide?
Though directors may also be shareholders, when they go to a board meeting, they must act as directors and promote the success of the company WITHOUT thinking of their personal interests as a shareholder.
When they attend general meetings, they can act as shareholders and vote to promote their own interests.
What is actual/apparent authority when it comes to directors?
Directors are agents of the company with the company being the principal.
They have both actual and apparent authority to bind the company into contracts with third parties.
Actual authority arises when a director has consent from the other directors to act in a certain way. Could be express actual authority or implied actual authority (not expressly permitted to act in this way but has acted in that way in the past and the board has not stopped them).
Apparent authority is when the director acts without the company’s prior consent but still bind the company to the contract.
The company is estopped from denying the director’s authority as this representation is given by the company to the third party, by words or conduct, that the director is acting with the company’s authority. ** COMPANY’S ACTS/OMISSIONS MUST BE CONSIDERED HERE, NOT DIRECTORS’ ACTIONS.
If a director has neither actual or apparent authority, the director is personally liable to the third party and the company is NOT a party to the contract/liable to the third party.
How can directors decide on the terms of a director’s service contract? (Under what MA rules)
Under their general powers to run the company (MA 3) and their specific power to decide on directors’ remuneration (MA 19).
What types of things does a service contract cover?
Salary, what authority the director has, the directors’ responsibilities, benefits and notice period.
What is the exception to the rule that directors can decide the terms of a director’s service contract?
Exception is if the board is proposing to enter into a service contract with a guaranteed term of more than years.
Called long-term service contracts and MUST be approved by shareholders by ordinary resolution - otherwise that specific section of the contract is voidable (other parts still stand).
Note: if the company has the power to terminate the service contract with notice of two years or less, it will not fall under the definition of a guaranteed term of more than 2 years and will not need shareholder approval. - It is the guaranteed term element of the contract that needs authorisation, not the overall length.
What will happen if a company has Model Articles and only has two directors & they want to vote on one of the director’s service contract?
The directors will not be able to approve the service contracts at board meetings because the director in question will be prevented from counting in the quorum and voting by virtue of MA 14, due to their personal interest in the service contract.
Can get around this by amending the AoA permanently by special resolution, allowing directors to vote even when they have a personal interest in the matter or just to allow them to vote when the subject under discussion is service contracts. Could also temporarily suspend operation of MA 14 by ordinary resolution.
What admin things must the board do regarding the proposed service contract?
When the board proposes an ordinary resolution under s188, it must keep a copy of the memorandum setting out the terms of the proposed service contract at the registered office for 15 DAYS prior to the general meeting, and at the general meeting itself.
If the ordinary resolution is proposed by written resolution, a copy of the memo must be circulated to shareholders along with the written resolution.
What happens if the directors enter into a long-term fixed term contract without the approval of the shareholders?
If the company enters into a service contract with a guaranteed term of more than 2 years without the approval of the shareholders, the guaranteed term element of the service contract would be void - though the rest of the contract would be enforceable.
The service contract would be capable of termination on reasonable notice.
What are the admin requirements after a long-term service contract has been passed?
Directors’ service contracts (or a memo setting out their terms) must be available for inspection by the shareholders at the company’s registered office DURING their term and until a year after termination of the service contract.
Shareholders have the right to inspect them without charge and within 7 days of requesting them.
What happens if a director decides to resign?
They must complete form TM01 (for an individual) or TM02 (if they are a company) within 14 days of resignation.
What happens if the company removes a director? What will happen to their service contract?
When a director is removed, this DOES NOT terminate the director’s service contract - can only be terminated in accordance within its terms UNLESS the director is in repudiatory breach of their service contract and can be summarily dismissed on that basis.
What does the director have to do once they’ve resigned?
Notify Companies House of their resignation or their service contract may state that the company has power of attorney to complete the TM01 form on the director’s behalf.
