CH8 Companies: Ownership and Management Flashcards
- Identify the administrative consequences of incorporation or the formation of a limited liability partnership including requirements regarding statutory books, accounts, meetings and the role of the company secretary - Recognise how a shareholder can influence the management of a company through meetings and resolutions, including shareholders' rights to requisition a meeting - Identify the various statutory rights of shareholders to challenge the management of the company under the Companie
What are the seven types of director?
- Director (on incorporation or subsequently)
- De facto director
- Shadow director
- Alternate director
- Executive director
- Non-executive director
- Managing director
How does a director (appointed on incorporation or subsequently) come to be in office?
As provided by the articles (how they state that a director should be appointed)
Appointed by existing directors
By owners - ordinary resolution (>50%)
De facto director: who can be one? What powers do they have?
Anyone who acts as a director, although not validly appointed has the same powers as a properly appointed one.
What is a shadow director? How do we know if someone is a shadow director?
Someone ‘in accordance with whose directions or instructions the directors are accustomed to act’ (not professional advisor). Whether someone is a shadow director is a question of fact.
How does an alternate/proxy director come to be in office?
The articles usually provide that a director may appoint an alternate director to attend and vote at board meetings which they themselves are unable to attend.
Executive director (EE of company e.g. Finance Director): what is their role?
Day job is managing the business in their role
NON executive directive:
How appointed?
Day job or not?
EE?
Role?
What do they actually do?
Who is normally a NED on the board in particular?
Appointed or otherwise as an exec director would be (in accordance with articles/by ordinary resolution (members).
NOT their day job. NOT an EE of the business.
Act as a CONTROL
They attend board meetings and make sure directors are doing what they should be doing.
Chairman (runs the meetings) of the board is usually a NED
What is a managing director’s role? Are they an EE?
Runs the business
EE of the business
Can the chairman and managing director be the same person? Why?
NO!
To allow controls and checks on the directors
How old must a director be?
16 or more
How many directors for a Ltd company? How many for a PLC?
At least 1
At least 2
What do private companies with a sole director need to do to allow for board meetings with a single director?
Change the model articles
Are a director’s actions valid even if their appointment is subsequently found to be defective/void?
Yes - de facto director
Where should any change in the directors of a company be recorded? Within how many days?
In the company’s register of directors
14 days
Why was the Economic Crime and Corporate Transparency Act 2023 introduced?
How does it do this?
Aims to prevent fraudulent appointments and fictitious information being supplied to CH.
Identity verification for directors.
What are the two methods of verification that satisfy the Economic Crime and Corporate Transparency Act 2023?
- Direct: digital service through CH. Links person to official document.
- Indirect: Authorised Corporate Service Provider (ACSP) acts as intermediary authorised by the Registrar to verify identity
What are the seven ways that a director might leave office?
- Death of director/company
- Removal
- Disqualification
- Resignation
- Required by articles
- Prohibition by law
- Bankruptcy/ written medical opinion that physically/mentally unfit
Is removal of a director a key s/h right?
YES!
How can a director be removed from office?
- Ordinary resolution (>50%)
If shareholders wish to remove director from office by passing an ordinary resolution, what notice must be given and how long is it?
Special notice
28 days
If shareholders wish to remove director from office by passing an ordinary resolution, what two rights does the director have?
- Right to address the meeting
- Right to request that any written representations that they make be circulated to members or read out at the meeting.
In what situation might a director (EE) be able to to sue for breach of contract if removed?
If they have a service contract
What happens when a director is also a member in terms of removal? Could two members gang up on a third and remove them?
The director may have weighted voting rights given under the constitution.
No, they could not in that case.
E.g. 1 brother and 2 sisters. Brother may be given 3 votes so sisters could not remove him.
What is a quorum in simple terms?
The right number of people present at a meeting for it to be valid?
How can the idea of a quorum be used in order to prevent a director from being removed?
It is possible to draft a shareholders’ agreement stating that a member holding each class of share must be present at a general meeting to constitute a quorum (make the meeting valid). If so, a member holding shares of a certain class could prevent a director from being removed by not attending.
Where are the powers of the directors defined?
The company’s articles
Are directors agents of the members?
No. They are agents of the company.
What are the four ways that a director’s powers can be restricted?
- Statutory (general) - bound to exercise power only for purpose conferred
- Statutory (specific) - e.g. alteration of articles/reduction of capital needs a special resolution (>75%) - i.e. shareholders must agree major changes
- Articles
- Members - could pass a special resolution to change directors’ powers or remove them.
If a third party enters into a contract in good faith when the director’s authority is limited, can they rely on the contract?
Yes
If a third party enters into a contract in good faith when the director’s authority is limited, what is the assumption in terms of proving whether the third party was acting in good faith or not?
Third party deemed to be acting in good faith unless proved otherwise. Also, confusingly, they are deemed to be acting in good faith even if they know of the limitation.
If a third party enters into a contract in good faith when the director’s authority is limited, what is the situation where they CANNOT rely on the contract?
If they are a director themselves/related to one. Transaction becomes voidable by the company.
What are the duties owed by directors to the company as a whole (NOT to individual shareholders)? ASPIRIN
Accountability
Success
Powers: act within them
Independent judgement
Reasonable skill and care
Interest: declare it
No benefits
In terms of duties owed by directors to the company - conflicts of interest, the other directors can sometimes authorise a conflict. When can this happen in a private company? A public one?
PRIVATE: Provided the company’s constitution does not invalidate it.
PUBLIC: provided the company’s constitution expressly allows it.
How can a director declare a conflict of interest?
- Board meeting
- Notice in writing
- General notice
If a director declares a conflict of interest, do the members/board need to approve it? What are the two exceptions?
No - declare only unless
Constitution (articles) require it
It is an arrangement between a director and the company for the transfer of a ‘substantial non-cash asset’
What are consequences for breach of director duties? Five things.
Losses
Contracts
Property
Stopping
Liability is ? and ?
- Make good any loss, inc. secret profits
- Contracts may be voidable
- Property take can be recovered if still in director’s possession
- Injunction
- More than one director involved: liability is joint and several
Statutory controls on directors’ behaviour: administrators, receivers and liquidators can take what two actions if they think the directors have mismanaged the company? Point one: what must the director do?
- Apply to the court for an order to be made under the wrongful or fraudulent trading rules> Director required to contribute to the assets of the company.
- Statutory duty to report to the Department for Business, Innovation and Skills (BIS) where they believe that the director should be disqualified.
How long does the Secretary of State have to apply a court order if they decide to do it?
Two years of the date of insolvency.
What is the difference between wrongful trading and fraudulent trading?
Wrongful trading: director continues trading when they know the business will become insolvent.
Fraudulent trading: ANYONE who allows business to carry on with the INTENT to defraud creditors.
What are the potential CRIMINAL consequences of fraudulent trading? When do they apply?
Applies whether company is wound up or not
Fine/prison 10 years
What are the potential CIVIL consequences of fraudulent trading? When do they apply?
Applies ONLY if comp wound up
Court can order director to contribute to assets
In terms of director disqualification, when might a director be disqualified for up to 15 years?
Serious offence (usually connected with promotion, formation, management or liquidation)
Fraudulent trading (not necessarily convicted)
If in public interest
Breached competition law
Wrongful trading
In terms of director disqualification, when might a director be disqualified for up to 5 years?
In persistent default in relation to the Companies Act
There is a section that says a disqualification order must be made for a minimum of 2 years and a maximum of 15 years where…
someone has been a director at a company that has been at any time insolvent (while they were a director or subsequently) and their conduct made them unfit to manage. Can be disqualified even if they take no active part in running the business.
What is the alternative to disqualification?
Secretary of State may accept undertaking from director to refrain from acting in the management of a company in uncontested cases.
What are the consequences of breaching a disqualification order?
Fine or imprisonment
When might the courts impose a lower period of disqualification?
- Lack of dishonesty
- Loss of director’s own money
- Absence of personal gain
- Efforts to mitigate
- Low likelihood of reoffending
What is a shareholders agreement and what is the advantage?
It is an agreement, separate from the articles which sets out how the shareholders agree to interact with each other. Not filed with the Registrar - private.
What are three shareholder/member rights?
- To be sent a copy of the annual accounts and reports
- To require directors to call a general meeting
- To appoint a proxy (needs to be in writing)
Certain director actions require approval of members to be valid. What are they? Four.
- Service contracts >2 years
- Substantial property transactions
- Loans to directors
- Payments for loss of office
If approval is not sought for a director having a service contract of >2 years, what is the consequence?
Contract can be terminated by the company giving reasonable notice.
Substantial property transactions (where a director acquires non-cash assets from the company) require approval from the members. What does ‘substantial’ mean?
Aggregate value
Exceeds 10% of company’s asset value and is >£5,000
OR
Exceeds £100,000
If approval is not sought for a director to acquire substantial non-cash assets from the company, what happens?
Contract is what unless what?
Director is liable…?
Transaction is voidable by the company, unless members give approval within a reasonable period.
Director is liable to account to the company for any gain and to indemnify the company against any loss or damage.
If approval is not sought for a loan by a company to a director or a guarantee or security by a company (if the company is guaranteed a loan by a director), what happens?
The transaction is voidable by the company, unless it is approved by the members within a reasonable period.
Director is liable to account for any gain and to indemnify the company against any loss/damage
If approval is not sought for discretionary payments for loss of office over £200, what happens?
Payment is held on trust for the company. Director who authorised it is liable to indemnify the company.
In what cases does statute allow minority shareholders to bring some kind of action in their own right? 5 cases
- Cancellation of variation of class rights
- Right to call a company meeting
- Notice of members’ resolutions
- Payment out of capital by private company for redemption or purchase of its shares
- Registration of limited company as unlimited
In some cases, minority shareholders can bring action in their own right. Cancellation of variation of class rights is one such instance. What does that mean and what is the requirement for you to be able to cancel that?
Someone wants to vary the classes of shares.
If you hold >=15% of the class of shares that is going to be varied then you have the right to cancel that.
In some cases, minority shareholders can bring action in their own right. Right to call a company meeting and right to put something on the agenda to be voted for in that meeting (called notice of members’ resolutions) are such cases. How many shares do you need to own to be able to tell the company to call a meeting and put something on the meeting agenda?
> =5%
In some cases, minority shareholders can bring action in their own right. Payment out of capital by private company for the redemption or purchase of its shares (where a company pays out all of its money and has none left to pay the bills due) is such a case.
Who can cancel that and how?
Any shareholder or creditor can apply to the court to prohibit this.
In some cases, minority shareholders can bring action in their own right against a director. Registration of limited company as unlimited is such a case.
Who can cancel that?
ANY member
In relation to minority shareholder actions against directors, what are derivative actions?
I.e. who would normally bring action and why?
When can a member bring a derivative case?
Normally the director’s duties are owed to the company.
Therefore the company should bring action.
A member can bring a derivative claim in respect of an actual or proposed act or omission by a director, former director or shadow director involving negligence, breach of duty, breach of trust or default.
In relation to minority shareholder actions against directors and derivative actions, what must an individual member do first in order to bring about a case?
Make a prima facie case to the court and obtain permission to carry on
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Exclusion and removal from the board when the director had a legitimate expectation of being involved in management.
Yes
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Improper allotment of shares. What is the example (niece/aunt)
Yes. Niece kept blocking aunt’s actions so aunt issued shares to a friend so that they could outvote the niece.
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Making inaccurate statements to shareholders. E.g. misleading them by recommending acceptance of a bid by another company which the directors owned.
Yes
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Diversion of a company’s business to a director-controlled company
Yes
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Failure by a parent company to pay debts of a subsidiary.
No - parent company is separate entity. Sub is liable for its own debts.
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Non-compliance with the Stock Exchange rules, the City Code and the Cadbury Code
No
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Failure by a fellow director and majority shareholder to increase the petitioner’s shareholding
No
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
A reasonable offer to buy out shares of the excluded shareholder
No - it is likely to be accepted by the courts so long as it is reasonable
In terms of derivative action, are the following examples of unfairly prejudicial conduct?
Complaint based on prejudice to:
Member
Employee
Unpaid creditor
Member: yes
Employee: no
Unpaid creditor: no
In terms of derivative action, is the following an example of unfairly prejudicial conduct?
Shareholders invoking the provision when they do not like the way the company is being run (even bad management)?
No
Do general meetings have to be held by PLCs and LTDs?
Yes
Who may call a general meeting? Five.
Company director
Members with >= 5% shares
Auditors
The court
PLC in crisis
When a company director calls a general meeting, how many days notice must they give?
Does the notice period include the day notice was given and the day of the meeting?
How much time must you give for posting notice?
Reduced if what % shareholders agree to short notice?
Who must notice be sent to?
What information must be included?
14 days clear notice
No
48 hours
90% LTD or 95% PLC
All shareholders and directors
Time, place, key points of business
When members with >=5% shares call a general meeting (as is their right as minority shareholders), what else can they do?
How long do directors have to call that meeting?
Within how many days of the notice must the meeting be held?
Specify a proposed resolution (i.e. ask for something to go on the agenda)
21 days to call
Within 28 days of the notice
Why might an auditor call a meeting?
What must accompany this?
When they wish to resign.
Statement of circumstances (i.e. do they just wish to rotate off as they have been auditing the company for a long time or are there circumstances which made them feel that they had to resign?).
When might the courts force a meeting to be held?
If a minority shareholder has asked the directors to hold a meeting and they have not done it.
In terms of general meetings, one needs to be held for a PLC in crisis. What does this mean?
Net assets have fallen to half or less of its called up share capital.
Which type of company MUST hold an AGM?
PLC
How often must a PLC hold an AGM?
Must be held not more than ? months after the ?
Each financial year
Not more than 6 months after the accounting reference date (y/e). Same as filing date.
What is the notice period for an AGM? What is the exception?
21 days. ALL members can agree to short notice.
What three things are dealt with at an AGM?
- Appointment of directors and auditors
- Approval of accounts
- Approval of dividend
How many votes required for an ordinary resolution to be passed? ?% of those who ? and ?
> 50% of those who attend the meeting and vote
How many votes required for a special resolution to be passed? ?% of those who ? and ?
> =75% of those who attend the meeting and vote
What might a special resolution be required for? Four things
- Change of company name
- Alteration of articles
- Reduction of share capital
- Winding up of the company
Must the text of a special resolution be included in the notice of the meeting?
Yes
How many days does a company have to file a special resolution with the Registrar?
15 days
Which type of company is a written resolution open to?
Private
What is a written resolution?
When you write to shareholders, tell them what the resolution is and how they can vote on it.
For a written resolution, what %s are needed to pass ordinary and special? What is the difference to non-written resolution?
Ordinary: >50%
Special: >=75%
It needs to be the % of ALL shareholders rather than just those who attended/voted as with a non-written resolution
What can a written resolution NOT be used for?
- Removal of a director
- Removal of an auditor
They must have the opportunity to speak and be heard.
Within how many days of circulation must a written resolution be passed?
Within 28 days of circulation
When will a written resolution be assumed to be passed? Can you change your mind once agreed?
Assumed passed once vote has requisite majority.
No
What is special notice? Does it apply ordinary or special resolutions?
Special notice is where you need to give longer notice of a resolution.
Ordinary.
How much notice do you need to give for a ‘special notice’ resolution?
28 days
How many votes are needed to pass a resolution called on special notice?
> 50%
What is a ‘special notice’ resolution used for?
Removal of director/auditor
In terms of a ‘quorum’, what is the minimum number of members that the Companies Act requires to be present at a meeting?
Minimum of two, unless company only has one member.
What is a poll vote?
Where 1 share = 1 vote
rather than 1 person = 1 vote
Records of meetings must be kept for how long?
10 years
