Chapter 3 - Legislation Flashcards
What are the 6 general guidelines on directors?
Appointment, Number of directors needed, age of directors, resignation, removal.
- Directors are appointed by shareholders
- s 154 requires private company to have at least 1 director while public companies has t have 2 directors
- s 155 requires that at least 1 director has to be natural person
- s 157 requires that the directors be at least 16 yo
- Resignation of directors are governed by the articles
- s 168 allows the removal of directors to be done by ordinary resolution at a shareholders’ meeting
What are the types of directors?
- De Jure Directors
- De Facto Directors
- Shadow Directors
What are the differences between executive and non-executive directors?
Non-Executive directors typically does not engage in day-to-day management, but is involved in policy making and planning exercises. They are also responsible for monitoring executive directors and to act in the interest of any stakeholders. Executive directors are responsible for all of the above.
What is stated under CA 2006, s 40?
Power of directors to bind the company:
(1) In favor of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed t be free of any limitations under the company’s constitution.
(2) For this purpose -
(a) a person “deals with” a company if he is a party to any transaction or other act to which the company is a party,
(b) a person dealing with a company -
(i) is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so,
(ii) is presumed to have acted in good faith unless the contrary is proved, and
(iii) is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution
(5) This section does not affect any liability incurred by the directors, or any other person, by reason of the directors’ exceeding their powers.
Under what circumstances will individual director be considered to have the authority to bind the company?
(i) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;
(ii) that such representation was made by a person or persons who had ‘actual’ authority to manage the business of the company either generally or in respect of those matters to which the contract relates;
(iii) that he (the contractor) was induced by such representation to enter into the contract, i.e. that he in fact relied upon it; and
(iv) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.
What is stated under CA 2006, s 170?
Scope and nature of general duties
(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company.
(2) A person who ceases to be a director continues to be subject—
(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and
(b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director. To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.
(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.
(4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.
(5) The general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles so apply.
What is stated under CA 2006, s 172?
Duty of directors to act within powers
A director of a company must
(a) act in accordance with the company's constitution, and (b) only exercise powers for the purposes for which they are conferred.
What is stated under CA 2006, s 172(1)?
Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to
(a) the likely consequences of any decision in the long terms,
(b) the interests of the company’s employees
(c) the need to foster the company’s business relationships with suppliers, customers, and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company
What is stated under CA 2006, s 172(3)?
Duty to promote the success of the company - Creditors’ interests
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.
What is stated under CA 2006, s 173?
Duty to exercise independent judgment
(1) A director of a company must exercise independent judgment
(2) This duty is not infringed by his acting—
(a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors; or
(b) in a way authorised by the company’s constitution.
Note: If there is a shadow director, by definition, de jure directors are not exercising their independence
What is stated under CA 2006, s 175?
No conflict of interest & No secret profit
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
Are there situations where duties under CA 2006, s 175 does no apply?
Yes.
- Situations which cannot be reasonably be regarded as likely to give rise to a conflict of interest
- Situations where a director is interested directly or indirectly in a proposed transaction or arrangement with the company (s 177)
- Transaction is approved by shareholders or is exempt from approval in accordance with CA 2006, s 180(2)
Note: such interest must be disclosed and approved by shareholders
What is the importance of CA 2006, s 175(4)(b) in regards to authorisation by independent directors and what are the guidelines for authorising transactions with directors with interest.
- s 175(4)(b) states that the duty to avoid conflicts of interest will not be infringed if the matter has been authorised by other independent directors (Independent - no interest).
- For private companies, there must not be anything in the constitution which invalidates authorisation by the directors. Public companies require authorisation provision in their articles.
- Director in question and any other ‘interested director’ are excluded from the quorum and their votes are excluded
- No provision for shareholders to be notified of any authorisation granted, whether in public or private company.
- This is not applicable to “gaining secret profit” from the situation
What is stated under CA 2006, s 176?
Duty to not accept benefits from third parties
- Duty not to accept benefits from a third-party conferred by reason of his being a director, or by reason of his doing or not doing anything as a director.
- Duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
- CA 2006, s 180(2) provides that if the transaction in respect of which the benefit is conferred is approved or is exempt from approval, a director is not required to comply with s 176.
What is stated under CA 2006, s 177
Duty to declare interest in proposed transaction or arrangement.
- Directors who are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company must declare the nature and extent of that interest to the other directors at a full board meeting. This must be done before the company enters into the transaction or arrangement. (No shit)
- Applies only to proposed transaction with the company
