Chapter 6 - Companies: ownership and management

Question 1

Describe the seven types of Directors.

Answer 1

Director - Usually appointed by existing directors or by ordinary resolution.

De facto director (director in fact) - Anyone who acts as a director, although not validly appointed as one. They have the same powers as a properly appointed director.

Shadow director - someone “in accordance with whose directions or instructions the directors are accustomed to act”

Alternate director - The articles usually provide that a director may appoint an alternate director to attend and vote at board meetings which they are unable to attend.

Executive director - director who is also charged with performing a specific role, eg, a finance director, usually as an employee of the company. If an executive director ceases to be a director, their office will also terminate.

Non-executive director - a director who does not have a particular function but generally just attends board meetings.

Managing Director - Charged with carrying out
day-to-day management functions.

Question 2

In which ways might a director leave office?

Answer 2

Death of the director or winding up of the company

Removal

Disqualification

Resignation

Where they are required to do so by a provision in the articles

Question 3

Model articles provide that a director should leave office where:

Answer 3

that person ceases to be a director by virtue of any provision of the Companies Act 2006, or is prohibited from being a director by law

a bankruptcy order is made against that person

a composition is made with that person’s creditors generally in satisfaction of that person’s debts

a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months

by reason of that person’s mental health, a court makes an order which wholly or partly prevents that person from personally exercising any powers or rights which that person would otherwise have

notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms

Question 4

Can a company also remove a director by passing an ordinary resolution?

Answer 4

Yes.

Special notice (of 28 days) must be given of the intended resolution.

Question 5

What are four restrictions on the powers of directors?

Answer 5

Statutory (general) - The directors are statutorily bound to exercise powers only “for the purpose for which they are conferred”

Statutory (specific) - For example alteration of the articles and reduction of capital need a special resolution, which the directors must secure from the shareholders in general meeting before they can act.

Articles - For example the articles may set a maximum amount that the directors are entitled to borrow, any greater amount needing approval of the company in general meeting.

Members - The members can exercise control over the directors’ powers: a) by passing a special resolution to alter the articles, thereby re-allocating the powers between the board and the general meeting and b) ultimately by removing directors from office

Question 6

What are the ‘general duties’ of directors?

Answer 6

To act within powers - If the directors infringe this rule by exercising their powers for a collateral purpose, the transaction will be invalid unless it is approved or ratified by the company in general meeting.

To promote the success of the company

To exercise independent judgement

To exercise reasonable care, skill and diligence

To avoid conflict of interest

Not to accept benefits from third parties

To declare interest in proposed transaction or arrangement

Question 7

How must any ratification of conduct amount to negligence or breach of duty by a director be made?

Answer 7

Any ratification of conduct amounting to negligence or other breach of duty by a director (or former director or shadow director) must be made by an ordinary resolution of the members, disregarding the votes of that director and any member connected with them

Question 8

What is wrongful trading?

Answer 8

Wrongful trading applies only where a company goes into insolvent liquidation and the liquidator can show that, at some time before the commencement of the winding up, the director(s) knew or should have known that there was no reasonable prospect that the company could have avoided going into insolvent liquidation.

Question 9

What is fraudulent trading?

Answer 9

Fraudulent trading occurs where any business of a company is carried on with intent to defraud creditors of the company (or of another person) or for any fraudulent purpose.

Punishable by a fine and/or imprisonment for up to 10 years.

Question 10

On what grounds can a director be disqualified for up to 15 years?

Answer 10

Serious offence

Fraudulent trading

Public interest

Breaches of competition law

Wrongful trading

Question 11

On what grounds can a director be disqualified for up to 5 years?

Answer 11

Where a person has been persistently in default in relation to provisions of company legislation (and three convictions for default in five years are conclusive evidence of persistent default).

Question 12

What is the minimum and maximum duration of a disqualification order?

Answer 12

A disqualification order must be made, for a minimum of 2 years and a maximum of 15 years.

Question 13

What is the sanction for breach of a disqualification order?

Answer 13

Breach of a disqualification order can result in a fine and/or imprisonment.

Question 14

Which circumstances may result in the court imposing a lower period of disqualification in mitigation?

Answer 14

Lack of dishonesty

Loss of director’s own money in the company

Absence of personal gain (such as excessive remuneration)

Efforts to mitigate the situation

Low likelihood of re-offending

Question 15

Is there a statutory duty to report to the BEIS on directors of companies in whose affairs they have become insolvent?

Answer 15

Yes.

Administrators, receivers and liquidators all have a statutory duty to report to the Department for Business, Energy and Industrial Strategy (BEIS) on directors of companies in whose affairs they have become involved, where they believe the conditions for a disqualification order have been satisfied.

The Secretary of State then decides whether to apply to the court for an order, but if they do decide to apply, they must do so within two years of the date on which the company became insolvent.

Question 16

Who are members of a company?

Answer 16

Any subscriber of a company’s memorandum and any person entered on the company’s register of members is a member of the company.

Question 17

Can a company be a member of its holding company?

Answer 17

Subject to limited exceptions, a company cannot be a member of its holding company.

Question 18

How are the members regulated?

Answer 18

The members are regulated internally by the articles of association. These may be supplemented by a shareholders’ agreement which deals with members’ rights and duties.

Question 19

Does a shareholder agreement require registration?

Answer 19

No.

One advantage of a shareholders’ agreement is that it is a private document not requiring registration

Question 20

What are three member rights?

Answer 20

to be sent a copy of annual accounts and reports

to require directors to call a general meeting

to appoint a proxy

Question 21

What are information rights?

Answer 21

A member of a listed company who holds shares on behalf of another person may nominate that other person to enjoy information rights, ie, the right to receive a copy of all communications required to be sent to members, including accounting reports.

Question 22

What directors’ actions require approval from members?

Answer 22

Service contracts - Approval is required if the service contract provides for a director’s employment to be a guaranteed term of two years or more. In case of breach, provision is void.

Substantial property transactions - exceeds 10% of the company’s asset value and is more than £5,000; or exceeds £100,000. In case of breach, transaction is voidable.

Loans to directors - Voidable in case of breach

Payments for loss of office - Approval is required for payments or benefits to be made on loss of office or retirement. In case of breach, The payment is held on trust for the company.

Question 23

What is the difference between complete control and considerable influence?

Answer 23

Usually a 75% majority gives complete control and a majority of over 50% gives considerable influence, including the power to appoint and remove directors.

Question 24

What actions can a minority take?

Answer 24

Where statute specifically provides for a minority to have a particular power or to apply to the court for example.

A derivative action for negligence, breach of duty, default or breach of trust by the directors

A derivative action in respect of unfairly prejudicial conduct by the majority

To petition the court for the company to be wound up on the grounds that it is just and equitable to do to so

Question 25

What are specific statutory rights that a minority of members are given?

Answer 25

Variation of class rights - Holders of >= 15% of class of shares (or >= 15% of members where no share capital) can apply to court for cancellation

Company meeting - Can be requisitioned by holders of (usually) >= 5% of company’s paid up capital with voting rights (or >= 5% of voting rights where no share capital)

Notice of members’ resolutions - Must be given by company on requisition of members holding >= 5% of voting rights

Payment out of capital by private company for the redemption or purchase of its shares - Any member (or creditor) can apply to court to prohibit the transaction

Registration of limited company as unlimited - Can be prevented by individual members

Question 26

Regarding a derivative claim on behalf of the company, when will a member be refused permission by the court?

Answer 26

the relevant act or omission has been authorised by the company beforehand or ratified by the company subsequently, (remembering that any decision to ratify must be made not counting the votes of the director concerned or any connected person, s.239)

a person acting in accordance with the duty to promote the success of the company would not seek to continue the claim

Question 27

Regarding a derivative claim on behalf of the company, when deciding whether to grant or refuse permission. the court will have regard to the following:

Answer 27

Whether the member is acting in good faith

The importance that a person promoting the success of the company would attach to it

Whether authorisation or ratification by the company by the company is likely

Whether the company has decided not to pursue the claim

Whether its member could pursue the claim in their own right rather than on behalf of the company

The views of members with no personal interest in the matter

Question 28

Who may apply for relief on the grounds of unfairly prejudicial conduct?

Answer 28

Any member (including someone to whom shares have been transferred by operation of law, for example on death) or the Secretary of State may apply to the court for relief

Question 29

Give examples of conducts that have been held to be unfairly prejudicial.

Answer 29

removal of a company’s auditor from office on improper grounds

Exclusion and removal from the board where the company was one in which the director had a legitimate expectation of being involved in management

Improper allotment of shares

Making an inaccurate statement to shareholders

Diversion of a company’s business to a director-controlled company

Question 30

Give examples of conducts that have NOT been held to be unfairly prejudicial.

Answer 30

Failure by a parent company to pay the debts of a subsidiary

Non-compliance with the stock exchange rules, the City Code and the Cadbury Code

Failure by a fellow director and majority shareholder to increase the petitioner’s shareholding

Question 31

When a petition is successful, what orders may the court make?

Answer 31

Regulating the future conduct of the company’s affairs

Authorising any person to bring legal proceedings on behalf of the company

Requiring the company to do an act that it has omitted to do or to refrain from doing an act complained of.

Providing for the purchase of shares of the minority by other members or by the company itself.

Requiring the company to make any (specified) alterations to its articles, or not to make such alterations without leave of the court.

order that either the controlling shareholder or the company shall purchase the petitioner’s shares at a fair price.

Question 32

Give situations in which orders have been made for winding up.

Answer 32

Where the company was formed for an illegal or fraudulent purpose

Where there is a complete deadlock in the management of its affairs

Where the directors deliberately withheld information so that the shareholders had no confidence in the company’s management

Question 33

Who may call a general meeting?

Answer 33

The directors

5% of the members

The court

An auditor who gives notice of their resignation accompanied by a statement of the circumstances connected with their resignation and requesting a meeting

A general meeting of a public company must be called where the net assets fall to half or less of its called up share capital

Within 21 days of any such requirement, the directors must call a meeting to take place within a
28-day notice period.

Question 34

When must public companies hold an AGM?

Answer 34

Every public company must hold an annual general meeting (AGM) during the six months following its accounting reference date (s.336). Failure to do so renders every officer of the company who is in default liable to a fine.

Question 35

In a public company, what percentage of the voting rights or nominal value of shares with voting rights must consent to a notice period of less than 14 days?

Answer 35

For a general meeting - 95%

For an AGM - 100%

Question 36

Section 281 provides that resolutions can only be passed in accordance with the Act, namely:

Answer 36

Private companies: as a written resolution or at a general meeting

Public companies: at a general meeting

Where a resolution is required but not specified, an ordinary resolution will be required

Question 37

What are the differences between an ordinary and a special resolution?

Answer 37

Ordinary:

• < 50% required majority of the votes cast
• Any business for which a special resolution is not
  specifically required by enactment or the articles

Special:

• <= 75% required majority of the votes cast
• Where special resolution is specifically required by enactment or the articles, for example: Change of name, Alteration of the articles, reduction of share capital, winding up the company.
• The notice of the meeting must include the text of the resolution and specify that it is to be moved as a special resolution.
• All special resolutions must be filed with the Registrar within 15 days.

Question 38

In which cases are members or directors of a private company not allowed to propose a written resolution instead of a meeting?

Answer 38

• removal of a director before the expiration of their office period
• removal of a auditor before the expiration of their office period

A written resolution must be passed within 28 days from its circulation.

Special notice of at least 28 days needs to be given where a resolution is proposed.

Question 39

Notice

Answer 39

14 days’ notice is required for general meetings except:

• for AGMs of a public company, which require 21 days
• where special notice (of 28 days) is required to be given

The number of days always refers to clear days, that is excluding the day of the meeting and the day on which notice is given or a request is received.

Question 40

What is a quorum?

Answer 40

A quorum is the minimum number of persons required to be present at a general meeting.

Question 41

What records must be kept by a company?

Answer 41

Every company must keep the following records for 10 years (s.355) and available for inspection by members:

• Copies of all resolutions passed otherwise than at general meeting
• Minutes of all general meetings
• Details of decisions by sole member companies