Chapter 6 - Companies: ownership and management Flashcards
Describe the seven types of Directors.
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.
In which ways might a director leave office?
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
Model articles provide that a director should leave office where:
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
Can a company also remove a director by passing an ordinary resolution?
Yes.
Special notice (of 28 days) must be given of the intended resolution.
What are four restrictions on the powers of directors?
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
What are the ‘general duties’ of directors?
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
How must any ratification of conduct amount to negligence or breach of duty by a director be made?
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
What is wrongful trading?
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.
What is fraudulent trading?
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.
On what grounds can a director be disqualified for up to 15 years?
Serious offence
Fraudulent trading
Public interest
Breaches of competition law
Wrongful trading
On what grounds can a director be disqualified for up to 5 years?
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).
What is the minimum and maximum duration of a disqualification order?
A disqualification order must be made, for a minimum of 2 years and a maximum of 15 years.
What is the sanction for breach of a disqualification order?
Breach of a disqualification order can result in a fine and/or imprisonment.
Which circumstances may result in the court imposing a lower period of disqualification in mitigation?
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
Is there a statutory duty to report to the BEIS on directors of companies in whose affairs they have become insolvent?
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.
Who are members of a company?
Any subscriber of a company’s memorandum and any person entered on the company’s register of members is a member of the company.
Can a company be a member of its holding company?
Subject to limited exceptions, a company cannot be a member of its holding company.
How are the members regulated?
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.
Does a shareholder agreement require registration?
No.
One advantage of a shareholders’ agreement is that it is a private document not requiring registration
What are three member rights?
to be sent a copy of annual accounts and reports
to require directors to call a general meeting
to appoint a proxy
What are information rights?
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.
What directors’ actions require approval from members?
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.
What is the difference between complete control and considerable influence?
Usually a 75% majority gives complete control and a majority of over 50% gives considerable influence, including the power to appoint and remove directors.
What actions can a minority take?
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
