COMPANIES—DIRECTORS AND OFFICERS

Question 1

Appointment of directors

Answer 1

A private company must have at least one director and a
public company must have at least two and at least one
director of a company must be a natural person (that is, a
human as opposed to another corporate entity), at least 16
years of age. The frst director(s) of a company is/are those
specifed on the registration documents on incorporation.

Question 2

Procedure forAppointing New Directors

Answer 2

The appointment provisions for subsequent/new directors
are typically found in the company’s articles. For example,
the model articles for a company limited by shares provide
that a director can be appointed by an ordinary resolution
of the shareholders (that is, by a vote taken at a sharehold-
ers’ meeting and approved by a majority of the votes) or
by a decision of the directors

Question 3

.Notice of Change of directors

Answer 3

The company must notify the Registrar of Companies with-
in 14 days of any new director appointments and of any
changes to the details (for example, their address) of existing directors.

Question 4

Types of Directors

Answer 4

a.De Jure Directors
b.De Facto Directors
c.Shadow Directors
d.Executive and Non-Executive Directors
e.Alternate Director
f.Nominee Director

Question 5

De Jure Directors

Answer 5

A de jure director is a director who has been formally and
properly appointed and registered as such with the Registrar of Companies at Companies House.

Question 6

De Facto Directors

Answer 6

A de facto director is someone who has not been formally
appointed and registered with the Registrar of Companies
but who carries out all the duties of and behaves as a direc-
tor. Such a person is held out as a director by the company,
and claims to be a director, despite the fact that they have
never actually been appointed as such.

Question 7

Shadow Directors

Answer 7

1. A person who regularly infuences the acts of a company’s
   directors may be considered a shadow director, more tech-
   nically defned as a person in accordance with whose direc-
   tions or instructions the directors of the company are accus-
   tomed to act.
2. The Companies Act 2006 treats shadow directors the same as de facto or de jure directors. Note that advisors acting for the company in a professional capacity
   are specifcally excluded from the defnition of a shadow
   director by the Companies Act 2006.

Question 8

Executive and Non-Executive Directors

Answer 8

It is a function of good corporate governance for a board to
consist of a mixture of executive and non-executive direc-
tors. Executive directors are responsible for the day-to-day
running of the company and are employees of the company, while non-executive directors are usually consultants and
take more of a supervisory role overseeing the activity of the executive directors.

Question 9

Alternate Director

Answer 9

An alternate director is someone appointed by a director
to attend and vote at board meetings when the director is
unable to attend.

Question 10

Nominee Director

Answer 10

A nominee director is appointed to the board to represent
the interests of a particular stakeholder, usually a sharehold-
er. Nominee directors will still be de jure directors and have
all the rights and duties expected of other directors. In par-
ticular, a nominee director must still act in the best interests
of the company, even though they have been appointed to
represent the interests of a particular stakeholder.

Question 11

Powers of Directors

Answer 11

1.The di-rectors’ powers are derived from the articles.
2.The model arti-cles give the directors the power to exercise all of the powers of the company except where the articles specifcally provide otherwise. 3. However, the shareholders do retain an element of control over the directors, as the model articles also state that the shareholders may, by special resolution (that is, a resolu-tion approved by a vote of 75% or more), direct the directors
to take, or refrain from taking, specifed action.
4. Directors are required by the model articles to exercise their powers collectively as a board. However, it is permitted for
the board to delegate their powers to a person or committee as they think ft.

Question 12

Decisions Requiring ShareholderApproval

Answer 12

Some decisions by the directors require the prior approval of the shareholders. Many of these decisions allow the share-
holders to approve a transaction in which a director has a
fnancial interest.

Question 13

Decisions Reserved to Shareholders

Answer 13

Certain decisions are reserved to the shareholders by legis-
lation (the Companies Act 2006) or in the articles of associ-
ation. For example, changing the articles requires a special
resolution.

Question 14

Directors as Agents of the Company
Actual Authority

Answer 14

Actual authority can be expressly granted to a director in the articles or by a resolution; that is, a director has actual author-ity to do whatever the articles or a resolution say the director can do. As a general rule, the articles usually require the
board to act collectively, but the articles or a board resolution may delegate authority over specifc matters to a particular
director or group of directors

Question 15

Directors as Agents of the Company
Apparent or Ostensible Authority

Answer 15

apparent authority (also called ‘ostensible author-
ity’) exists where the principal’s words or conduct would lead
a reasonable person in the third party’s position to believe
that the agent was authorised to act, even if the agent had
no such authority. Since a director usually has no power to
bind the company except when the directors act as a board,
apparent authority should not arise often, but apparent au-
thority could arise through past dealings.
Note: The Companies Act 2006 provides that acts of a
person acting as a director are valid notwithstanding that
it is afterwards discovered that there was a defect in their
appointment, that they were disqualifed from holding ofce,
that they had ceased to hold ofce, or that they were not
entitled to vote on the matter in question.

Question 16

Execution of Contracts and Documents

Answer 16

Companies may enter contracts under their seal or by a
person with authority to act on behalf of the company, as
discussed above. Companies may execute documents either by afxing their seal to the documents or by the signature of either two directors or a director and a secretary, or a single
director if signed in the presence of a witness who attests the signature.

Question 17

Duties

Answer 17

Directors’ duties are derived from a number of sources, main-
ly the common law, the articles, and statute. Directors will
also have obligations that arise by virtue of their contracts of employment with the company. A breach of duty could result
in a director being required to compensate the company for
any loss caused as a result of their breach, and if any proft
was made or beneft gained, to account to the company for it.

Question 18

Basic Fiduciary Duty

Answer 18

A director has a common law fduciary duty to act in good
faith and in the best interest of the company as a whole.

Question 19

Provisions Protecting Director from Liability

Answer 19

Any provision in the articles or a contract that purports to
exempt a director for liability that would otherwise attach
to the director for breach of duty, negligence, or breach
of trust in relation to the company is void.

Question 20

Liability May Extend Beyond Term

Answer 20

It is important to note that directors may still be subject to
statutory and fduciary duties owed for the period when they were a director, even after they have ceased being a director. For example, a person who was a director may not exploit
property, or information, or opportunities of which the direc-
tor became aware while a director.

Question 21

Duty to Promote the Success of the Company

Answer 21

1. A director must act in the way the director considers,** in good faith,** would be most likely to promote the success of the
   company for the beneft of its members as a whole. 2. However, in deciding what’s best for the company as a whole, directors are **not limited to considering only what will maximise proft. **
2. In the Companies Act 2006, Parliament adopted the concept of ‘enlightened shareholder value’ and requires directors to have regard to all of the following (amongst other matters):
   *The likely consequences of any decision in the long term;
   *The interests of the company’s employees
   *The need to foster the company’s business relationships
   with other stakeholders (for example, suppliers and cus-
   tomers);
   *The impact of the company’s operations on the commu-
   nity and the environment;
   *The desirability of the company maintaining a reputation
   for high standards of business conduct; and
   *The need to act fairly as between members of the com-
   pany.

Question 22

Interests of Creditors

Answer 22

If the company is insolvent or is on the brink of becoming
insolvent, the Companies Act 2006 requires the directors
to consider or act in the interests of the creditors of the
company, that is, the duty to shareholders is displaced.

Question 23

Duty to Exercise Reasonable Care, Skill, and Diligence
A director must exercise the care, skill, and diligence that
would be exercised by a reasonably diligent person with:

Answer 23

*The general knowledge, skill, and experience that may
reasonably be expected of a person carrying out the
functions carried out by the director in relation to the
company (an objective test); and
*The general knowledge, skill, and experience the direc-
tor in question actually has (a subjective test).

Each director is judged by whichever standard applicable to the director is higher. Thus, a director with no more knowl-
edge, skill, and experience than reasonably expected is
judged under the objective test, but a director with more is
judged under the subjective standard.

Question 24

Duty to Exercise Independent Judgment

Answer 24

1. A director must exercise independent judgment, without
   subordinating their powers to the will of others.
2. However, this duty is not breached by a director acting in accordance with an agreement which has been entered into by the company, or in a way authorised by the company’s constitution/articles.
3. Neither does this duty prevent a director from seeking inde-pendent advice from experts, so long as the director makes
   the fnal decision and does not delegate their decision mak-
   ing to the expert.

Question 25

Duty to Avoid Conficts of Interest

Answer 25

1. A director must avoid a situation in which they have, or can
   have, a direct or indirect interest that conficts, or possibly
   may confict, with the interests of the company (for exam-
   ple, a situation that would beneft a spouse or close relative
   of the director or a situation that would beneft some other
   business in which the director has a signifcant interest).
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).
3. Note that no duty is breached if the confict of interest relates to: (1) a transaction with the company itself and the board knows the director has an interest (see Duty to Declare Inter-est, below), (2) the situation cannot reasonably be regarded as likely to give rise to a confict of interest, or (3) the matter
   has been authorised by the directors.

Question 26

Secret Proft
A director is accountable for any undisclosed profit obtained by virtue of his/her position as a director, the so-called “secret profit rule”.

Answer 26

A director should not make an unauthorised proft from
the company, sometimes referred to as a secret proft.
However, both the confict of interest and a secret proft can be authorised by the directors.

EXAMPLE
Company A owned a cinema, but the directors wanted to
acquire other cinemas to make the future sale of the compa-ny more attractive. Company A created a subsidiary to lease
two new cinemas, with a share capital of 5,000 £1 shares.
The two companies shared common directors. Company A
subscribed for 2,000 shares in the subsidiary. Directors of
company A subscribed for the balance. The company was
subsequently sold for a substantial proft. The proft the
directors made on their shares was a breach of their fdu-
ciary duty to the company, as it was made only by reason
of the fact that they were directors of the company and in
the course of the execution of their role as directors. The
directors would therefore have to account for their profts to
the company.

Question 27

Duty Not to Accept Benefts from Third Parties

Answer 27

A director is not allowed to accept a beneft from a third
party conferred by reason of being a director, or doing (or not doing) anything as director. However, there is an exception to this rule where the beneft cannot reasonably be regarded as likely to give rise to a confict of interest.

Question 28

Duty to Declare Interest in Proposed or Existing
Transactions or Arrangements

Answer 28

1. If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, or
   becomes interested in an existing transaction, they must give the other directors notice of the interest before entering into, or continuing with, the transaction or arrangement.
2. No particular form of disclosure is required. The statute
   permits disclosure by written notice, general notice, or
   oral notice at a meeting of the directors. The notice must
   include the nature and extent of the interest
3. Under the model articles, a director who is interested
   in an actual or proposed transaction with the company
   usually cannot form the quorum on that decision.
4. A director is not required to declare an interest if it could
   not reasonably be regarded as likely to give rise to a
   confict of interest, the other directors are already aware
   of it, or it concerns terms of the director’s service contract
   that have been or are to be considered by the board of
   directors.

Question 29

Loans to Directors

Answer 29

A company may not make a loan to a director or guarantee
or give security for a loan to a director by a third party unless
the transaction has been approved by the members of the
company.

Question 30

calling a booard meeting

Answer 30

1.Pursuant to the model articles, any director may call a direc-
tors’ meeting by giving reasonable notice of the meeting to
the other directors or by authorising the company secretary
(if the company has one) to give notice.
2. on notice, date time place
2.It is permissible to hold a board meeting by phone, by
video conference, or by other electronic means.

Question 31

Vote Required for Decisions

Answer 31

Decisions at a board meeting are made by a majority vote,
and the model articles allow for the chairman of the board to have a casting vote in the event of deadlock

Question 32

Quorum

Answer 32

The quorum (the number of directors who must participate to make the meeting valid) is usually no less than two, pursuant to the model articles. If a director has a personal interest in a matter, they may be prevented from counting in the quorum.

EXAMPLES
1) A company with the model articles has three directors:
A, B, and C. C is the chairman. If only C turns up to a validly
called board meeting, then no decisions can be made as the meeting is not quorate.
2) If both A and C turn up, then the meeting is quorate, so
long as they are not voting on a matter in which either is
personally interested. If C votes against a decision and A
votes for it, the resolution will fail, as there must be a major-
ity vote in favour. There is no need for C to use the chair-
man’s casting vote.
3) If C votes for the decision and A against, then the vote is
tied 1:1. C can now use the casting vote to pass the resolu-
tion.
4) If B also attends, then C will never need to use his casting vote so long as no director has a personal interest.

Question 33

Written Resolution

Answer 33

Directors can pass written resolutions without holding a
meeting. However if this process is used, the resolution
is considered approved only if all the directors approve it
(unanimous approval) rather than a majority.

Question 34

Removal

Answer 34

1.The power to remove a director is given to the sharehold-
ers under the Companies Act 2006 and is carried out by
way of a simple majority vote (an ordinary resolution) of the
shareholders. It is important to note that it is not possible to
remove a director by written resolution.
2. The shareholders’ statutory right to remove a director
overrides most provisions to the contrary in either the
articles or the director’s service contract.
3. However, in certain circumstances the shareholders’ removal power may be limited by a clause—known as a Bushell v Faith
clause—which gives weighted voting rights to a director who is also a shareholder in the event of a resolution to remove a director.
A clause in the articles of a company provided that in the
event of a resolution being proposed to remove a director,
the shares of that director would carry the right to three
votes per share. The company had £300 capital, with 100
shares held by three shareholders who were also directors. When two of the shareholders tried to remove the other as a director, the shareholder in question would have 300 votes and the other two, 200 votes. This type of clause is permis-sible, and therefore, the resolution to remove the director
could not be passed.
4.Removal of a director may trigger payments to compen-
sate for loss of ofce and damages for termination of the
service contract.
5.A shareholder wanting to propose a resolution to remove
a director must give the company a formal notice of the
intention to propose the resolution at least 28 days be-
fore a general shareholders’ meeting. The company must
give notice to the director, and that director has the right
to make a written representation (which the company
must send to shareholders) and to speak at the meeting
(even if that director is not a shareholder)

Question 35

Retirement by Rotation—Public Limited
Companies

Answer 35

In the case of a PLC, the model articles provide that at the
frst annual general shareholders’ meeting, all the directors
must retire from ofce. At every subsequent annual general
shareholders’ meeting any directors who have been appoint-ed by the directors since the last annual general sharehold-
ers’ meeting, or who were not appointed or reappointed
at one of the preceding two annual general shareholders’
meetings, must retire from ofce and may ofer themselves
for reappointment by the members. This system of retirement by rotation gives new shareholders that have subscribed for
shares since the last annual general shareholders’ meeting a chance to have a say in the composition of the board.

Question 36

Disqualifcation

Answer 36

A director can be disqualifed from ofce under the Compa-
ny Directors Disqualifcation Act 1986 (‘CDDA’) for general
misconduct in connection with companies or because of
unftness. An individual disqualifed under the CDDA may not be a director of a company, act as receiver of a company’s
property, or in any way take part in the promotion, formation, or management of a company.

Question 37

general
misconduct in connection with companies

Answer 37

*Conviction of an indictable ofence in connection with the promotion, formation, management, liquidation, or striking of of a company, with the receivership of
a company’s property, or with being an administrative receiver of a company;
*Persistent breaches of companies’ legislation requir-ing any return, account, or other document to be fled with the Registrar of Companies;
*Fraud, including fraudulent trading, in connectionwith the winding up of a company; or
*Summary conviction of an ofence in contravention
of, or failure to comply with, any provision of the
companies’ legislation requiring a return, account, or
other document to be sent to the Registrar of Com-
panies.

Question 38

Unftness

Answer 38

1.A director can be disqualifed under this heading—for a
period of between two and 15 years—for being an unft
director of an insolvent company, if the director’s conduct
as a director of that company (either taken alone or taken
together with that director’s conduct as a director of any
other company or companies) makes them unft to be
concerned in the management of a company.
2.A director can be disqualifed for wrongful trading under
the Insolvency Act 1986 or because they are an undis-
charged bankrupt.

Question 39

COMPANY SECRETARY
Public company directors have a duty to take reasonable
steps to ensure the secretary has the requisite knowledge
and experience to discharge the functions of secretary of the company and has one or more of the required qualifcations:

Answer 39

*Held the ofce of secretary of a public company for at
least three of the fve years immediately preceding this
appointment as secretary;
*Is a member of a specifed list of accountancy/secretarial
bodies;
*Is a barrister, advocate, or solicitor called or admitted in
any part of the United Kingdom; or
*Is a person who, by virtue of holding or having held any
other position or being a member of any other body,
appears to the directors to be capable of discharging the
functions of secretary of the company.

Question 40

Powers and Duties
of Company Secretary

Answer 40

1. There are no prescribed duties of a company
   secretary by legislation, but they are usually responsible for maintaining the books and records of the company, taking
   minutes at shareholder and board meetings, and making
   sure the company is in compliance with its statutory obliga-
   tions
2. The company secretary’s powers are usually expressly del-
   egated by the board of directors, but much like a partner in
   a partnership, a company secretary’s authority can also be
   implied or apparent. This means that the company can be
   bound by the acts of a company secretary even if they were
   not authorised by the board, if the contracts the company
   secretary entered were of an administrative nature, that is, of the type that a third party could reasonably assume would be within the powers of the company secretary.