COMPANIES—DIRECTORS AND OFFICERS

Question 1

2

Appointment of directors

Answer 1

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.
2. The first director(s) of a company is/are those specifed on the registration documents on incorporation.

Question 2

2

Procedure forAppointing New Directors

Answer 2

1. The appointment provisions for subsequent/new directorsare typically found in the company’s articles.
2. For example,the model articles for a company limited by shares provide
   that a director can be appointed by an ordinary resolutionof 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 within 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

2

De Facto Directors

Answer 6

1. 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 director.
2. 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 influences the acts of a company’s
   directors may be considered a shadow director, more technically defined as a person in accordance with whose directions or instructions the directors of the company are accustomed to act.
2. The Companies Act 2006 treats shadow directors the same as de facto or de jure directors.
3. Note that advisors acting for the company in a professional capacity are specifcally excluded from the definition of a shadow director by the Companies Act 2006.

Question 8

3

Executive and Non-Executive Directors

Answer 8

1. It is a function of good corporate governance for a board to consist of a mixture of executive and non-executive directors.
2. Executive directors are responsible for the **day-to-day **running of the company and are employees of the company
3. 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 directors’ 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 mcollectively as a board. However, it is permitted for the board to delegate their powers to a person or committee as they think fit.

Question 12

Decisions Requiring ShareholderApproval

Answer 12

1. Some decisions by the directors require the prior approval of the shareholders.
2. Many of these decisions allow the shareholders to approve a transaction in which a director has a financial interest.

Question 13

Decisions Reserved to Shareholders

Answer 13

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

Question 14

2

Directors as Agents of the Company
Actual Authority

Answer 14

1. 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.
2. 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

3

Directors as Agents of the Company
Apparent or Ostensible Authority

Answer 15

1. apparent authority (also called ‘ostensible authority’) 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.
2. 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 authority could arise through past dealings.
3. 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 office, that they had ceased to hold office, or that they were not entitled to vote on the matter in question.

Question 16

2

Execution of Contracts and Documents

Answer 16

1. Companies may enter contracts under their seal or by a person with authority to act on behalf of the company.
2. Companies may execute documents either by affixing 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

3

Duties

Answer 17

1. Directors’ duties are derived from a number of sources, mainly the common law, the articles, and statute.
2. Directors will also have obligations that arise by virtue of their contracts of employment with the company.
3. 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 profit was made or benefit gained, to account to the company for it.

Question 18

Basic Fiduciary Duty

Answer 18

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

Question 19

3

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

2

Liability May Extend Beyond Term

Answer 20

1. It is important to note that directors may still be subject to statutory and fiduciary duties owed for the period when they were a director, even after they have ceased being a director.
2. For example, a person who was a director may not exploit property, or information, or opportunities of which the director 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. **
3. 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 community 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 company.

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

2

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

1. 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
2. The general knowledge, skill, and experience the director 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 knowledge, 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

3

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 final decision and does not delegate their decision making to the expert.

Question 25

3

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 conflicts, or possibly may conflict, with the interests of the company (for example, a situation that would beneft a spouse or close relative of the director or a situation that would benefit 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

2

Secret Profit
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

1. A director should not make an unauthorised proift from the company, sometimes referred to as a secret profit.
2. However, both the conflict of interest and a secret profit 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 profit. The proft the directors made on their shares was a breach of their fiduciary 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

5

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, ororal notice at a meeting of the directors.
3. The notice must include the** nature and extent** of the interest
4. 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.
5. A director is not required to declare an interest if it could not reasonably be regarded as likely to give rise to a conflict 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 directors’ 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

3.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 majority vote in favour. There is no need for C to use the chairman’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 resolution.
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

6

Removal

Answer 34

1. The power to remove a director is given to the shareholders 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 Faithclause—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 compensate for loss of office 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 before a general shareholders’ meeting.
6. 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

3

Retirement by Rotation—Public Limited
Companies

Answer 35

1. In the case of a PLC, the model articles provide that at** the first annual general shareholders’ meeting**, all the directors must retire from office.
2. 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 office and may offer themselves for reappointment by the members.
3. 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

1. A director can be disqualifed from office under the Company Directors Disqualifcation Act 1986 (‘CDDA’) for general** misconduct** in connection with companies or because of unftness.
2. 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

1. Conviction of an** indictable offence** 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;
2. Persistent breaches of companies’ legislation requifing any return, account, or other document to be filed with the Registrar of Companies;
3. Fraud, including fraudulent trading, in connectionwith the winding up of a company; or
4. Summary conviction of an offence 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 Companies.

Question 38

2

Unftness

Answer 38

1. A director can be disqualifed under this heading—for a period of between 2 and 15 years—for being an unfit 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 unfit 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 undischarged bankrupt.

Question 39

4

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

1. Held the office of secretary of a public company for at least three of the five years immediately preceding this appointment as secretary;
2. Is a member of a specifed list of accountancy/secretarial bodies;
3. Is a barrister, advocate, or solicitor called or admitted in any part of the United Kingdom; or
4. 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

2

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 obligations
2. The company secretary’s powers are usually expressly delegated 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.