Companies: ownership and management Flashcards
Types of director - De facto director
Anyone who acts as a director, although not validly appointed as one
Types of director - Shadow director
Someone ‘in accordance with whose directions or instructions the directors are accustomed to act’
(directors follow their directions)
Types of director - Alternate director
A director may appoint an alternate director to attend and vote at board meetings when he is unable to
Types of director - Executive director
In charge with performing a specific role e.g finance director
- full time employee involved in management
Types of director - Non-executive director
Who does not have a particular function but generally just attend board meetings
- no salary, usually part time
- receive nominal fee
- exerts control over executive directors
Types of director - Managing director
Usually provide for the directors to appoint one or more of their number to be managing director, carrying out day-to-day functions
Types of director - Chairman
- responsible for ensuring procedure in meetings is followed
- usually a non-executive director
Types of director - De Jure director
A person who has been appointed following the correct legal procedure
Removal of a director
- Death
- By members
- Disqualification
- Resignation
- Not standing for re-election
- Required to do by article
- Prohibition by law
- Result of bankruptcy
what are the requirements for removal of a director?
ordinary resolution with special notice
Notice required of resolution to remove a director
28 days
Time period to notify Companies House of new directors
14 days
Resolution required to appoint a director
ordinary
Notice needed to remove a director
special
Director’s powers - Statutory (general)
The directors are statutorily bound to exercise powers only ‘for the purpose for which they are conferred’
Director’s powers - 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
Director’s powers - Restriction in Articles
For example the articles may set a maximum amount that the directors are entitled to borrow, any greater amount needing approval
Director’s powers - Members
The members can exercise control over the directors’ powers:
- By passing special resolution to alter the articles
- Removing directors
Directors’ authority - Express actual
The actions of a director with express authority will bind the company
Directors’ authority - Implied
Managing directors and to some extent other executive directors, are much more likely to bind the company by their actions.
A company secretary has limited authority to enter into contracts.
(third party assumes they are director)
Directors’ authority - Ostensible
If the board permits a director to behave as if he were a managing director or give the impression that he is one, that director will have apparent or ostensible authority to enter a contract
Directors’ duties - To act within powers
- Must only do what they have authority to do
- Must use powers for the purpose given
If director act outside their powers the transaction will be invalid
Directors’ duties - To promote the success of the company
- Act in the best interest of the company
- Consider long term and short term effects of decisions
- Consider impacts on different stakeholders
Directors’ duties - To exercise independent judgement
- Ignore own personal interest and bias in any decision being taken
Directors’ duties - To exercise reasonable skill and care
- Objective test - the general knowledge skill and experience that could reasonable be expected of a director
- Subjective test - the actual knowledge, skills and experience held by the director
Directors’ duties - To avoid a conflict of interest
should avoid placing self in situations where own interest could conflict with those of the company
Directors’ duties - Not to accept benefits from third parties
should not accept benefits that may interfere with exercise of independent judgement
Directors’ duties - To declare an interest in proposed transaction
- should disclose to the board
- before the transaction is entered into
Wrongful trading
no reasonable prospect that company could avoid insolvent liquidation
- directors and shadow directors are liable
Wrongful trading - Consequences
- contribute to company assets
- upto 15 years disqualification
Fraudulent trading
business is carried on with intent to defraud
- any person knowingly to carry on the business is liable
consequences of fraudulent trading
- Civil action (contribution to assets, disqualification)
- Criminal Prosecution (prison,fine)
what is a shareholders agreement?
Contractual agreement setting out the members’ rights and duties
- private document and doesnt have to be filed with registrar
members rights
- to be sent a copy of annual accounts and reports
- to require the directors to call a general meeting
- to appoint a proxy to exercise their rights
If a company refuses to respect the member’s rights, they can take legal action to enforce them
Approval of directors’ actions - Service contracts
Approval is required if the contract guaranteed for a director is more than 2 years by members
Approval of directors’ actions -Substantial property transactions
If a director buys from, or sells to, the company an asset of a substantial value, the transaction must be approved by the members. If not, the transaction is voidable by the company and the director in question may have to repay to the company any gain he has made or any loss the company has suffered.
A substantial value is either:
- more than £100,000, OR
- more than £5,000 AND more than 10% of the company’s assets.
Approval of directors’ actions - Loans to directors
If the company plans to make a loan to a director, or give a guarantee for a loan to a third party on behalf of a director, they must first provide a document to the members setting out the details and gain those members’ approval.
Failure to do so allows the company to treat the transaction as voidable and also can mean the director in question must repay the company any gain he has made or any loss the company has suffered.
Similar rules apply for loans made to someone connected to a director.
Approval of directors’ actions - Loans to directors
EXEPTIONS
- the loan is to be used to meet expenses incurred on company business or defending the company in legal / regulatory actions
- the loan is for a minor amount
- the loan is made between two group companies
- the company’s usual business is lending money and the loan was made on comparable terms to those it would be made to a member of the public.
Approval of directors’ actions - Payments for loss of office
Any ex-gratia (i.e. not in the director’s contract) payments made to a director on loss of office / retirement should be approved by the members. To allow them to do this, they should be provided with a memorandum setting out the details of the payment.
If approval is not given, the payment is treated as if it were on trust for the company, and the company can claim it back.
The director who authorised the payment can also be made to repay the company for any losses it has suffered.
Minority protection - Variation of class rights
Holders of more than 15% of a class of shares to the court for cancellation a variation of rights
Minority Protection - Company meeting
- Can force the inclusion of a resolution on the agenda of the AGM
- Can require directors to call a GM
Minority protection - Notice of members’ resolutions
Must be given by the company if required to do so by members holding more than 5% of voting rights.
Minority protection - Redeeming or purchasing shares by payment from capital
Any member or creditor can apply to the court to prohibit the transaction
what is a proxy
can attend meetings, vot and speak on behalf of member for whom he or she is acting
what is a quorum
minimum number of member that need to be present at a meeting to validate business
percival vs wright
directors owe no general duty to individual members
problem with quorum (show of hands)
members may not get total voting rights therefore members with 10% more rights can call for a poll
rules for single member companies
- can conduct business without need for notice or minutes
- must have full written record of any decision taken in general meeting and must be retain for 10 years
what requires a special resolution
- alteration of articles
- reduction in capital
name three matters that concern directors but require approval of the members in a general meeting and state the consequences of breach
- Service contract - provision is void and provision for termination
- Substantial property transactions - contract is voidable and director liable for any gain
- Loan to directors - contract is voidable and director liable for any gain
- Payment for loss of office - payment is held on trust for the company, director liable to indemnify for any loss
under what two circumstances is a public company required to call a general meeting?
- An AGM every year
- wherever it net assets are half or less of its called up share capital
three instances where a written resolution cannot be used:
- in a public company
- to remove an auditor
- to remove a director
