Companies: Ownership and Management

Question 1

What are the types of director and how do they come into office?

Answer 1

Director - appointed by existing directors by ordinary resolution
De facto - acts as a director even though not appointed
Shadow - acts like a director, gives director directions/instructions
Alternative - proxy director
Executive - employee with specific role
Non-executive - no particular function, attends board meetings
Managing director - daily management

Question 2

What are the key points of a director?

Answer 2

16+
Not disqualified
Every company must have at least 1 who is natural person, public should have 2
Actions are valid even if appointment found to be defective or void
Change in director must be recorded in register and notify registrar within 14 days

Question 3

How might a director leave?

Answer 3

Death
Removal
Disqualification
Resignation
Required by articles
Prohibition by law
Bankruptcy or written medical opinion

Question 4

What are the restrictions on how director’s powers are executed?

Answer 4

Statutory general
Statutory specific - alteration of articles and reduction of capital need special resolution
Articles - max amount of borrowings
Members - removing directors, special resolution to alter articles

Question 5

What is the process of the removal of a director?

Answer 5

Removal by ordinary resolution, special notice of 28 days, director can address meeting to request written representation be circulated
If he has service contract, can sue for breach of contract
Director who is also member may have weighted voting rights so can automatically defeat motion of removal
Draft shareholder agreement to say a member of each class of share must be at meetings to constitute a quorum

Question 6

What are the directors’ duties?

Answer 6

Accountability
Success
act with Powers
Independent judgement
Reasonable skill
declare an Interest
No benefits
ASPIRIN

Question 7

What must a director consider to promote the success of the company?

Answer 7

Long term consequences of decisions
Interests of employees
Foster company’s business relationships
Impact of operations on community/environment
Desirability maintaining reputation for high standards
Act fairly between members

Question 7

What must a director do to act within his powers?

Answer 7

Act in accordance with constitutions
Exercise powers only for purpose conferred
If infringed, transaction invalid unless approved or ratified
Director’s can’t issue shares to help reach a decision

Question 8

When is a conflict of interest duty not infringed?

Answer 8

When authorised by directors
Private company - provided company’s constitution does not invalidate authorisation
Public company - provided company’s constitution expressly allows it
Relevant director cannot be counted towards quorum on determining if authorisation given

Question 9

What are the consequences of a breach of director duties?

Answer 9

Make good any loss suffered, including secret profits
Contracts entered between company and director rendered voidable
Property recovered if still in possession
Injunction
More than 1 director in breach, liability is joint and several

Question 10

Where should a notice of conflict of interest be given?

Answer 10

Board meeting
Writing
General notice

Question 11

What is wrongful trading?

Answer 11

Where a company goes into insolvent liquidation and at some time before commencement of winding up, director knew/should have known no reasonable prospect that company could have avoided insolvent liquidation

Question 12

When will no declaration of wrongful trading be made?

Answer 12

If court is satisfied that director took all steps that should be taken to minimise potential loss to creditors

Question 13

What is fraudulent trading?

Answer 13

Where business of company carried on with intent to defraud creditors or any fraudulent purpose

Question 14

What are the consequences for criminal/civil offences of fraudulent trading?

Answer 14

Criminal - applies whether or not company wound up, fine/10 yrs prison
Civil - only when wound up, director must make a contribution to the assets

Question 15

What types of disqualification can be made and what are the grounds?

Answer 15

Up to 15 yrs - serious offence relating to promotion, formation, management, liquidation/ guilty of fraudulent trading/ in public interest/ breaches of competition law/ wrongful trading
Up to 5 yrs - persistently in default in relation to provisions of company legislation
2-15 years - conduct as director makes unfit for management
Alternative - undertaking from director to refrain from acting in management

Question 16

What are the consequences of breaching a disqualification order and what circumstances may result in lower disqualification?

Answer 16

Fine or prison
Lack of dishonesty
Loss of own money
Absence of personal gain
Efforts to mitigate
Low likelihood of re-offending

Question 17

How are members bound?

Answer 17

By articles of association as if a binding contract
Private companies have shareholder’s agreements

Question 18

What rights do members have?

Answer 18

Sent copy of annual accounts and reports
Require directors to call general meeting
To appoint a proxy in writing

Question 19

What matters for directors require member approval and what are the consequences of a breach?

Answer 19

Director service contracts term of 2 years - terminated with reasonable notice
Acquiring non-cash assets (>10% of asset value and >5000 or >100,000) - voidable and liable
Loans to directors - voidable and liable
Payment for loss of office/retirement - held on trust, liable

Question 20

What is the minority protection rule in Foss and Harbottle?

Answer 20

Majority shareholders control company, minority have no course of action if unhappy with action taken by majority

Question 21

What are the exceptions to the Foss and Harbottle rule?

Answer 21

Where statute gives specific powers
Derivative actions
Unfairly prejudicial conduct

Question 22

What situations are there when statute gives specific powers to minority shareholders?

Answer 22

Cancellation of variation of class rights - >15% of class of shares
Right to call meeting - >5%
Notice of member’s resolution - >5%
Payment of capital for redemption of shares of private company - any shareholder can prohibit in court
Registration of limited as unlimited - any member

Question 23

What will the court consider before granting permission of a derivative claim with prima facie case?

Answer 23

Acting in good faith
Importance that promoting success of company would attach to it
Authorisation/ratification likely
Company decided not to pursue claim
Member could pursue claim in own right rather than on behalf of company
Views of members with no personal interest

Question 24

What are examples of unfairly prejudicial conduct?

Answer 24

Exclusion/removal from board where director had legit expectation of being involved in management
Improper allotment of shares
Inaccurate statements to shareholders
Diversion of business to director-controlled company

Question 25

What are examples that aren’t unfairly prejudicial conduct?

Answer 25

Failure of parent company to pay debts of subsidiary
Non-compliance with stock exchange rules etc
Failure by fellow director to increase petitioner’s shareholdings
Reasonable offer to buy out shares of excluded shareholder
Based on prejudice as a member, not employee/creditor
Provision cannot be invoked by shareholders when don’t like the way company is run

Question 26

What are the consequences of a successful petition for unfair prejudicial conduct?

Answer 26

Regulating future conduct of affairs
Authorising any person to bring legal proceedings on behalf of company
Requiring company to do act omitted/ refrain from act complained of
Requiring alterations to articles
Providing purchase of shares of minority by other members or company at fair price

Question 27

What are examples of a just and equitable winding up?

Answer 27

Company formed for illegal/fraudulent purpose
Deadlock in management
Director deliberately withheld info so shareholders had no confidence in management

Question 28

Who may call a general meeting?

Answer 28

Company director - 14 days clear notice, 90%/95% (public) shareholder consent to short notice, time place and indication of key business
Members with >5% of shares - proposed resolution, directors have 21 days to call meeting, held within 28 days of notice
Auditor - notice of resignation, statement of circumstances
Court - own or request of shareholder
PLC in crisis - directors call when net assets fall to half or less of called up share capital

Question 29

What are the key points to an annual general meeting?

Answer 29

Each financial year, 6 months after accounting date
Fine for failure to do so
21 day notice period
Private company don’t need one
Appointment of directors, approval of accounts and a dividend

Question 30

What are the types of resolution?

Answer 30

Ordinary - >50% votes
Special - >75% - resolution filed within 15 days
Written - passed within 28 days of circulation
Special notice - >50% - 28 days notice, removal of auditor or director
Notice period - add 2 days as excludes day notice given and day of meeting

Question 31

Who needs to be present at meetings?

Answer 31

quorum and minimum of 2 members

Question 32

How are votes taken at meetings and how long are records kept?

Answer 32

Show of hands
Poll vote - votes on number of shareholdings, disregards show of hands
10 yrs - minutes and resolutions

Question 33

What are class meetings?

Answer 33

Meetings held for each class of shareholders

Question 34

How does a general meeting work with single member companies?

Answer 34

Informally without notice or minutes
Written record of decisions made in GM
Comply with filing records