COMPANIES OWNERSHIP AND MANAGEMENT

Question 1

Types of director (6 types)

Answer 1

Anyone who occupies the role of the director (even if not formally appointed)

Director:
Articles
Existing director
ORINARY RESOLUTION (PLC should vote on directors individually)

De facto directors:
Acts as director even if not formally appointed
Same powers as a formally appointed one

Shadow director:
Acts as a director because of instructions given
Must act in accordance of a director
QUESTION OF FACT

Alternate director:
Usually in articles
When a director is unable to attend a board meeting

Executive director:
Performs a specific role
Usually an employee
Articles usally say that they can appoint one or more execs, on remuneration and powers they see fit.
If ceases, office will also terminate, can claim for breach of service contract

Non-exec director:
Does not have a particular function
Attends board meetings usually
Chairman is usally non exec

Managing director:
Articles usually allow appointment of one or more
Day to day management functions

Question 2

Key points

Answer 2

16 years and over

Must not be disqualified under companies disqualification act or articles.

Required to have at least one director who is a natural person (not a corporate director), PLC must have 2.

Directors actions are valid even if appointment is found to be defective / void.

Changes in directors of a company should be recorded in the companys register of directors, MUST NOTIFY REGISTRAR WITHIN 14 DAYS

Question 3

Why removal of a director

Answer 3

Death
Removal
Disqualification
Resignation
Required to do by the articles: prohibition by law, bankruptcy or medical opinion.

Question 4

How to remove a director

Answer 4

ORDINARY RESOLUTION WITH SPECIAL NOTICE (28 days before a meeting)

Director then has opportunity to address meeting and request written representations he has made to be handed out at meeting.

If directors has a service contract he may be able to sue for breach of contract e.g. damages of not getting job back.

Director who is also a member may also have weighted voting rights, therefore he cant auto defeat to remove him.

May be a shareholders agreement requiring someone who holds each class of share be present to create a quorum, therefore a shareholder not attending could prevent removal.

Question 5

Directors powers

Answer 5

Defined by company articles - generally authorised to exercise all powers of the company.

Directors are not agents of the members but of the company.

No rules governing board meetings - directors do not need to be physically present.

Statutory (general):
Bound to exercise powers ‘for the purpose for which they are conferred’

Statutory (specific):
e.g. alternation of articles and reduction of capital need a SPECIAL RESOLUTION, must be retained before in a meeting before they can act.

Articles:
May set a max amount directors are entitled to borrow, greater amounts need approval in general meeting.

Members: can exercise control over directors powers
SPECIAL RESOLUTION to alter articles, reallocate powers between board and general meeting.
Or remove directors from office (special notice / written resolution)

Question 6

Directors authority

Answer 6

Express actual:
To directors binds company

Implied: formal
Managing director has implied usual authority to enter into business contracts.
Company sec may have limited authority to enter into contracts.
Restrictions need to be communicated to third parties.

Ostensible: informal
Board may permit a director to act as an MD therefore assume ostesentile / apparent authority to enter into business contracts.

Question 7

Authority under companies act

Answer 7

Seeks to protect a third party in good faith, even where directors authority was limited.

• Third party is deemed to be acting in good faith unless proved otherwise (not deemed in bad faith even if knowing of limitation)
• Limitations on directors authority will be disregarded
• Not apply when person is connected, contract could be voidable e.g. party should account for gain and compensate party for any loss.

Question 8

Directors duty

Answer 8

ASPIRIN
Accountability
Success
Powers (act within)
Independent judgement
Reasonable skill and care
Interest (declare any)
No benefits

Question 9

Directors duty - Powers (act within)

Answer 9

1. Act in accordance with articles etc
2. Exercise powers only for purpose for which they are conferred e.g. unless a shareholder overrides

If directors exercise their rights for a collateral purpose - INVALID unless ratified at a general meeting.

If used irregular use of powers to allot shares - votes attached to new shares may not be used in a decision at general meeting.

e.g. cant use powers to destroy existing majority or creating a new majority.

Question 10

Directors duty - Success promotion

Answer 10

Good faith for the benefit of the members as a WHOLE

1. Long term consequences of any decision
2. Interests of a companies employees (as employees help co success)
3. Foster relationships with suppliers, customers and others
4. Impact on community and environment
5. Maintain reputation for high standards of conduct (desirability)
6. Need to act fairly as between members of the company

Question 11

Directors duty - independent judgement

Answer 11

Does not mean he is not exercising independent judgement when:

• Agreement entered by the company restricts future exercise of discretion by members
• Companies constitution
• Accept if shareholders tell you to

Question 12

Directors duty - reasonable skill and care

Answer 12

Reasonably diligent person.

General knowledge, skill and experience e.g. valid amount

Just attending meetings is not sufficient.

Question 13

Directors duty - avoid a conflict of interest

Answer 13

Must avoid this situation

Duty still applies when authorised by directors:

1. LTD companies articles does not disallow these transactions
2. PLC articles must expressly allow for authorisation

Relevant directors votes are not counted and cant go towards a quorum in determining whether authorisation should be given - duty does not apply when director has declared his interest in a transaction.

Question 14

Not to accept benefits from third parties

Answer 14

1. Being a director
2. Doing or not doing anything as a director

Unless acceptance of benefit can’t be reasonably regarded as likely to be a conflict of interest.

Question 15

Declare an interest in the proposed transaction

Answer 15

If the director or ought to reasonably be aware of, must be declared to directors (unless reasonably regarded that it does not give rise to a conflict of interest)

Notice can be made:
- At a board meeting
- Notice in writing e.g. specific transaction
- General notice, must take reasonable steps to ensure this is taken up in board meeting e.g. ongoing.

If notice is made, no need for approval of members UNLESS:
- Articles say so
- Arrangement between a director and the company for a transfer of a ‘substantial non-cash asset’

Question 16

Breach of directors duty

Answer 16

Directors duty is owed to the company and not the individual shareholders.

Consequences of breach:
- Make good any loss suffered by the company including secret profits
- Contract entered into by company and director may be voidable
- Property taken by director from company can be recovered if still in possession
- Injunction (court order to stop doing something) if the breach is continuing
- More than one director liability is joint and several
- Dismissal

Question 17

Other statutory controls on directors’ behaviour

Answer 17

Penalise directors responsible for mismanagement, often results in the company wound up.

Administrators, receivers and liquidators must consider what action should be taken:

• Apply for court order under wrongful or fraudulent trading, director is required to contribute to assets ‘just and reasonable’ amount.
• Statutory duty to report to department for business, inovation, skills - where conditions for disqualification have been met.
• Sec of state then decides whether to apply for a court order, MUST BE WITHIN 2 YEARS on the date at which the company become insolvent.

Question 18

Wrongful trading

Answer 18

Only ever in liquidation.

Directors knew or should have known there was no reasonable prospect that the company would have avoided liquidation.

• Reasonably diligent person similar post to a director would have know.
• If has a special skill may be judged on relevant capcity.
• Wrongful trading WILL NOT be passed in court if court can see that director took every relevant step to minimise loss to creditors.

CONSEQUENCE:

• Director found liable may have to contribute to company assets.

Question 19

Fraudulent trading

Answer 19

e.g. pyramid scheme (recruiting new members to make money rather than trading)

• Carried on with intent to defraud creditors etc. for a fraudulent reason.
• Any person who is a knowing party can commit the offence.
• Only persons who decide to carry on business are liable.

CONSEQUENCE:

• CRIMINAL OFFENCE
  Whether of not co. is liquidated.
  FINE AND / OR IMPRISONMENT UP TO 10 YEARS
• CIVIL OFFENCE
  Only on liquidation
  Order director to make contribution to assets.

Question 20

Disqualification of directors

Answer 20

Company directors disqualification act:
- Stops directors failing companies

UP TO 15 YEARS:
- Serious offence e.g. promotion, formation, management or liquidation
- Fraudulent trading (in course of winding up)
- In public interest
- Breaches of competition law
- Wrongful trading

UP TO 5 YEARS:
- Persistently in default in legislation e.g. late filing
- 3 convictions in 5 years is considered persistent

2 YEARS TO 5 YEARS:
- Director of a company that has become insolvent (at the time of being director or subsequently) AND conduct of that business makes him unfit to manage a business (may take into account conduct of other business)
- Can be disqualified even if take no active part in the business.

ALTERNATIVE TO DISQULIFICATION:
- Court may accept an undertaking that director will not act in the management of a company where pled guilt in a case.

Question 21

Disqualification of directors - consequences

Answer 21

Breach can lead to FINE OR IMPRISONMENT.

Lower period of disqualification (given by court): e.g. 2 years instead of 5

• Lack of dishonesty
• Loss of directors own money in company
• Absence of personal gain
• Efforts to mitigate situation
• Low likelihood of reoffending

Question 22

Members

Answer 22

Anyone entered on companies register is a member (shareholders)

Regulation:
- Articles
- Shareholders agreement (maybe)

Rights:
- Copy of annual account / reports
- Require directors to call a general meeting
- Appoint a proxy (exercise member rights to vote, speak, attend meetings) in writing.

Question 23

Members approval of directors actions

Answer 23

MATTER REQURING APPROVAL AND CONSEQUENCE OF BREACH

Directors service contracts with a term of 2 years or more:
- Terminated giving reasonable notice

Substantial property transactions (also relates to stock / furniture) - director acquires ‘substantial non-cash assets’ - aggregate value must be more than the lower of 1. Exceeds 10% of companies asset value and is more than 5k 2. Exceeds 100k (not in service contracts or loss of office):
- Voidable unless members give approval in a reasonable period.
- Liable to account for any gain and indemnify co against loss / damage.

Loans to directors (approval is required for any loan by a co to a director or any guarantee or security of a co):
- Voidable unless approved by the company in a reasonable period.
- Liable to account for any gain and indemnify co against loss / damage.

Payments for loss of office (approval required for payments or benefits to be made on loss of office or retirement) - exempt under £200 & discharge of legal obligations (contractual):
- Payment is held on trust (co become beneficiary) for the co. - director who authorises payment is liable to indemify co for loss of damage.

Question 24

Minority protection

Answer 24

Rule in Foss Vs Harbottle
- Majority of shareholders control, GENERALLY minority have no course of action.
- Shareholders have no duty to act in the interests of the company.

Shareholder sued the directors for selling land at an inflated price to the company

Company must take actions against directors not shareholders.

May exceptions to this rule……

Question 25

Minority protection - where statue gives powers

Answer 25

Cancellation of variation of class rights - equal to or more than 15% class shares

Right to call a company meeting - equal to or more than 5% shares

Notice of members resolutions - equal to or more than 5% shares

Payment out of capital by LTD for redemption or purchase of shares - any shareholder can apply to court to prohibit

Registration of LTD as unlimited - any member can prevent

Question 26

Minority protection - Derivative actions (on behalf of company)

Answer 26

Directors duty of care to company and not shareholder, therefore only company can bring action.

Member can bring action on behalf of the company for actual or proposed breach of duty / negligence. Member must first make a ‘prima facie’ case to court to obtain permission to continue a claim.

Court will consider before giving permission:

• If member is acting in good faith - MOST IMPORTANT
• Importance of the person promoting the faith of the company
• Authorisation or ratification of the co is likely
• Why company has decided to pursue the claim
• If member could pursue the claim personally rather than on behalf of the company (unfairly prejudicial - not in the best interests of the shareholders as a whole)
• Views of members that have no personal interest in the matter.

Negligence, default, breach of duty or breach of trust against officer of company may be excused if considered he acted reasonably considering circumstances.

Question 27

Minority protection - unfairly prejudicial conduct (on your on behalf) - 3 examples, 7 NOTS.

Answer 27

Member may apply at any time for any reason. Could just be proposed conduct.

EXAMPLES:

• Exclusion and removal from board when a director has an expectation of being involved in management of a quasi partnership.
• Improper allotment of shares - allotment of shares by majority shareholder to increase his holding
• Diversion of a companies business to director controlled.

NOT ACCEPTED:

• Failure by a parent to pay debts of sub
• Non-compliance with stock exchange rules, city code, cadbury code.
• Failure by director and majority shareholder to increase the petitioners shareholding.
• Reasonable offer to buy out shareholder (as likely to be accepted by court)
• Compliant must be based on prejudice to member as a member and not as any other role e.g. employee / unpaid creditor
• Provision can’t be invoked by shareholders when they don’t like the way the business is run, even when bad management may amount to unfairly prejudicial conduct.
• Courts may take petitioners conduct into account when considering unfair prejudice.

Question 28

Minority protection - unfairly prejudicial conduct (on your on behalf) - CONSEQUENCES

Answer 28

When petition is successful, court may give orders it thinks fit:

• Regulating future conduct of the companies affairs e.g. regulation of board meetings
• Authorising any person to bring legal proceedings to the company
• Requiring a company to do an act that is omitted
• Requiring company to make changes to articles or not to make changes without court allowing
• Providing for purchase of shares from minority by other members or company itself at a fair price - MOST LIKELY AS THE LEAST ADMIN

Question 29

Minority protection - just and equitable winding up (on own behalf)

Answer 29

Petition to the court for winding up if just and equitable to do so.

Any shareholder, any time, any reason.

Last resort, must have taken other necessary steps to avoid.

Examples of successful claims:

• Company was formed for an illegal / fraudulent purpose.
• Complete deadlock in co affairs e.g. refuse to speak to each other
• Directors deliberately withheld information, therefore shareholders has no confidence in management.

Question 30

Meetings and resolutions - general meeting (shareholders vote through resolutions)

Answer 30

WHO CAN CALL THE MEETING

Company director (through co sec):
- 14 DAYS clear notice (exclude date of posting & meeting)
- Can be reduced if 90% LTD, 95% PLC shareholders consent to short notice.
- Notice to ALL shareholders & directors
- Time & place
- Indication of key business

Members with more than 5% shares:
- Can specify a proposed resolution
- Directors have 21 DAYS to call a meeting
- Meeting must be held within 28 DAYS after notice

Auditor:
- Notice of resignation
- With statement of circumstances
- And request a meeting

The court:
- Own motion
- At the request of a shareholder

PLC in crisis:
- Directors must call when ‘net assets fall to half or less of its called up share capital’

Question 31

Meeting and resolutions - annual general meeting

Answer 31

Plc must hold AGM each financial year not more than 6 mths after financial reference date.

Failure can result in FINE FOR COMPANY AND OFFICERS.

21 DAYS CLEAR NOTICE, ALL members can consent to short notice.

LTD is not required to hold AGM.

Business:
1. Appointment of directors and auditors
2. Approval of accounts
3. Approval of dividend

Question 32

Meeting and resolutions - resolutions

Answer 32

Ordinary - over 50%:
- Where special resolution is not specifically required by articles.

Special - equal to or over 75%:
- Specifically required by articles - change of name, articles, reduction of share cap, winding up company.
- Text of resolution must be included in meeting
- Resolution must be filed with the registrar WITHIN 15 DAYS.

Written resolution (LTD only) - over 50%:
- For any business matter EXCEPT - removal of a director / auditor
- Must be passed WITHIN 28 DAYS of circulation
- Assumed to be passed once reached majority

Special notice - over 50%:
- 28 DAYS NOTICE of meeting is needed.
- Used for removal of an auditor / director.

NOTICE PERIODS EXCLUDE THE DAY OF NOTICE & DAY OF MEETING

Question 33

Proceedings at meetings

Answer 33

Meetings must not proceed unless quorum is present.

CA Requires a min of 2 members (unless 1 member company).

Votes initially by a show of hands but any member with a required number of shares can request a poll vote (allows them to cast as many votes as their shareholding grants them)

Records of meetings must be kept for 10YEARS, must be available for inspection of members e.g. minutes and resolutions.

CLASS MEETINGS:
- Company with several different classes of shares may hold class meetings.
- Most statutory provisions apply to these.

Question 34

Single member companies

Answer 34

Can conduct business informally without notice or minutes.

Must still provide a written record of any decision that should have been taken in a general meeting.

Must comply with filing requirements.