Company Decision Making Flashcards
It is 11 January. A company’s current accounting period is 31 December, having already been changed once more than six years ago from 30 September.
Can the company alter its accounting reference date for a second time to 30 June, and does this require a shareholder resolution?
A-Having already altered the accounting reference period once since the company was incorporated, it is not possible to change it again.
B-The company can alter its accounting reference period but not until 30 June as the extension cannot result in a new period of more than 15 months.
C-The company can change the accounting reference period as it wishes and no shareholder resolution is required.
D-The company can change the accounting reference period as it wishes but an ordinary resolution of the shareholders will be required.
E-The company can change the accounting reference period as it wishes but a special resolution of the shareholders will be required.
Option C is correct. Whilst there is no limit on the number of times the accounting reference period can be changed, a further change will not be effective if notice is given less than 5 years after the end of an earlier accounting reference period extension. The extension must not result in a new period exceeding 18 months. The decision is one that can be made at a board meeting. No shareholder resolution is required.
Option A is wrong. The company can on these facts change their accounting reference period for a second time.
Option B is wrong. An extension must not result in a new accounting reference period of more than 18 months (which it does not), not 15 months.
Options D and E are wrong. On the facts, the decision to change the accounting reference period is one that the board of directors can make and no shareholder resolution is required.
A private company limited by shares has three shareholders. The company’s issued share capital is 3,000 ordinary shares. A woman holds 1,800 shares, a man holds 900 shares and a girl holds 300 shares. The company has adopted the model articles without amendment.
The company wishes to change its name.
Who needs to vote in favour in order to pass the decision?
A-Any two shareholders
B-The woman and the man
C-The woman only
D-The man only
E-The man and the girl
Changing the company name requires a special resolution (S77 Companies Act). A special resolution requires 75% of the shareholders to agree (s283). The woman holds 60% of the voting rights, the man holds 30% and the girl holds 10%. The only way the members will achieve 75% is if both the woman and the man vote in favour. Therefore, B is the correct answer.
A company is proposing to enter into a contract to sell a factory to one of its directors. The factory is valued at £80,000.
Following the sale, what must be filed at Companies House?
A-The shareholders’ resolution approving the sale.
B-The shareholders’ resolution approving the sale, a memorandum of the terms of the sale agreement and a fee.
C-The shareholders’ resolution approving the sale, Form SPT1 and a fee.
D-Nothing.
E-It will depend on the asset value of the company.
Option D is correct. It is not certain from the facts whether or not this transaction would amount to a substantial property transaction requiring an ordinary resolution of the shareholders (s190 Companies Act 2006). To determine this it would be necessary to know the net asset value, or if no statutory accounts have been prepared, the amount of the company’s called up share capital of the company. However, even if it were a substantial property transaction, there would be no related filing needed at Companies House.
Option A is wrong because, even if this was a substantial property transaction which required authorisation by an ordinary resolution of the shareholders, the resolution would not need to be filed at Companies House.
Option B is wrong because, as explained above, even if this was a substantial property transaction which therefore required authorisation by an ordinary resolution of the shareholders, the resolution would not need to be filed at Companies House. There is therefore no associated fee. A substantial property transaction does not require the preparation of a memorandum of the terms of the sale agreement.
Option C is wrong because, as explained above, even if this was a substantial property transaction which therefore required authorisation by an ordinary resolution of the shareholders, the resolution would not need to be filed at Companies House. There is therefore no associated fee. Form SPT1 does not exist.
Option E is wrong because whilst the asset value is relevant to determining whether or not the transaction is a substantial property transaction, as explained above, if it was a substantial property transaction which therefore required authorisation by an ordinary resolution of the shareholders, the resolution would not need to be filed at Companies House.
The directors of a private limited company with one class of shares in issue (ordinary shares with a nominal value of £1) have a board meeting scheduled for next week where they will appoint a new director with immediate effect as the first item on the agenda. A balance sheet prepared for the board meeting shows the company’s net assets are £460,000. The company also wants to allot new ordinary shares with a nominal value of £1 to the director in return for the freehold of a small unit owned by him and valued at £50,000. The company has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association.
Does the proposed allotment of new shares require shareholder approval?
A-No, because the company is a private limited company with only one class of shares in issue before and after the allotment.
B-No, because the company is a private limited company with only one class of shares in issue before and after the allotment and because the consideration for the shares is other than cash.
C-Yes, because the directors will need authority to allot the shares as no authority is contained in the company’s articles of association.
D-Yes, because the existing shareholders’ pre-emption rights will need to be disapplied.
E-Yes, because the purchase of the unit is a substantial property transaction.
Option E is correct because the purchase of the unit is a substantial property transaction (s190 Companies Act 2006). The unit (non-cash asset) is being sold to the company by one its directors and it is of substantial value. Its value is over £5,000 but not over £100,000 and therefore the value must exceed 10% of the company’s net asset value (ss191(2)(3) Companies Act 2006). 10% of the company’s net asset value is £46,000 and the value of the unit is £50,000. Therefore the shareholders will need to authorise the transaction by passing an ordinary resolution.
Option A is wrong because, although the company is a private limited company with one class of shares in issue, the purchase of the unit is a substantial property transaction (see above).
Option B is wrong because, although the company is a private limited company with one class of shares in issue and the consideration for the shares is not cash, which means that statutory pre-emption rights do not apply (s565 Companies Act 2006), the purchase of the unit is a substantial property transaction (see above).
Option C is wrong because directors have authority to allot where the company is a private limited company and there is only one class of shares in issue before and after the allotment and there is no restriction in the company’s articles (s550 Companies Act 2006). There is no restriction in the company’s articles of association.
Option D is wrong because the existing shareholders pre-emption rights do not apply if the shares are being allotted for non-cash consideration (s565 Companies Act 2006).
An accountant is a director of the first company and owns 35% of the shares in the company. The other shareholders of the company have no connection with the accountant. The accountant’s husband is the sole director of another company and, together with his wife, owns 30% of the shares in that other company. The two companies wish to enter into a contract for the sale of freehold business premises from one of the companies to the other for the purchase price of £1.5 million.
Does the proposed contract require board and shareholder resolutions from both companies?
A-No, because only a board resolution is required from each company to enter the contract.
B-No, because whilst a board resolution is required from each company, only the company of which the accountant is a director needs to pass a shareholders’ ordinary resolution approving the transaction.
C-No, because whilst a board resolution is required from each company, only the company of which the accountant’s husband is a director needs to pass a shareholders’ ordinary resolution approving the transaction contract.
D-Yes, because a board resolution is required from each company together with a shareholders’ ordinary resolution from each company approving the transaction.
E-Yes, because a board resolution is required from each company together with a shareholders’ special resolution from each company approving the transaction.
Option D is the correct answer. A board resolution is required from each company to enter the contract. For both companies, the transaction is a substantial property transaction: the company is buying/selling a non-cash asset of substantial value from a body corporate connected to one of its directors (ss 190, 252-254 Companies Act 2006).
The other company is connected to the accountant because the accountant and a person connected to her, her husband, own at least 20% of the voting shares of that other company (30%).
The first company is connected to the accountant’s husband because a person connected to him, the accountant, owns at least 20% of the voting shares of that company (35%).
Therefore a shareholders’ ordinary resolution approving the transaction is required from each company.
Option A is wrong because shareholder resolutions are required.
Option B is wrong because both companies need to pass board and shareholder resolutions.
Option C is wrong because both companies need to pass board and shareholder resolutions.
Option E is wrong because the shareholder resolutions required are ordinary resolutions not special resolutions.
Ordinary vs special resolutions:
Special resolutions are generally required for corporate matters of great importance and consequence – the types of decisions that are made only in rare circumstances. More routine company decisions are dealt with by ordinary resolution (of the members) or board resolution (of the directors)
E.g. special resolutions:
Special resolutions are typically required for matters such as making significant changes to a company’s articles, altering the company’s name, approving certain types of corporate transactions (e.g., mergers or acquisitions), authorising share buybacks or reductions, and winding up or liquidating the company.
The directors of a private limited company intend to sell a property which the company owns. The buyer is the mother of one of the directors. The three directors of the company are also the only shareholders, each holding a third of the shares. It has been agreed that the sale price of the property will be £95,000. The most recent audited accounts of the company show that net profits are £860,000 and net assets are £900,000. The company’s constitution is the Companies (Model Articles) Regulations 2008 without amendment.
Does the proposed transaction require shareholder approval?
A-No, because the property is not being sold to a director of the company.
B-Yes, because the transaction involves the sale of a property with a value which exceeds 10% of the company’s net profit value to a person connected with a director.
C-Yes, because the transaction involves the sale of a property with a value which exceeds 10% of the company’s net asset value to a person connected with a director.
D-No, because the price of the transaction does not exceed £100,000.
E-No, because the directors have general authority to run the business day to day.
the sale of a non-cash asset (the property); of substantial value because the value exceeds 10% of the company’s net asset value (the sale price is £95,000 which exceeds £90,000, i.e. 10% of the company’s net asset value of £900,000);to a person connected to a director (the director’s mother (ss252, 253 Companies Act 2006)
and so needs approval by an ordinary resolution of shareholders (s.190 Companies Act 2006).
Option A is wrong because the property is being sold to a person connected to a director and is therefore still caught by the legislation. The definition of a connected person includes the director’s family members (s252(a) Companies Act 2006) and the definition of family members includes the director’s parents (s253(2)(e) Companies Act 2006).
Option B is wrong because even though the value of the transaction is less than £100,000, it will still be classed as substantial as its value exceeds 10% of the company’s asset value, not 10% of the company’s net profit value (s191 (2) (a) Companies Act 2006).
Option D is wrong because where the price of the transaction does not exceed £100,000, the transaction will still be classed as substantial if its value exceeds 10% of the company’s net asset value (ss191(2)(a), 191(3)(a) Companies Act 2006).
Option E is wrong – the general authority of directors set out in the company’s articles does not apply to this situation as it is a substantial property transaction and therefore needs approval by ordinary resolution of the shareholders (s190 Companies Act 2006).
An English woman and a Welsh woman wish to set up a joint venture. To give effect to this, they plan to incorporate a limited company in which each will hold 50% of the shares. Each will nominate one director. They have agreed that under the company’s constitution:
The English Woman’s nominee will be the chairman with a casting vote
Dividends, directors’ service contracts over two years in length, and any borrowing must be approved by an ordinary resolution of the shareholders.
Which of the following best describes the steps required to be taken on incorporation of the company to give effect to the parties’ agreement?
A-The company should adopt the model articles without amendment.
B-The company should adopt the model articles amended to give the chairman a casting vote at directors’ meetings.
C-The company should adopt the model articles amended to provide that dividends may be declared by a shareholders’ ordinary resolution.
D-The company should adopt the model articles amended to provide that directors’ service contracts over two years must be approved by a shareholders’ ordinary resolution.
E-The company should adopt the model articles amended to provide that borrowing of the company must be approved by a shareholders’ ordinary resolution.
Option E is correct as it is the only option that correctly deals with the desired restriction on the directors’ borrowing powers.
Option A is wrong because there is nothing in the model articles or the Companies Act 2006 which restricts the directors’ power to borrow.
Option B is wrong. Whilst the model articles make provision for the chairman’s casting vote, they will need to be amended to restrict borrowing powers.
Option C is wrong. Whilst the model articles provide that dividends are declared by ordinary resolution, they will need to be amended to restrict borrowing powers.
Option D is wrong. Whilst section 188 of CA2006 requires service contracts over two years to be approved by ordinary resolution, the model articles will need to be amended to restrict borrowing powers.
A director runs a private company limited by shares. It has Model Articles.
The director owns all the shares in the company and is the only director of the company. The director also owns 16% of the shares in a local delivery company which is a private company she set up with other takeaway food providers in the local area. She is not a director of the delivery company.
The delivery company handles all of the company’s deliveries. Last week, the company acquired a van for £22,000 but the director quickly realised that the company had little need for it. The company now intends to sell the van to the delivery company for £22,000.
Which of the following options best describes the procedure the company should follow for the sale of the van?
A-This is a simple contract and can be dealt with by the board under MA3.
B-This is a substantial property transaction and must be approved by the members of the company by ordinary resolution before the sale takes place.
C-This is a transaction at an undervalue and the director could be liable if the company enters liquidation.
D-The director cannot pass any resolutions as there will not be a quorate board meeting.
E-This is a substantial property transaction and must be approved by the members of the delivery company by ordinary resolution before the sale takes place.
Option A is the correct answer.
Option B is wrong because the director does not own more than 20% of the shares in the delivery company so it is not an SPT as far as the company is concerned. Option E is wrong because the director is not a director of the delivery company so it is not an SPT as far as they are concerned.
Option C is wrong because this is not a transaction at an undervalue as it is being sold at the purchase price (purchased only 1 week ago).
Option D is wrong because a sole director can be quorate under MA7.
The directors of a company are proposing to call a general meeting of the shareholders to ask the shareholders to pass an ordinary resolution.
The company has three directors. The Managing Director and the Sales Director are shareholders in the company, but the Finance Director is not. There is one other shareholder who is not a director.
It has Model Articles for private companies limited by shares unamended.
Which of the following statements best describes the position in relation to the notice of the general meeting?
A-The notice must be sent to all the shareholders.
B-The notice must be sent in either hard copy or electronic form.
C-The notice must include the exact text of the proposed resolution.
D-The notice must include a statement of the right of a member to ask for the meeting to be held on short notice.
E-The notice must include a statement of the right of a member to appoint a proxy.
Option E is correct. The notice must include (with reasonable prominence) the right of a member who cannot attend to appoint a proxy. Failure to do so could invalidate the meeting. (s.325 CA 06).
Option A is wrong. For a meeting to be validly convened, the shareholders and the directors are entitled to receive notice of the meeting (s.310 CA 2006), so the Finance Director would also be entitled to receive a copy of the notice.
Option B is wrong. Notice can be sent in hard copy or in electronic form or on a website (or a combination of these). (s.308).
Option C is wrong. The notice need only state the general nature of the business to be dealt with (s.311).
Option D is wrong. There is no requirement to include any statement in relation to short notice.
Five shareholders in a company have the following shareholdings:
The Managing Director holds 30 voting shares;
The Finance Director holds 40 voting shares;
A surveyor holds 10 voting shares;
A builder holds 15 voting shares;
An estate agent holds 5 voting shares.
The company has Model Articles for private companies limited by shares unamended.
The Finance Director, the Managing Director, the surveyor and the estate agent have confirmed that they will attend a general meeting which has been validly called to remove one of the directors of the company.
The Finance Director and the surveyor will support the resolution. The builder will not be able to attend but has sent a written statement confirming that he supports the resolution. The Managing Director and the estate agent will oppose the resolution.
The surveyor has called for a poll vote.
Which of the following best explains whether the resolution will pass?
A-It will pass because the Finance Director, the surveyor and the builder together hold more than 50% of the voting shares.
B-It will pass because the Finance Director and the surveyor hold at least 50% of the voting shares of those attending the meeting.
C- It will not pass because the Managing Director on his own can block the resolution.
D-It will not pass because a single shareholder is not entitled to call for a poll vote and, on a show of hands, the resolution cannot pass.
E-It will not pass because the builder must attend or appoint a proxy for the resolution to pass.
Option B is correct. To dismiss a director, an ordinary resolution of the shareholders is required which requires a simple majority (more than 50%). As the builder is not present at the meeting (and has not appointed a proxy), there are 85 voting shares at the meeting, and the Finance Director and surveyor hold 50 of those. On a poll vote, they will together have the requisite majority to dismiss the director.
Option A is not the best answer. Whilst it is the case that all three individuals hold more than 50% of the voting shares, the builder will not be present at the meeting and his shares will not be counted in a poll vote. His written statement cannot be counted in the poll vote.
Option C is wrong as with 30 voting shares, the Managing Director can block a special resolution but not an ordinary resolution.
Option D is wrong as any shareholder holding at least 10% of the voting shares is entitled to call for a poll (s.321).
Option E is wrong as the Finance Director and surveyor can together pass the ordinary resolution required. Not all shareholders need to be present at the meeting.
Quick Q:
Which of the following statements best describes shareholder rights in relation to general meetings?
D- Shareholders who either individually or together hold 5% of paid up voting shares in the company may request the directors to call a general meeting.
Option D is the correct answer. Shareholders who either individually or together hold 5% of the paid up capital holding voting rights can request the directors to call a general meeting (s.303 Companies Act 2006).
Quick Q:
The directors of a private limited company hold a board meeting on 2 October and resolve to call a general meeting of the company’s shareholders on full notice. On the same day the directors hand the notice of the general meeting to all of the shareholders. The company has the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association.
What is the earliest date that the general meeting can be held?
17 October.
Option E is correct. 14 clear days from 2 October is 17 October. The day after the notice is handed out (3 October) is the first clear day and 14 days later (16 October) is the last clear day. Therefore the earliest the meeting can be held is 17 October (Sections 307 and 360 Companies Act 2006).
Options A, B and D are therefore wrong.
Option C is wrong. When counting days for these purposes, whether it is a business day or not is irrelevant.
Quick Q:
The directors of a private limited company intend to change the name of the company. The four directors of the company are also the only shareholders, each holding a quarter of the shares. The company’s constitution is the Companies (Model Articles) Regulations 2008 without amendment.
What needs to be filed with the Registrar of Companies following the change of name?
A copy of the shareholder resolution to change the name, the appropriate form and the prescribed fee.
Option A is correct because a copy of the special resolution to change the name must be filed (s.29 (1) (a) Companies Act 2006 (CA 06)) and the Registrar must be notified (s.78 (1) CA 06). The relevant form is the NM01 and there is a prescribed fee which must be paid.
Quick Q:
The board of directors of a company wants to call a general meeting on short notice. There are five shareholders with the following shareholdings:
A baker – 14,000 ordinary £1 shares
A salesperson – 20,000 ordinary £1 shares
A lecturer – 5,000 ordinary £1 shares
A surveyor – 10,000 ordinary £1 shares
A physiotherapist – 51,000 ordinary £1 shares
Which of the following best describes which shareholders would need to agree in order for the general meeting to be held on short notice?
The baker, the salesperson, the physiotherapist and either the lecturer or the surveyor, because between them they constitute the required majority in number holding between them at least 90% of the shares.
Option B is correct. A majority in number of shareholders who between them hold 90% or more of the shares are required in order to agree to a general meeting being held on short notice (s 307(4)–(6) CA 2006). All of the other options are wrong either because they do not constitute a majority in number of shareholders or because those shareholders do not between them hold 90% or more of the shares.
Quick Q:
A private company with seven directors has the Model Articles of Association with no amendments. A board meeting is scheduled for next week and the chair intends to propose a resolution to change the company’s registered office. Five directors (the chair, the sales director, the IT director, the marketing director and the HR director, referred to collectively as the ‘Directors in Favour’) are in favour of the appointment and the other two directors (the finance director and the operations director) are against it.
Assume that at the board meeting everyone who attends will vote as indicated above and that none of the directors have a personal interest in the matter.
Which of the following best explains who should attend the board meeting in order for the resolution to be passed?
As long as the chair and one of the other Directors in Favour attend the board meeting, the resolution will be passed.
Option A is correct. In order for the resolution to be passed, the board meeting must be quorate and a simple majority of directors must vote in favour of the resolution (MA 7). The quorum for a board meeting is two (MA 11), so two of the Directors in Favour must attend, to ensure there is a quorum. If they did not, the directors who are against the resolution could fail to turn up and the meeting would not be quorate. The chair of the board has a casting vote (MA 13), so at the board meeting, either three directors or the chair and another director must vote in favour to ensure that there is a majority in favour of the resolution. Option A is the only combination which makes sure the quorum is met and that enough directors are present to outvote the finance director and the operations director.
