Company decision-making, directors, shareholders Flashcards
What is a de facto director?
A person who acts as a director even though they have never been validly appointed
What is a shadow director?
A person in accordance with whose instructions the directors tend to act, but who has not been formally appointed as a director of the company (eg. major shareholder)
Don’t need to act in accordance with shadow director’s instructions in relation to all matters → sufficient just that they have high influence & control over the director’s actions in practice
Is there a provision for alternative directors in the Model Articles?
No - a company that wishes to allow alternative directors* must include a special article
*Alternative director = if director can’t attend board meeting, sometimes appoint alternative director to attend & vote in accordance with their wishes
What are the restrictions on being a director?
A person cannot be a director if they are disqualified from doing so
A person will cease to be a director if bankruptcy order made against them or written medical opinion that are physically or mentally incapable of acting as director (& may remain so for more than 3 months)
What does a company secretary do & how can they be removed?
Deal with the company’s legal & administrative requirements (required for a public company)
Can be removed by the directors using a board resolution
Which companies need an auditor & how can the auditor be removed?
All companies must have an auditor (except small & dormant companies)
Can be removed by the shareholders using an ordinary resolution
What are the 8 main directors’ duties set out in the Companies Act 2006?
To act within powers
To promote the success of the company
To exercise independent judgement
To exercise reasonable care, skill & diligence
To avoid conflicts of interest
Not to accept benefits from third parties
To declare interest in a proposed transaction or arrangement with the company
To declare interest in an existing transaction
What is considered ‘promoting the success of the company’ as part of a director’s duties?
Acting in a way likely to promote success of company for the benefit of its members as a whole, having regard to
- consequences of any decisions
- interests of the company’s employees
- need to foster business relationships with suppliers, customers etc
- impact of operations on the community & **environment
- maintaining a good reputation
- acting fairly between members of the company
subjective test (did the director act in good faith?)
How can a director declare their interest in a proposed transaction with the company as part of their s177 CA duty?
V. flexible - can be made at a board meeting, by general notice in writing to the directors, or in some other way
What are the exceptions to the director’s s177 duty to declare an interest in a proposed transaction with the company?
- If the director is not aware of the interest or the transaction (unless ought reasonably to be aware)
- If interest cannot reasonably be regarded as likely to give rise to a conflict of interest
- If the other directors are already aware
- If it concerns the terms of the director’s service contract
Can s177 obligation on a director to declare an interest in a proposed transaction or arrangement with the company be disapplied by the company’s articles?
No
(Even if company has disapplied the similar obligation under MA14, obligation to declare under s177 remains)
When must a director declare an interest in an existing transaction under s182, & how must they do it?
Must declare the interest as soon as is reasonably practicable
The declaration must be made at a directors meeting, by notice in writing to all other directors, or by general notice of the interest at a board meeting
Nb. Failure to comply is a criminal offence punishable by fine
What are the exceptions to the director’s s182 duty to declare an interest in a existing transaction with the company?
- If the director is not aware of the interest or the transaction (unless ought reasonably to be aware)
- If interest cannot reasonably be regarded as likely to give rise to a conflict of interest
- If the other directors are already aware
- If it concerns the terms of the director’s service contract
What is the effect of shareholder’s ratifying a director’s breach of duty & how must it be done?
If ratified, the director will not be liable to the company for the breach
The shareholders must ratify the potential breach by ordinary resolution
Ratify = make valid
What are the 3 claims possible against directors of insolvent companies?
Wrongful trading
Fraudulent trading
Misfeasance
What must be proven in a wrongful trading claim against the director of an insolvent company?
Court may order a director to contribute to the company’s assets if:
- The company has gone into insolvent liquidation or administration; &
- Before commencement of the winding up, director knew or ought to have known there was no reasonable prospect the company would avoid insolvent liquidation; &
- That person was a director of the company at the time
Nb. Will not be liable if took every step with a view to minimising the potential loss
What is the control on directors regarding a substantial property transaction?
Must be approved by ordinary resolution
If not approved, transaction will be voidable & director may be ordered to account to the company for any gain made + indemnify the company for any loss/damage resulting
What is a substantial property transaction?
A director in their personal capacity, or a connected person
Buys from or sells to the company
A non-cash asset
Of substantial value
- More than £100k; or
- More than £5k & 10% of the company’s net asset value
When is an ordinary resolution not needed to approve a substantial property transaction?
Transaction when the company is a wholly owned subsidiary of any other company
or
Transaction between
- A company & a person in his character as a member of the company
- A holding co & its wholly owned subsidiary
- Two wholly owned subsidiaries of the same holding co
Can a company make a loan to a director?
Must be approved by ordinary resolution or will be voidable
Exceptions:
- Expenditure on company business (max £50k)
- Expenditure on defending civil / criminal / regulatory proceedings
- Minor & business transactions not exceeding £10k
Nb. Transaction will be voidable or company can affirm loan within reasonable time by passing an ordinary resolution
What is defined as a ‘long-term’ service contract & how must it be approved?
Service contract for a guaranteed term of more more than 2 years
- Does not include where company has power to terminate with notice of 2 years or less
Must be approved by ordinary resolution - if not, the guaranteed term element of the contract is void (but rest of contract is enforceable)
What are payments for loss of office, and how must they be approved?
Any payments of £200 or more (other than those to which director legally entitled) to directors, past directors or connected persons
Must be approved by ordinary resolution - if not, money held by recipient on trust for the company & any director who authorised payment is jointly & severally liable to indemnify company for any resulting loss
How are subsequent directors of a company appointed?
If not amended by the company’s articles, can either be appointed by the board (quickest) or by ordinary resolution
Must notify CH within 14 days (form AP01) & update internal directors register immediately
What must a company do if a director resigns?
Complete form TM01 notifying Companies House within 14 days & update internal registers
How can a director be removed?
By the shareholders passing an ordinary resolution at a general meeting
- Must give special notice at least 28 days before the general meeting
- On receipt of special notice, company must give notice of the resolution to the shareholders in same way as it gives notice for a general meeting or, if not practicable, at least 14 days before by advert in an appropriately circulated newspaper
- If other directors, rather than shareholders, have proposed ordinary resolution, must prepare formal notice of intention to propose ordinary resolution, kept at registered office
If removed, must complete TM01 notifying CH within 14 days of removal & update internal registers immediately
How long can the court disqualify a director for?
2 - 15 years
Can’t be a director or in any way concerned with the management of a company during that time, and contravention is a criminal offence
What are some of the grounds for disqualifying a director?
Conviction for indictable offence
Persistent breaches of companies legislation or a breach of competition law
Fraud on winding up, or for fraudulent or wrongful trading
Summary conviction for failure to file a required notice or document
Being an unfit director of an insolvent company, or a finding of unfitness in an investigation
What is the difference between ordinary & preference shares?
Ordinary shares: give shareholders right to attend & vote at general meetings, and to receive dividends
Preference shares give shareholders enhanced rights, set out in the company’s articles (eg. right to missed dividends if cumulative preference share)
What is the difference between cumulative & non-cumulative preference shares?
Cumulative preference shareholders have the right to be paid any missed dividends from previous financial years as well as current financial year’s dividend
This right ranks before dividend payments to ordinary shareholders
(Non-cumulative preference shares don’t have this right)
What can a shareholder with 75% shareholding do?
Pass or block a special resolution
What can a shareholder with over 50% of the shareholding do?
Pass or block an ordinary resolution
- Block: exactly 50%
- Pass: over 50%
What does it mean that a shareholder has the right to receive a dividend ‘if declared’?
If there are profits available & the directors have made a recommendation as to its amount which has been approved by the shareholders
What is the shareholder’s power to request the company to circulate a written resolution?
Shareholders with 5% or more of the voting rights can require the company to circulate a written resolution
Company must then circulate a copy of this resolution within 21 days of the request
Nb. company articles can reduce this to below 5% but can’t increase it to above 5%
What is the shareholder’s power to requisition a general meeting?
The shareholders can require the directors to call a general meeting → directors must do so once have received requests from shareholders representing at least 5% of voting rights
- Directors must call the GM within 21 days of the request
- Notice period must be no more than 28 days
What are the 2 main legal mechanisms protecting minority shareholders?
Unfair prejudice petitions
Derivative claims
What is an unfair prejudice claim?
Claim brought by a shareholder who feels unfairly prejudiced
→ Two possible grounds:
(a) Company’s affairs have been conducted in an unfairly prejudicial way; or
(b) An actual or proposed act or omission of the company is prejudicial
Prejudicial: causes harm to one or more shareholders & is unfair
What are the 2 possible grounds for bringing an unfair prejudice petition?
(a) Company’s affairs have been conducted in an unfairly prejudicial way; or
(b) An actual or proposed act or omission of the company is prejudicial
What is the possible remedy for an unfair prejudice petition?
Court can make such an order as it sees fit - most common is that the other shareholders must buy the shares of the unfairly prejudiced shareholder
Nb. These claims are very time consuming & expensive
What is a derivative claim?
A claim instigated by a shareholder for a wrong done to the company as a result of an act or omission of a director
- Claimant would be the company
- Can only be brought in relation to negligence, default, breach of trust, breach of duty
First stage of proceedings is that the shareholder applies to the court for permission to continue the claim
When must the court refuse a shareholder permission to continue a derivative claim?
Where it considers that a person promoting the success of the company would not continue the claim
Where the cause of action arises from an act/omission which has been authorised by the company or ratified since
Who attends board meetings?
Directors → pass board resolutions
Under the model articles, what are the notice requirements for board meetings?
Director must give notice to the other directors
Notice must be reasonable & include the time, date, place
Under the model articles, what are the quorum requirements for a board meeting?
A quorum of two directors must be present at all times during a board meeting
Under the model articles, can a director count in the quorum or vote in a proposed decision of the board on a transaction they have an interest in?
No
Nb. This rule (MA14) can be disapplied, but the directors’ duty to declare interest in proposed transaction with company under s177 CA cannot be disapplied
Under the model articles, how are resolutions passed at board meetings?
By a simple majority, ie. over half
If board has a chair, they will have the casting vote in the event of a tie
Under the model articles, is it possible for board resolutions to be passed unanimously?
MA8: Can pass board resolution in the form of a resolution showing (by writing or another way) that all eligible directors have indicated to each other that they share a common view on a matter
What is the difference between an ordinary resolution & a special resolution?
An ordinary resolution needs more than 50% of votes in favour to pass
A special resolution needs 75% or more of the votes in favour to pass
What are the two ways of passing shareholders resolutions?
In a general meeting or by written resolution
How are general meetings called?
Called by the board of directors passing a board resolution
Must give notice to every shareholder & director (& auditor, if there is one) setting out:
- The time, date, place
- The general nature of the business to be dealt with
- The exact wording of any special resolutions
- Each shareholder’s right to appoint a proxy to attend on their behalf
What are the notice requirements for calling a shareholders’ general meeting
The directors must give notice to every shareholder & director (& auditor, if there is one) setting out:
- The time, date, place
- The general nature of the business to be dealt with
- The exact wording of any special resolutions
- Each shareholder’s right to appoint a proxy to attend on their behalf
The minimum notice period is 14 clear days
* Does not include day notice deemed received (48 hours after sending for post or email) or day of meeting itself
When can a shareholders general meeting be held on short notice?
If consent of majority of company’s shareholders who between them hold 90% or more of the company’s voting shares
Standard minimum notice for a GM is 14 clear days
What is the quorum for a shareholders general meeting?
Subject to the company’s articles, the quorum is two
How do shareholders vote in general meetings?
Generally, on a show of hands with each shareholder having one vote
In certain circumstances, will be poll vote, ie. one vote for each share owned → can be demanded before or during meeting by:
- The chair
- The directors
- Two or more persons with the right to vote on the resolution
- Person(s) representing at least 10% of the total voting rights
Can shareholders count in a quorum or vote on a matter in which they have a person interest?
Yes → except vote not counted if it makes the difference in:
- A resolution to buy back some or all of the shareholder’s shares
- An ordinary resolution to ratify a director’s breach of duty where the director is also a shareholder
Which companies can pass shareholder resolutions by written resolution?
Private companies only
How are shareholder resolutions passed by written resolution
Board distribute written resolution to every eligible shareholder → shareholder will sign & return if want to vote in favour
- Must include information on how to signify agreement & the lapse date (ie. deadline for returning)
- Unless otherwise stated, lapse date is 28th day following circulation (no requirement to wait until lapse date for everyone to vote, just until majority have voted in favour)
How are shareholders’ votes weighted in written resolutions?
Each shareholder has one vote for each share they own
What are some of the registers & other records that a company must keep?
Register of members
Register of persons with significant control
Register of directors
Directors’ service contracts
Register of secretaries
Accounting records for each financial year
Board & general meeting minutes & copies of written resolutions
What constitutes a person with significant control in a company?
Any shareholder who owns >25% of the shares or controls >25% of the voting rights
What are the filing requirements for any board decision or shareholder decision?
The meeting minutes (or copy of written resolution) must be kept by the company for 10 years
What are the filing requirements when a company transfers shares?
New share certificates must be issued to the shareholder within 2 months (don’t need to be sent to Companies House!)
The internal register of members must be updated immediately & yearly updates on shareholders provided to Companies House
What are the filing requirements when a shareholder appears on the PSC register for the first time or changes category on the PSC register?
Internal register must be updated then must notify companies house within 14 days using form:
- PSC01 (first time)
- PSC04 (changing category)
- PSC07 (no longer has significant control)
What are the filing requirements for changing the company’s articles?
Must notify CH (including a copy of the new articles) within 15 days
What are the notification requirements for passing a special resolution?
Must notify CH within 15 days
What are the notification requirements for appointing or removing a director?
Must notify CH within 14 days & update internal register of directors immediately
When must a company’s accounts be sent to Companies House
Private company: within 9 months after the end of the accounting period
Public company: within 6 months
What are the filing requirements for a company’s confirmation statement?
Form CS01 must be sent to CH within 14 days from the company’s confirmation date (the anniversary of incorporation)
What are the filing requirements for appointing or removing a company secretary?
Must notify CH, using form AP03 (appointment), within 14 days & update the internal register of secretaries immediately
What kind of shareholder resolution is required to disapply pre-emption rights?
Special resolution
Can a company change its accounting reference period without shareholder approval?
Yes, but must ensure extension does not result in new accounting reference period of more than 18 months
What kind of resolution is required to change a company’s name?
Special resolution (ie. 75%)
Do ordinary shareholders and preference shareholders both have the right to vote in shareholder meetings?
No - for a company using the Model Articles, ordinary shareholders can vote, but preference shareholders don’t have the right to vote
Does a company with the Model Articles need shareholder approval to borrow money?
No
Borrowing falls within the directors’ general powers under Model Article 3
What kind of shareholder resolution is needed to ratify director’s conduct?
Ordinary resolution
Nb. If the director involved is also a shareholder, their vote won’t count
What is a Bushell v Faith clause?
A clause in the company’s articles where someone is both shareholder & director: gives them greater voting rights as a shareholder if the resolution is to remove that person as a director
