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SQE1: Business Law & Practice > Company decision-making, directors, shareholders > Flashcards

Company decision-making, directors, shareholders Flashcards

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1
Q

What is a de facto director?

A

A person who acts as a director even though they have never been validly appointed

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2
Q

What is a shadow director?

A

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

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3
Q

Is there a provision for alternative directors in the Model Articles?

A

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

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4
Q

What are the restrictions on being a director?

A

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)

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5
Q

What does a company secretary do & how can they be removed?

A

Deal with the company’s legal & administrative requirements (required for a public company)

Can be removed by the directors using a board resolution

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6
Q

Which companies need an auditor & how can the auditor be removed?

A

All companies must have an auditor (except small & dormant companies)

Can be removed by the shareholders using an ordinary resolution

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7
Q

What are the 8 main directors’ duties set out in the Companies Act 2006?

A

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

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8
Q

What is considered ‘promoting the success of the company’ as part of a director’s duties?

A

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?)

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9
Q

How can a director declare their interest in a proposed transaction with the company as part of their s177 CA duty?

A

V. flexible - can be made at a board meeting, by general notice in writing to the directors, or in some other way

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10
Q

What are the exceptions to the director’s s177 duty to declare an interest in a proposed transaction with the company?

A
  • 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
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11
Q

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?

A

No

(Even if company has disapplied the similar obligation under MA14, obligation to declare under s177 remains)

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12
Q

When must a director declare an interest in an existing transaction under s182, & how must they do it?

A

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

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13
Q

What are the exceptions to the director’s s182 duty to declare an interest in a existing transaction with the company?

A
  • 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
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14
Q

What is the effect of shareholder’s ratifying a director’s breach of duty & how must it be done?

A

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

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15
Q

What are the 3 claims possible against directors of insolvent companies?

A

Wrongful trading

Fraudulent trading

Misfeasance

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16
Q

What must be proven in a wrongful trading claim against the director of an insolvent company?

A

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

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17
Q

What is the control on directors regarding a substantial property transaction?

A

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

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18
Q

What is a substantial property transaction?

A

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
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19
Q

When is an ordinary resolution not needed to approve a substantial property transaction?

A

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
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20
Q

Can a company make a loan to a director?

A

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

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21
Q

What is defined as a ‘long-term’ service contract & how must it be approved?

A

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)

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22
Q

What are payments for loss of office, and how must they be approved?

A

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

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23
Q

How are subsequent directors of a company appointed?

A

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

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24
Q

What must a company do if a director resigns?

A

Complete form TM01 notifying Companies House within 14 days & update internal registers

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25
Q

How can a director be removed?

A

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

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26
Q

How long can the court disqualify a director for?

A

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

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27
Q

What are some of the grounds for disqualifying a director?

A

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

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28
Q

What is the difference between ordinary & preference shares?

A

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)

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29
Q

What is the difference between cumulative & non-cumulative preference shares?

A

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)

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30
Q

What can a shareholder with 75% shareholding do?

A

Pass or block a special resolution

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31
Q

What can a shareholder with over 50% of the shareholding do?

A

Pass or block an ordinary resolution

  • Block: exactly 50%
  • Pass: over 50%
32
Q

What does it mean that a shareholder has the right to receive a dividend ‘if declared’?

A

If there are profits available & the directors have made a recommendation as to its amount which has been approved by the shareholders

33
Q

What is the shareholder’s power to request the company to circulate a written resolution?

A

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%

34
Q

What is the shareholder’s power to requisition a general meeting?

A

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
35
Q

What are the 2 main legal mechanisms protecting minority shareholders?

A

Unfair prejudice petitions

Derivative claims

36
Q

What is an unfair prejudice claim?

A

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

37
Q

What are the 2 possible grounds for bringing an unfair prejudice petition?

A

(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

38
Q

What is the possible remedy for an unfair prejudice petition?

A

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

39
Q

What is a derivative claim?

A

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

40
Q

When must the court refuse a shareholder permission to continue a derivative claim?

A

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

41
Q

Who attends board meetings?

A

Directors → pass board resolutions

42
Q

Under the model articles, what are the notice requirements for board meetings?

A

Director must give notice to the other directors

Notice must be reasonable & include the time, date, place

43
Q

Under the model articles, what are the quorum requirements for a board meeting?

A

A quorum of two directors must be present at all times during a board meeting

44
Q

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?

A

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

45
Q

Under the model articles, how are resolutions passed at board meetings?

A

By a simple majority, ie. over half

If board has a chair, they will have the casting vote in the event of a tie

46
Q

Under the model articles, is it possible for board resolutions to be passed unanimously?

A

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

47
Q

What is the difference between an ordinary resolution & a special resolution?

A

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

48
Q

What are the two ways of passing shareholders resolutions?

A

In a general meeting or by written resolution

49
Q

How are general meetings called?

A

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
50
Q

What are the notice requirements for calling a shareholders’ general meeting

A

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

51
Q

When can a shareholders general meeting be held on short notice?

A

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

52
Q

What is the quorum for a shareholders general meeting?

A

Subject to the company’s articles, the quorum is two

53
Q

How do shareholders vote in general meetings?

A

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
54
Q

Can shareholders count in a quorum or vote on a matter in which they have a person interest?

A

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
55
Q

Which companies can pass shareholder resolutions by written resolution?

A

Private companies only

56
Q

How are shareholder resolutions passed by written resolution

A

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)
57
Q

How are shareholders’ votes weighted in written resolutions?

A

Each shareholder has one vote for each share they own

58
Q

What are some of the registers & other records that a company must keep?

A

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

59
Q

What constitutes a person with significant control in a company?

A

Any shareholder who owns >25% of the shares or controls >25% of the voting rights

60
Q

What are the filing requirements for any board decision or shareholder decision?

A

The meeting minutes (or copy of written resolution) must be kept by the company for 10 years

61
Q

What are the filing requirements when a company transfers shares?

A

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

62
Q

What are the filing requirements when a shareholder appears on the PSC register for the first time or changes category on the PSC register?

A

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)
63
Q

What are the filing requirements for changing the company’s articles?

A

Must notify CH (including a copy of the new articles) within 15 days

64
Q

What are the notification requirements for passing a special resolution?

A

Must notify CH within 15 days

65
Q

What are the notification requirements for appointing or removing a director?

A

Must notify CH within 14 days & update internal register of directors immediately

66
Q

When must a company’s accounts be sent to Companies House

A

Private company: within 9 months after the end of the accounting period

Public company: within 6 months

67
Q

What are the filing requirements for a company’s confirmation statement?

A

Form CS01 must be sent to CH within 14 days from the company’s confirmation date (the anniversary of incorporation)

68
Q

What are the filing requirements for appointing or removing a company secretary?

A

Must notify CH, using form AP03 (appointment), within 14 days & update the internal register of secretaries immediately

69
Q

What kind of shareholder resolution is required to disapply pre-emption rights?

A

Special resolution

70
Q

Can a company change its accounting reference period without shareholder approval?

A

Yes, but must ensure extension does not result in new accounting reference period of more than 18 months

71
Q

What kind of resolution is required to change a company’s name?

A

Special resolution (ie. 75%)

72
Q

Do ordinary shareholders and preference shareholders both have the right to vote in shareholder meetings?

A

No - for a company using the Model Articles, ordinary shareholders can vote, but preference shareholders don’t have the right to vote

73
Q

Does a company with the Model Articles need shareholder approval to borrow money?

A

No

Borrowing falls within the directors’ general powers under Model Article 3

74
Q

What kind of shareholder resolution is needed to ratify director’s conduct?

A

Ordinary resolution

Nb. If the director involved is also a shareholder, their vote won’t count

75
Q

What is a Bushell v Faith clause?

A

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

SQE1: Business Law & Practice (9 decks)

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