Company decision-making, directors, shareholders

Question 1

What is a de facto director?

Answer 1

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

Question 2

What is a shadow director?

Answer 2

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

Question 3

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

Answer 3

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

Question 4

What are the restrictions on being a director?

Answer 4

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)

Question 5

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

Answer 5

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

Can be removed by the directors using a board resolution

Question 6

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

Answer 6

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

Can be removed by the shareholders using an ordinary resolution

Question 7

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

Answer 7

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

Question 8

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

Answer 8

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?)

Question 9

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

Answer 9

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

Question 10

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

Answer 10

• 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

Question 11

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?

Answer 11

No

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

Question 12

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

Answer 12

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

Question 13

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

Answer 13

• 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

Question 14

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

Answer 14

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

Question 15

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

Answer 15

Wrongful trading

Fraudulent trading

Misfeasance

Question 16

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

Answer 16

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

Question 17

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

Answer 17

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

Question 18

What is a substantial property transaction?

Answer 18

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

Question 19

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

Answer 19

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

Question 20

Can a company make a loan to a director?

Answer 20

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

Question 21

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

Answer 21

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)

Question 22

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

Answer 22

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

Question 23

How are subsequent directors of a company appointed?

Answer 23

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

Question 24

What must a company do if a director resigns?

Answer 24

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

Question 25

How can a director be removed?

Answer 25

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

Question 26

How long can the court disqualify a director for?

Answer 26

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

Question 27

What are some of the grounds for disqualifying a director?

Answer 27

**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

Question 28

What is the difference between ordinary & preference shares?

Answer 28

**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)*

Question 29

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

Answer 29

**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)

Question 30

What can a shareholder with 75% shareholding do?

Answer 30

Pass or block a **special resolution**

Question 31

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

Answer 31

Pass or block an **ordinary resolution** * *Block*: _exactly_ 50% * *Pass*: _over_ 50%

Question 32

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

Answer 32

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

Question 33

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

Answer 33

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%

Question 34

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

Answer 34

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**

Question 35

What are the 2 main legal mechanisms protecting minority shareholders?

Answer 35

Unfair prejudice petitions Derivative claims

Question 36

What is an unfair prejudice claim?

Answer 36

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**

Question 37

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

Answer 37

(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

Question 38

What is the possible remedy for an unfair prejudice petition?

Answer 38

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

Question 39

What is a derivative claim?

Answer 39

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

Question 40

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

Answer 40

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**

Question 41

Who attends board meetings?

Answer 41

Directors → pass board resolutions

Question 42

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

Answer 42

Director must give **notice to the other directors** Notice must be **reasonable** & include the time, date, place

Question 43

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

Answer 43

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

Question 44

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?

Answer 44

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

Question 45

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

Answer 45

By a **simple majority**, ie. over half If board has a **chair**, they will have the **casting vote** in the event of a tie

Question 46

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

Answer 46

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

Question 47

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

Answer 47

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

Question 48

What are the two ways of passing shareholders resolutions?

Answer 48

In a **general meeting** or by **written resolution**

Question 49

How are general meetings called?

Answer 49

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

Question 50

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

Answer 50

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

Question 51

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

Answer 51

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*

Question 52

What is the quorum for a shareholders general meeting?

Answer 52

Subject to the company's articles, the quorum is **two**

Question 53

How do shareholders vote in general meetings?

Answer 53

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**

Question 54

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

Answer 54

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

Question 55

Which companies can pass shareholder resolutions by written resolution?

Answer 55

Private companies only

Question 56

How are shareholder resolutions passed by written resolution

Answer 56

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)*

Question 57

How are shareholders' votes weighted in written resolutions?

Answer 57

Each shareholder has **one vote for each share they own**

Question 58

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

Answer 58

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**

Question 59

What constitutes a person with significant control in a company?

Answer 59

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

Question 60

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

Answer 60

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

Question 61

What are the filing requirements when a company transfers shares?

Answer 61

**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

Question 62

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

Answer 62

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)

Question 63

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

Answer 63

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

Question 64

What are the notification requirements for passing a special resolution?

Answer 64

Must notify CH **within 15 days**

Question 65

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

Answer 65

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

Question 66

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

Answer 66

_Private_ company: within **9 months** after the end of the accounting period _Public_ company: within **6 months**

Question 67

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

Answer 67

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

Question 68

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

Answer 68

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

Question 69

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

Answer 69

**Special** resolution

Question 70

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

Answer 70

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

Question 71

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

Answer 71

**Special** resolution (ie. 75%)

Question 72

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

Answer 72

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

Question 73

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

Answer 73

No Borrowing falls within the directors’ general powers under Model Article 3

Question 74

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

Answer 74

**Ordinary** resolution *Nb. If the director involved is also a shareholder, their vote won't count*

Question 75

What is a Bushell v Faith clause?

Answer 75

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