Company - Incorporation, Share Capital, Directors

Question 1

What is the nominal value / “par value” of a share?

What is the “issued share capital”?

What is “paid-up share capital”?

Answer 1

The minimum subscription price for that share (represents a unit of ownership, not the actual value of the share).

Issued share capital is the total value of shares (nominal and premium) in issue at one time.
EG: £1 a share, 100 shares exist = £100 share capital.

Not all outstanding amounts on shares need to be paid immediately. The amount paid-up is “paid-up share capital” but the Company can demand, or “call”, this at any time.

Question 2

What are the 2 main types of company, and 2 lesser know types of company?

Answer 2

Private company limited by shares; public companies (includes listed companies, are stock exchanges)

Private company limited by guarantee; unlimited company.

Question 3

Can a Company’s Articles of Association go further than the CA 2006 and include more onerous provisions, e.g. requiring a minimum of 3 directors?

Answer 3

Yes. (Valid so long as the Articles include the minimum requirements under CA 2006).

Question 4

How do you amend a Company’s Articles of Association?

Answer 4

Special shareholder resolution (75%+ shareholder votes).

Question 5

What is an ordinary resolution and what is the percentage of votes required to pass one?

Answer 5

Ordinary shareholder resolutions are any matter put up for a shareholder vote (51%+ vote required).

Question 6

When altering the Company’s Articles, what is the main requirement based on case law?

Answer 6

Any alteration to the Company’s Articles must be in the bona fide best interests of the company (Allen v Gold Reefs).
EG: Articles amended so minority shareholders can be bought out at fair price (Sidebottom v Kershaw)
EG: Articles amended so minority shareholders could be compulsorily brought along under a takeover was held to be “no more than a cleaning up exercise” but could not be challenged due to the absence of bad faith, improper motive or irrationality/unreasonableness (Re Charterhouse Capital)

Question 7

What happens if the Memorandum has a statement of objects [purpose] restricting the objects [purpose] of the Company?

Answer 7

Any restrictions in the Memorandum take effect as if they were written in the Articles until the Articles are amended or new Articles are adopted.

Question 8

How do you incorporate and register a company from scratch?

Answer 8

Submit the following the Companies House:
1. Memorandum,
2. Articles of Association (assuming the Model Articles will not be used),
3. Fee,
4. Application for registration (Form IN01), which contains:
- statement of capital and initial shareholdings [not applicable to company limited by guarantee],
- statement of company’s proposed officers,
- [if limited by guarantee], details on the guarantee,
- Statement that CA 2006 requirements have been complied with.

Companies House then gives you a Certificate of Association (sets out company name, date of incorporation., and company number).

Question 9

How do you incorporate a company using a “shelf company”?

Answer 9

Clients will execute the formalities (e.g. special resolution) needed to change the following details of the shelf company:
- Name, [special res. required]
- Articles, [special res. required]
- Registered office,
- Members, directors and company secretary.

Question 10

What is “allotment”? When does a shareholders’ membership start?

Answer 10

Shares are “allotted” when a person acquires the unconditional right to be included in the Company’s register of members in respect of those shares.

When their name is entered in the Company’s register of members.
(Note shareholders can be other entities!)

Question 11

What does an “ordinary share” entitle you to?

Answer 11

To vote in shareholder meetings, to receive a share of profits, to receive any surplus assets after the company is wound up.

Question 12

A shareholders liability is limited to what?

Answer 12

Answer: The nominal value of the shares you own, but haven’t paid up yet. (Typically set at £1 per share).

If your shares are all paid up at nominal value, you owe nothing to the Company in an insolvency.

If you own 10 shares at a nominal value of £1 (£10 total), and you have paid-up 8 of these shares, this means you will owe and contribute the remaining £2 in an insolvency.

Question 13

What is a Person with Significant Control (PSC)?

Answer 13

Someone [including an entity] who owns more than 25% of a company,
Someone who can appoint or remove a majority of the board of directors,
Someone who otherwise exercises “significant influence and control” over the company.

Question 14

What are the types of directors?

Answer 14

Executive directors [officer and employee of the company] (e.g. CEO, CFO, COO);
Non-executive directors [officer but not employee];
Shadow directors [not formally appointed but a key decision-maker that other directors follow],
Alternate directors (e.g. if the usual director is incapacitated),
De facto directors [assume role of directors but not formally appointed, so not treated as directors in law].

Question 15

How are directors appointed?

Answer 15

Ordinary shareholder resolution, or

Majority vote in a board resolution by the directors [the easiest method].

Question 16

Executive directors are company employees, and have service contracts with the company (i.e. employment contracts). How are these approved, and what if they are long-term service contracts?

Answer 16

Standard service contracts - approved by directors’ resolution.
Long-term service contracts (2+ years) - approved by ordinary shareholder resolution.

Note: It is deemed (under statute) that the Company can terminate these service contracts at any time by giving reasonable notice.

Question 17

How do directors make their decisions? What about in the event of a deadlock?

Answer 17

Decision are made by Board Resolution in a Board Meeting.

The pass mark is SIMPLE MAJORITY (Model Articles), unless the directors have decided a certain decision requires unanimous director consent.

In the event of deadlock, the chairman of the Board Meeting (if appointed) will have the casting vote.

Question 18

What is the quorum needed for a directors’ board meeting (Model Articles)?

Answer 18

Minimum number of directors needed to make a decision; it is two directors unless otherwise written in the Articles.

Question 19

What are decisions that require special shareholder resolutions?

Answer 19

• Altering the Companies’ Articles of Association
• Approving certain transactions between directors and the Company
• Formal declaration of dividends

Question 20

Vote by show of hands vs Vote by poll - what’s the difference? When call this be called? Who can call a vote by poll?

Answer 20

A poll vote means that all present shareholders get one vote per ordinary share that they own.

WHEN?
A poll vote can be called in advance of the general meeting (shareholders meeting) or at the meeting but before the vote (show of hands).

WHO?:
- The directors [2+ directors under MA]
- Two or more persons having the right to vote in the shareholders resolution
- Shareholder(s) owning 10% or more of the voting rights.
- Chairperson of the meeting [e.g. if the chairperson does not want to use his casting vote in event of deadlock]

The CA 2006 states that the Articles are INVALID if 5 shareholders, or shareholders owning 10% of the voting rights, cannot call a poll vote.

Question 21

Can a company pass a shareholders resolution without holding a general meeting?

Answer 21

Yes, private companies can use the “written resolution” method of voting.

• ordinary shareholders resolution is passed by majority (51%+) of TOTAL VOTING RIGHTS of eligible members.
• special resolution must state it is a “special resolution” and get 75% or more of the TOTAL VOTING RIGHTS of eligible members.

Question 22

How much notice do you need to give before a directors’ board meetings?

Answer 22

Reasonable Notice.

EG: a couple days’ or even weeks’ notice if the directors are overseas + need to find room big enough.

Question 23

What notice is required before calling a shareholders’ meeting (aka “general meeting”)?

Answer 23

14 clear days’ notice (i.e. does not include day of calling meeting or date of the meeting).

Question 24

What documents must be filed at Companies House if a company wishes to amend its Articles of Incorporation?

Answer 24

Copy of the special shareholder resolution, copy of the Amended Articles.

Question 25

If a private company (X Ltd) wishes to become a public company (X plc), what two things does it need?

Answer 25

A re-issued certificate of incorporation, showing the name change.
A trading certificate.

Question 26

Can a shareholder’s limited liability (only for the nominal value of the shares he owns) be overriden?

Answer 26

Yes, by contracts / guarantees often required by lenders like banks.

Question 27

Who can sign a deed on behalf of the Company? (3 options)

Answer 27

2 directors,
1 director and 1 company secretary,
1 director + witness signature and attestation.

Question 28

Can directors pass board resolutions in writing (i.e. without a board meeting)?

Answer 28

Yes, but only if ALL directors are in agreement with the decision to be discussed.

Question 29

How are votes counted in passing shareholder resolutions (ordinary and special)?

Answer 29

Ordinary meeting of shareholders: by show of hands.

By poll vote, or written resolution voting methods: by total voting rights of eligible members.

Question 30

Who can call a board meeting?

Answer 30

Any director can, personally, or by requiring a company secretary to do so [if the company has a secretary].

Question 31

What is the quorum necessary for a general [shareholders] meeting?

Answer 31

Two shareholders (CA 2006).

Question 32

Can you ever shorten the notice requirement [14 clear days] for a general meeting of the shareholders?

Answer 32

For private companies, CA 2006 provides you can shorten the notice for a GM, if agreed by:
- a majority of the members,
- the majority must hold 90% or more of the total nominal value of the shares [which give right to vote and attend the GM].

For public companies:
- GMs require 95% of voting rights.
- AGMs require 100% of voting rights.

Shortened notice can be agreed at 1hr / immediately after the board meeting used to convene a GM.

In other words, the first board meeting, GM, second board meeting can all be done in one day if necessary.

Question 33

Are there any exceptions to what can be done via written shareholder resolution?

Answer 33

You cannot remove a director or remove an auditor by conducting a shareholders’ meeting via written resolution method.

Question 34

When members vote by written resolution:

• who calls a vote by written resolution?
• If the members are not present or available - what happens?
• what is a lapse period, and how long is it?

Answer 34

Members or directors can propose that members vote by written resolution.

If the members are not present, the directors’ board meeting is closed and then the written resolution is sent out to the members.

If the company does not receive a sufficient number of responses from its members, the written resolution will lapse (extinguish).

If sufficient votes are received, the resolution is passed.

The lapse period is 28 days (Model Articles).

Question 35

Do you need to record written resolutions?

Answer 35

Yes, written resolutions must be recorded in the same way as minutes of a general meeting of shareholders.

Question 36

What are Post-Meeting Matters (formalities) that must be completed after EVERY board/shareholder/board resolution cycle?

Answer 36

INTERNAL
- Minutes of ALL meeting must be kept for 10 years
- Update statutory books, e.g. register of members, directors, PSC register.

COMPANIES HOUSE
- Amended Articles must be filed with any associated forms, e.g. Change of Name forms [if the Company’s name was changed].
- All special resolutions must be filed at CH.
- Some ordinary resolutions must be filed, e.g. the authority to allot shares.

RECORD-KEEPING
EG: Directors’ service contracts.

Question 37

If a director takes a comapny loan, does what sort of authorisation does this need?

Answer 37

Ordinary resolution.

Question 38

What is the benefit of using a shelf company to incorporate?

Answer 38

You can start trading immediately.

(Note for same-day incorporation, incorporation must be done on a working day in normal business hours).

Question 39

How many directors do you need at any one time?
- private company
- public company

Is there an age requirement for directors?

Answer 39

Private company (Ltd) - 1
Public companies (Plc) - 2

At least one director must be a natural person (i.e. not a body corporate).

Yes, directors must be 16 years’ old.

Question 40

What is the significance of “total nominal value” of shares? E.g. when asking to call a GM on short notice.

Answer 40

You need to note that, depending on the MCQ, some shareholders’ class of shares will have different nominal values, e.g. Class A nominal value is £1; Class B nominal value is £2.

The class of shares with higher value (£2) will have greater voting power.

EXAMPLE:
£100 company share capital.
B has 40 class B shares, so has £80(%) of the total nominal value of the shares.

N.B.: Exclude non-voting shares, e.g. preferential shares.

Question 41

Not attending a general meeting (and not voting by proxy)

vs

Not responding to a written resolution

• What’s the difference?

Answer 41

Not attending a meeting = counts as not voting.

Not responding to a written resolution = counts as a vote “against” the proposed decision.

Question 42

Can directors delegate decision-making?

Answer 42

Yes (Model Article 5), for example, one director or committee can be responsible for HR decision (HR Director).

Question 43

What are two key characteristics of company directors and their relationship with the company?

• does this include de facto and shadow directors?

Answer 43

1. They are agents of the company
2. They owe a fiduciary duty to promote the success of the company; act within the powers set out in the Articles; exercise independent judgment; avoid conflicts of interest and refuse unauthorised profits/benefits from third parties.

These duties include de facto and shadow directors.

Question 44

What is the scope of directors’ decision-making?

Answer 44

Directors can make decisions on any matter not governed by shareholder approval (Model Article 3).

Question 45

What records must be kept in relation to directors?
Are any notifications required when a director is appointed / removed?

Answer 45

1. Maintain a register of directors
2. Notify Companies House of any changes

Records should be kept at the company’s registered office (e.g. ALL director’s service contracts) and records should be available for inspection by any member/shareholder without charge.

Question 46

Are there any disclosure required re. annual accounts?

Answer 46

Information about directors’ (+ past directors) remuneration must be included in the company’s annual accounts:
- salaries, bonuses + pension entitlement;
- compensation paid to directors and past directors for loss of office.

The following must also be disclosed in the annual accounts:
- advances and credits given by a company to its directors;
- guarantees entered into a company on behalf of its directors.

Question 47

What is the procedure for removing a director?

Answer 47

1. Ordinary shareholder resolution
   - requires special 28 days’ notice.

The Board of Directors cannot remove a director UNLESS the Articles specifically allow for this.

Shareholders who are also directors can still vote for removals.

Question 48

What are the ways in which a director can lose his office/position?

Answer 48

1. Resignation by notice (MA 18(f))
   - Typically, the Board will pass a board resolution accepting the letter of resignation.
2. Automatic Termination:
   • D is disqualified from being a director
   • D is subject to individual voluntary arrangement or similar
   • D becomes bankrupt
   • Registered medical practitioner states in writing to the company that the director is physically / mentally incapable of acting as a director and will remain so for MORE than 3 months.
   • Retirement by rotation:
     (a) public companies require retirement and reappointment of directors (by the members) every 3 years.
     (b) listed companies have yearly re-elections for directors

Question 49

What are the 3 types of transactions between a company and its directors which require shareholder approval under CA 2006?

Answer 49

1. Directors’ long-term service contracts (2+ years);
2. Substantial property transactions;
3. Loans, quasi-loans and credit transactions.

Question 50

If a long-term service contract for a director is approved without the necessary formality, what happens?

Answer 50

1. The “term” of the contract is void.
2. The contract can be terminated at any time, with reasonable notice.

Question 51

How do we define “Directors’ long-term service contracts”

Answer 51

They are contracts of employment with a term of 2+ years.

EG: Director has a contract for 18 months but the company must give him a minimum of 9 months’ notice before terminating him. This time, added together, amounts to 2+ years and will need to be approved via ordinary shareholder resolution.

Question 52

Can directors vote in the passing of their own service contract?

Answer 52

No, they cannot vote (MA 14.(1)).

Question 53

Do directors need to declare their interest in the service contract?

Answer 53

No, they are not required to do so under statute (s.177(6)(c)), but it is standard practice for directors to declare their interests under s.177(1) so that it is documents for the board minutes.

Question 54

If a director is having his long-term service contract approved, but he is also a director of a holding company - what happens?

Answer 54

The shareholders of the holding company will also need to give approval (s.188(2)(b)).

Question 55

Is the following contract a “long-term service contract” defined under s.188 CA?

“A contract with a fixed term of three years. During the period of the agreement the company can terminate the employment on six months’ notice.”

Answer 55

NO, it is not. This is because the company can terminate the employment on 6 months’ notice.

Question 56

Is the following contract a “long-term service contract” defined under s.188 CA?

“A contract with an initial term of 18 months, where the director has an option to extend the contract for a further year, provided they give notice to the company six months before the expiry of the initial period. The company does not have the same right to renew. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy.”

Answer 56

Yes, it is a long-term service contract.

Question 57

How do we deal with “substantial property transactions”? Please give the full test.

Answer 57

N.B.: These are deals between the “director” or those closely associated AND the company! They require an ordinary shareholder resolution.

1. Acquisition or sale by a director, holding company director, or connected person.

• Members of D’s family (spouse, children, parents, step-children);
• Companies in which D, or those close to him, holds 20% or more of the shares;
• A business partner of, or those closely connected with, the Director.
• Trustees of a trust whereby the director or those connected to him are listed as beneficiaries of the trust.

2. Substantial non-cash asset, to or from the company.

• More than £100,000 or
• More than £5,000 if the asset is worth more than 10% of the company’s net asset value (total assets – total liabilities).

Question 58

What happens if a “substantial property transaction” is carried out but the directors never sought approval?

What are the consequences / remedies (there are 2)?

Answer 58

1. Transaction is voidable at the request of the Company, unless:
   (a) restitution is no longer possible;
   (b) the company has been indemnified for the loss and damage suffered; or
   (c) rights acquired in GOOD FAITH by a third party would be affected by avoiding the required formality (shareholder OR).
2. The directors involved (or those closely connected) are liable to indemnify the company for any losses OR transfer to the company any profits incurred.

Question 59

What happens if a “substantial property transaction” is carried out but the directors never sought approval?

• Are there any defences?

Answer 59

1. Director must show they took all reasonable steps to ensure the company’s compliance with s.190.
   If this works, D will not be liable (s.195(6)).
2. If any connected persons or directors can show that they had no knowledge of the situation/circumstances leading to contravene the formality, then they cannot be liable (s.195(7)).

Question 60

When a “substantial property transaction” occurs, what must the interested Director do?

Answer 60

He should declare the NATURE and EXTENT of his interest to the Board of directors (s.177(1)).

Question 61

ABC Ltd is proposing to buy a piece of land from the aunt of one of its directors. ABC Ltd has three shareholders including the director.

The land has been independently valued at £150,000 and all parties are happy with this valuation. The net asset value of ABC Ltd is £3.5 million.

Is the approval of the shareholders of ABC Ltd required for this transaction?

Answer 61

Shareholder approval is not required because an “aunt” is not a person closely connected to a director under statute, therefore the acquisition falls outside of s.190-196 CA 2006.

Question 62

ABC Ltd is proposing to buy some equipment from the father of one of its directors. ABC Ltd has a single shareholder, which is DEF Ltd. The director in question is also a director of DEF Ltd.

The equipment has been independently valued at £110,000. The net asset value of ABC Ltd is £2 million.

Are the approvals of the shareholders of ABC Ltd and/or DEF Ltd required?

Answer 62

Only DEF Ltd’s ordinary resolution is required.

Since ABC Ltd is a wholly owned subsidiary, no approval is required from its members.

Shareholder approval will be required from the shareholders of DEF Ltd since the director is also a director of that holding company.

Question 63

Name the key general directors’ duties under s.17- - 177 CA 2006.

Answer 63

Duty to act within the powers [act within Articles and for the company’s Purpose];

Duty to promote the success of the company for the benefit of its members as a whole [act in best interests of the Company/members + long-term increase in value]

Duty to exercise reasonable care, skill and diligence;

Duty to exercise independent judgment; [this applies to directors individually, so they cannot be “following the crowd”.]

Duty to avoid conflicts of interests;

Duty not to accept benefits from third parties; and

Duty to declare any interest in a proposed transaction.

Question 64

What are some of the non-exhaustive OTHER considerations that directors must have regard to when promoting the company’s success?

Answer 64

1. Long-term consequences of a decision;
2. Employee’s interests;
3. Need to foster relationship with clients, customers and suppliers;
4. Impact of operations on environment and community;
5. Maintaining reputation for high standards of business & professional conduct;
6. Need to act fairly between different members [shareholders] of the company.

Question 65

How do companies show compliance with the “enlightened shareholder value” considerations under s.172?

Answer 65

Companies note in the board meeting minutes that these items have been considered. Especially with significant decisions, they will evidence that a sufficient amount of research, discussing and briefing has occurred.

Question 66

What is the directors’ “standard of care” with regard to the following duty?

• Duty to exercise reasonable care, skill and diligence;

Answer 66

The standard of the reasonably diligent person with that director’s general knowledge and skill, and the level of skill, knowledge and experience reasonably expected of someone in that role.

Question 67

To whom do the directors owe their duties under s.170-177?

Answer 67

Directors owe their duties to the COMPANY, not the individual shareholders.

Question 68

How widely drafted is the directors’ duty to avoid conflicts of interest?

What are common examples of conflicts?

Answer 68

Widely drafted, e.g. including “a direct or indirect interest that conflicts, or POSSIBLY conflicts…”

Common examples of conflicts are interests in competitor companies, and the exploitation of property, information or opportunity for personal gain, especially at the expense of the company.

Question 69

When is a conflict of interest likely to be avoided [2]?

Answer 69

1. Where it is a transaction entered into by the company. Provided the director declares interests (s.177), the transaction is expressly excluded from giving rise to a conflict of interest (s.175(3)).
2. When the director get (prior) authorisation from the board of directors, e.g. to hold a directorship in a company in the same industry.

Question 70

When will a director have to disclose his interest in a transaction under s.177?

How should he declare his interests?

Who does he need to declare to?

Answer 70

Example: If the director, or his spouse, is a shareholder or director on the target company.
* Note that the director does not NEED to be a party to the transaction for him to be required to declare his interests.
* D must declare BEFORE the transaction is entered into.

Statute does not require a particular method of declaring director interests, but states it is often done (1) in a board meeting, or (2) by notice in writing, or (3) notice in a general which means they are ALWAYS to be considered interested in a transaction, e.g. have an interest in a specific firm or closely connected person close to the company.

Any written notice (in paper, or E-form if agreed) must be given to ALL directors.

Question 71

Does the director need to declare his interests in an EXISTING transaction?

Answer 71

Yes, existing transactions (s.182) are dealt with in the same way as declaring your interests in a proposed transaction (s.177).

Question 72

Can a director vote on passing a transaction which he is personally interested in? Can he count as a quorum?

Answer 72

The director cannot vote or count as towards the quorum (MA 14).

This Model Article 14 can be difficult for smaller companies and limit their decision-making, so:
- MA 14 can be disapplied by ordinary shareholder resolution.

Question 73

What are the key remedies for breach of directors’ duties?

Answer 73

For all duties (other than application of care, skill and diligence):
1. Injunction
2. Setting aside the transaction
3. Restitution and Account of Profits [equitable remedy = surrendering profits]
4. Restoration of company property
5. Damages

For breach of duty to apply care, skill and diligence: DAMAGES.

REMEMBER these duties are owed to the Company, not the Members!

Question 74

Can the shareholders approve a director’s action if it would otherwise be a conflict of interest? If so, how? Are there any limits?

Answer 74

Yes, in two ways:

1. Shareholders can pre-authorise director’s actions via ordinary resolution.
2. Shareholders can ratify an action already taken by the director via ordinary resolution.

Shareholders cannot approve or ratify illegal acts.

N.B. the company’s Articles may require a higher standard for approvals, e.g. 75+ or 100% unanimous shareholder voting.

Question 75

When does a director NOT need to declare his interest?

Answer 75

1. When there is no reasonable prospect of a conflict of interest arising.
2. Any matters the directors are aware of, or ought reasonably to be aware of,
3. When the board of directors are voting on the individual director’s service contract.

[In practice, you would not risk relying on items 1 or 2 and would reiterate your interest to the directors, so that this can be recorded in the Board minutes].

Question 76

Please explain what is meant by, and which parties are involved under CA 2006:
- loan
- quasi-loan
- credit transactions
- guarantees or security provided by the company for any of the above

Answer 76

The only parties to these agreements should be the Company and the director / holding company director / closely connected person.

Loans = Company lends to director

Quasi-Loans =
Company pays out D’s outstanding account to a third party on the understanding D will later reimburse the company.
EXAMPLE: Company pays off D’s outstanding accountant bill or builders’ invoice.

Credit Transactions =
Company provides goods or services on a credit basis that D will later repay
EXAMPLE: Building company constructs new extension for the director on credit terms.

Guarantees or security given for any of the above =
Anytime the director takes out a loan, quasi-loan or credit transaction and the Company acts as guarantor or provides security.

Question 77

For a private company NOT associated with a PLC (public company), what LOAN transactions require shareholder approval?

Answer 77

Only a basic loan (Company to director) will require shareholder resolution approval.

Loans to CLOSELY ASSOCIATED PERSONS do not NOT require SH approval.”

Question 78

For a public company (PLC), or private company associated with a public company (PLC), what LOAN transactions require shareholder approval?

Answer 78

Shareholder approval (resolution) is required for all loan transactions with directors or closely associated persons:
Loans, quasi-loans, credit transactions and guarantees/securities provided.

Question 79

How many company shareholders need to approve if the company is loaning to a director of a holding company (or person closely associated to the holding company director)?

Answer 79

The Company and holding company’s shareholders will both need to pass SH resolutions.

Question 80

What are the exceptions to the require for SH approval of loan transactions?

Answer 80

s.204 - s.210 CA 2006:
* Expenditure on company business (up to a maximum of £50,000);

• Loans for defending proceedings brought against a director;
• Loans for defending regulatory actions or investigations;
• Minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval;
• Intra group transactions, and
• Money lending companies (where the loan is made in the ordinary course of the business of the company).

Question 81

What are the remedies if a loan transaction does not get approved with the required SH resolution?

Answer 81

Transaction is voidable, unless:
* restitution is no longer possible,
* company has been indemnified for loss or damage suffered
* rights acquired in good faith by a third party purchaser (BFP) would be affected by the avoidance.

Director must return money to the company and indemnify the company for any losses.

Question 82

What exceptions apply to loan transactions (where a SH approval is not required)?

Answer 82

• Expenditure on company business (up to a maximum of £50,000);
• Loans for defending proceedings brought against a director;
• Loans for defending regulatory actions or investigations;
• Minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval;
• Intra group transactions, and
• Money lending companies (where the loan is made in the ordinary course of the business of the company).

Same exceptions as with proposed and existing transactions:

• A 100% owned subsidiary’s shareholders do not need to approve.
• Director is not liable if he took all reasonable steps to ensure the company would comply with the relevant sections (s.200-s.203).

Question 83

If a proposed loan transactions is approved, what procedural steps must be followed?

Answer 83

If approved a GENERAL MEETING:
* a memorandum setting out the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the date of the meeting and at the meeting itself.

If approved using a WRITTEN RESOLUTION:
* the memorandum must be annexed to the written resolution and sent to all eligible members.
(FAR LESS PROCEDURE IF APPROVED VIA WRITTEN RESOLUTION)

Question 84

What is the Duomatic Principle?

Answer 84

If the shareholders all agree on something that requires a SH resolution, they can ratify decisions informally.

This must be done where the shareholders have FULL & INFORMED knowledge of the matter.

Question 85

What happens if there are 2 directors in a company and, in a board meeting, one director cannot vote because he is interested in the decision?

Answer 85

You can declare yourself as a sole director company, but in practice, you would call a board meeting to appoint a NEW DIRECTOR.

(The new director can be demoted immediately after the meeting, if necessary).

Question 86

What is a derivative action?

Answer 86

This is where the shareholder bring a claim against directors on behalf of the company, e.g. for breach of directors duty, to make the director make good the company’s losses.

Question 87

Is 12 out of 20 directors approve a transaction (where Mr Smith is an interested director) without shareholder approval, who is liable?

Answer 87

All 12 directors would be liable because they voted for a transaction without the required SH approval - not just Mr Smith.

Question 88

If a director signs a contract on behalf of the company (e.g. supply of goods), who can the supplier sue if he is not paid?

Answer 88

Company only.

Not the director personally, nor the shareholders.

Question 89

When a buyer purchases new stock in a company - what are the relevant steps re. stamp duty tax, HMRC and the Stock Transfer Form?

Answer 89

1. Execute stock transfer form
2. Send this to HMRC with payment of Stamp Duty within 30 days of effective date of the transfer.
3. The stock transfer form is stamped once HMRC are satisfied. Then, you can send this to the company for registration on members’ register and registration of shares.

Question 90

It takes [X]% minimum to request to call a shareholders meeting.

What is this number. Are companies free to lower it or increase it?

Answer 90

A shareholder must have 5% of the voting shares to call a meeting (s.303 CA).

Alternatively, the request can be made by shareholders whose aggregate membership represents 5% of the paid-up share capital.

You CANNOT increase this (think: protection of minority shareholders), but you can lower it, e.g. 1% voting shareholders can call a company meeting.