Corporate Governance Flashcards
Trio layer of the company
- The company (separate legal person)
- The shareholders (the owners, who are members of the company)
- The management (the directors of the company, who run the company and act as its agents)
Director
A director is an officer of a company who acts as an AGENT of the company and can therefore BIND the company by his acts
You DO NOT need to have been formally appointed as a director to be seen as a director by law. NOR will having the title necessarily mean the law will see you as a director.
Shadow director
(1) Not an appointed director, but a natural person/legal person on whose directions or instructions the directors are accustomed to act
(2) The law will treat this person in many ways as an appointed director of the company concerned and so he will be bound by the same director’s duties:
- PERSONAL LIABILITY for breach of duties
- May have to personally contribute assets on insolvency, but they are NOT covered by the director’s insurance
Director’s Duties
A duty of CARE, SKILL and DILIGENCE
USA duty of care test: ‘business judgment rule’:
Directors are not liable for mere errors of judgment
BUT:
- They must NOT ACT NEGLIGENTLY
- They must show REASONABLE PRUDENCE
- They must act HONESTLY for the benefit of the company
Objective: Must act with reasonable care, skill, and diligence
Subjective: Taking into account the director’s knowledge and experience
Duty to disclose
Self-dealing rule!
If a director of a company has in any way, directly or indirectly, a personal interest in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors
Disclose property transactions, loans or other credit arrangements made with the company
Self-dealing rule
Duty to disclose
A director may be personally liable for a breach of duty, unless…
(1) His act is ratified by the shareholders (fraud cannot be ratified)
(2) in UK law: unless directors of a private company, who are disinterested parties, authorize the breach. If it is a public company, the Articles must allow this
Two exceptions when minority shareholders will be heard by the courts
- Derivative actions (those on behalf of the company for a wrongdoing to the company)
- Personal actions for wrongdoing to shareholders
Derivative actions
Here the shareholders bring a claim against officers or directors on behalf of the company where there has been an actionable wrongdoing to the company (BREACH of officer/director’s duties)
Shareholders want corporate governance changes. Any damages awarded go to the company.
Personal actions for wrongdoing to shareholders
Collective action if the personal rights of a large group of shareholders have been affected.
Typically where directors’ NEGLIGENCE or FRAUD has affected shareholder value.
Types of winding up
- Voluntary winding up
- Compulsory winding up
Priority in liquidation
- Fixed charge holders may realize their assets, any surplus going tot he liquidation
- Preferential creditors
- Floating charge holders
- Unsecured trade creditors
- Shareholders (the residual claimholders)
*If there are not enough general assets to pay the liquidator, he is paid before floating charge holders and preferential creditors
Personal liability of directors in a winding up
- Fraudulent trading (fraudulent intent must be shown)
- Director (may be liable to contribute to the company’s assets)
- Wrongful trading (any director knew or should have known that this would occur and failed to take all reasonable steps to minimize loss)
- Continuing to trade at a loss, so increasing the deficit to creditors rather than ceasing to trade or putting the company into liquidation can constitute failure to take such steps
FRAUDULENT TRADING
WRONGFUL TRADING
DIRECTOR
Lien
A charge on the property of one another.
The liquidator cannot take the property until the holder of the lien has been paid off, for example until the holder has been paid for repair work on the property.
These assets are not available to the liquidator
The trust
