CoSec, Directors, Members, CC Flashcards
People who frequently attend board meetings are in danger of?
Directors must exercise care when considering attendees at Board meetings. This is because any non-directors who frequently attend are at risk of being considered as a shadow director. A shadow director is a person, not appointed as a director, managing or directing the affairs of a company or who directs the actions of the directors. This situation can occur where a significant shareholder or advisors to the company frequently attend Board meetings. The point of concern is that pursuant to s.251 CA 2006, a shadow director is deemed to be a director of the company for all purposes.
Director Indemnification and additional protections given to directors.
A 2006 confirms that directors and officers may be indemnified against civil proceedings (both defence costs and damages) brought by third parties and criminal proceedings. The Model Articles include provisions for a company to indemnify their directors against certain civil or criminal proceedings, so some form of protection is available. Given the business is not expected to have significant income, additional protection via insurance may be appropriate. Companies are permitted by statute to take out an insurance policy covering directors and officers of the business against the liabilities that they may incur in carrying out their duties. These provisions apply equally to both a private company limited by shares and a company limited by guarantee
What is the Process for Appointing Directors/Public Companies- Full Procedure?
Appointing Directors
- First directors appointed on form IN01 filed at Companies House
- Subsequent appointments governed by Articles
- Board (or nomination committee) usually appoints directors
- Companies House form AP01
- Shareholders may propose director appointments by requisitioning a general meeting
Public companies
- at first AGM, all directors retire and must be re-elected by shareholders
- at subsequent AGMs, directors appointed since last AGM or not Deverell appointed or reappointed at last two AGMs must retire and seek re-election
- elections or re-elections following retirement by rotation or removal to be approved by the company at a general meeting
Procedure for Appointment
- Board or nomination committee draws up profile
- Select preferred candidate, provide full details to board (details of individual, proposed remuneration, draft service contract and press release) - board approves
- Secretary writes to director confirm appointment:
- request personal details for AP01 and for payment
- AP01 submitted (no director signature required, ensure consent obtained for acting as director)
- if to be a signatory, get specimen signature for bank
- inform of any share qualifications they must acquire
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request notice of interests in the company’s contracts
- If listed company, notify UKLA via a RIS (by end of business day following decision to appoint)
- Update register of directors and secretaries
- File AP01 with Registrar of Companies within 14 days
- If directors’ names appear on company stationery, amend accordingly
- Arrange induction and briefing
- directors should receive induction and regularly update and refresh their skills and knowledge (UK Corporate Governance Code)
- ensure director fully aware of responsibilities, duties and liabilities - can use written materials, in-house resources, training courses, etc
What occurs during a Disputed Appointment, and the process of a Directors Resignation?
Disputed
- Introduced in 2016 CA2006 s. 1095(4A) enables a director to dispute their appointment or amend details filed in respect of their appointment.
- Application to the Registrar form RP06. The Registrar will enquire of the company to ascertain whether consent was given or not and where consent cannot be proved the appointee’s details will be removed from the record.
- Recommended get written consent to act as a director be obtained for all proposed directors prior to their formal appointment
Director Resignation
- letter of resignation
- LETTER OF ASSURANCE
- formally minute the vacation of office
- record in Register of Directors & Secretaries
- Form TM01 and file at Companies House within 14 days
- pay outstanding fees/expenses, inform HMRC
- check if share options triggered
- remove name from any stationery
- inform bank (if authorised signatory)
- notify UKLA, if listed company, and issue press release
- director to return all documents and property
What are Director Duties?
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To act within powers (171)
- act in accordance with the constitution
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To promote the success of the company (s172)
- acting in good faith for the benefit of members as a whole, taking into account:
- long-term consequences of decision
- interests of employees
- the need to foster business relationships with third parties
- impact of the company’s operations on community & environment
- maintaining high standards of business conduct
- acting fairly as between members of the company
- acting in good faith for the benefit of members as a whole, taking into account:
- To exercise independent judgement (s173)
although could be legitimately restricted by other agreements in place
- To exercise reasonable care, skill & diligence (s174)
The duties imposed by CA2006 ss. 173 and 174 require that a director owes a duty to exercise the same standard of care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of the person carrying out the same functions as a director in relation to that company (an objective test); and the general knowledge, skill and experience that the director actually has (a subjective test).
Example, a finance director would be expected to have a greater knowledge of finance issues than, say, the HR director (the objective test); but if the HR director is also a qualified accountant, then they would be expected to have a greater knowledge than would normally be expected of an HR director, although not necessarily the same knowledge as the finance director (the subjective test)
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To avoid conflicts of interest (s175)
- unless authorised by the directors:
- private companies - authorisation permitted unless anything in Articles prohibits
- public companies - authorisation permitted if specifically prescribed in Articles
- CoSec to ensure policies and procedures for recording
- unless authorised by the directors:
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Not to accept benefits from third parties (s176)
- unless cannot reasonably give rise to a conflict of interest
- unlike s175, directors cannot authorise - must be shareholders
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To declare an interest in a proposed transaction or arrangement (s177)
- unless cannot reasonably give rise to a conflict of interest.
What should be considered when deciding if a company limited by shares or a company limited by guarantee is most appropriate.
Liability should be considered, which for the directors will be the same regardless of whether it is a company limited by guarantee or by shares. Liability for the members must also be considered. Generally, for a company limited by guarantee the liability is in respect of the amount guaranteed. For a limited company, the liability will be up to the amount subscribed (plus the balance of any unpaid calls)
Byelaws can operate with either companies limited by guarantee or companies limited by shares. However, guarantee companies are a popular choice for membership organisations where the Articles are supplemented by internal byelaws regulating how the organisation is run, for example how directors are elected.
If the company plans to pay dividends and return assets on a winding up, a company limited by shares may be a more suitable option. The default position for a company limited by shares is that there is an ability to receive dividends from distributable reserves and that any surplus assets are distributed pro-rata on a winding-up. In respect of a company limited by guarantee, the guarantor members are usually not entitled to participate in profits or surplus assets. On winding-up of a guarantee company the default position is that any surplus assets must be passed to another guarantee or charitable company with similar objects. However, it is possible to amend the Articles to distribution income (dividend) or capital.
A new company limited by guarantee is not permitted to be formed or operate with a share capital (only companies formed up to December 1980 may do so). If a share capital is required then the company must only be limited by shares. Furthermore, typically guarantee companies do not have frequent changes in the members and there is no statutory mechanism to transfer a guarantee to another guarantor. Instead the guarantor must resign and a replacement must apply in their place. However, a resigning guarantor will remain liable for one year after resigning, compared to a shareholder, who would not have such a liability.
How to disapply pre-emption rights?
Companies may permanently disapply pre-emption by excluding such rights in their Articles of Association (this will require a variation of the Articles). Alternatively, the rights may be excluded for a specific duration by special resolution of the members. It is usual for listed companies to request an annual waiver at each AGM for up to 10% of the issued share capital, subject to a rolling limit of 7.5% over three years.
Process for Unfair prejudice
- Directors fiduciary duty (common law and s172) to act in best interests of members as a whole – liable if act for subgroup, themselves or not at all
- Shareholders statutory right to apply to court for relief if company’s affairs have been/are/proposed to be conducted in manner ‘unfairly prejudicial’ to interests of shareholders, all or some but including himself - s994
- Shareholder must
- demonstrate conduct is unfair and caused/causing prejudice or harm
- have refused offer by majority to purchase shares at proper value (contentious!)
- ‘Unfair conduct’ = objective test by court
- no need to show bad faith or intention to cause prejudice
- reasonable bystander test
- ‘Prejudice’ actually caused/causing harm = broad view taken by court
- unless can prove actions were outside Articles, difficult to succeed (see examples)
- Expensive from outset (not always recoverable) and lengthy process
- More common in private than PLC – just sell shares in market and get out
Examples
- Exclusion from management where express or implied agreement to participate exists (eg substantial shareholder)
- Majority shareholder receiving excessive financial benefits
- Fraud by director such that majority gain and minority disadvantaged
- Diversion of business or assets to another company of which the majority shareholder/directors are interested
- Failure to observe pre-emption rights thus denying shareholder right to new share and existing shares holding being diluted
- Abuse of powers and breach of Articles (eg not sending accounts or GM notice to shareholders)
Court remedies
- Most common: instructs offending shareholders to purchase prejudiced shareholders interest at proper value as if prejudice had not occurred → contentious valuation. Get on with business.
- Directs company to stop offending conduct or regulates it going forward
- Authorises civil action be brought in name of company on such terms as may direct (ie Derivative Action) – this could be at company’s cost!
Directs that no variation to company’s Articles without Court approval
Process for Derivative Claims, and alternative remedy to Unfair Prejudice and Derivative Action.
Derivative claims
- A member can, on behalf of the company, bring a claim against a director (ss.260-269)
- For negligence, breach of duty or breach of trust
- Applies to court for permission- by establishing a prima facie case.
- no permission if a person acting under ‘duty to promote success of the company’ would not pursue, or if act or omission was authorised/ratified by company
- court takes into account views of other shareholders, whether acting in good faith, company likely to authorise/ratify, importance of claim to person promoting success of company, and if company decided not to bring a claim
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Only member canbringderivative civil action vsa director (or 3rd party)
- company must have cause (per examples) but doesn’t act
- Foss v Harbottle – company is liable for contracts/tort
- action brought on behalf of company as director owed duty of care
- purpose: mainly to seize back assets and/or recover compensation – see examples
- benefits awarded for company not shareholder
- NB Very different to direct sh’er action made in own name/for own benefit
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Two stage Court procedure
- establish prima facie case for permission to continue new action (or past/current action pursued/completed unsatisfactorily by company/other member)
- Court may require evidence from company before action can commence
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Factors for court to consider
- shareholder acting in good faith (ie not vexatious or frivolous) and got ‘clean hands’?
- should shareholder pursue claim/remedy in own right instead (as above)?
- importance that director promoting success of company would attach to continuing claim
- likelihood that conduct would be authorised or ratified company
- whether and why company had decided not to bring a claim (or has aborted/completed)
- most important: views of other ‘independent’ (ie disinterested) shareholders
Advantages
- Scope is wide – claims can be brought for conduct amounting to negligence, default, breach of duty or breach of trust (e.g. breach of general statutory duties incl. duty to exercise reasonable care, skill and diligence or promote success of company)
- Doesn’t matter that member bringing action became shareholder after cause of action
- No minimum shareholding requirement for person bringing action
- No minimum time period for by which member must have held their shares before bringing action
- Claim can be brought in respect of past acts or omissions and proposed future ones
- If claim successful, shareholder achieves outcome that directors had refused
Disadvantages
- Courts have strong powers and discretion to refuse permission for waste of time claims. Lots of cases thrown out and costs awarded against shareholder!
- Lengthy process (months) even if permission to proceed is granted.
- Remedies awarded are for company’s benefit and not the shareholder bringing the action
Costs
- Expensive process!
- But, Court can order company to pay shareholder’s costs and indemnify them against future costs, even if claim unsuccessful. (Company/directors may have D&O insurance/indemnity)
Shareholder cost and risk in bringing action can be limited
Alternative remedy to Unfair prejudice and Derivative Action
- Petition for ‘just and equitable winding-up’ – IA 1986 s122 (eg occurs particularly where 50/50 deadlock mismanagement or exclusion exists) Brought by directors, majority creditors or members.
Explain the difference between a members’ voluntary winding-up and a creditors’ voluntary winding-up
A members’ voluntary winding-up is a solvent winding-up under which the directors are able to make a statutory declaration that the company will be able to pay its debts in full within a period not exceeding 12 months from commencement of the winding-up. This statement creates liability for Directors, and they may be liable to pay a fine or imprisonment if they did not have reasonable grounds to make the statement under s186 of the 1986 Insolvency Act. Under a creditors’ voluntary winding up, the directors are unable to make a statutory declaration of solvency. Under a creditors’ winding-up, a meeting of the creditors must be called and held within 14 days after the meeting of the members of the company at which a resolution to wind-up is passed (s.98 Insolvency Act 1986).
What are the requirements for an Acquisition, and an alternative to compulsory acquisition?
Sections 974–87 Companies Act 2006 (CA 2006) set out certain requirements regarding the compulsory acquisition of another company’s shares. However, a compulsory acquisition cannot be considered until the offeror company has acquired or contracted to acquire not less than 90% in value of the shares.
Provided the 90% level can be achieved, the CA 2006 provides protections of the rights of the remaining shareholders (i.e. the minority holders). The CA 2006 allows minority holders to resist a compulsory acquisition if they have reasonable grounds to do so and to ensure that they are treated no less fairly than the other shareholders who have accepted the offer.
Schemes of arrangement may be useful where it would not be possible to obtain the required 90% level of acceptances for a compulsory acquisition. However, minority interests still have to be protected so this would not be a route to reduce the value of the offer by an unfair amount. A scheme of arrangement will require a special resolution of the members plus the approval of the Court.
Statutory Requirements to Re-Register as a PLC
Before a private company limited by shares can re-register as a public company, it must meet certain minimum criteria and it must also take action in advance as part of the re-registration in any area where the company is deficient.
- A plc must have at least two directors (s.154 Companies Act 2006)
- The directors will need to consider if the Company Secretary of a plc is suitably qualified as per the criteria set out in the CA 2006 (s.273 CA 2006)
- A plc must have issued at least £50,000 of share capital, in nominal value of which all of a premium and at least 25% of the nominal value must be paid (s. 763 - 764 CA 2006)
- find a new shareholder to make the additional investment
- launch a rights issue so that each shareholder is given the opportunity to increase their shareholding pro-rata to their existing shareholding
- disapply pre-emption rights and allot additional shares to one or more holders so that the minimum capital requirement is achieved
- All companies’ annual accounts must be audited (s.475 CA 2006) unless the company qualifies as exempt from audit- small company (s.477 CA 2006)
Requirements to Form a CIC
A CIC must meet certain conditions in addition to other limited companies. In particular, the Memorandum and Articles must comply with additional statutory provisions (including those in the Community Interest Company Regulations 2005) which for example set out details of the ‘asset lock’. The name of the CIC is subject to the usual provisions when forming a company – an index of company names is maintained by the Registrar of Companies which must be checked to make sure that the proposed name will not be the same as or too similar to the name of any existing company. Furthermore, a CIC must also end with the words ‘Community Interest Company’ or ‘CIC. The CIC can be a company limited by shares or guarantee.
In order to qualify as a CIC, the business must clearly demonstrate how its purpose will meet the community interest test. One way it can do this is to define closely its objects, rather than using the general commercial objects clause. When the business is being incorporated, it must confirm and demonstrate by explaining the intended activities using the relevant form (Form CIC36) that the company will benefit the community. A further document (the Excluded Company Declaration (ECD), in the form approved by the Regulator, will also be needed to confirm that the company is not excluded from being eligible from being a CIC. The CIC Regulator must confirm that the proposed company meets the eligibility criteria. The name of the CIC may be changed by special resolution and any available name may be chosen, provided the name ends with ‘CIC’ or ‘Community Interest Company’. However, the purpose of the company must at all times meet the CIC test and hence there will be restrictions on the any change of purpose should the business wish to remain a CIC.
What are the ways in which a Company’s existence may come to an end?
Voluntary application to strike off, Winding-up and leaving the company Dormant
Pursuant to s.1003 Companies Act 2006, a private company which is not trading may make a voluntary application to have the company’s name struck off the Register and the company dissolved. This procedure may not be used if, within three months of the proposed application, the company has changed its name, traded, disposed of property, or engaged in any activity other than that required to effect the dissolution. All property must be disposed of, otherwise upon dissolution it will pass to the Crown as Bona Vacantia. The voluntary application route is only available for private limited companies.
Members’ voluntary winding up: This is a winding up under which the directors must have prepared a statutory declaration within the five weeks immediately preceding the resolution to wind up that they are of the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months from commencement of the winding up. If a director makes such declaration without reasonable grounds and the debts are not paid, the directors are liable to a fine or imprisonment (s.89 Insolvency Act 1986).
A dormant company is one which has not traded or has ceased trading and has no accounting transactions that need to be entered in its financial records. A company which qualifies as dormant is however subject to filing obligations with the Registrar of Companies and these must continue to be complied with whilst the company remains in existence.
What is the difference between Private Limited Company and Public Limited Company in respect of Share Capital and Shareholders, Directors and Officers, General Meetings, Stautory Registers adn Compliance and Accounts.
