Director's duties and responsibilities MCQs Flashcards
Your client is a manufacturing company (‘Company A’).
The managing director of Company A (‘the MD’) asks to speak to you about a proposed contract between Company A and a website design company (‘Company B’).
Company B is run by the MD’s close friend. The managing director has even invested in Company B himself and now owns 5% in Company B.
The MD wants to discuss this proposed contract at the upcoming board meeting of the 5 directors of Company A. The other directors of Company A are already aware that the MD has shares in Company B. Company A is a private limited company with unamended Model Articles.
Which of the following statements best summarises the advice you should give to the MD of Company A?
The MD should not declare their interest in the proposed contract with Company B as the other directors are already aware that the MD has an interest in the proposed transaction.
The MD should sell their 5% shares in Company B to avoid a breach of their directors’ duties in the Companies Act 2006.
The MD should declare their interest in the proposed contract with Company B at the board meeting of Company A. The MD will not be allowed to vote on the proposed contract at the board meeting.
The MD should declare their interest in the proposed contract with Company B. If they do not, all 5 directors of Company A are at risk of breaching their directors’ duties contained within the Companies Act 2006.
The MD has a duty under s 175 of the Companies Act to avoid a conflict of interest. They are at risk of breaching that duty. They should therefore not propose that this contract is entered into at the board meeting of Company A.
The MD should declare their interest in the proposed contract with Company B at the board meeting of Company A. The MD will not be allowed to vote on the proposed contract at the board meeting.
This is correct. This is the effect of Model Article 14 and s 177 of the Companies Act 2006.
A private limited company is planning to grant a service contract for a three-year term to one of its directors. The company was incorporated in 2010 and has adopted unamended model articles.
The company is keen for this to be approved by the shareholders as quickly as possible and has already been advised that this will need to be approved by way of an ordinary resolution.
All shareholders are understood to be generally available and responsive over the coming weeks.
Which of the following statements best describes the appropriate method the company should use?
The company should use the short notice procedure in calling the general meeting as this should allow the process to be shortened significantly.
The company should call a general meeting under the usual notice requirements to ensure that all shareholders have an opportunity to participate in the voting.
The company should use the written resolution procedure to ensure that all shareholders have an opportunity to participate in the voting.
The company should use the short notice procedure in calling the general meeting to ensure that all shareholders have an opportunity to participate in the voting.
The company should use the written resolution procedure as this should allow the process to be shortened significantly.
The company should use the written resolution procedure as this should allow the process to be shortened significantly.
Correct. The written resolution procedure is the only procedure that can be used to potentially bring down the time period significantly. The fact pattern indicates that all shareholders are expected to be available and responsive so there is no reason to suggest that a written resolution would take longer than a general meeting whether on short notice or not. The company will need to comply with the provisions of s 188(5)(a) Companies Act 2006 and with the general rules on the written resolution procedure – see s 288 Companies Act 2006 onwards. Use of the short notice procedure for the sake of time is incorrect given that, in the case of directors’ long term service contracts, s 188(5)(b) Companies Act 2006 requires a memorandum setting out the proposed contract to be made available to the members (i) at the company’s registered office for not less than 15 days ending with the date of the meeting and (ii) at the meeting itself. In reality, therefore, this would only shorten the ‘normal’ procedure by one day – i.e. 15 days instead of 14 clear days. Use of the written resolution procedure for the reasoning that it will allow all shareholders to have an opportunity to participate in the voting is incorrect as the scenario states that all shareholders are due to be available and responsive over the coming weeks.
A private limited company, which operates a publishing business, has no subsidiaries and is owned by individual shareholders. One of its directors wishes to undertake some home improvements and has obtained a quotation of £8,000 from a firm of builders. The director has asked the other board members if the company would pay this sum to the builders up-front, on condition that the director repay the company in monthly instalments over the coming year. The board is happy to approve such an arrangement and has asked you whether or not it also requires shareholder approval.
Which of the following comprises the best advice to the company’s board?
An ordinary resolution is necessary because the transaction is a quasi-loan.
No shareholder approval is necessary because the value of the transaction is below £10,000.
No shareholder resolution is necessary because the company is not a wholly-owned subsidiary of any other company.
No shareholder resolution is necessary because the Companies Act 2006 does not require approval of this transaction.
An ordinary resolution is necessary because the transaction is a credit transaction.
No shareholder resolution is necessary because the Companies Act 2006 does not require approval of this transaction.
Correct. No shareholder resolution is necessary. The transaction described is a quasi-loan, as defined in s 199 Companies Act 2006. The requirement in s 198 (2) for shareholders to approve a quasi-loan to a director of a company applies only if such company is either (i) a public company or (ii) a private company associated with a public company. The company in this case is a private limited company. Because it is owned by individuals and has no subsidiaries, we can conclude that it is not associated with a public company (s 256).
Director A is a director of Company B. Company B proposes to issue Director A with a service contract (the “Contract”) for a fixed term of three years (the “Term”) which contains the following provision at clause 11:
“The Company may not terminate the Contract before the expiry of the Term except for disciplinary reasons as set out in clause 15.”
What does Company B need to do before offering the Contract to Director A and what is the consequence of it failing to do so?
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on reasonable notice.
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, the Contract will be void.
Company B must seek shareholder approval for the Contract by special resolution. If it fails to do so, the Contract will be void.
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on six months’ notice.
Company B must seek shareholder approval for the Contract by special resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on reasonable notice.
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on reasonable notice.
Correct. This answer reflects the correct position. While the other answer option might sound plausible, they are each incorrect. Clause 11 of the Contract constitutes a “guaranteed term” of more than two years. As such, Company B cannot agree to such a provision unless it has been approved by the shareholders by ordinary resolution. If Company B enters into the Contract without the Term being approved by the shareholders as described, the contravening clause (clause 11) would be void to the extent of the contravention and the Contract would be deemed to contain a term entitling Company B to terminate it at any time by giving reasonable notice.
A company (the “Company”) has three directors, a company secretary and four shareholders, each shareholder holding 25% of the Company’s share capital. The Company has unamended Model Articles of Association for Private Companies Limited by Shares. One of its directors would like a loan of £30,000 from the Company (the “Loan”) to fund some renovation work on personal property. The board of the Company would like to implement this Loan and do not anticipate the shareholders objecting to it. The Company does not use the written resolution procedure for such matters.
What resolutions (board and shareholder) are required for the Company to implement the Loan?
Shareholder resolution: Ordinary resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the wording of the resolution to be passed, (4) approve entry into the loan agreement, (5) authorise a shareholder to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
Shareholder resolution: Ordinary resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the nature, amount and purpose of the Loan, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
Shareholder resolution: Ordinary resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a copy of the Loan agreement, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
Shareholder resolution: Special resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the nature, amount and purpose of the Loan, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
Shareholder resolution: Special resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a copy of the Loan agreement, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
Shareholder resolution: Ordinary resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the nature, amount and purpose of the Loan, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
Correct. This answer reflects the correct position. While the other answer options might sound plausible, they are each incorrect. A company may not make a loan to its director unless the transaction has been approved by the shareholders passing an ordinary resolution. This is the only shareholder resolution required to implement the Loan. Since the Company does not use the written resolution procedure for such matters, a general meeting will need to be convened. A board meeting will therefore be required and board resolutions passed to convene the general meeting and approve the form of notice for the meeting. The ordinary resolution approving the Loan may not be passed unless a memorandum setting out the nature and amount of the Loan and the purpose for which it is required is made available for inspection by the shareholders for at least 15 days ending with the date of the general meeting at which it is voted on and at the general meeting itself. Once the ordinary resolution approving the Loan is passed by the shareholders, a second board meeting is required to implement the Loan. This will entail passing board resolutions to approve entering into the loan agreement and appointing a director to sign the document on behalf of the Company. A board resolution requiring the company secretary to deal with post meeting matters is also required.
Question 2
A private company has the Model Articles of Association with no amendments. It has six
directors. A board meeting is scheduled for next week and the chair intends to propose
a resolution to appoint a new director. Four directors (the chair, the finance director, the
operations director and the HR director, referred to collectively as the ‘Directors in Favour’)
are in favour of the appointment and the other two directors (the IT director and the
director of planning) are against it.
Assume that at the board meeting everyone who attends will vote as indicated above and
that none of the directors have a personal interest in the matter.
Which of the following best explains who should attend the board meeting in order for
the resolution to be passed?
A As long as any two directors attend the board meeting, the resolution will be passed.
B As long as the chair and any one other director attend the board meeting, the
resolution will be passed.
C As long as the chair attends the board meeting, the resolution will be passed.
D As long as any two of the Directors in Favour attend the board meeting, the resolution
will be passed.
E As long as the chair and one of the other Directors in Favour attend the board meeting,
the resolution will be passed.
Answer
Option E is correct. In order for the resolution to be passed, the board meeting must be
quorate and a simple majority of directors must vote in favour of the resolution (MA 7). The
quorum for a board meeting is two (MA 11), so two of those directors in favour must attend,
to ensure there is a quorum. If they did not, the directors who are against the resolution
could fail to turn up and the meeting would not be quorate. The chair of the board has
a casting vote (MA 13), so at the board meeting, either three directors or the chair and
another director must vote in favour to ensure that there is a majority in favour of the
resolution. Option E is the only combination which makes sure the quorum is met and that
enough directors are present to outvote the IT director and the director of planning.
Question 2
The client is a director of an electronical wholesale company and a shareholder in an
electronical retail company.
If the client failed to mention their interest in the electrical retail company when the
electrical wholesale company transacted with it, which of the following best describes
their liability for breach of duty?
A The client will not have breached their duties to the electrical wholesale company
because their relationship with the electrical retail company cannot be regarded as
giving rise to a conflict of interests.
B The client is in breach of the duty to avoid conflicts of interest.
C The client is in breach of duty, but the electrical wholesale company’s directors may be
able to authorise the breach as long the client is not counted in the quorum and does
not vote when the decision is taken.
D The client may be in breach of their duty to declare an interest in a proposed
transaction or arrangement.
E The client is in breach of duty, but this breach can be ratified by the shareholders by
ordinary resolution.
Answer
Option D is correct. Options A and B are wrong because we do not know enough about
the situation to be able to say for sure whether there is or is not a conflict of interest. If the
client’s shareholding in the electrical retail company is very small, the situation is unlikely
to give rise to a conflict of interest, but we do not have enough facts to know whether this
is the case. Option D is correct: the client should declare their interest unless it cannot be
regarded as likely to give rise to a conflict of interest, and we do not know whether this is
the case, so the client ‘may’ be in breach. Option C is wrong because it is not possible for
the board to authorise a breach of the duty to declare an interest in a transaction. Option E
is wrong because while the shareholders could ratify any breach by ordinary resolution, we
cannot say for sure whether there is even a breach.
Question 3
The client is a manufacturing company with three directors, an IT director, a managing
director and an operations director. The client has the Model Articles with no amendments
and its net asset value is £95,000. The IT director has 49% of the shares in a distribution
company. The IT director wishes to sell a van to the client for £6,000 and the distribution
company wishes to purchase a warehouse from the client for £80,000.
Assuming that there are no agreements in place and no relevant resolutions have
been passed, which of the following best describes what shareholders’ resolutions the
client would need to pass in order that the transactions described above could validly
go ahead?
A An ordinary resolution to authorise the sale of the warehouse.
B Two ordinary resolutions, one to authorise the sale of the warehouse and one to
authorise the purchase of the van.
C An ordinary resolution to authorise the purchase of the van.
D A special resolution to authorise the IT director’s involvement in the purchase of the
warehouse.
E A special resolution to authorise the IT director’s involvement in the purchase of the
warehouse and two ordinary resolutions, one to authorise the sale of the warehouse
and one to authorise the purchase of the van.
Answer
Option A is correct. The purchase of the van does not need to be authorised by the
shareholders because its value is less than £100,000 and less than10% of the client’s net asset
value of £95,000. The sale of the warehouse is a substantial property transaction (‘SPT’) and
therefore does need to be authorised by the shareholders, by ordinary resolution under s 190.
It is an SPT because:
*
It is a transaction between the company and a person connected to the company
(the distribution company, because the IT director owns over 20% of the shares in the
distribution company);
*
It involves a non- cash asset (the warehouse); and
*
It is of substantial value (over £5,000 and over 10% of the client’s net asset value of
£95,000)
The IT director’s involvement in the sale of the warehouse does not need to be authorised as
a separate issue from the ordinary resolution to authorise the sale of the warehouse.
Question 6
The directors of a private limited company plan to sell some land which is owned by the company. The proposed purchaser of the land is known to all the directors, and is the father of one of the directors. The company’s directors are all also shareholders in the company.
The land has recently been independently valued at £70,000 and it is agreed that this will be the sale price.
The company’s most recent set of annual accounts states net profits of £770,000 and net assets of £600,000. The company has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association.
Does the proposed sale of land require shareholder approval?
A. No, because the transaction falls under the directors’ general authority to manage the company’s business.
B. No, because the transaction involves the sale and purchase of land which is a non-cash asset.
C. No, because the transaction involves the sale and purchase of an asset at its fair market value.
D. Yes, because the transaction involves the sale and purchase of land whose value exceeds 10% of the company’s asset value.
E. Yes, because the company’s directors are all also shareholders in the company.
D - Yes, because the transaction involves the sale and purchase of land whose value exceeds 10% of the company’s asset value.
A private limited company was incorporated in 2018 and has adopted unamended Model Articles. There are three directors and four shareholders (including the directors).
The company is planning to give a loan to one of its directors and would like this to be approved by the shareholders by way of ordinary resolution as quickly as possible. All of the shareholders are in agreement about the loan and all are available to vote.
What is the best advice to the board of directors of the company about the procedure to follow in order to obtain shareholder approval for the loan as quickly as possible?
Select one alternative:
The board should circulate the ordinary resolution as a written resolution as this will allow the process to be shortened significantly. The written resolution will be passed once shareholders representing 50% of the total voting rights sign it.
The board should seek approval from the shareholders to hold a general meeting on short notice. The consent of shareholders holding at least 75% of the shares and a majority in number (at least three of the four shareholders) will be required.
The board should circulate the ordinary resolution as a written resolution as this will allow the process to be shortened significantly. The written resolution will be passed once shareholders representing over 50% of the total voting rights sign it.
The board should call a general meeting on full notice so that all the shareholders have an opportunity to vote.
The board should seek approval from the shareholders to hold a general meeting on short notice. The consent of shareholders holding at least 90% of the shares and a majority in number (all 4 shareholders) will be required.
The board should circulate the ordinary resolution as a written resolution as this will allow the process to be shortened significantly. The written resolution will be passed once shareholders representing over 50% of the total voting rights sign it.
This is a BLP question. Where a company seeks to make a loan to a director, shareholder approval by way of ordinary resolution is required. If approval is sought at a GM, a written memorandum needs to be displayed at the registered office for 15 days ending with the date of the GM. A short notice GM is therefore not beneficial since it would only save one day. The quickest way to obtain the shareholder approval is therefore to use a written resolution, since the memorandum may be attached to the written resolution and the 15-day display requirement is not applicable. The written resolution will be passed once shareholders representing over 50% of the total voting rights sign it.
