Directors

Question 1

Where in the CA 2006 are Directors’ Duties prescribed?

Answer 1

s.170-177 CA 2006

Question 2

What are the duties owed by directors to companies as prescribed in the CA 2006?

And what section of the CA2006 are these duties laid out?

Answer 2

s170 - The director owes the general duties under ss. 170-177 CA 2006 to the company

s171 - Duty to act within powers

s172 - Duty to promote success of the company

s173 - Duty to exercise independent judgment

s174 - Duty to exercise reasonable care, skill and diligence

s175 - Duty to avoid conflicts of interest

s176 - Duty not to accept benefits from third parties

s177 - Duty to declare interest in proposed transaction or arrangement

Question 3

What happens if director’s fail to adhere to the duties prescribed in the CA 2006?

Answer 3

Failure to adhere to these duties enables the company to pursue the director under common law principles - damages in favour of the company.

Question 4

Which section deals with directors’ duty to avoid conflicts of interest?

Answer 4

s175 duty to avoid conflicts of interest and;

s176 duty to not accept benefits from third parties

Question 5

Are there any exceptions to s.175 and s.176?

Answer 5

If the situation cannot reasonably be regarded as giving rise to a conflict; or

If the potential conflict is authorised by the directors (excluding the potentially conflicted director) the only s175 will apply.

Question 6

What are the further exceptions to s. 175 and s.176 ?

Answer 6

s180(2) if a transaction requires shareholder approval under CA2006 and shareholder approval is properly obtained, it is not necessary to comply with s 175 and 176 duties.

s.175(3) the duty to avoid conflicts of interest doesn’t apply to a conflict arising in relation to a transaction/arrangement with the company (ie. where the director would already need to declare an interest under s177).

Question 7

Generally, what duties do directors have in disclosing their interests under the CA 2006?

Answer 7

s177(1) CA 2006 directors have a duty to disclose interest in proposed transactions or arrangements.

s182 CA2006 directors have a duty to disclose interest in current transactions or arrangements.

Question 8

What does s. 177(1) CA 2006 actually mean?

Answer 8

Directors who are in anyway directly or indirectly interested in a:

• proposed transaction, or
• arrangement with the company,

must declare the nature and extent of that interest to the other directors of the company.

Question 9

In analysing the director’s duty under s.177(1) what are the key issues, generally which must be identified?

Answer 9

Whether the director has a direct or indirect interest in a proposed transaction or arrangement with the company.

When must the interest be disclosed?

When does the director not need to make a declaration (exceptions)?

What form of notice must be used if the director needs to declare an interest?

What are the consequences of non-disclosure of interest?

Question 10

What is the difference between direct and indirect interest in relation to s.177(1)?

Answer 10

Direct interest can mean a director entering into a service contract with the company.

Indirect interest is less easy to identify. It means where a director has an interest through a spouse or relative.

In Re British American Corp if a director is a director of Company A and B, he will be indirectly interested in any contract Company A and B enter into together.

Question 11

When must a director’s interest under s177 need to be disclosed?

Answer 11

s177(4) CA 2006 -before the co. enters into the transaction/arrangement (check AoA to see if there are any additional requirements).

s177(3) CA 2006 -further declaration must be made if original declaration becomes inaccurate or incomplete.

Question 12

When does the director not need to make a declaration of interest under s177?

Answer 12

s177(5) -where the director may not be aware of the transaction/arrangement in question

s177(6)(a)-where it cannot reasonably be regarded as likely to give rise to a conflict of interest

s177(6)(c)-if it concerns terms of his/her service contract with the company that has been or will be considered by the board, committee of the board, or directors

Question 13

What form must the notice be in if a director needs to declare an interest under s177?

Answer 13

s184-if a director discloses by written notice, it must be sent to all directors electronically or in paper form

s185-director can opt to give general notice to the effect that he is always considered to be interested in any transaction /arrangement with a specified party.

Procedural aspects:

BM1–send transaction to GM for approval. Director may vote as this is merely procedural

GM–members vote on approving transaction

If Director is a S/H,can vote in favour

BM2–Director decide to enter into contract

Director must declare his interest and per

MA14,Director cannot vote or count in the quorum.

Question 14

What are the consequences of non-disclosure of an interest by a director under s 177?

Answer 14

Common law rules will apply, ie. damages

Question 15

What does the CA 2006 generally require director’s to disclose about themselves?

Answer 15

s163(1) name, service address, nationality.

Service address must be included on the company’s register of directors.

Under s167, you have 14 days to notify the registrar:

• of any changes
• if person becomes or ceases to be a director

Question 16

What is a substantial property transaction? and where is it defined in the CA 2006?

Answer 16

Defined in s190 CA 2006

It is when:

The director of a company or;
director of a holding company or; connected person to the company

buys/sells

a substantial non-cash asset

between a company and either:

a director of co1
the holding co.
connected person

Question 17

Which arrangements fall under section 190(1) of the CA 2006 dealing with substantial property transactions?

Answer 17

s190(1) CA 2006 controls the following arrangements which deal with substantial property transactions:

1) a director of a company or;
a director of a holding company; or a connected person buying a substantial non cash asset from a company; or

2) a director of a company or a director of a holding company, or a connected person, selling a substantial cash asset to a company

Question 18

What is a connected person under s.252 CA

Answer 18

Member of the director’s family (includes spouse, civil partner, child, step child or parent
of the director)

A company with which the director is associated (i.e. a company with which the director and his connected persons own at least a 20% share of

A trustee of a trust in which the director or a connected person has an interest

A person acting in the capacity of a partner of the director, or of a connected person

Question 19

What is considered to be a non cash asset?

Answer 19

s1163 CA2006: Any property or interest in property other than cash.

Question 20

What is considered to be a substantial non cash asset under s 191 CA 2006?

Answer 20

s191 CA 2006

Asset worth 5 000 or less is not a substantial asset

Asset worth more than 100 000 is a substantial asset

Asset worth between 5000-100 000 is only substantial if it is worth more than 10% of the company’s net asset value (see accounts).

If co. only recently incorporated, net asset value is the amount of called up share capital.

Question 21

What must a director do, if he satisfies all of the elements under section 190(1) CA 2006?

Answer 21

The director must get:

a) approval by a resolution of the company.
b) this is conditional upon such approval being obtained

s190(2) If a director of a company is a director of the company’s holding company, or is a person connected with such a director, the arrangement must also be approved by members of the holding company.

s190(3) a company is not liable if shareholder approval is not forthcoming

s190(4)(b): doesn’t include wholly owned subsidiaries, however, due to company holding provisions, parent companies may need to obtain shareholder approval as well

s190(6) anything a director is entitled to under his service contract is excluded from being a substantial property transaction.

Question 22

Once you’ve satisfied all the elements of s190(1) CA 2006, what do you do next?

Answer 22

State what will happen if the director does not obtain shareholder approval:

s195: a transaction is voidable by the company.

Question 23

What are the circumstances in which a transaction may not be voidable by the company under s.195 even after having satisfied that you are dealing with a substantial non cash transaction under s. 190(1)?

Answer 23

s195: a transaction is voidable by the company unless:

s195(2)

Restitution is no longer possible;

The company has been indemnified by another person for the loss or damage
suffered by it; or

Bona fide rights have been acquired by a third party who was not a party to the
transaction

The arrangement has been affirmed by an ordinary resolution of the shareholders
within a reasonable period under s196

s 195(3) CA: irrespective of whether the transaction is voidable, either: (1) a director (2) a CP (3) any other director authorising the arrangement – is liable to:

1) account to the company for any gain made directly/indirectly from the transaction; and
2) Indemnify the company for any loss/damage resulting from the transaction

Question 24

What are the defenses and exemptions which apply to a director satisfying all the elements of a substantial property transaction, and has not reported his interest?

Answer 24

S. 192 CA: Transactions with members or other group companies are exempt (e.g. share buybacks)

§ S. 195(6) CA: If transaction between company and connected person, and D took all reasonable steps to ensure Co’s compliance, director is not liable.

§ S. 195(7) CA: Defence to any person who can show he had no knowledge of the circumstances constituting the contravention.

S. 196 CA: Agreement has been affirmed by an OR of S/H within a reasonable period.

Question 25

What duty does a director have under s 172 CA 2006?

Answer 25

A director also has a duty to promote the success of a company.

Question 26

What is an example of a situation where a director may have a duty to promote the success of a company? And what must the director do in such circumstances?

Answer 26

Where an asset is sold for an undervalue. Director must have a discussion and include proper justifications for entering into transaction – ensure this is recorded within the board minutes.

Question 27

What is the general rule regarding the restriction of certain transactions which directors can make?

Answer 27

s197(1): No company (private or public) may make: 1) a loan or 2) give guarantee/some sort of security to a director or to a director of its holding company, without the transaction first being approved by the shareholders.

Question 28

What types of transactions cannot be entered into between a company and a director without shareholder approval?

Answer 28

s.197 (2) Without shareholder approval, the public company will not be able to carry-out the following transactions with either a director, director of the holding company, or a connected person to the director: A) Loans - s197(1) (director/director of holding company) and s200(2) (persons connected to director - see s252 for definition) B) Quasi-loans - s198(2) (director/director of holding company) and s200(2) (persons connected to director) C) Credit transactions - s201(2) (director/director of holding company and persons connected to the director) D) Guarantee/security - s198(2) (director/director of holding company) and s200(2) (persons connected to director)

Question 29

Explain the four different types of transactions restricted under section 197 if no shareholder approval is given.

Answer 29

1) Loans (ss197 and 200): Straightforward lending of money 2) Quasi-loans (ss198 - 200): defined in s199 - where a company agrees to pay off an outstanding account owed by a director to a third party, on the understanding that the director will later reimburse the company 3) Credit transactions (ss201 - 202): defined in s202 - includes any transaction entered into between company and director where the company provides goods/services on a credit basis which will be paid off at a later date by the director 4) Guarantee/provision of any form of security (ss197, 198, 200 and 201): not defined, but includes arrangements where director obtains loan from a bank and his company acts as guarantor

Question 30

Explain section 256 of CA2006 which deals with companies associated with a public company.

Answer 30

s256 states that a company is associated with a public company when: it is a subsidiary of a public company if it is two subsidiaries of the same body corporate

Question 31

What exceptions may be available to directors having to get SH approval regarding loans?

Answer 31

B) s197(5)(b) - for private and public companies, approval is not required by members of any company that is a wholly-owned subsidiary of another company * C) s204 - shareholder approval not required where director is provided with money to pay for company expenses or expenses to help him perform his duties as a director - NB the benefit of this exception = limited to £50,000 * D) s205 - shareholder approval not required where company is providing funds (loan, quasi-loan or credit transaction) for director to defend proceedings for things like negligence, default, breach of trust etc * E) s207 - loans, quasi loans or credit transactions that are classed as minor business transactions (£10,000 for loans/quasi loans - £15,000 for credit transactions) do not require shareholder approval * F) s209 - company whose normal business is giving loans, quasi-loans, guarantees/ security can make such an arrangement with a director, without shareholder approval, provided it is made on normal business terms S. 213(6) CA – reasonable steps (D) – if a transaction contravenes ss. 200, 201, 203 and is entered with a CP, the director will not be held liable if he took all reasonable steps to ensure the company complied with those provisions § S. 213(7) CA – no knowledge – defence for any person who can show he had no knowledge of circumstances constituting contravention § S. 214 CA – an arrangement that has been affirmed by the shareholders of the company (and Holdco where relevant) by OR within a reasonable period § NB – “downstream” provision of security o This is not an exception per se, but merely falls outside the parameters of the legislation o This is where a PLC provides a loan to the director of its subsidiary – no shareholder approval is required

Question 32

What are the sanctions for non-compliance with the rules relating to directors restrictions to make transactions listed under s197:

Answer 32

s213 CA 2006 A) Transaction voidable unless: • 1) Restitution no longer possible • 2) Company has been indemnified by another person for the loss/damage suffered by it • 3) Bona fide rights have been acquired by a third party who was not a party to the transaction B) In addition to A: • 1) Director (and connected person - if relevant) must account for any gain they made directly/indirectly from the transaction • 2) s214 - allows for the shareholders to affirm the transaction by ordinary resolution within a reasonable period - if this is done, the transaction may no longer be avoided under s213

Question 33

What defenses/exemptions are available for directors violating section 197 regarding the restriction of certain transactions?

Answer 33

* s213(6) - director took all reasonable steps to ensure the company complied with sections 200, 201 and 203 in the arrangement with the connected person * s213(7) - director/connected person had no knowledge of the circumstances constituting the contravention S. 214 CA – an arrangement that has been affirmed by the shareholders of the company (and Holdco where relevant) by OR within a reasonable period § NB – “downstream” provision of security This is not an exception per se, but merely falls outside the parameters of the legislation o This is where a PLC provides a loan to the director of its subsidiary – no shareholder approval is required

Question 34

Which section of the CA 2006 deals with shareholder approval of directors' long term service contracts? What are the circumstances where SH approval will be needed in relation to long term service contracts ?

Answer 34

s.188 CA 2006 Shareholder approval required for any directors’ service contract which is, or may be, in excess of 2 years (referred to as the ‘guaranteed term’) - this term applies to either: • 1) s188(3)(a)(i): • Continuing period: means contractual term of two years or more, where the director is in control of how long the contract continues; and • s188(3)(a)(ii): During this time there is limited termination which means the company either cannot terminate the contract or can only terminate by notice in specific circumstances OR • 2) s188(3)(b): terminable by notice by company, ie look at the period of notice to be given by the company NB the guaranteed term can apply to the aggregate of any periods covered by s188(3)(a) or (b) - e.g. a service contract which doesn’t allow the company to terminate a director’s service contract for 18 months and thereafter has to give 9 months notice prior to termination will be caught by s188(3)

Question 35

What is the rule regarding the need for shareholder authorisation regarding service contracts for a director in a holding company?

Answer 35

Where director is director of holding company, approval of the members of the holding company is required when the guaranteed term of his employment within the group is/may be 2 years + ss. 188(1)(b) and 188(2)(b)

Question 36

What is the rule regarding the need for shareholder authorisation regarding service contracts for a director in a wholly owned subsidiary?

Answer 36

s188(6)(b) - shareholder approval not required if director’s service contract is with a company that is a wholly-owned subsidiary of another company NB - parent company of the wholly-owned subsidiary may still have to obtain shareholder approval

Question 37

What are the consequences of non compliance with section 188 regarding getting SH approval for director's service agreements?

Answer 37

Provision in the service contract will be void under s189, and the contract will be deemed to contain a term entitling the company to terminate it at any time by giving reasonable notice.

Question 38

What are the disclosure requirements in relation to disclosure of directors' service agreements?

Answer 38

under s. 188(5) CA, there are additional “display” requirements: o A memorandum setting out the proposed contract must be made available for inspection at the registered office for not less than 15 days. § This means that short notice is not particularly useful, but WR can be used to speed up the process if needed. * s228(1) CA 2006 (key starting point) states that a company must keep available for inspection a copy of every director’s service contract with the company or with a subsidiary (or memorandum setting terms of the contract if it’s not in writing) * s227 CA 2006 defines service contract widely - includes not only to the terms of a person’s appointment as director, but also to any contracts for services * s229(1) CA 2006 - Copies and memoranda must be open to inspection by any member of the company without charge. * s229(2) CA 2006 - Members have the right (subject to payment of a fee) to request a copy of the service contract/memoranda * s230 CA 2006 - Requirements relating to directors’ service contracts outlined above apply equally to shadow directors

Question 39

What are the defenses and exemptions available to directors who did not get proper SH with respect to service agreements?

Answer 39

* s213(6) - director took all reasonable steps to ensure the company complied with sections 200, 201 and 203 in the arrangement with the connected person * s213(7) - director/connected person had no knowledge of the circumstances constituting the contravention S. 177(6)(c) CA is an exemption from the requirement to declare an interest in relation to consideration of a D’s service contract. § However, the usual rules on voting and quorum in 14 MA still apply. Loans to Directors Companies ‘Associated’ with a Public Company (s. 256 CA)

Question 40

What is the general rule on indemnities of directors?

Answer 40

S. 232 CA – General prohibition – a company cannot indemnify a director of the company or an associated company for any liability he may have incurred as a result of his negligence, default, breach of duty or trust in relation to the company of which he is a director

Question 41

Given the restrictions on indemnifying directors, there is a need to balance the restrictions on indemnifying directors with the need to encourage people to become directors. What sections of the CA2006 seek to achieve this?

Answer 41

* 1) Companies are able to purchase and maintain insurance for a director against liability for negligence, default, breach of duty or trust in relation to the company of which he is a director (s. 232(2)(a) and s. 233); and * 2) Companies can provide Qualifying Third Party Indemnity Provisions for their directors

Question 42

Explain article 52 MA with respect to restrictions on indemnity provisions.

Answer 42

Indemnity provisions in the AA – 52 MA is not an indemnity but rather a permission to indemnify  Even if it were an indemnity, cannot enforce AA as this is a contract between members and the company Therefore, directors will want a stand-alone indemnity they can enforce § Executive Ds – service contracts § Non-executive Ds – separate deed of indemnity Note that 52(2) MA prevents any indemnity that would be prohibited or rendered void by CA provisions

Question 43

What does s.234 CA deal with in terms of indemnities for directors?

Answer 43

S. 234 – permits a company to indemnify its directors against liability incurred by the director to a person other than the company or an associated company . But there are a number of restrictions, ie. it must not include: S. 234(2) CA – liability is not owed to the company (e.g. company suing for breach of a director’s duty) s. 234(3)(a) CA Indemnity for a fine under criminal proceedings or fine for regulatory penalties S. 234(3)(b) CA Indemnity in defending civil proceedings brought by the company and judgment is give against the director • Indemnity in relation to directors unsuccessful s.661 or 1157 applications S. 233 CA – note the company can also purchase insurance for potential liabilities, but there are public policy constraints (e.g. criminal) and specific carve- outs for certain wrongdoings s. 236 CA – QTPIPs must be disclosed in the directors’ report.