Directors’ Long Term Service Contracts Flashcards
Under s188 CA 2006, shareholder approval is required for a director’s service contract if it guarantees employment for more than:
A) 12 months
B) 18 months
C) 24 months
D) 30 months
C) 24 months
Explanation:
Under s188(2)(a) CA 2006, shareholder approval is needed for any director’s service contract that guarantees employment for more than two years.
What is the consequence of failing to obtain shareholder approval for a long-term service contract?
A) The contract is void in its entirety
B) The entire contract remains valid but unenforceable
C) The term exceeding two years is void, and the company can terminate on reasonable notice
D) The director must resign immediately
C) The term exceeding two years is void, and the company can terminate on reasonable notice
Explanation:
Under s189 CA 2006, if a service contract contravenes s188 CA 2006, the contract is not void entirely but the term exceeding two years is void, and the company can terminate with reasonable notice.
Which of the following is NOT an exception to the requirement for shareholder approval under s188 CA 2006?
A) The company is a wholly owned subsidiary
B) The director is also a director of the holding company
C) The director’s contract is for exactly two years
D) The director is an executive director rather than a non-executive director
D) The director is an executive director rather than a non-executive director
Explanation:
The nature of the directorship (executive or non-executive) does not affect the requirement for shareholder approval. However, shareholder approval is not needed when:
The company is a wholly owned subsidiary (s188(6)(b) CA 2006).
The director is also a director of the holding company, in which case holding company shareholders must approve (s188(2)(b) CA 2006).
If the contract is exactly two years, it does not trigger s188 CA 2006.
A private company, XYZ Ltd, wants to hire a new finance director on a four-year contract. What is the most appropriate way to proceed?
A) The board of directors can approve the contract without restrictions
B) The company must seek approval from its shareholders through an ordinary resolution
C) The company must file the contract with Companies House for review
D) The contract must be approved by the company’s auditors before execution
B) The company must seek approval from its shareholders through an ordinary resolution
Explanation:
Under s188(2)(a) CA 2006, if a service contract exceeds two years, shareholder approval by ordinary resolution is required.
John, a director at ABC Ltd, has been offered a new service contract. The contract states that he cannot be dismissed for 18 months, and after that, the company must give at least 9 months’ notice to terminate. Does this contract require shareholder approval?
A) Yes, because the total guaranteed term exceeds two years
B) No, because each individual term is less than two years
C) No, because shareholder approval is only needed for public companies
D) No, because John is a non-executive director
A) Yes, because the total guaranteed term exceeds two years
Explanation:
Under s188(3) CA 2006, if a contract prevents dismissal for 18 months, followed by a 9-month notice period, the total guaranteed term is 27 months, which exceeds two years. Shareholder approval is required.
Jane is a director at HoldCo Ltd, which owns 100% of Subsidiary Ltd. Subsidiary Ltd wants to offer Jane a three-year service contract. Does Subsidiary Ltd need shareholder approval?
A) Yes, from both Subsidiary Ltd and HoldCo Ltd shareholders
B) No, because Subsidiary Ltd is a wholly owned subsidiary
C) Yes, but only from HoldCo Ltd shareholders
D) No, because Jane is also a shareholder
B) No, because Subsidiary Ltd is a wholly owned subsidiary
Explanation:
Under s188(6)(b) CA 2006, wholly owned subsidiaries do not need shareholder approval for long-term service contracts.
Under s188 CA 2006, which type of company does NOT need shareholder approval for a long-term service contract?
A) A private company
B) A wholly owned subsidiary
C) A public company
D) A company limited by guarantee
B) A wholly owned subsidiary
Explanation:
Under s188(6)(b) CA 2006, wholly owned subsidiaries do not require shareholder approval.
If a director’s service contract includes a term preventing dismissal for three years, but the board failed to obtain shareholder approval, what happens to the contract?
A) The entire contract is void and unenforceable
B) The director must resign immediately
C) The term exceeding two years is void, but the company can terminate with reasonable notice
D) The board can retrospectively approve the contract
C) The term exceeding two years is void, but the company can terminate with reasonable notice
Explanation:
Under s189 CA 2006, any term exceeding two years in a director’s contract is void, and the company can terminate with reasonable notice.
A director of Delta Plc is negotiating a new service contract. The proposed contract is for a five-year term. What action should be taken?
A) The board must obtain shareholder approval before signing the contract
B) The contract can be approved by a simple majority of the directors
C) The contract can only be approved at the company’s annual general meeting
D) The director must resign before entering into the contract
A) The board must obtain shareholder approval before signing the contract
Explanation:
Under s188(2)(a) CA 2006, shareholder approval by ordinary resolution is required for any service contract exceeding two years.
How long must a company retain copies of directors’ service contracts for inspection under s228 CA 2006?
A) One year from termination or expiry
B) Two years from termination
C) Indefinitely
D) Three years from the date of the contract
A) One year from termination or expiry
Explanation:
Under s228 CA 2006, companies must keep service contracts at their registered office for at least one year after termination or expiry.
If a director fails to declare an interest in their own long-term service contract, which provision applies?
A) s175 CA 2006 – Duty to avoid conflicts of interest
B) s176 CA 2006 – Duty not to accept benefits from third parties
C) s177 CA 2006 – Duty to declare an interest in a proposed transaction
D) s188 CA 2006 – Requirement for shareholder approval
C) s177 CA 2006 – Duty to declare an interest in a proposed transaction
Explanation:
Under s177(6)(c) CA 2006, a director does not need to declare an interest in their own service contract, but best practice is to document it in board minutes.
