Directors' Long-term Service Contracts and Substantial Property Transactions

Question 1

What are the key rules surrounding directors’ service contracts?

Answer 1

• Generally a directors’ service agreement only requires approval by Board Resolution
• Shareholder approval is required to enter into long-term service contracts. The director is not permitted to vote or count in quorum on any board resolution relating to the contract
• Company must keep its directors’ service contracts at its registered office for inspection by the members

Question 2

What is a long-term service contract?

Answer 2

A contract which is or may be for a guaranteed period in excess of two years

The guaranteed term applies to:
- contractual term of more than two years or where the director is in control of how long the contract continues and the company cannot terminate/can only terminate in specific circumstances
- period of notice which must be given by the company
- an aggregate of the above (e.g., the company cannot terminate for first 18 months and thereafter must give nine months notice)

Question 3

What shareholder resolution is required to approve a directors’ long-term service contract?

Answer 3

Ordinary resolution

Question 4

What does the ‘guaranteed term’ apply to?

Answer 4

• a period during which the contract is to continue, other than at the instance of the company (contractual term of more than two years or where the director is in control of how long the contract continues)
• during this time the company either cannot terminate the contract, or can only terminate in specific circumstances

Or
- the period of notice to be given by the company

Question 5

What is meant by the requirement for the company to agree to the guaranteed term?

Answer 5

If there is a requirement for the company to agree to an extension of the service contract, this is not a guaranteed term

“if both parties agree” - the director does not have the unilateral right to extend

Question 6

What are the consequences if a company agrees a provision in a service contract in contravention of s188?

Answer 6

• The contract itself is not void
• But the term beyond two years is void
• There is an implied term of reasonable notice inserted - implied term that the company can terminate the contract upon reasonable notice

Question 7

What are the Companies House disclosure requirements for directors and secretary?

Answer 7

• Company must maintain register of directors and secretary and keep these at its registered office
• Must notify Companies House of changes using form AP01 (director) and AP03 (secretary)
• Form TM01 for removal of director
• Info at Companies House is publicly available
• Register must be open for inspection by any member of company without charge and by any other person on payment of fee

Question 8

What is the procedure for long-term service contracts?

Answer 8

Where ordinary resolution is to be passed at General Meeting, a memorandum setting out the proposed contract must be made available for inspection by members both:
a) at the company’s registered office for not less than 15 days ending with date of the meeting; and
b) at the general meeting itself

Question 9

What is the minimum notice that needs to be give to approve the long-term service contract?

Answer 9

Minimum of 15 days’ notice, unless written resolution procedure is followed

Question 10

What is the procedure for when the written resolution procedure is used?

Answer 10

• No 15 days notice requirement
• Memorandum setting out proposed contract must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member

Question 11

What are the rules regarding approval of holding companies / subsidiaries for long-term service contracts

Answer 11

• If the director is also a director of any holding company, the shareholders of the holding company will also need to give approval
• Approval is not required by the members of any company which is a wholly owned subsidiary of another company

Question 12

What is the duty of directors to declare any interest in a proposed transaction?

Answer 12

• Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors
• Director must declare interest ini proposed transaction before it is entered, by BM, in writing before BM, or one-off general notice
• A written notice must be sent to all directors
• Direct and indirect interests
• Directors required to disclose interests in existing transactions or arrangements entered into by the company

Question 13

In which circumstances is a director not required to make a declaration as to their interest in a proposed transaction?

Answer 13

• Director is not aware / ought not to be reasonably aware
• Interest cannot be regarded as likely to give rise to conflict of interest
• If the conflict arises because it concerns the service contract and their service contract has been or will be considered by the board

Question 14

What does MA 14 stipulate with regard to board resolutions made in respect of director’s interest in a transaction or arrangement?

Answer 14

A director who is interested in a transaction or arrangement with the company CANNOT vote on or count in quorum for board resolutions in respect of that transaction

Conflicted director can count / vote if:
- Company disapplies MA 14
- Director’s interest cannot reasonably be regarded as likely to give rise to conflict of interest
- Director’s conflict arises from a permitted cause

Question 15

What approval is needed for an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company (substantial property transaction)

Answer 15

• Shareholder approval by ordinary resolution
• Must be given either before transaction is entered into, or after provided the transaction is made conditional upon approval being obtained

Holding company:
- If the transaction is between a company and a director of the company’s holding company (or connected person), the holding company will also need to approve the transaction by ordinary resolution

Question 16

How is substantial asset defined?

Answer 16

• More than £100,000 = substantial asset
• Less than £5,000 = not substantial asset
• Between £5,000 - £100,000 and worth more than 10% of company’s net asset value = substantial asset

The value which it is judged against the is net ASSET value

Question 17

Who is a connected person?

Answer 17

• Members of director’s family: spouse, parents, children or step-children
• Companies in which director (or those connected) hold 20% or more of those shares
• Business partner of the director or those connected with them
• Trustees of a trust

Question 18

What family members are not connected persons?

Answer 18

• brothers
• sisters
• grandparents
• grandchildren
• uncles and aunts

Question 19

What are the exceptions to the requirement for approval for a substantial property transaction?

Answer 19

• Approval is not required by members of any company which is a wholly-owned subsidiary of another company
• Arrangement is within a limited exception: e.g., a director who is also a shareholder sells their shares back to the company, this is not a SPT

Question 20

What are the consequences of a substantial property transaction being entered without shareholder approval?

Answer 20

It is voidable at the instance of the company unless:
a) restitution is no longer possible
b) company has been indemnified for the loss or damage suffered by it
c) rights acquired in good faith by third party would be affected by the avoidance

• Directors involved are liable to account to the company for any profits made and to indemnify the company for losses
• Arrangement can be affirmed by shareholders by ordinary resolution within a reasonable period

Question 21

What are applicable defences to an unauthorised SPT?

Answer 21

• If SPT is between a company and a person connected with a director, and director shows they took all reasonable steps to ensure company’s compliance - director not liable
• Defence for any connected person and any director who authorised the transaction who can show they had no knowledge

Question 22

Which types of transactions between company and directors, holding company directors and connected persons are subject to requirement of shareholder approval?

Answer 22

Shareholder approval by ordinary resolution

1. Loans
2. Quasi-loan (company agrees to pay off outstanding account owed by director to a third party on understanding that director will later reimburse the company)
3. Credit transactions - any transaction between company and director where company provides goods or services on a credit basis which will be paid for at a later date
4. Guarantees for provision of security for the above

Question 23

What restrictions apply to all companies (private and public)?

Answer 23

• Loans to directors or to directors of holding companies
• Giving guarantees for loans

Question 24

What additional restrictions apply to public companies / private companies associated with public companies?

Answer 24

• Loans
• Quasi Loans
• Credit transactions

Question 25

What are the exceptions to the requirement for shareholder approval?

Answer 25

• Expenditure on company business up to max of £50,000
• Loans for defending proceedings against a director
• Loans for defending regulatory actions or investigations
• Minor business transactions: loans or quasi-loans up to £10,000 and creditor transactions up to £15,000
• Intra group transactions
• Money lending companies

Question 26

What are the remedies if shareholder approval is not obtained for a loan or related transaction with a director?

Answer 26

Arrangement is voidable

• Directors involved are liable to account for profits and indemnify for losses
• Arrangement can be affirmed by shareholders

Question 27

How many parties are involved in a quasi-loan?

Answer 27

Three parties

• how to distinguish it from a credit transaction where only the company and director are parties to the arrangement

Question 28

Is shareholder approval required for a holding company to make a loan to a director of its subsidiary?

Answer 28

No - transactions going ‘down the chain’ are not included and do not require shareholder approval

Question 29

Is shareholder approval required for transactions from subsidiary to a director of its holding company?

Answer 29

Yes - this is a transaction too a director of its holding company and requires approval by ordinary resolution

Question 30

Is shareholder approval required for a private company to make a quasi-loan or credit transaction?

Answer 30

No - shareholder approval is only required for loans or guarantees for loans

Question 31

Do transactions for non-cash consideration fall into definition of substantial property transactions?

Answer 31

No, non-cash consideration does not fall within the definition

E.g.,
A transaction where the seller receives shares in exchange for the property does not fall within the definition