Directors/Officers/Minority Protect Chp 16-19 Flashcards
Can unanimous and informed agreements be treated as equivalent to formal resolutions?
Yes, Duomatic 1969
What happens if one of two shareholders refused to attend a general meeting?
s306 CA 2006 court can order a meeting to be held and specify quorum. It can use s306 to permit a meeting to take place with single member.
Union Music v Watson 2003 - court ordered single member meeting but only to conduct one item - election of additional director.
What is a director?
s250 CA 2006 includes any person occupying the position of a director by whatever name called
What is a de jure director?
A de jure director is one formally and properly appointed as a director.
What is a de facto director?
A de facto director is:
A person not appointed but acting as a director Re Hydrodam 1994
A person must be part of governance structure, essentially attending and voting at board meetings
Sec of State for Trade v Hollier 2007
What is a shadow director?
s251 CA 2006 a person in accordance with whose directions or instructions the directors are accustomed to act
Must instruct (not suggest). Board must act (if ignore, not a shadow). More than single instance
Can be held liable for wrongful/fraudulent trading
General director duties apply to extent capable of applying - Vivendi v Richards 2013
How are directors removed from their position by general meeting?
s168 CA 2006 shareholders by ordinary resolution can remove a director, notwithstanding anything in any contract with the director.
However:
Director may have weighted votes, preventing ordinary resolution to be passed Bushell v Faith 1970
If director has service contract he may be able to claim compensation for breach of contract s168(5)
Director who is also shareholder may be able to bring proceedings under s994 (unfairly prejudicial)
What are the two ways directors can be disqualified?
- Under provision in articles (i.e. bankruptcy, but this is an offence anyway without court’s leave)
- Under CDDA 1986 (convicted indictable offence/fraudulent trading)
Most important is under s6 CDDA - company gone into insolvent liquidation and court judges their conduct unfit to be concerned in management of the company (no discretion, must disqualify 2-15yrs, can also make compensation order for loss to creditors if applicable)
Unfitness = more than misjudgement = gross incompetence
i.e. failing to read accounts Continental Assurance 1996
Court can grant leave to disqualified director to act (can insist on safeguards)
Which Model Article states ‘the company is managed by its directors’?
Article 3 Model Articles
What role do non-exec directors have?
Limited role. Little authority (express or implied) to act, or bind it in transactions with third parties.
Hold executive directors to account.
UK Corporate Governance Code recommends at least one half of directors be independent non-execs. Listed companies must declare they comply or explain why not.
Where an offence has a mens rea element, the company will be found liable only if the ‘directing mind and will’ of the company had the necessary mens rea.
What three ways have the courts been prepared to accept may be sufficiently senior to constitute the directing mind and will of the company?
- Board of directors
- Individual directors
- Some cases, senior manager. In Tesco v Nattrass 1971 court refused to accept manager of individual branch was ‘directing mind and will’.
What is the offence of corporate manslaughter?
Corporate Manslaughter and Corporate Homicide Act 2007
statutory offence committed where:
the way in which activities are managed or organised a) cause death b) amounts to gross breach of relevant duty of care owed by organisation to deceased
Does not require directing mind be responsible. Liable if way in which activities are managed/organised by senior mgmt is susbstantial element in events that caused death.
Under Article 3 Model Articles, it states that authority of the directors is all the powers of the company.
What are the three caveats?
- Shareholders can only interfere with board decisions if CA 2006 or articles give that right, although under Art 4 they can direct the board to take/refrain from action on spec. resolution
- Board must exercise powers for lawful purposes and to promote the success of the company, else lacks authority
- Articles may limit general authority (individual type of transaction, or capacity as a whole due to objects clause)
A third party dealing with the board may be unaware of any limits on board authority. In this situation the transaction is voidable at the company’s option. What two ways are the third party protected so that the transaction will still be binding?
- s40 CA 2006, in circ. where a person in acting in good faith, the power of directors is free of any limitation under company’s constitution. (presumption of good faith. not required to enquire re authority)
- Outsider entitled to assume internal matters of procedure have been followed Royal British Bank v Turquand 1856
Can directors enjoy implied authority?
Yes, in the absence of expressly delegated authority, they enjoy the usual authority that a person occupying their position would be given.
To whom are directors duties owed?
Directors duties are owed to the company s170 CA & Percival v Wright 1902
It is the company which must take action to enforce the duties Foss v Harbottle 1843
Who can decide if the company will sue for breach of directors duties?
- Board
- If being w/up - liquidator
- Art 4 - Shareholders by spec. resolution
- Individual shareholders can bring a derivative claim on behalf of the company
What is the director duty to promote the success of the company?
s172 CA 2006 Directors must act in bona fide/good faith to promote the success of the company Smith v Fawcett 1942
Duty is subjective - did they honestly think would promote success - Regentcrest v Cohen 2001
Promote success - run for benefit of members
Factors directors must have regard to include long term consequences, employees, suppliers, operations, reputation, acting fairly between members
If insolvent/verge of directors must prioritise interest of creditors (know/should know insolvency likely BTI v Sequana 2019)
What are the directors duties (five)?
Promote success s172
Act within powers s171
Exercise independent judgment s173
Avoid conflict of interest s175
Care, skill & diligence s174
Declaration of interest s175
What is the director duty to act within their powers?
s171 CA 2006 - act in accordance with constitution & only exercise powers for purposes which they are conferred
Objective. Court to decide what purposes are for power conferred and did they exercise power for that purpose Howard Smith v Ampol Petroleum 1974 (allotting shares to thwart takeover)
What is the director duty to exercise independent judgment?
s173 codification of former duty directors must not fetter their discretion Fulham FC v Cabra 1994
What is the director duty to avoid conflicts of interest?
s175 CA 2006 must avoid situation where has/can (in)direct interest that conflicts/may.
in particular to property, info or opportunity (immaterial whether company could take advantage)
Where director makes personal profit the courts apply this rule strictly
Regal v Gulliver 1942 (irrelevant that company benefitted & acted in good faith)
Industrial Developments v Cooley 1972 (persons ceasing to be directors still subject to duty)
What is a directors duty of case, skill & diligence?
s174 CA 2006 - reasonable care, skill & diligence.
objective (minimum) - all directors general knowledge, skill and experience reasonably expected Re D’Jan of London 1994
subjective - director capable of higher standard than objective min. will be judged subjectively against the knowledge, skill and experience that the director has
What is the duty regarding directors’ interests in contracts with the company?
s177 where company itself is entering into a contract. Director must disclose interest and provided they do, will not be voidable and any profit made by director not accountable.
Sometimes law requires disclosure and approval by shareholders (ord. resolution)
- Substantial property transactions (dir acquires/sells to company non-cash asset over £100k or 10% of net asset value)
- Long service contracts (exceeding two years)
- Loans to directors (but not to enable them to perform duties)
- Compensation for loss of office (not for bona fide payments i.e. damages for breach of directors contract)
When can a director be relieved from liability for breach of duty?
Not possible for articles or service contract to exempt.
May be relieved in one of two ways
- Shareholder vote to authorise or ratify breach
- Court under s1157 CA 2006 if honest and reasonable and ought fairly to be relieved (inc. shadow dir).
Court reluctant to relieve Towers v Premier Waste 2011
Does not apply to wrongful trading under s214 IA 1986
What is the voluntary code of practice for public companies with premium stock exchange listing?
UK Corporate Governance Code 2018
What role does a manager have in a company?
Senior employee not on board.
Sometimes treated as fiduciary and will therefore owe director duties Canadian Aero v O’Malley 1973
May be regarded as ‘directing mind/will’ when establishing mens rea for criminal offence
May count as part of senior mgmt under Corporate Manslaughter and Corporate Homicide Act 2007
Will be liable jointly with company when personally involved in commission of tort MCA Records v Charly Records 2003
What is a company secretary?
Public required. Private optional
Service board meetings, comply with filing requirements, maintaining registers
Implied authority to bind in relation to secretarial functions and running of the company
Panorama v Fidelis 1971 (vehicle hire contract binding)
What are auditors?
All companies, except small companies defined in s382 CA 2006 are required to appoint auditors.
They report to members on whether accounts are true view of financial performance and have been properly prepared. If they think not, statement at shareholders meeting.
Removed by ord. resolution on special notice (28 days) where they can make written representations.
Liable if perform negligently - breach of contract with company or negligent misstatement
Duty is to existing holders as general body but not individual or prospective Caparo v Dickman 1990
What are the advantages of majority rule?
Stops minorities blocking desirable change
Quick and cheap way of resolving disagreements
Avoids judge involvement in disagreements between shareholders
What cannot be excused by any majority of shareholders?
Unlawful actions e.g. unlawful dividend
What can a shareholder do to enforce their personal rights under the articles?
Remember each shareholder has a personal right under s33 to enforce articles Pender v Lushington 1877
Three problems minority shareholders have:
- Courts have refused to enforce articles which are regarded as giving rights to holders in their capacity other than as a member (i.e. company solicitor)
- Courts sometimes view breach as a ‘mere internal irregularity’ MacDougall v Gardiner 1875
- Articles can always be altered (spec. res) to remove provision minority may have wished to rely
They can also apply under s994 that company affairs are unfairly prejudicial to interest of member(s). More effective than S33.
Can individual, minority shareholder bring personal action directly against director for that director’s misbehaviour?
If they could, they would secure personal remedy for themselves and avoid persuading company to sue.
Yes, but rarely allowed.
- Must who duty owed personally to them has been infringed (but remember duties of directors are owed to the company, not members).
- Must show loss is not reflective loss (that which merely reflects a loss to the company itself) Johnson v Gore Wood 2001 unless breach caused company to become insolvent and therefore could not sue Giles v Rhind 2003
What is a derivative claim?
Chapter 1 Part 11 CA 2006 ss260-264
Derivative claim is brought by a shareholder/group on behalf of the company
Enforce action that company itself has e.g. director duty breach
Any damages/profits belong to company
Based on actual/proposed negligence, breach of duty, default or breach of trust by director s260 CA 2006.
How does a shareholder bring a derivative claim?
Apply to court for permission.
Mandatory bars (court must refuse permission)
a person acting to promote success of company would not continue the claim Iesini v Westrip 2010, Kleanthous v Paphitis 2016 (continuing would result in experienced directors being lost, reputation harm, trading performance harm)
Act was authorised/ratified by company
If none then consider discretionary factors
member acting in good faith
importance someone with duty to promote would attach to proceedings
authorisation/ratification likely
whether company has already decided not to pursue
whether member could bring personal action (Franbar 2008 refused as complaint would be better under s994) (Wishart 2010 s994 not better way, claimant wanted to remain a shareholder)
Obtaining permission for derivative claim chart
Concern breach of directors breach of duty, trust negligence
Is claimant member
Has act been authorised/ratified
Would hypothetical director promoting success NOT continue the claim
The discretionary factors i.e. good faith, importance of claim, likelihood of authorisation/ratification/ has board decided not to sue, does claimant have personal remedy?
What must a shareholder claimant show to bring a claim under s994 CA 2006 (unfair prejudice)
Their interest as a member (broad interpretation - compared with narrow in s33, most likely to apply in ‘quasi-partnerships where the courts will look at what the parties themselves have agreed O’Neill v Phillips 1999’)
have been prejudiced (found when treatment goes against their interests, unless they are to blame)
and unfairly so
by the conduct of company’s affairs or act/omission (not private behaviour of managers/shareholders)
What is a ‘quasi-partnership’?
Ebrahami v Westbourne Galleries 1973 states following characteristics
- company formed on basis of personal relationships and mutual confidence
- agmt/understanding all/some holders would have expectation of participation in mgmt
- restriction on transfer of shares
What are the remedies for a successful s994 CA 2006 claim (unfair prejudice)
As court sees fit
Preferred is buyout (Grace v Biagioli 2005)
Valuation must be independent (not company auditors) O’Neill v Phillips 1999 and on a pro rata basis
Advantage: laying down clear criteria for orders given avoids protracted legal proceedings
What other statutory remedy other than s994 (unfair prejudice) does a shareholder have to claim against the company in a personal capacity?
Just and equitable winding up under IA 1986.
No criteria but examples include:
Inability to achieve company’s main object Re German Date Coffee 1882
Shareholder deadlock Yenidje Tobacco 1916
Loss of confidence in mgmt Lock v John 1924
When does the BEIS carry out an investigation?
Dept for Business, Energy & Industrial Strategy (BEIS) can carry out investigations into company affairs.
Slow and expensive
200 shareholders or those who hold 10% issued shares must band together to request and provide up to £5k security.
