Law Flashcards
Types of director.(8)
De facto-Anyone who acts as one although not validly appointed//A person who becomes liable as a director due to conduct
De Jure-A person who has been appointed following the correct procedure
Shadow-A person in accordance with whose directions and instructions the directors of a company are accustomed to act//not shadow if only act on advice given in a professional capacity
Alternate-may be an alternative director or an outsider appointed to attend board meetings and vote-may require approval from the board
Executive-likely a full-time employee involved in management and usually with a specific role
Executive
-NEDs-usually part time bringing outside expertise and exerting control over execs
-Managing director MD the board usually delegates day to day ops
-chairman-usually a non exec responsible for procedure being followed in meetings
Note companies require at least 1 director whilst publicly held require 2.
What is the procedure of removal for directors?(6)
-Special notice 28 days is required of the resolution. -The company must forward a copy of the resolution to the director concerned
-Notice of the meeting goes to the director and all members entitled to attend and vote
The director in question can require the company to circulate written reps to members
-At the meeting the director can read out reps if there was no time prior circulation The director must be allowed to attend the meeting and speak and an ordinary resolution is required to removed
Note a removal may breach service contracts and powers may be limited by the directors ability to potentially vote against removal similarly some require certain directors classes to be present at meeting for removal so if one were not tp attend this could also prevent removal
Restriction on directors powers.(4)
general statutory-the companies act 2006 states that directors must only use their powers for the purpose for which they are conferred otherwise would be a breach of duties
specific statutory-certain decisions for which shareholder approval is required through ordinary or specific resolution eg reduction of share capital
restrictions in the articles-powers may be restricted by company’s articles eg amount they can borrow
restriction of powers made by the members-members have two options if unhappy:director removal //alter articles through special resolution
Directors cannot bind the company without being permitted authority, this can be obtain by…(3)
Express-expressly given all decisions taken are bindings
Implied-authority flow from a person’s position eg MD has implied authority to bind the company
Apparent/Ostensible-arises when a director is held out as having the authority to bind a company, if a third party acts in good faith on representation the company is ‘estopped’ from denying its truth
What are the general duties of directors.(7)
Numbers all relate to CA 2006.
s.171-to act within powers
s.172-to promote the success of the company
s.173-to exercise independent judgement
s.174-to exercise reasonable care and diligence
s.175-to avoid conflicts of interest
s.176-not to accept benefits from third parties
s.177-to declare an interest in a proposed transaction or arrangement
Wrongful v fraudulent trading- definitions.(2)
-Fraudulent trading is when company business is carried on with intent to defraud creditors and others for fraudulent purposes-may be criminal or civil and can involve a single transaction
-Meanwhile wrongful trading essentially during wind-up deemed a director knew there was no reasonable prospect that the company could avoid insolvent liquidation and ought to have took sufficient steps to minimise potential loss to creditors but didnt s.214 insolvency act 1986
Wrongful v fraudulent trading-liability.(2)
Any persons knowingly party to the carrying on of business is liable-FT
Directors and shadow directors-WT
Wrongful v fraudulent trading-consequences.(2)
Must contribute to companies assets on a winding up. Up to 15 years disqualification under CDDA86. Fine or/and imprisonment for up to 10 years CA06-FT
Contribute to companies assets and up to 15 years disqualification CDDA86
Grounds for disqualification under company directors disqualification act (CDDA86).(5)
-consistent CA breaches eg failure to file returns-3 convictions for default in 5 years is evidence-max 5 year disqualification OR breach of competition law max 15 years
-conviction of a serious offence in connection with the management of a company (may 15 years)
-Fraudulent or wrongful trading max 15 years
-Secretary of State investigation finds director unfit max 15 years or feels it is in public interest
-Liquidators reports deems director unfit max 15 min 2 years
NOTE: Breach of disqualification is a criminal offence which could lead to fine or imprisonment whilst the disqualified director (or any who act on their instructions) is personally liable for the debts of the company while so acting
Member rights.(3)
-sent a copy of annual accounts and reports
-require directors to call a GM
-appoint a proxy to exercise their rights
Approval of directors’ actions.(5)
-service contracts-If the company wishes to grant a contract to a director for a period of more than 2 years, that contract must be approved by the members. If it is not, the courts will imply a term into the contract allowing the company to terminate the contract by giving reasonable notice
-substantial property transactions-If a director buys from, or sells to, the company an asset of a substantial value, the transaction must be approved by the members. If not, the transaction is voidable by the company and the director in question may have to repay to the company any gain he has made or any loss the company has suffered. A substantial value is either:
more than £100,000, OR
more than £5,000 AND more than 10% of the company’s assets.
-loans to directors-If the company plans to make a loan to a director, or give a guarantee for a loan to a third party on behalf of a director, they must first provide a document to the members setting out the details and gain those members’ approval. Failure to do so allows the company to treat the transaction as voidable and also can mean the director in question must repay the company any gain he has made or any loss the company has suffered. Similar rules apply for loans made to someone connected to a director.
-loans to directors-exceptions-A loan to / guarantee for a loan to a director does not have to be approved by members if:
the loan is to be used to meet expenses incurred on company business or defending the company in legal / regulatory actions
the loan is for a minor amount the loan is made between two group companies/the company’s usual business is lending money and the loan was made on comparable terms to those it would be made to a member of the public.
-payments for loss of offices-Any ex-gratia (i.e. not in the director’s contract) payments made to a director on loss of office / retirement should be approved by the members. To allow them to do this, they should be provided with a memorandum setting out the details of the payment.
If approval is not given, the payment is treated as if it were on trust for the company, and the company can claim it back. The director who authorised the payment can also be made to repay the company for any losses it has suffered.
Minority protection rights.(4)
-Any member can apply to court to prohibit a payment out of capital of a private company-can prevent registration of a ltd company as an unltd company
-those with 5% or greater can force inclusion of a resolution agenda of the AGM and require directors to call a GM
-those with greater or equal to 15% can apply to court to cancel variation of class rights
-greater than 25% can defeat a special resolution to alter name articles and reduce share capital or wind up.
what does foss v harbottle show?
it is for the company itself to bring proceedings where a wrong has been done to the company not shareholders,
How does the CA06 protect minority shareholders.(3)
Derivative actions-allows action on behalf of the company can only be permissible by court through good faith and best interest of the company cannot be if company has already approved a thing
-unfairly prejudicial conduct-company is being unfairly ran and must be effected member individually not company-court is allowed to see what they see fit eg order of specific performance or injunction
-just and equitable winding up-ask order to end of life of company needs to prove its fair and no other option (last resort)
Meetings of members
AGM-annual and requirement of public not private, can be fined for not and all members need 21 day notice inc its an AGM, can only be reduced if all entitled agree to less AGM has no set agenda but auditor director appts etc requisition resolution may mean topic of discussion if members hold 5% voting rights or 100 members averaging £100 of paid up share cap
general meetings-called when needs but public required if endure serious loss of capital (net assets fallen to less than half called up share capital) 14 day notice and no set agenda requisitioning party decides
class meetings-only involve members of particular class of shares eg want to change rights 14 day notice required to that class and decision to be valid quorom must be at least 2 members who hold 2/3s
Within how many months from its year end must a public company hold their annual general meeting?
A public company must hold its AGM within 6 months of its year end. There is no requirement for private companies to hold one.
Calling meetings.(2)
When the directors receive a request, they must call a meeting within 21 days and the meeting must take place within 28 days of the notice.
Special notice requires 28 days. This is needed for removal of a director and an auditor. The notice must include the text of any special resolutions. 14 days notice is needed for a general meeting unless 90% of those holding shares agrees to less.
3 types of resolution.(3)
-special-A special resolution requires 75% of those attending the meeting to vote in order to pass the decision. Special resolutions are used when either the law says they must be used or the articles of the company says they must be used. Copies of special resolutions should be filed with the Registrar within 15 days.
-ordinary-Ordinary resolutions require more than 50% of those attending the meeting to vote in order to approve. They are the default type of legislation so they are used when the law / articles do not state that a special resolution is needed. They do not usually have to be filed with the Registrar unless the law specifically says they do.
-written-These can only be used by private companies, public companies must take their decision in meetings. These decisions are passed when enough people have signed, either electronically or on paper. For it to be passed, the majority must have approved it within 28 days. The same majority is needed as if the decision was taken in meetings, eg: 75% if it is a decision that requires special notice. Written resolutions cannot be used for removal of a director or auditor.
Single member companies.(3)
Under the Companies Act it is possible to set up a company with just one member. In this case there is no need for notice of meetings to be given, or minutes of a meeting to be taken.
However, records must be kept in writing of any decisions made by that member which would usually require a resolution in a general meeting.
These records must be kept for ten years.
Single member companies.(3)
Under the Companies Act it is possible to set up a company with just one member. In this case there is no need for notice of meetings to be given, or minutes of a meeting to be taken.
However, records must be kept in writing of any decisions made by that member which would usually require a resolution in a general meeting.
These records must be kept for ten years.
If a director wished to buy from the company a building which of the following values would require shareholder approval?
A. Property value £50,000, company total assets £600,000
B. Property value £6,000, company total assets £50,000
C. Property value £120,000, company total assets £5,000,000
Substantial property transactions must be approved. These either exceed £100,000 or exceed £5,000 and 10% of the company’s assets.
Available Answers
B and C (1 Mark)
Special issues of shares.(3)
preemption rights-rights of first refusal CA06 states existing share holders are given first refusal if company wants new shares and requires 21 days but company can apply to go against of these
rights issue-if premption rights not applicable have right to buy more shares usually at less than market value but NEVER less than nominal value
bonus issue-free shares in proportion to existing shares coming from share prem so no liability on shareholders
The nominal value of the share represents what people are willing to pay for it. True or false?
The market value of the share represents what people are willing to pay for it…FALSE
The called up capital of the company is the amount of the nominal value the shareholders have been requested to pay in. True or false?
True!
How variance in procedure effects class rights.(1)
If special procedure must be followed if not 75% in class majority written consent or special resolution is required.
Minority protection concerning variation of class rights as provided in s.633 CA06.(2)
If holders of greater or equal to 15% of class of shares object they may apply to courts within 21 days of variation and must prove it is unfairly prejudicial :
If variation changes the right themselves the court will cancel whilst if the variation merely affects value enjoyment or power derived from rights the court will alow.
Allotment of shares requires authority, list 3 ways this can be obtained and what the authority must state.(2)
ordinary resolution, implied authority (for directors of a company with only one class of shares) or the articles of association
must state max number of shares to be allotted and expiry date of authority eg max 5 years
Issue at discount v prem.(2)
Can’t offer discount on nominal and if this occurs issue is still valid but shareholder still liable to pay this discount plus interest//debentures may be issued at discount if no immediate right to convert shares
Can offer prem hence prem account this may only be used for writing of expenses dividends in issue of those shares and issuing bonus shares.
Share allotment v share issue.(2)
When a person has been given the unconditional right to be included within the company’s register of members in respect of some shares, those shares are said to have been allotted.
Then the person to whom shares are allotted receives a letter of allotment or share certificates as evidence of his ownership of the shares, then the shares are said to be issued.Once the share owner’s name is entered on the register of members, he or she is a member of the company.
When must action be brought against a company for not following preemption rights procedures?
This is the on demand icon. The image is a circle containing a book.Pre-emption rights
Select each item to learn more.
What are pre-emption rights?
How long do shareholders have to accept?
What if this process isn’t followed?
The sale of shares is still valid but the shareholders who missed out on their rights can sue the company or the directors for any losses suffered. Such an action must be brought within 2 years.
When must action be brought against a company for not following preemption rights procedures?
The sale of shares is still valid but the shareholders who missed out on their rights can sue the company or the directors for any losses suffered. Such an action must be brought within 2 years.
When do preemption rights not apply?
The rights do not apply to:
bonus issues
sales other than for cash
shares issued through an employee share scheme.
A private company can exclude the pre-emption rights in the articles.
Additonal rules for paying public company shares.(5)
-Subscribers to the memorandum (first shareholders) must pay cash for their subscription shares
-Payment for shares must not be in the form of work or services
-Shares cannot be allotted until at least one-quarter of their nominal value and the whole of any premium have been paid up
-Non-cash consideration must be received within five years
-Non-cash consideration must be independently valued and reported on by a person qualified to be the company’s auditor
Disclosure and transparency rules.(1)
The Disclosure and Transparency Rules state that a shareholder must notify the issuer if their shareholding reaches 3% of the shares, then for each additional 1% increase thereafter. This notification must be made within two trading days.
Alteration of share capital
A company may decide to reduce its share capital. However, there are other methods of alteration of capital such as:
-increase it by allotting more shares
-subdivide it into shares of smaller nominal amounts than current shares, or
consolidate and divide its shares into shares of a larger nominal amount than its current shares.
If shares are to be subdivided or consolidated, the proportion of the unpaid and paid amounts of the shares must remain the same.
Share capital can change if shares are re-denominated from one currency to another.
This may result in a reduction in capital, to round off nominal values in the new currency. This change requires a special resolution, and it must not exceed 10% of the nominal value of the reduced share capital.
Reduction in share capital.(1)
Must be by special resolution
Private companies but also inc a solvency statement whilst public require court approval
A company cannot acquire its own shares and if does so shares would be void, what are two exceptions to this?(2)
-redemption of shares
A company can issue redeemable shares (shares that include a term for the company to buy them back). The redemption (or buy-back) of these would be valid as long as certain conditions are met.
-purchase of own shares
If the company buys back shares that were not issued as redeemable it would fall under this scenario. For such a repurchase to be valid the company must follow the correct procedure.
Permissible capital payment (PCP).(2)
PRIVATE COMPANIES ONLY UNLESS EXCEPTIONS FOR PUBLIC
Make up deficit
directors must provide statement of solvency supported by company auditors and available for members to review who give special resolution and must be passed within one week of solvency statement an d public noticement must be made so court has 5 weeks to cancel and payment 5-7weeks and copies and updated statement of capital filed with registrar.
In general financial assistance cannot be provided to a third party by a company in order for them to buy shares…what are exceptions to this?(3)
Permitted reasons only with caveat for public that it cannot decrease net assets
Permitted reasons include:
employee share scheme or to employee to purchase fully paid shares
if the primary reason for assistance is not to buy shares
company makes a loan but is a money lending business thus lending is made of usual terms of business.
What isnt deemed financial assistance?(4)
Payment of a dividend or provision of bonus shares to an existing shareholder.
Post liquidation payments to a shareholder.
Reduction of capital as permitted by the Act.
Repurchase / redemption of shares as discussed previously.
