Law of Organisations Oral Prep- Part A Flashcards
What does a 51% shareholding enable Jiang to do?
- A 51% shareholding will enable Jiang to pass ordinary resolutions and block ordinary resolutions brought by other shareholders.
- Section 282 Company Act 2006 sets out that for a resolution to be passed, a simple majority of over 50% is required in favour of the resolution at the general meeting.
What is a private limited company?
- A private limited company is business entity that is formally set up and registered at companies house.It issues shares to shareholders however theses shares are not publicly traded on a exchange like public companies.
- A private limited company is an incorporated business structure, meaning it has its own separate legal personality, which stems from the landmark case of Salomon v A Salomon and Co ltd
- A company having its own separate legal personality, means it exists separately from the people who manage and own the company (directors and shareholders). The company’s assets, liabilities and profits belong to the company itself, and shareholders (Like Jiang) are generally not liable for the companies debts. Their liability is restricted to how much they paid for the shares.
- If someone wishes to sue the company, the defendant will be the company itself NOT the directors and shareholders.
In what ways is Jiang able to acquire shares, and how does he become a member?
Jiang can acquire shares in one of two ways;
- Jiang could have acquired shares through allotment- this is where a company creates shares and gives them to an existing shareholder or new shareholder in return for payment.
- Jiang could have acquired shares via share transfer- This is when an existing shareholder sells their shares or gives them to another shareholder or a new shareholder.
- The company will then issue a share certificate which signifies the new ownership of the shares and enter the new shareholder on the register of members (for new shareholders).
- Under s113 CA 2006, all shareholders have the right to have their name on the register of members, and a company must register a new shareholder on the register of members as soon as practicable or no more than 2 months after the transfer, s771 CA 2006 if shares are acquired through share transfer, s 554 CA 2006 if shares are acquired through allotment.
What is model article 14 and what does disapplying it mean?
- A quorum is the minimum number of directors at a meeting for that meeting to be legally valid (meetings require 2 directors).
- Model Article 14 states, that directors with an interest cannot count in the quorum and cannot vote on a proposed transaction.
- In this scenario as model article 14 has been disapplied, directors with an interest CAN count in the quorum and CAN vote on a proposed transaction
What is the process of a director retiring?
External Administration
- When a director retires, they must complete form TMO1 (as they are an individual), which must be filed at companies house no later than 14 days after the resignation/removal from office under section 167 CA 2006.
Internal Administration
- When a directors is removed or resigns, the register of directors must be updated along with the register of directors’ residential addresses.
What is the shareholder director divide?
-The shareholder directors divide concerns the strict separation between the role of directors (who run the company on a day to day basis and make decisions), and the role of shareholders (who own the company and get involved with important decisions).
- Whilst it is common for directors and shareholders to be the same people, they should not merge the distinct roles of director and shareholder.
-When a person who is both a shareholder and director (i.e. Marcus and Corinne) attend board meetings they should act as directors and promote the success of the company NOT their own interests as a shareholder.
-When they attend a general meeting, they can vote as a shareholder to promote their own interests.
What is a Substantial Property Transaction (SPT) + Who makes the decision to enter into the contract
What is an SPT?
Under s 190 Company Act 2006, a substantial property transaction occurs where;
- A director in their personal capacity or someone connected with a director.
- Buys from or sells to the company
- A non-cash asset (property/interest in property other than cash- section 1163 CA 2006)
- Of substantial value; (Over £100k or more an asset worth more than 10% of company’s net asset value- section 191 CA2006)
This transaction will be a substantial property transaction because;
-James (Aneesa’s husband so connected with a director)
- Is selling to the company
- A non cash asset- Land, (so they can build a new office space)
-Which is of substantial value (worth more than £100k, here £150k)
Who makes the decision?
- A substantial property transaction is a director decision that requires shareholder consent.
What is the procedure to enter into a Substantial Property Transaction?
Board Meeting 1
- In this board meeting, the directors will approve the draft terms of the substantial property transaction (subject to shareholder approval)
- The directors will pass a formal board resolution where they resolve either to call a general meeting or circulate a written resolution.
- Note- as this is a resolution to get the shareholder to do something, but is not a resolution for the board to do something, no director has to declare an interest and all can count in the quorum and vote. The board meeting is then ended.
General Meeting
- At the general meeting the shareholders will either approve or disapprove of the resolution presented to them- (Here to enter into a substantial property transaction).
- Entering into an SPT is approved by way of ordinary resolution , so a simple majority (over 50%) is needed for the transaction to be approved. A poll vote can also be demanded
Board Meeting 2
- Now that the transaction has been approved, the directors will pass a board resolution where they resolve to enter into the contract and authorise a director to execute the contract.
Application- How did the board vote in this scenario
- The board has agreed to enter into the contract to purchase land from James.
-The vote passed was 2:1- Aneesa and Marnus were in favour (66%) MA 14 disapplied, with Corinne voting against due to concerns about the relationship between Aneesa and James and the potential resulting conflict of interest.
Does Aneesa need to declare a conflict of interest under s 177
- Under s 177 CA 2006, if a director has a direct or indirect interest in a proposed transaction or arrangement with the company, he should delcare that interest to the other directors
- Because the transaction is with Aneesa’s husband James, she should declare it (indirect interest).
- It is important for the board to be aware of any potential bias the director may have that may affect their duty as a director due to their personal interest in the transaction in which the company is involved.
- Here, Aneesa might want to fetch a higher price for the land than it is worth, which would benefit her husband and herself (indirectly), but would go against s172 CA 2006- The duty to promote the success of the company, which encompasses getting the best price in a purchase.
An exception to s 177 is that;
- Under Section 177(2) A director does not need to declare their interest in a proposed transaction or arrangement with the company if the other directors are already aware of the interest.
The directors may already be aware that she is married to James, so she might not need to declare her interest in said proposed transaction, but it is good practice to do so anyways.
What are the factors the directors need to consider under s 172 CA 2006, when choosing to fire a team of employees
- Section 172 requires directors to act in a way he considers, in good faith promotes the success of the company for the benefit of its members.
- Success can be measured using financial and non financial indicators, but in a commercial context success of a business is measured financially.
-Lord Goldsmith stated ‘for a commercial company success is defined as the long term increase in value’
- Under the enlightened shareholder value approach, the aim of a company should be to maximise shareholder value, as this in turn promotes prosperity and overall welfare. However primary focus on short term profits is NOT equated to maximising shareholder value and directors should seek to establish co-operative relationships with stakeholders, which might lead to short term losses but will lead to greater benefits long term.
- When considering whether the decision to make redundant the entire department of the bodyboarding team, the director needs to weigh up whether this action is promoting the success of the company, but also consider other factors, such as these employees and the company’s reputation. However these factors cannot be prioritised over promoting the success of the company.
- Shutting down an unprofitable part of the business does seem to promote the success of the company, and coupled with the fact that directors must consider long term consequences of their decisions, it seems more profitable in the long term to discontinue the body boarding department, if they are continually making losses due to lack of sales. By shutting down this part of the business, you are reducing the company’s liabilities which should increase the company’s equity and overall lead to a higer share value.
-The actual powers of directors to make discretionary decisions to promote the success of the company, come from Model Article 3 and Section 43 of the Company Act 2006, which sets out general directors duties.
