Lecture 4 - Company Ownership and Management Flashcards
Explain the role of directors
The term director refers to every person who occupies the position or fulfils the role of director
The directors of the company manage the company
Directors owe several duties to the company and face potential civil and criminal liability in the event of a breach
Executive directors devote substantially the whole of their working time to performing their duties and derive most of their income from the company. They are employees of the company
A non-executive director does not have a function to perform in a company’s management but is involved in its governance ‐ they are subject to the same legal rules as executive directors
Appointment of directors
The first directors of a company agree to become directors when the company is registered. Unless the articles provide otherwise
Public companies must have two directors, but private companies need only have one. Usually, directors also own shares in their own companies but this is not mandatory
What’s the removal process of directors like?
- Directors may leave office by removal under s168 Companies Act 2006, by disqualification, by resignation, by not offering themselves for re‐election, or on death or dissolution of the company.
- Model articles set out the procedure for the retirement and re‐election (rotation) of directors whereby a number of the directors retire by rotation
- Model articles provide that a director must vacate office if they become bankrupt or enter an arrangement with their creditors or become of unsound mind or if they are absent for from board meetings without leave – typically six months - from the other directors who resolve that they should therefore vacate office.
- The Company Directors Disqualification Act (CDDA) provides that a director may be disqualified for persistent breaches of company legislation, fraudulent or wrongful trading or insider dealing.
Explain Company Directors Disqualification Act 1986 - CDDA
- A person who is disqualified automatically ceases to hold office as a director
- A disqualification order must be made where a person has been a director of a company which has at any time become insolvent and his conduct as a director of that company makes him unfit to be concerned in the management of a company.
- A bankruptcy order made against a person automatically disqualifies him from acting as a director of a company
A disqualification order may be made where a person is convicted of a serious offence in managing a company: - Failure to keep proper accounting records
- Failure to read the company’s accounts
- Loans to associated companies on uncommercial terms to the detriment of creditors
- the Secretary of State considers it to be in the public interest
- a director is guilty of certain breaches of competition law
- a director has participated in wrongful trading
- it appears in a winding up that a person has been guilty of fraudulent trading
Explain how long the disqualification period is and the period can be lesser
Disqualification orders carry a minimum period of 2 years and a maximum period of 15 years
The following circumstances may result in the court imposing a lesser period of disqualification:
- Lack of dishonesty
- Loss of directors’ own money in the company
- Absence of personal gain such as excessive remuneration
- Efforts to mitigate the situation
- Low likelihood of reoffending
- Breach of a disqualification order can result in a fine and/ or imprisonment
To help speed up the disqualification process, the Secretary of State may accept a voluntary disqualification undertaking from a director as an alternative to initiating disqualification proceedings
The advantage to a director in giving a voluntary disqualification undertaking is that they will then not need to pay the costs of going to court
They may also be given a discount on the length of any disqualification period.
What is wrongful trading?
Wrongful trading applies only when a company goes into insolvent liquidation and the liquidator can show that the director knew or should have known there was no reasonable prospect that the company could have avoided going into insolvent liquidation. No declaration will be made when the court is satisfied that the director took every step, he ought to have taken to minimise the potential loss to creditors.
What is fraudulent trading?
If it appears to a liquidator that any business of the company has been carried out with the intention of defrauding creditors, or for any fraudulent purpose the person who acted fraudulently should make such contributions to the company’s assets as the court feels fit. In addition, a disqualification order could be made under the CDDA 1986
What are the director’s powers?
- The board of directors of a company is charged with managing the business of the company usually with a view to maximising profits. Powers are conferred on the directors collectively. These powers are defined by the company’s articles which normally authorise the directors to manage the business of the company and to exercise all the powers of the company
- Statutory provisions and directors’ contract of employment will also be relevant to defining directors’ powers and responsibilities. Directors appointed managing directors have apparent authority as agents of the company to enter business contracts on behalf of the company
- Some matters are solely for the directors such as a declaration of solvency on a capital reduction or voluntary liquidation and the declaration of an interim dividend. Sometimes the articles will place limits on the directors’ powers such as maximum borrowing limit
What are the director’s duties?
- S171 Duty to act within powers:
A director must act in accordance with the company’s constitution and only exercise powers for the purpose for which they were conferred - S172 Duty to promote the success of the company:
The principle of enlightened shareholder value requires directors to act in a way which is most likely to promote the success of the company for the benefit of the members as a whole.
This principle means directors should have regard to the long-term consequences of any actions. They should have regard for all stakeholders - S173 Duty to exercise independent judgement:
Directors must not delegate their powers or be swayed by the influence of others. He must not merely obey instructions from fellow directors - S174 Duty to exercise reasonable care, skill and diligence:
Directors have a duty to exercise the same standard of care, skill and diligence that would reasonably be expected of a reasonably diligent person with the knowledge, skill and experience which may reasonably be expected of a person in their position and the knowledge, skill and experience s/he have - S175 Duty to avoid conflicts of interests (situational):
Between directors’ own interests and those of the company. The section states that this applies particularly to the exploitation of any property, information or opportunity but is expressly stated not to apply to any conflict arising in relation to a transaction or arrangement with the company - S176 Duty not to accept benefits from third parties:
A director of a company must not accept a benefit from a third party conferred by reason of his being a director, or his doing or not doing anything as a director. The duty is not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest - S177 Duty to declare an interest in a proposed transaction or arrangement with the company (transactional):
Provided the director is, or ought reasonably to have been aware of the situation, s/he must declare the nature and extent of any such interest (direct or indirect) to the other directors.The notice may be given at a board meeting or by notice in writing or by a general notice
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Annual General Meetings
- Every public company must hold an AGM within 6 months its financial year end. Private companies are not required to hold an AGM
- At least 21 days written notice must be given unless all the members agree to a shorter period
- The members of a public company may require the company to give notice of a resolution to be moved at the meeting provided they represent at least 5% of the total voting rights
Annual General Meetings
- Every public company must hold an AGM within 6 months its financial year end. Private companies are not required to hold an AGM
- At least 21 days written notice must be given unless all the members agree to a shorter period
- The members of a public company may require the company to give notice of a resolution to be moved at the meeting provided they represent at least 5% of the total voting rights
Class meetings
A class meeting may be held in respect of individual classes of shareholders or debenture holders. Most statutory provisions relating to meetings and resolutions also apply to class meetings
Explain Resolutions and the two different types
- Public companies pass resolutions at a GM
- Private companies pass resolutions at a GM or can pass resolutions as a written resolution
There are two types of resolution Ordinary and Special: - Ordinary resolution > 50% of the votes cast for any business for which a special resolution is not specifically required by enactment or the articles
A Special resolution (75%) is required for: - Change of name
- Alteration of the articles
- Reduction of share capital
- Winding up of the company
Written Resolution
A written resolution is one which may be passed only by a private company. They are available to them because private companies are not required to hold general meetings. They can be used to pass almost any type of decision.
They cannot be used to remove a director or auditor from office since both have a right to attend and speak at a meeting where any proposal for removal is to be discussed.
Procedures at meetings - Quorum
A quorum is the minimum number of persons to be present at a general meeting. Normally a company must have a quorum of two members or proxies, or corporate representatives
A single member company may have a quorum of one.
If the required number is not present the meeting is said to be inquorate. Usually, the articles provide for an automatic and compulsory adjournment in such cases.
