Long-term service contracts Flashcards
What are the three types of transactions that require shareholder approval?
- Long-term service contracts
- Substantial property transactions
- Loans, quasi-loans and credit transactions
When is it necessary for a long-term service contract to be approved?
Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years (referred to as ‘GUARANTEED TERM’).
What does the guaranteed term apply to?
*A contractual term of more than two years or where the director is in control of how long the contract continues AND
*During this time the company either cannot terminate the contract or can only terminate i specific circumstances OR
*The period of notice to be given by the company is in excess of 2 years.
It can be an aggregate of the above.
If a director is also a director of any holding company, will extra approval be needed?
If the director is also director of any holding company, the shareholders of the holding company will also need to give approval.
What are the consequences of non-compliance?
*The provision will be void to the extent of the contravention; and
*The contract will be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.
What is an exception to the requirement for shareholder approval?
Approval is not required by the members of any company which is a wholly owned subsidiary of another company.
Must a director disclose an interest in the long-term service contract under s.177?
A director is not required to disclose their interest in the service contract. However, it is likely that directors will continue to make the declaration of interest so that it is documented in the board minutes.
Additionally, the director will not be permitted to vote or count in the quorum on any board resolution relating to the contract (MA).
Explain members right to inspect service contracts
A company must keep a copy of all directors’ service contracts (or, where the contracts are not in writing, memoranda of their terms) at the company’s registered office for a period of at least one year from the date of termination or expiry of the contract for the members to inspect.
*This obligation applies regardless of the length of any service contract and whether or not it is terminable within 12 months.
*Members have the right to inspect without charge or to request a copy on payment of a fee.
Where the ordinary resolution is to be passed at a GM, what is the procedure that must be followed under CA?
Where the ordinary resolution is to be passed at a General Meeting, CA sets out that a memorandum setting out the proposed contract must be made available for inspection by members of the company both:
a) At the company’s registered office for not less than 15 days ending with the date of the meeting; and
b) At the meeting itself.
A minimum of 15 days’ notice of the GM held to approve the contract will therefore have to be given to shareholders (even if the short notice procedure is followed) unless the written resolution procedure is used.
Where a WR is being used to pass the ordinary resolution what procedure must be followed?
Where the written resolution procedure is being followed, the memorandum setting out the 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.
