The Board Of Directors

Question 1

What is a director under s.250 CA2006? Can a company be a director?

Answer 1

A director is any person occupying the position of director, by whatever named called

If they carry out the functions of a director then they are one

‘person’ = company or LLP can a be a director, but must have at least 1 director who is a natural person

Question 2

What is a de jure director?

Answer 2

A director validly appointed at Companies House

Question 3

What is a de facto director? What 3 conditions must be satisfied for a person to be deemed a de factor director?

Answer 3

Someone who acts as director but has not been validly appointed as one.

To be deemed a de facto director, person must:

1. Exercise real influence in the corporate governance of the company
2. Undertake functions only a director could do
3. Act as equals with de jure directors and participate in the company’s affairs

Question 4

What is a shadow director? What are 5 instances when a person is not a shadow director?

Answer 4

s.251 CA2006 = a person in accordance with whose directions or instructions the directors of the company are accustomed to act

Not a shadow director if:

1. Give advice in a professional capacity
2. Give advice in the exercise of a function under an enactment
3. Give advice in a capacity as Minister of the Crown
4. Other directors do not act on their instructions
5. The instructions are acted on for the first time (must be accustomed to act)

Question 5

What is an executive director?

Answer 5

Usually a full time employee involved in the day-to-day management

Question 6

What is a Non-Executive Director?
What do they do?
What is their role according to the UK CG code?

Answer 6

Usually part-time and no active role in management.
They perform board tasks and attend meetings.

Provision 13 UK CG Code = must scrutinise and hold to account the performance of management and individual directors against agreed performance objectives

Provision 11 UK CG Code = at least half the board should be made up of NEDs the board considers to be independent

Question 7

What is an alternate director? When will directors have the power to appoint someone?

Answer 7

Someone temporarily appointed to act as director on a director’s behalf

Director only has the power to appoint someone if provided for in the company’s articles

MA for Plc has this power but MA for private companies doesn’t

Question 8

What is a nominee director? Where is the power to appoint found?
Who is the nominee’s duty to?

Answer 8

Someone who has been appointed to the board to act on behalf of another person and represents a particular interest in the company

(i.e. a major shareholder may wish to safeguard their interest and therefore negotiate with the company the ability to appoint a director)

Power of appointment is in articles or shareholder agreement

Nominee’s duty is to the company, not who appointed them

Question 9

What are 2 specific board roles? What are both of their roles?

Answer 9

The CEO and the Chair.

CEO is the head of the company and is responsible for delivering the board’s strategy.
Role and powers found in the articles and CEO’s service contract

Art.12 MA = company may appoint a director to chair their meetings.
Principle F UK CGCode = chair leads the board and is responsible for its overall effectiveness

Question 10

Who is not eligible to act as a director? (4)

What else may limit/prohibit a person from acting?

Answer 10

1. Those under 16
2. A company’s statutory auditor
3. Those subject to a disqualification order (unless obtained leave of court)
4. Those who are undischarged bankrupt (unless obtained leave of court)

Company’s articles may prohibit or limit a person’s ability to act

Question 11

What is the process of appointing a director and who has the power to appoint? What does the UK CG Code say about the process?

Answer 11

S.16 CA2006 = first directors are appointed on incorporation

New directors are appointed subject to the articles

Art.17 MA for Ltd and Art.20 MA for Plc = by ordinary resolutions or by a decision of the directors

UK CG Code = appointments should be subject to a formal, rigorous, and transparent procedure. (It recommends the board establishes a nomination committee to lead the process made up of at least half independent NEDs)

Question 12

Who is required to keep a register of directors?
When must the company inform CH of any changes and what must the notice contain?
Who can inspect it?
Where can private companies keep the information?

Answer 12

S.162 CA2006 = every company must keep a register of directors
and notify CH of any changes within 14 days

S.167 CA2006 = notice must contain a statement of particulars and a statement by the company that the director has consented to act

Members can inspect free of charge, anyone else must pay

Private companies can keep the required information on the public register maintained by CH and inform CH of any changes

Question 13

Under s.161 CA2006, the acts of directors are valid unless what 4 things are discovered?

Answer 13

1. There was a defect in their appointment
2. They were disqualified from holding office
3. They ceased to hold office
4. They were not entitled to vote on the matter

Question 14

When does s.161 CA2006 not apply? (3 situations)

Answer 14

1. where the person seeking to rely on s.161 hasn’t acted in good faith
2. Where they knew of the defect and its legal effect at the time of the appointment
3. Where there was no purported appointment in the first place

Question 15

Are directors entitled to be paid?

Answer 15

A director is prima facie an office holder so not entitled to be paid, unless the payment is authorised by:

1. The members
2. The articles (Art.19 MA for Private; Art.23 MA for Plc), or
3. A director’s service contract

No authorisation = any remuneration paid to a director will be void

Question 16

Who determines directors’ pay if the article are silent? What about the rules for larger companies?

Answer 16

The company’s articles.
If articles are silent, the company will decide in a general meeting.
Art.19 MA Ltd and Art.23 MA Plc = the directors can determine themselves

The UK CG code disallows this and recommends large companies establish a remuneration committee of at least 3 independent NEDs

Question 17

What are the disclosure requirements for directors’ remuneration? What about large companies? (4 things)
What about large unquoted companies?
What must quoted companies do?
What must premium listed companies do?

Answer 17

S.228 and 230 CA2006 = all companies must keep copies of each director and shadow directors’ service contract
• Members can inspect free of charge
• Failure = criminal offence

The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008:

1. Director’s remuneration
2. Directors’ gains made by exercising share options
3. Money paid or assets received under a long-term incentive scheme
4. Company contributions paid into directors’ pension schemes

Large unquoted = Schedule 5, para 2-5 on the legislation website

Quoted companies are required to prepare a directors’ remuneration report annually

Companies with a premium listing must comply or explain with the disclosure-related Principles and Provisons of the UK CG Code

Question 18

What is the standard board structure that companies usually adopt?
What are the 3 committees large companies may delegate board powers to?
What is the minimum number of directors a company can have on a board?
What does the UK CG code say about who should be on the board and what the appointments should promote?

Answer 18

• Companies usually adopt a unitary board structure where all directors are part of a single board that undertakes all board functions
• Larger companies may delegate board powers to:

1. Remuneration committee = determine directors’ remuneration
2. Nomination committee = recommend directorial appointments
3. Audit committee = recommend auditor appointments and monitor internal audit and financial control

• S.154 CA2006 = private company must have at least 1 director and public company must have at least 2

• Prov.11 UK CG Code = at least half the board should be made up of NEDs the board consider to be independent
• Princ.J UK CG Code = board appointments should promote diversity of gender, social and ethnic backgrounds, and personal strengths

Question 19

What are the 4 ways a director can vacate office?

Answer 19

1. Resignation
   • Director can vacate office at any time by resigning and the company must accept the resignation
   • A requirement to provide reasonable notice will be implied into the contract
2. Vacation in accordance with the articles
3. Removal
4. Disqualification

Question 20

When do the model articles provide that a director will vacate office? (4)
What is another rule under the model articles for public companies?
What about for companies with a premium listing under the UK CG Code?

Answer 20

Art.18 MA for Private; Art.22 MA for Plc = a director will vacate office if:

1. They cease to be a director by virtue of the CA2006
2. They are prohibited from being a director by law
3. Declared bankrupt
4. Declared physically or mentally incapable of acting as a director and remain so for more than 3 months

Articles may require retirement by rotation = director is required to periodically vacate office and seek re-election
• Art.21(1) MA for Plc = directors must retire at the company’s first AGM and may seek re-election
• Art.21(2) MA for Plc = requires directors to retire every 3 years then may seek re-election

• Prov.18 UK CG Code = directors of companies with a premium listing are subject to annual re-election

Question 21

What are the 2 ways a director can be removed from office?

Answer 21

1. Removal under s.168 CA2006 = company can remover a director before the end of his period of office (despite any agreement between the company and the director) by ordinary resolution
2. Removal under the articles = Articles may state a director will be required to vacate office if all the other directors require
   (MA do not contain this or any other methods of removal)
   Advantage = company doesn’t need to comply with the procedural rules found in s.168

Question 22

What are the 4 requirements for a s.168 CA2006 removal to be valid?
How can a company make it more difficult to remove a director?

Answer 22

• Rules for a removal to be valid:

1. Resolution must be held at a meeting (written resolution cannot be used)
2. 28 day notice is required
3. A copy of the resolution must be sent to the director(s) whose removal is sought
4. The director whose removal is sought may protest against his removal, address the meeting, and circulate written representations to the meeting

Can make a removal more difficult by inserting a weighted voting rights clause in the articles
(MA do not contain such a provision and Listing Rules prohibit them)

Question 23

What are 12 instances when a company can be disqualified under the CDDA1986 and is the maximum disqualification period of each?

Answer 23

1. S.2 CDDA1986 = where convicted of an indictable offence (15 years)
2. S.3 CDDA1986 = for persistent breaches of company legislation (5 years)
3. S.4 CDDA1986 = for fraudulent trading under s.993 CA2006 during winding up (15 years)
4. S.5 CDDA1986 = where guilty of a summary offence and convicted at least 3 times (5 years)
5. S.5A CDDA1986 = where guilty of a summary offence overseas (15 years)
6. S.6 CDDA1986 = for unfitness of a company that has become insolvent (includes shadow directors) (15 years)
7. S.8 CDDA1986 = where, in the opinion of the Secretary of State, it is in the public interest to disqualify (15 years)
8. S.8ZA CDDA1986 = for instructing an unfit director of insolvent company (15 years)
9. S.8ZD CDDA1986 = for instructing an unfit director (15 years)
10. S.9A CDDA1986 = for committing a breach of competition law (15 years)
11. S.10 CDDA1986 = where found liable for fraudulent trading or wrongful trading under IA1986 (15 years)
12. S.11 CDDA1986 = where undischarged bankrupt (Disqualification period = while order or undertaking remains in force)

Question 24

What 3 things must a disqualified person not do?

Answer 24

• s.1 and 1A of CDDA1986 = disqualified persons shall:
1. Not be a director of a company
2. Act as a receiver of a company’s property
3. Take part in promotion, formation or management of a company
(unless obtains leave of the court)

Question 25

What are the 2 methods of disqualification?

What are the 2 limitations of the second method?

Answer 25

1. Disqualification order = order of the court providing that a person is to be disqualified
2. Disqualification undertaking = The director gives the Secretary of State an undertaking that he will not engage in s.1 and 1A CDDA1986
   Breach of either = criminal offence

2 limitations of a disqualification undertaking:

1. Only used for disqualifications found in certain acts e.g. ss. 5A, 7, 8, or 9A
2. Only accepted if expedient in the public interest

Question 26

What do compensation orders and undertakings require a disqualified person to do?
Who can make an order / accept an undertaking?
What are the 2 conditions that must be met for either to be made/accepted?

Answer 26

Compensation order or undertaking requires the disqualified person to pay a specified amount to either:
• the Secretary of State for the benefit of the creditor(s)
• Or as a contribution to the assets of the company

The courts can make compensation orders and the Secretary of State can accept compensation undertakings

A compensation order or undertaking can only be made if 2 conditions are met:

1. The person is subject to a disqualification order or undertaking
2. The conduct the order / undertaking relates to has caused loss to the creditors of an insolvent company of which the person was a director