The interests, rights, obligations, and powers of stakeholders in a business

Question 1

Directors of a company have duties imposed on them by?

Answer 1

ss.171-177 CA 2006 to regulate their behaviour and hold them to account.

Question 2

If a director breaches any of these duties he will?

Answer 2

incur liability and action may be taken against him by the company (not the shareholders) as directors owe their duties to the company.

Question 3

The remedies for a breach of duty include:

Answer 3

*The director to account for profits to the company.
*The Director to return company property.
*Payment of equitable compensation by the Director.
*Rescission of a contract.
*Injunction against the Director if a breach is threatened.

Question 4

Directors have a fiduciary relationship with the company, namely?

Answer 4

a position of trust, good faith, honesty, and loyalty to the company.

Question 5

Every private company must?

Answer 5

have at least one director.

Question 6

The powers of the directors are set out in?

Answer 6

the articles of association.

Question 7

Certain transactions with directors are regulated, such as?

Answer 7

substantial property transactions and the granting of director’s service contracts.

Question 8

Directors’ duties apply to?

Answer 8

executive directors, non-executive directors, and shadow directors.

Question 9

Executive Directors:

Answer 9

*A director who has been appointed to an executive office within the company.
*Will spend his time working on the day-to-day business of the company.
*Will be an employee of the company and have a service contract with it.
*Receives a salary.

Question 10

Non-executive Directors:

Answer 10

*Do not participate in the day-to-day running of the business.
*Principal role is to attend and vote at board meetings.
*Not an employee and would not have a contract of employment.
*Would be paid in the form of directors’ fees.
*Appointed for their experience and advice in running the company.

Question 11

Shadow Directors:

Answer 11

*A person (not properly appointed as a director) but whose directions or instructions the directors of the company are accustomed to act upon and follow.
*Directors duties apply to shadow directors, despite them not being formally appointed.

Question 12

On incorporation, first directors are named and appointed in?

Answer 12

the form IN01.

Question 13

Subsequent Directors appointment will follow the procedure set out in the model articles (Article 17) which provides?

Answer 13

the passing of Board Resolution of the existing directors or an ordinary resolution of the shareholders.

Question 14

Appointment of Directors -
File form?

Answer 14

AP01.

Question 15

Update the register of directors and register of directors…

Answer 15

residential addresses.

Question 16

A director must be:

Answer 16

At least 16 years old.
Not be disqualified under the Company Directors Disqualification Act 1986.
Not be a bankrupt or physically or mentally incapable of being a director (Article 18).

Question 17

Any service contract granted to a director on appointment of a guaranteed fixed term of more than two years must be?

Answer 17

approved by ordinary resolution of the shareholders.
If not approved, the contract will be terminable by reasonable notice.

Question 18

A director can resign by?

Answer 18

giving notice to the company.

Question 19

The board of directors can dismiss a director by?

Answer 19

majority vote at the board meeting.

Question 20

Members also have the right to remove a director from office at any time by passing an ordinary resolution as follows:

Answer 20

*Special notice must be given to the company to pass the ordinary resolution at least 28 days before the GM.
*A written resolution cannot be used under this procedure.
*A copy of the special notice must be sent to the director concerned by the company.
*The director has the right to make written representations to the company and speak at the GM.
*Ensure there is no Bushell v Faith clause in the articles which would give the shareholder-director weighted voting right on any resolution to remove him from his position as director
or any resolution to amend the articles to allow them to remove the Bushell v Faith clause.

Question 21

Notwithstanding dismissal by the board of directors or shareholders, a director may claim for?

Answer 21

wrongful dismissal, unfair dismissal, or redundancy.

Question 22

File form TM01 at?

Answer 22

companies house.

Question 23

Update the register of directors and update the register of directors’?

Answer 23

residential addresses

Question 24

Duty to act within powers (s.171 CA):

Answer 24

*A director of a company must act in accordance with the company’s constitution (articles of association).
*Only exercise powers for the purpose for which they are conferred.

Question 25

Duty to promote the success of the company (s172 CA 2006):

Answer 25

• A director must promote the success of the company for the benefit of the members as a whole (unless the company is insolvent when the interests of the creditors are put first).

Question 26

Factors directors must consider include but are not limited to:

Answer 26

*The likely consequences of any decision long term.
*The interest of the company’s employees.
*The need to foster business relationships with suppliers, customers, and others.
*The impact of the company’s operations in the community and environment.
*The desirability of the company maintaining a reputation for high standards of business and conduct.
*The need to act fairly between members of the company.

Question 27

Duty to exercise independent judgement (s.173 CA 2006):

Answer 27

*A director of a company must exercise independent judgement.
*Ensure directors act independently in their decision-making rather than contracting it out.

Question 28

Duty to exercise reasonable care, skill, and diligence (s.174 CA 2006):

Answer 28

*A director must exercise reasonable care, skill, and diligence.
*The care, skill, and diligence that would be exercised by a reasonably diligent person with:
The general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions carried out by the director regarding the company (objective test) AND
The general knowledge, skill, and experience that director has (subjective test: where a director possesses a higher standard of general knowledge and skill or experience, they
will be judged by that higher standard).

Question 29

Duty to exercise reasonable care, skill, and diligence:
This duty seeks to ensure that?

Answer 29

directors carry out their functions carefully and competently.

Question 30

Duty to avoid conflict of interest (s.175 CA 2006):

Answer 30

*A director of a company must avoid a situation in which he has or can have direct or indirect interest that conflicts with the interest of the company.
*Applies in particular to the exploitation of any property, information, or opportunity (and it is immaterial whether the company could take advantage of the property, information, or opportunity).
*The duty also applies after a director ceases to be a director regarding property/information/opportunity he became aware of as a director.

Question 31

Duty not to accept benefits from third parties (s176 CA 2006):

Answer 31

*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 director.

Question 32

Duty not to accept benefits from third parties (s176 CA 2006):
This duty would cover?

Answer 32

corporate hospitality given to a director.

Question 33

Duty not to accept benefits from third parties (s176 CA 2006):
There may be provisions permitting such benefits in?

Answer 33

the articles.

Question 34

Duty not to accept benefits from third parties (s176 CA 2006):
There is also a right for the shareholders to approve?

Answer 34

the giving of such benefits.

Question 35

Duty to declare interest in proposed transaction or arrangement with company (s.177 CA 2006):

Answer 35

*If a director of a company is in any way directly or indirectly interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
*It ensures the board of directors have full disclosure of a possible conflict of interest before deciding whether to enter into the transaction with one of their own directors.
*The company needs to be aware that the director concerned, when acting on the behalf of the company as a decision maker, has an invested interest in a personal capacity and this may give rise to a conflict of interest.
*A declaration must be made before the company enters into the contract.
*Under model article 14(1), the director who made the declaration cannot vote as a director regarding the contract, nor form part of the quorum for a board meeting (unless certain exceptions apply).

Question 36

Directors take decisions as a board, except where?

Answer 36

they have delegated their specific decision-making powers to an individual director.

Question 37

Board of directors may take decisions either at a board meeting by?

Answer 37

passing a board resolution (either unanimous or majority decision) or by written resolution (without holding a board meeting).

Question 38

Model articles permit?

Answer 38

any one of the directors to call a board meeting.

Question 39

When a director calls a board meeting, he must?

Answer 39

give the other directors notice of the meeting before it takes place.

Question 40

The notice must specify the proposed date, time and place of the meeting and?

Answer 40

means of communication if they are not all in the same place.

Question 41

The quorum (the minimum number of directors needed for a valid meeting) for a board meeting with the model articles for private companies is?

Answer 41

2 directors.

Question 42

In accordance with s.177, a director can be prevented from?

Answer 42

counting in the quorum and voting by the model articles unless it’s specified exception applies
or if the company disapplies the article by ordinary resolution,
or if it cannot be reasonably regarded as giving rise to a conflict of interest.

Question 43

Once a quorum has been established, the directors begin the agenda of the board meeting and?

Answer 43

the decisions to be taken.

Question 44

The rules for voting by directors will be found?

Answer 44

in the articles.

Question 45

Under the model articles, each director has?

Answer 45

one vote at the board meeting and all resolutions may be passed by unanimity or majority vote.

Question 46

If there is an equal number of votes for and against a resolution, there is a…

Answer 46

deadlock, and the negative view will prevail.

Question 47

A resolution is defeated unless?

Answer 47

the chairperson has a casting vote to carry the resolution.

Question 48

The board of directors can appoint?

Answer 48

one of their person to be a chairperson.

Question 49

The chairperson has control of the agenda and?

Answer 49

the meeting.

Question 50

Minutes must be recorded for every board meeting and?

Answer 50

kept for 10 years.

Question 51

Director’s service contract:

Answer 51

*May not exceed 2 years (unless approved by ordinary resolution of members).
*Members have the right to inspect service contracts and be available for inspection until at least 12 months after they expire.

Question 52

Substantial property transactions:

Answer 52

*A transaction with a director (or a person connected to a director) to acquire from the company or dispose of to the company, a substantial non-cash asset are prohibited (unless approved by ordinary resolution of the members or conditional on member approval).
*Substantial non-cash asset by reference to the most recent statutory accounts means the asset:
Exceeds 10% of the company’s asset value and is over £5000
or exceeds over £100,000.

Question 53

The value of assets forming part of an arrangement or series are?

Answer 53

aggregated.

Question 54

Persons connected to a director include?

Answer 54

spouse, civil partner, romantic partner in an enduring relationship, children, stepchildren, parents, and children of romantic parents, but not brothers, sisters, grandparents, children, uncles, aunts, nephews, and nieces.

Question 55

If member approval is not obtained, the contract is?

Answer 55

voidable, and any director involved must indemnify the company for any loss, damage, or account to it for any profit.

Question 56

Loans to directors:

Answer 56

*A company may not (unless approved by ordinary resolution of the members)
make a loan to a director of more than £10,000 in aggregate
or give a guarantee or provided security for a loan to a director.

Question 57

Payments for loss of office:

Answer 57

*Payments for loss of office in excess of £200, require prior approval of members by ordinary resolution.
*Redundancy payments, unfair dismissal and wrongful dismissal compensation are not included in this restriction.

Question 58

Shareholders (members):

Answer 58

*The constitution of a company forms a contract between the company and each of its members.
*It provides a means for a shareholder to take action against the company or against another shareholder for breach of his contractual rights set out in the articles.
*Shareholder power is exercised in a company on the basis of majority rule.
*The majority of the voting shares will decide the outcome.

Question 59

Applying to wind up the company s.122(1)(g) IA 1986:

Answer 59

*The affected member must be able to show that it is just and equitable to seek to end the life of the company and distribute any remaining assets
(once all debts have been paid) to the shareholders.
*The remedy is a severe one as it brings the life of the company to an end.
*S.125 IA 1986 provides that the court will not grant a winding up order if it is satisfied both that some other remedy (e.g., s.994 CA) is available to the petitioners
and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
*The availability of a s.994 CA 2006 relief will normally result in a s.122 petition being struck out.

Question 60

Unfair Prejudice (s.994 CA 2006):

Answer 60

*Any member feels that the company’s affairs are being conducted in a manner which is unfairly prejudicial to the interest of members (or part of its members) has a right to petition the court for a remedy.
*This includes any actual or proposed act or omission of the company.
*Unfair prejudice examples include non-payment of dividends, directors awarding themselves excessive remuneration, exclusion from management in a small company where there was an understanding that all or certain shareholders will participate in management.

Question 61

Derivative Claims (ss260-264 CA 2006):

Answer 61

*Brought by a member for an actual or proposed omission involving negligence, default, breach of duty, or trust by a director.
*Derivative claim is for a wrong against the company, not the member.
*The member brings the claim, but it vests in the company.
*A successful derivative claim leads to relief for the company.
*It benefits a shareholder indirectly.
*A derivative claim is a two-stage process:
*Preliminary to decide if applicant is entitled to bring a claim (establish a prima facie case) and if successful, the full hearing of the claim itself.

Question 62

Summary of shareholder rights -
Share certificates and register of members:

Answer 62

Request a share certificate within two months of transfer
have their name on register of members.

Question 63

Summary of shareholder rights - Notices and meetings:

Answer 63

Right to receive notice of GM and attend and vote at GM.

Question 64

Summary of shareholder rights - Annual accounts:

Answer 64

Right to a copy of the annual accounts for each financial year

Question 65

Summary of shareholder rights - Dividends:

Answer 65

If declared a right to a dividend.

Question 66

Summary of shareholder rights -Inspect records, service contracts:

Answer 66

Right to inspect records of resolutions, minutes of meetings and long-term service contracts of directors.

Question 67

Summary of shareholder rights -
Call a GM:

Answer 67

Request the court to call a GM.

Question 68

Summary of shareholder rights -
Bring winding up proceedings:

Answer 68

If just and equitable and the member has a tangible interest

Question 69

Summary of shareholder rights -
Voting:

Answer 69

The right to demand a poll vote,
two or more persons with the right to vote on a resolution
or member(s) with at least 10% of the voting rights.

Question 70

Summary of shareholder rights -
Unfair prejudice or derivative claim:

Answer 70

Members have a right to bring these claims to protect their minority position

Question 71

Summary of shareholder rights -Approve director’s service contract:

Answer 71

Pass an OR to approve a long time (more than two years) service contract of a director.

Question 72

Summary of shareholder rights -
Ratify breach:

Answer 72

Pass an OR to ratify a director’s breach of duty.

Question 73

Summary of shareholder rights -Appoint a director:

Answer 73

Pass an OR to approve the appointment of a director.

Question 74

Summary of shareholder rights -Removal of director or auditor:

Answer 74

Pass an OR to remove a director or auditor.

Question 75

Summary of shareholder rights -Substantial property transactions:

Answer 75

Pass an OR to approve a substantial property transaction with a director.

Question 76

Summary of shareholder rights -
Loans to directors:

Answer 76

Pass an OR to approve a loan to a director.

Question 77

Summary of shareholder rights -Buyback:

Answer 77

Pass an OR to authorise a buyback contract.

Question 78

Summary of shareholder rights -Amend articles:

Answer 78

Pass a SR to amend the company’s articles (file SR and copy of new articles at CO HSE within 15 days).

Question 79

Summary of shareholder rights -
Pre-emption rights:

Answer 79

Pass a SR to disapply statutory pre-emption rights.

Question 80

Summary of shareholder powers by vote:

Answer 80

Control of the company - 100%.
Pass special resolution - 75%.
Pass ordinary resolution - 50%+
Block special resolution - 25%+ (negative control).
Block ordinary resolution - 50% (negative control)
Consent to Short Notice of a GM - 90%.
Refuse To consent to short notice of a GM - 10%+.
Circulate written resolution - 5%+
Demand a poll vote - 10%+