Transactions requiring member approval

Question 1

What is required for Directors’ Long-Term Service Contracts exceeding two years?

Answer 1

Approval by ordinary resolution is required for service contracts granted for a guaranteed term in excess of two years.

Question 2

What is the guaranteed term in a service contract?

Answer 2

A period where the company has no control/can only terminate in specific circumstances/has to give notice

Question 3

What happens if there is non-compliance with long-term service contracts?

Answer 3

The provision for long-term will be void, and the contract will be deemed to contain a term entitling the company to terminate it at any time by giving reasonable notice.

Question 4

Is approval required for wholly owned subsidiaries regarding service contracts?

Answer 4

Approval is not required by the members of any company which is the wholly owned subsidiary of another.

Question 5

Can a director vote on board matters related to their own contract?

Answer 5

no

Question 6

How long must a company keep a copy of the service contract?

Answer 6

The company must keep a copy for at least one year from the date of termination or expiry of the contract for members to inspect.

Question 7

What is the inspection period for the proposed contract memorandum?

Answer 7

The memorandum must be made available for inspection by members at the company’s registered office for not less than 15 days and at the meeting itself.

Question 8

What is the exception to the inspection procedure for proposed contracts?

Answer 8

If a written resolution procedure is used, then no inspection procedure is required.

Question 9

What are substantial property transactions?

s190 - 196

Answer 9

The acquisition or disposal by a director of a company or a director of a company’s holding company, or aconnected person of a substantial non-cash asset from or to the company.

Question 10

How is a substantial asset defined in relation to a company?

Answer 10

• Its value exceeds 10% of the company’s asset value and is more than £5,000
• or the value exceeds £100,000.

Question 11

Who are considered connected persons?

Answer 11

• one up, one down, one across (mother; son; wife)
• bodies corporate where the director holds 20% or more of the shares
• business partners of the director
• trustees of a trust with beneficiaries including the director or those connected with them.

Question 12

What are the consequences of entering a substantial property transaction without shareholder approval?

Answer 12

The transaction is voidable at the instance of the company unless restitution is impossible, the company has been indemnified, or rights acquired in good faith for value by a non-party would be affected.

Question 13

Can directors vote on substantial property transactions?

Answer 13

Directors will be unable to vote.

Question 14

When will approval not be required for a substantial property transaction?

Answer 14

Approval is not required by members of any company that is a wholly-owned subsidiary of another company.

Question 15

What happens if a company shows it took reasonable steps to ensure compliance?

Answer 15

If a company can show they took all reasonable steps to ensure compliance, the director will not be liable.

Question 16

What are the types of loans to directors?

Answer 16

1. Loans: Lending money to a director.
2. Quasi-loans: Company pays off a director’s debt to a third party, expecting reimbursement.
3. Credit Transactions: Company provides goods/services on credit to be paid later.
4. Guarantees or provision of security: Company guarantees a bank loan or provides securities.

s197-214

Question 17

How are private companies restricted regarding loans to directors?

Answer 17

Private companies require approval for:
- loans to directors
- loans to directors of holding companies
- guarantees/securities for a director

Question 18

How are public companies restricted regarding loans to directors?

Answer 18

Private companies require approval for:
- loans to directors/connected persons
- loans to directors/connected perons of holding companies
- guarantees/securities for a director/connected person
- credit-transactions to director/connected person
- quasi loans to director/connected person

Question 19

What are the exceptions for loans to directors?

Answer 19

1. Expenditure on company business (max £50,000).
2. Loans for defending proceedings against a director.
3. Loans for defending regulatory actions.
4. Minor and business transactions.
5. Intra-group transactions: loans/quasi-loans up to £10,000 and credit transactions up to £15,000.
6. Money lending companies.

These do not require OR

Question 20

What remedies exist for loan agreements?

Answer 20

An arrangement is voidable unless restitution is impossible, the company has been indemnified, or third-party rights acquired in good faith are affected.

Question 21

What are the liabilities of directors involved in voidable arrangements?

Answer 21

Directors are liable to account for any profits made and indemnify the company for any losses incurred.

Question 22

What is the defense available to directors regarding compliance with s197 -214?

Answer 22

Directors can defend themselves if they show they took reasonable steps to ensure compliance, or if a connected partner/director had no knowledge of the contravention.

Question 23

What is the rule for wholly owned subsidiaries regarding loans to directors?

Answer 23

A wholly owned subsidiary never needs to pass an ordinary resolution for a transaction with a director of its holding company/its subsidiary or its own director.

Question 24

What is required for holding companies regarding loans to directors?

Answer 24

A holding company must pass an ordinary resolution for any transaction or loan between a subsidiary and a director of the holding company.

Question 25

What are the disclosure requirements when a holding company must give SH approval?

Answer 25

Similar disclosure is needed (15 day inspection period)

Question 26

What is required for payments for loss of office to a director?

Answer 26

Any payment for loss of office needs approval by shareholders via an ordinary resolution, unless it is in good faith or less than £200.

Question 27

What are the types of remedies available for a non-approved specific transaction?

Answer 27

The types of remedies include rescission, damages, injunction, and account for profits.

Question 28

What is the remedy for breach of the duty to exercise reasonable care, skill, and diligence under s174?

Answer 28

The only remedy for breach of this duty is damages.

Question 29

What are directors liable for regarding profits?

Answer 29

Directors may be held liable to account to the company for profits received from breach of their duties, regardless of honesty. Only profits received as a result of the breach are payable.

Question 30

How can directors obtain relief if there has been a specified transaction without the required SH approval?

Answer 30

- Prior approval of the directors (s175,177) - Prior approval by the SHs (s180) - Ratification (s239) - Court relief (s115)

Question 31

What does ratification under s239 allow shareholders to do?

Answer 31

Shareholders can ratify any conduct by a director amounting to a breach of duty, negligence, default, or breach of trust after the breach by ordinary resolution.

Question 32

What relief can the court grant under s115?

Answer 32

The court may grant relief if it appears that the officer acted honestly and reasonably, and ought fairly to be excused.

Question 33

When can directors never obtain relief?

Answer 33

Directors cannot be exempted from liability in negligence, default, breach of duty or breach of trust. Any provision which purports to do this will be void.