UNIT 3 - Company Decision Making

Question 1

The board of directors of a company wants to call a general meeting on short notice. There are five shareholders with the following shareholdings:

• An accountant – 15,000 ordinary £1 shares
• A financial adviser – 4,000 ordinary £1 shares
• A doctor – 51,000 ordinary £1 shares
• A teacher – 20,000 ordinary £1 shares
• An estate agent – 10,000 ordinary £1 shares

Which of the following best describes which shareholders would need to agree in order for the general meeting to be held on short notice?

A) The doctor, because they hold a majority of the company’s shares.
B) Any three shareholders, because between them they would constitute a majority in number of the shareholders.
C) The accountant, the doctor and the teacher and either the financial adviser or the estate agent, because between them they constitute the required majority in number holding between them at least 90% of the shares.
D) The accountant, the financial adviser, the doctor and the estate agent, because between them they constitute the required majority in number holding the majority of the shares.
E) All five shareholders, because they would all be needed in order for the required majority in number holding between them at least 95% of the shares.

Answer 1

CORRECT ANSWER C - A majority in number of shareholders who between them hold 90% or more of the shares are required in order to agree to a general meeting being held on short notice (s 307(4)–(6) CA 2006). All of the other options are wrong either because they do
not constitute a majority in number of shareholders or because those shareholders do not between them hold 90% or more of the shares.

Question 2

A private company has the Model Articles of Association with no amendments. It has six directors. A board meeting is scheduled for next week and the chair intends to propose
a resolution to appoint a new director. Four directors (the chair, the finance director, the operations director and the HR director, referred to collectively as the ‘Directors in Favour’) are in favour of the appointment and the other two directors (the IT director and the director of planning) are against it.
Assume that at the board meeting everyone who attends will vote as indicated above and that none of the directors have a personal interest in the matter.

Which of the following best explains who should attend the board meeting in order for the resolution to be passed?

A) As long as any two directors attend the board meeting, the resolution will be passed.
B) As long as the chair and any one other director attend the board meeting, the resolution will be passed.
C) As long as the chair attends the board meeting, the resolution will be passed.
D) As long as any two of the Directors in Favour attend the board meeting, the resolution will be passed.
E) As long as the chair and one of the other Directors in Favour attend the board meeting, the resolution will be passed.

Answer 2

CORRECT ANSWER E - In order for the resolution to be passed, the board meeting must be quorate and a simple majority of directors must vote in favour of the resolution (MA 7). The quorum for a board meeting is two (MA 11), so two of those directors in favour must attend, to ensure there is a quorum. If they did not, the directors who are against the resolution could fail to turn up and the meeting would not be quorate. The chair of the board has
a casting vote (MA 13), so at the board meeting, either three directors or the chair and another director must vote in favour to ensure that there is a majority in favour of the resolution. Option E is the only combination which makes sure the quorum is met and that enough directors are present to outvote the IT director and the director of planning.

Question 3

A company has an entire issued share capital of 1,000 shares of £1 each. The original shareholders were a nurse, who had 950 shares and a dentist, who had 50 shares. Last week the nurse sold 500 of his shares to the dentist, and the rest of his shares to new shareholders: 200 shares to a local investor and 250 shares to a surgeon.

Which of the following best describes the amendments the company must make to the register of People with Significant Control (‘PSC register’) as a consequence of the sale described above?

A) The company will need to add the local investor and the surgeon to the PSC register.
B) The company will need to add the local investor and the surgeon to the PSC register and remove the nurse.
C) The company will need to add the dentist to the PSC register and remove the nurse.
D) The company will need to add the dentist to the PSC register.
E) The company will need to add the dentist, the local investor and the surgeon to the PSC register and remove the nurse

Answer 3

CORRECT ANSWER C - Only those with over 25% of the company’s shares need to be on the PSC register. Before the transfers, the nurse had 95% of the company’s shares and the dentist had 5% of the company’s shares, so the nurse will have been on the PSC register and the dentist will not have been on it. Following the transfers, the shareholdings changed to the dentist (55%), the local investor (20%) and the surgeon (25%). The local investor does not have enough shares to appear on the register and neither does the surgeon, because they do not have over 25%. The dentist has enough shares to appear and must be added. The nurse should be removed because he has ceased to be a shareholder.

Question 4

In a company with model articles, which of the following decisions is made by only the directors of a company?

a) Change of company name.
b) Change of accounting reference date.
c) Change of articles.
d) Enter into a substantial property transaction.
e) Remove a director from office.

Answer 4

CORRECT ANSWER B - The directors are able to change the accounting reference date according to s392 CA06. The other decisions are reserved for the shareholders or require shareholder approval.

Question 5

A private limited company with model articles sends out a written resolution to its members on 1 January.

What will be the lapse date for the written resolution?

A) 1 January.
B) 14 January.
C) 21 January.
D) 28 January.
E) 29 January.

Answer 5

CORRECT ANSWER D - The lapse date will be 28 days after the circulation date and the timer period begins on the circulation date (s297). Almost all time periods in the Companies Act start to run the day after they are initiated, however the 28 days for the lapse date of written resolutions starts to run on the same day as the circulation date. Votes received on 28 January will still be valid but as it is the last day it is referred to as the lapse date.

Question 6

A private limited company with model articles wishes to pass an ordinary resolution by way of written resolution to appoint a director.

What percentage of the votes of the eligible members will be required to pass the written resolution?

A) More than 50%
B) 51%
C) 75%
D) More than 75%
E) 100%

Answer 6

CORRECT ANSWER A - The percentage required to pass a written resolution does not differ from the percentage required to pass a resolution at a general meeting. Here, an ordinary resolution needs to have more than 50% of the votes in favour to pass.

Question 7

Who would vote on a special resolution to be passed by way of written resolution?

A) The directors.
B) The shareholders.
C) Both the directors and the shareholders.
D) The chairman.
E) The creditors of the company.

Answer 7

CORRECT ANSWER B - Special resolutions are voted on by the shareholders and this does not change just because it is a written resolution.

Question 8

Shareholders in a private limited company with model articles vote on an ordinary resolution by way of written resolution.

When calculating if the vote has passed, how would the percentages be calculated?

A) The number of positive votes compared to the number of negative votes.
B) The number of positive votes as a percentage of the shares present and voting.
C) The number of positive votes as a percentage of the total shares of the eligible members.
D) The number of positive votes as a percentage of the shares which vote (ignoring shares which abstain).
E) The number of negative votes as a percentage of 100.

Answer 8

CORRECT ANSWER C - Written resolutions operate slightly differently from general meetings when calculating percentages. In order to pass a written resolution, the votes must match the required percentage against all the shares held by eligible members of the company. It is irrelevant if a shareholder abstains, does not return an answer or votes in the negative. A company with 100 shares held by eligible members must have at least 51 shares that vote for the resolution in order for it to pass an ordinary resolution.

In a general meeting the required percentage is of those present and voting, which can lead to a different result.

Question 9

What is the minimum time period between the directors circulating a written resolution and the resolution passing?

A) There is no minimum time period.
B) 24 hours.
C) 14 days.
D) 14 clear days.
E) 21 days.

Answer 9

CORRECT ANSWER A - There is no minimum time period. As soon as the written resolution is signed by the requisite percentage of eligible members and returned to the company it is validly passed (s296 CA06).

Question 10

Who has the power to change the articles of the company?

A) The directors.
B) The shareholders.
C) Either the directors or the shareholders.
D) Both the directors and the shareholders must be in agreement.
E) The shareholders must approve it and the directors must execute it.

Answer 10

CORRECT ANSWER B - The shareholders have the power to amend the articles of the company (s21 CA06).

Question 11

A private limited company has model articles with one amendment; MA4 has been disapplied. It has one director and one shareholder (who are not the same person). The shareholder and the director disagree on the best strategy for the company.

Will the shareholder or the director usually decide on the company’s strategy?

A) The shareholder.
B) The director.
C) They must both agree.
D) The shareholder, but the director can remove the shareholder and/or appoint new shareholders.
E) The director, but the shareholder can remove the director and/or appoint new directors.

Answer 11

CORRECT ANSWER E - Model article 3 provides that the directors will run the company from day to day. Shareholders are able to remove directors and/or appoint new ones who are more likely to implement the decisions that that the shareholders want.

(Model article 4 provides for the shareholders to direct the directors to take a specified action if the shareholders pass a special resolution. This is very unusual and it is impractical for the shareholders to rely on this power as it only applies to one action. Additionally, directors usually circulate the resolution, and in this case, presumably the shareholder would have to requisition the circulation of the resolution themselves which is more cumbersome.)

Question 12

A private limited company has model articles. The shareholders wish to vote at a general meeting to approve the long-term service contract (5 years) of one of the directors. The shareholders have not requisitioned a meeting.

What has to happen before the general meeting?

A) Consent to short notice must be agreed by a majority in number of the shareholders and at least 90% of the voting shares.
B) Update the PSC register.
C) General meeting minutes must be drafted.
D) A board meeting to call the general meeting.
E) Filing at Companies House.

Answer 12

CORRECT ANSWER D - The directors must call the general meeting at a board meeting before the general meeting can take place.

Question 13

In the usual company decision making process, what is the correct order of events?

A) General meeting notice, general meeting, board meeting notice, board meeting, general meeting.
B) General meeting notice, general meeting, board meeting notice, board meeting.
C) Board meeting notice, board meeting, general meeting notice, general meeting, board meeting.
D) Board meeting notice, general meeting notice, general meeting, board meeting.
E) General meeting, board meeting, general meeting notice, board meeting notice.

Answer 13

CORRECT ANSWER C - Notice is given of the board meeting, then the board meeting is held. At that board meeting the notice of the general meeting will be circulated. Then the general meeting will be held. Often decisions require a reconvened or a second board meeting in order to implement the decisions/approvals at the general meeting.

Option D is in the correct order but does not answer the question as well as option C. as it leaves out a key stage.

Question 14

A company has five shareholders, each with 20% of the voting shares. They are voting on an ordinary resolution to approve the purchase of some land from one of the shareholders. Three of the shareholders are for the resolution and two are against it. The shareholder who is selling the land is for the resolution. All the shareholders are present at the general meeting.

Will the ordinary resolution at a general meeting pass?

A. Yes, because an ordinary resolution requires more than 50% and the vote will be three to two on a show of hands and 60% to 40% on a poll.
B. Yes, because even though the selling shareholder is disqualified from voting, the vote will be tied and therefore will pass.
C. No because an ordinary resolution requires at least 75% of the vote to pass and only 60% of the shareholders are in favour (three to two on a show of hands and 60% to 40% on a poll).
D. No, because the interested shareholder will be disqualified from counting in the quorum and therefore if they are present at the meeting it will be inquorate.
E. No, because even though the selling shareholder is disqualified from voting, the vote will be tied and therefore will not pass.

Answer 14

CORRECT ANSWER A - An ordinary resolution will require more than 50% to pass. The vote will be won on a show of hands or a poll vote. The shareholder is not disqualified from voting or counting in the quorum. The rules for shareholders are not the same as the rules for directors - MA14 does not apply to shareholders. Because shareholders own the company, they have almost no restrictions on when their vote counts. The two notable exceptions to this are when they are voting on buying back their own shares or ratifying a breach of their own duty.

Question 15

A private limited company with model articles has three shareholders. Shareholder 1 has 95% of the shares, shareholder 2 has 3% of the shares and shareholder 3 has 2% of the shares. Shareholder 1 is in favour of the proposed shareholder resolution and shareholders 2 and 3 are against the resolution and they will fight it in any way they can. The directors wish to have the shareholders pass a special resolution as fast as possible.

What is the fastest option for the company to pass a special shareholder resolution in this case?

A. A general meeting held on normal notice.
B. A general meeting held on short notice.
C. The shareholder requisitions a general meeting.
D. A written resolution of the shareholders.
E. A written resolution of the directors.

Answer 15

CORRECT ANSWER D - A written resolution of the shareholders will be passed as soon as the requisite majority are in favour. Here at least 75% of the eligible members ( as defined in s 289 Companies Act 2006) must be in favour and shareholder 1 has 95%. So as soon as shareholder 1 signs and returns the written resolution it will pass, regardless of what the other two shareholders do. There are no minimum time limits for a written resolution. It could be passed immediately after the board meeting.

Option A is not as fast as a written resolution because they would have to wait a minimum of 14 clear days. Option B seems to be just as fast as a written resolution, but it suffers from the problem that the requirements for short notice are at least 90% of the shares AND a majority in number of shareholders must be in favour. Here 95% of the shares will vote in favour but two out of three will vote against short notice.
Option C is unnecessary as the directors are in favour of the resolution. It also does not improve on the problems with a delay in calling a general meeting.
Option E would pass a resolution of the directors, but we need a resolution of the shareholders. Directors can use a written resolution procedure, but it is not very common as every director must vote in favour in order for it to pass. This extra requirement, along with the fact that there minimum notice requirements for board meetings means that a directors written resolution is not as useful a procedure as the shareholder written resolution.

Question 16

A private limited company with model articles has three shareholders and the same three directors. The oldest director/shareholder has 95% of the shares and is chairman of the board, the middle director/shareholder has 3% of the shares and the youngest director/shareholder has 2% of the shares. The oldest is in favour of the proposed resolution and the middle and youngest are against the ordinary resolution and they will fight it in any way they can.

Will the company be able to pass the ordinary resolution at a general meeting?

A. No, because the middle and youngest director/shareholders can prevent the general meeting being called by voting against it at the board meeting.
B. No, because the middle and youngest director/shareholders would win on a show of hands at the board meeting and the general meeting.
C. No, because the middle and youngest director/shareholders could be absent from the meetings to make them inquorate.
D. Yes, because the oldest director/shareholder is chairman of the board so can call a general meeting and can request a poll vote.
E. Yes, because as a shareholder, the oldest director/shareholder can requisition a general meeting and then request a poll vote.

Answer 16

CORRECT ANSWER C - because being absent from the meetings would stop a board meeting or general meeting being quorate. The oldest director/shareholder could requisition the company to circulate a written resolution to get around this, because it has no quorum requirements - however a written resolution was not an option on these facts.
Option A is wrong because they can prevent a general meeting being called at the board meeting but the oldest director/shareholder could use their rights as a shareholder to requisition the circulation of a written resolution (or indeed a general meeting).
Option B is wrong because the oldest director/shareholder could requisition a poll vote on two different bases. The oldest director/shareholder is the chairman and owns more than 10% of the shares.
Option D is wrong because even though the oldest director/shareholder is the chairman, the oldest director/shareholder will still lose the vote 2:1 as the casting vote does not kick in unless there is a tie.
Option E is wrong. With over 5% of the shares, the oldest director/shareholder can requisition a general meeting even if the board do not wish them to. The board are then compelled to call a general meeting or commit a criminal offence. They then request a poll vote and the resolution will be passed when over 50% of the eligible members vote in favour (and the oldest director/shareholder controls 95%). However, the general meeting would be inquorate if the middle director/shareholder and the youngest director/shareholder are absent. This option would have worked if the oldest director/shareholder were circulating a written resolution instead of a general meeting.

Question 17

A company, which is a private company limited by shares, buys £200,000 of paper from a paper supplier (which is also a private limited company). One of the directors of the company is also a director of the paper supplier. Both companies have model articles.

Which of the following best describes the resolutions required for the purchasing company to properly enter into this contract?

A. The company needs a board resolution.
B. The company will need a board resolution and an ordinary resolution of the shareholders.
C. The company will need the approval of the suppliers’ shareholders.
D. The company will need a board resolution and a special resolution of the shareholders.
E. The company cannot lawfully enter into the contract.

Answer 17

CORRECT ANSWER A - This is not a substantial property transaction even though it is of the requisite value and it is a transaction that involves a non-cash asset. The director of the company is not a shareholder of the supplier. Just because they are a director of both companies is not enough to make the supplier a connected person to the director. Depending on the circumstances, there may be other duties that need to be complied with like declarations of interest and potentially not being able to vote or count in the quorum. However, despite these potential complications, this is just a contract being approved under MA3 and it does not require shareholder approval, nor is it unlawful.

Question 18

A company with model articles has a director who is interested in a proposed transaction with the company. The other directors were not previously aware of the interest.

Which of the following best describes the effect of the director declaring that interest?

A. The director is now allowed to vote and count in the quorum at the board meeting when voting on the transaction.
B. The director may vote against the resolution, but if they vote for the resolution and the resolution would not have passed if they had not done so their votes are not counted.
C. The director has now complied with their directors’ duties regarding declaring their interests.
D. The rules relating to substantial property transactions now do not apply to this transaction.
E. The director is still unable to benefit personally from the transaction.

Answer 18

CORRECT ANSWER C - s177 requires directors to declare their interests. Declaring your interests means that the other directors are now aware of the interest involving a transaction with the company. However, declaring your interests has no impact on your ability to vote or count in the quorum - do not confuse s177 with MA14.

Declaring your interests also has no impact on the rules regarding substantial property transactions or the director’s ability to benefit personally from the transaction.

Question 19

A private limited company passes a special resolution to change its name.

When is the name change effective?

A) When the board resolution is passed.
B) When the shareholder resolution is passed.
C) When the Registrar receives the application.
D) 21 days after the resolution is passed.
E) When the Registrar issues a new certificate of incorporation.

Answer 19

CORRECT ANSWER E - A change of a company’s name has effect from the date on which the new certificate of incorporation is issued (s81 CA06).

Question 20

When a shareholder changes category in terms of the PSC register, what does the company need to update?

A) Internal register.
B) External register.
C) Internal and external register.
D) Nothing.
E) Internal and external register and send a notification to all other shareholders.

Answer 20

CORRECT ANSWER C - The company must record any changes to PSC information in the company’s PSC register, such as a change of personal details or nature of control. The company must do this within 14 days of the change.

The company must send these changes to Companies House within a further 14 days.

Question 21

A private limited company with model articles passes a board resolution to enter into a contract to buy some stock.

What records need to be kept for this transaction?

A) A copy of the board minutes must be kept for 10 years.
B) A copy of the general meeting minutes must be kept for 10 years.
C) A copy of the board minutes and a copy of the contract must be kept for 10 years.
D) A copy of the general meeting minutes and a copy of the contract must be kept for 10 years.
E) Companies house must be notified.

Answer 21

CORRECT ANSWER A - The board minutes must be kept for 10 years. There is no need to have a general meeting and there is no requirement to keep a copy of the contract (although of course it makes sense to do so for commercial reasons).

Question 22

A private company with model articles wishes to enter into a substantial property transaction.

Which of the following best describes the procedure for the transaction to go ahead properly?

A) The directors must approve it.
B) The shareholders must approve it.
C) The directors and the shareholders must both approve it.
D) The shareholders must approve it and the directors must execute it.
E) The directors must approve it and the shareholders must execute it.

Answer 22

CORRECT ANSWER D - The directors will propose the transaction and ask the shareholders for approval by ordinary resolution. If this approval is given the directors are then free to enter into the transaction and execute the contract.

Question 23

A private limited company has model articles and net assets of £400,000. A landowner is a director of the company. The company wishes to purchase a small section of land from the landowner which is next to the company’s warehouse. The proposed sale price of the land is £99,000 in cash.

The company is not a wholly owned subsidiary, nor does it have a holding company.

Is the sale a substantial property transaction?

A) Yes, because the transaction is with a director of the company.
B) Yes, because the transaction is with a director of the company, it is substantial and a non-cash asset.
C) No, because the value of the transaction is not over £100,000.
D) No, because the transaction is being paid for in cash.
E) No, because the transaction is not between two companies.

Answer 23

CORRECT ANSWER B - The transaction fulfils the basic three-part test for substantial property transactions -
1. transaction between the company and one of its directors (or someone connected to that director) (s190 CA06)
2. Substantial (as set out in s191cA06)
3. Non-cash assets (s1163 CA06)

Here, it is between the company and a director of the company, it is substantial (it is above 10% of the company’s net asset value) and it is for a non-cash asset (land). This checklist is a good guide but there can be exceptions such as for wholly owned subsidiaries. However, this company is not a wholly owned subsidiary.

Question 24

A private limited company has model articles.

What is the minimum notice period for a general meeting called on full notice?

A) Immediately (no minimum notice period).
B) Whatever is stated in the articles.
C) 7 clear days.
D) 14 clear days.
E) 21 clear days.

Answer 24

CORRECT ANSWER D - Set out in s307 and s360 CA06. The articles cannot reduce the minimum notice period as set out in statute and the model articles do not attempt to do so

Question 26

A private limited company with model articles wishes to pass a shareholder resolution to change the articles as soon as possible. The company has five shareholders, one shareholder has 52% of the shares and the remaining four shareholders have 12% of the shares each. The shareholder with 52% of the shares is on holiday and is not contactable for another 30 days. All shareholders are in favour of the resolution.

The shareholders that are not on holiday will act promptly and attend meetings promptly.

What is the quickest way to pass the shareholder resolution?

A )A general meeting on full notice.
B) A written resolution.
C) A general meeting on short notice.
D) It is not possible to pass the resolution for 30 days.
E) The resolution will pass automatically.

Answer 26

CORRECT ANSWER A - A general meeting on full notice will allow the vote to pass in 14 clear days (although different delivery methods may affect it slightly). The voting percentage is calculated on those present and voting. The majority shareholder is absent, so their shares will be ignored, and the vote will pass as 100% in favour.

Short notice is not possible because a minimum of 90% of the shares must be in favour of short notice (along with a majority in number of the shareholders). With 52% of the shares held by a shareholder who is not contactable, it is not currently possible to reach the 90% threshold for consent to short notice.

It will be possible to circulate a written resolution but it is not possible to achieve the requisite percentage in the vote (at least 75% because it is a special resolution) as only 48% of the shares held by eligible members will vote in favour.

Question 27

A director purchases a house worth £800,000 from the company he is a director of. The director paid £799,900 for it in cash. The company is a private limited company with model articles. The company’s shares are owned by six different people.

Which of the following best describes the purchase?

A) A likely fraud on the shareholders.
B) A simple tort.
C) A straightforward contract.
D) A likely loan to a director.
E) A likely substantial property transaction.

Answer 27

CORRECT ANSWER E - This is a transaction between the company and one of its directors, it is for a substantial amount (more than £100,000) and it is a non-cash asset (a house). Therefore, it is likely to be a substantial property transaction.

It is a contract but it is not a straightforward contract as it is probably an SPT.

There is nothing to suggest that this fits within any of the other three categories.

Question 28

private limited company with model articles has six directors. Three of the directors belong to family A and three belong to family B. One of the B family is the chairman of the board. The directors are discussing a proposal to buy a new sorting machine for the delivery room.

Which of the possible following voting combinations would defeat the proposed board resolution?

A) All of the A family vote for the resolution and two of the B family vote against.
B) All of the B family vote for the resolution and two of the A family vote against.
C) Two of the B family vote (including the chairman) for the resolution and two of the A family vote against it.
D) All of the A family vote for the resolution and all of the B family vote against it.
E) All of the B family vote for the resolution and all of the A family vote against it.

Answer 28

When a board vote is tied, the “negative view prevails” which means that it requires more than half of the votes for the resolution to pass. When the vote is tied, the chairman can break the deadlock. When the B family tie with the A family in votes, the chairman’s casting vote will swing it in favour of the B family. However, with option D there is no need for the chairman to use their casting vote - the resolution would already be defeated when it is three votes to three.