UNIT 4 - Directors Flashcards
A private company with seven directors has the Model Articles for private companies limited by shares with no amendments. A board meeting is scheduled for next week and the Chairperson intends to propose a resolution to change the company’s registered office.
Five directors (the Chairperson, the Sales Director, the IT Director, the Marketing 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 Finance Director and the Operations Director) 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 the Chairperson and one of the other Directors in Favour attend the board meeting, the resolution will be passed.
B) As long as the Finance Director and the Operations Director attend the board meeting, the resolution will be passed.
C) As long as the Chairperson and any one other director attend the board meeting, the resolution will be passed.
D) As long as two of the Directors in Favour attend the board meeting, the resolution will be passed.
E) As long as any two directors attend the board meeting, the resolution will be passed.
CORRECT ANSWER A
A client is Finance Director of a construction company, which has Model Articles of Association for private companies with no amendments. There are two other directors. The company is proposing to buy timber worth £2,000 from a timber company. The client’s brother owns all of the shares in the timber company. The client has told the other directors about this.
A board meeting has been called to approve the terms and enter into the timber contract.
Which of the following statements best reflects the position concerning the client’s duties as a director at the board meeting?
A) As the client has an interest in the timber contract, she must make a declaration of interest.
B) As the client has an interest in the timber contract, she can ask the board to authorise her to count in the quorum and vote.
C) Although the client has an interest in the timber contract, she can count in the quorum at the board meeting but cannot vote on the timber contract.
D) The client need not make a declaration of interest, but she cannot count in the quorum at the board meeting or vote on the timber contract.
E) As the client herself does not own any shares in the timber company, she does not need to declare her interest in the timber contract.
CORRECT ANSWER D
Which of the following statements best explains the theory of separation of ownership and control within a company?
A) Shareholders must not be directors of a company, as those who control the company must be kept separate from the owners.
B) Shareholders must not play any part in the management of a company, as the control of a company must be kept separate from ownership.
C) The role of shareholders, who own the company has become separated from the role of directors, who control the company.
D) The directors of the company are controlled by the shareholders in order to prevent power concentrating in the hands of the directors.
E) The shareholders only exercise a supervisory power over the directors, who control the company.
CORRECT ANSWER C - The theory of separation of ownership and control states that those who run and manage companies (the directors) have become separated from the owners of companies (the shareholders).
Option A is wrong as shareholders may be directors and in the case of small private companies, very often are.
Option B is wrong as the shareholders do have a limited management role – there are certain decisions which cannot be taken without a resolution of the shareholders in general meeting.
Option D is wrong as directors, who exercise their management powers for the benefit of the company, cannot be controlled by the shareholders – they are not ‘delegates or agents’ of the shareholders.
Option E is wrong as the shareholders’ role is not simply supervisory (and the courts have always been reluctant to hold that the shareholders have a general supervisory power over the directors, even if there is a clause in the articles which gives them power to direct what the directors do).
Which of the following statements best explains the position in relation to the directors of a company?
A) Non-executive directors are employees of the company.
B) A company cannot have only one director as it will not be able to hold a board meeting.
C) A company cannot be a director of another company.
D) A non-executive director has the same duties and liabilities as an executive director.
E) Every company must have a mixture of executive and non-executive directors.
CORRECT ANSWER D - A non-executive director is subject to the same rights and responsibilities as an executive director. If a company acts wrongfully or illegally, all directors may be held liable.
Option A is wrong as non-executive directors are appointed to the board but will not have a service contract and so are not employees of the company. Most executive directors will have contracts of employment and so will also be employees of the company.
Option B is wrong as private companies need only have one director, although a public company must have at least two (s.154 CA 2006). Many small companies are single-director companies. Article 7 MA expressly provides that many of the rules relating to board meetings do not apply to single-director companies.
Option C is wrong as (currently) a company can be a director. A company must have at least one director who is a natural person (s.155).
Option E is wrong as there is no requirement for a company to have non-executive directors on the board. They are more suitable for larger companies, and most small private companies will not have any non-executive directors on the board.
A client is a 17-year-old French citizen currently living in the UK. She is heavily in debt and has never been a director before, nor had any real work experience. Her father is a UK citizen, aged 50, who is employed part-time as a research scientist. He currently attends hospital weekly for treatment for a behavioural problem, related to a brain trauma. Her grandfather is a UK citizen, aged 75, who declared himself bankrupt in 1990. He has since been discharged from bankruptcy and currently works in a cake shop. They are proposing to set up a company together.
The company has Model Articles for private companies limited by shares unamended.
Which of the following best describes who could be the directors in the company?
A) The client, her father and grandfather could all be directors in the company.
B) Only the client’s father and grandfather could be directors in the company.
C) Only the client and her grandfather could be directors in the company.
D) Only the client and her father could be directors in the company.
E) Only the client’s father could be a director in the company.
CORRECT ANSWER A - There are very few statutory restrictions on who may be a director and none of them apply here.
Options B to E are all therefore wrong.
A director must be at least 16 years of age (s.157 Companies Act 2006), so the client is old enough to be a director. There are no restrictions on foreign nationals being directors.
There is no maximum age limit. A director must not be an undischarged bankrupt (s.11 Company Directors Disqualification Act 1986) without the leave of the court, but as the client’s grandfather has been discharged, he can be appointed.
The articles may place restrictions on who can be a director. Article 18 of the Model Articles for private limited companies prevent the appointment of a person who is certified by a medical practitioner as likely to be physically or mentally incapable of acting as a director (and likely to remain so for more than three months). There is nothing on the facts to suggest that the client’s father is incapable of acting and the facts state that he is currently working as a research scientist.
A private limited company has three directors, all of whom work for the company. Two of the directors also have minority shareholdings in the company. There is a third shareholder with a majority shareholding but this shareholder is not a director. He owns and runs a separate small business. The two director shareholders are greatly influenced by the majority shareholder and typically follow the majority shareholder’s directions when making decisions at both board and shareholder level. The third director, who does not hold any shares in the company, does not have a close working relationship with the majority shareholder and is not influenced by him.
Will the majority shareholder fall within the definition of a shadow director?
A) Yes, because he holds the majority of the shares in the company.
B) No, because he does not work for the company.
C) No, because he could only be classed as a shadow director if he is a person with whose directions the whole of the board is accustomed to act.
D) No, because he has not been appointed as a director.
E) Yes, because he is a person in accordance with whose directions the directors are accustomed to act.
CORRECT ANSWER E - because the definition of a shadow director is a person with whose directions the directors are accustomed to act (s251(1) Companies Act 2006). The facts say that the two director shareholders are greatly influenced by the majority shareholder and typically follow his directions when making decisions at board level.
Option A is wrong because a shadow director need not hold shares in the company and so it is irrelevant that he is the majority shareholder.
Option B is wrong because it is not a requirement that a shadow director should be employed by the company in relation to which he is a shadow director.
Option C is wrong because only a governing majority needs to act in accordance with the majority shareholder’s directions for him to be classed as a shadow director, not the entire board. Here, two out of three typically act in accordance with his directions so that majority is achieved.
Option D is wrong because a shadow director is a person who has not been appointed to the board but who is a person with whose directions or instructions the board is accustomed to act.
A client, who was an undischarged bankrupt, invited a friend to set up a scrap metal company with him. The friend was appointed as a director of the company. As the client could not act as a director, the client’s girlfriend was appointed to act as a director, as the client’s nominee. She took no active part in the running of the company, although she did occasionally attend board meetings.
The friend was responsible for the finance and administration of the company, and the client was responsible for the buying and selling of the metals.
The company also appointed an accountant who gave professional advice to the friend on the finances of the company, although the friend did not always follow that advice.
Which of the following statements best explains who would be considered to be a director of the company?
A) As the client was never formally appointed, he was not a director of the company.
B) As the client acted as a director of the company, he was a ‘de facto’ director of the company.
C) As the client’s girlfriend took no part in the running of the company but was formally appointed as a director, she was a shadow director of the company.
D) As the client’s girlfriend took no part in the running of the company, she was not a director of the company, despite being appointed as such.
E) As the accountant gave professional advice to the friend on the finances of the company, he was a shadow director of the company.
CORRECT ANSWER B - A ‘de facto’ director is someone who has never been formally appointed, as here, but nevertheless acts as a director. Here the client has been acting as a director, for example for being responsible for the sale and purchase of metals, and is likely to be seen as a de facto director.
This makes Option A wrong. It is not necessary for someone to be formally appointed to be held to be a director of a company.
Option C is wrong. The fact that the girlfriend does not take part in the running of the company does not make her a shadow director. Under s.251 CA 2006 a shadow director is someone under whose directions or instructions the directors are accustomed to act. (Note that this is slightly different from a ‘de facto’ director, who actually acts as a director – a shadow director does not necessarily act as a director.)
Option D is wrong. The girlfriend is a ‘de jure’ director. She has been validly appointed, and the fact that she does not take part in the running of the company does not change this.
Option E is wrong. Under s.251(2) CA 2006, giving advice in a professional capacity will not make someone a shadow director – and the facts make it clear that the board does not always follow this advice.
A company has Model Articles for private companies limited by shares unamended and has a board consisting of 10 directors. At a board meeting convened to vote on whether the company should enter into a contract to purchase a property, five directors are in favour and five are against. The board has appointed a chairperson. The chairperson is in favour of the resolution. Which of the following statements best reflects the likely outcome of the vote on the resolution to enter into the contract to purchase the property?
A) As there is deadlock, the resolution to buy the property will pass.
B) As the chairperson is in favour of the resolution, she can use her casting vote to break the deadlock and pass the resolution.
C) As there is deadlock, the resolution to buy the property will be defeated.
D) Chairpersons do not ordinarily vote on board matters, save where there is deadlock, when the chairperson can then vote.
E) Where there is deadlock, the board must adjourn the meeting until the deadlock is resolved.
CORRECT ANSWER B - The general rule is that where there is deadlock the negative view will prevail. If the chairperson wants the resolution to pass and to break the deadlock, the chairperson would need to use their casting vote.
Option A is therefore wrong.
Option C is not the best answer. Whilst it correctly identifies that the negative view ordinarily prevails, in this case the chairperson will likely use her casting vote to break the deadlock.
Option D is wrong. The chairperson is a director and therefore will vote on board matters. Their appointment as the chair means that they can use an extra vote (their casting vote) to ensure that resolutions pass in cases of deadlock.
Option E is clearly wrong. There is no requirement to adjourn a meeting where there is deadlock.
A client is a director of a dog grooming company. There are two other directors, an Operations Director and a Finance Director. Recently, the Operations Director married a property developer, who she met on the internet. The other directors were surprised when she told them of the marriage. They did not attend the wedding, know very little about the property developer and do not know that he has a daughter.
A board meeting has been convened to approve the terms of, and enter into the contracts, for:
- The purchase of office premises from the property developer;
- The sale of a field to the property developer’s daughter; ·
- The award of a two year service contract to the Finance Director;
- The purchase of dog grooming equipment for £50 from a company in which the Finance Director’s wife has shares.
The company has Model Articles for private companies limited by shares unamended.
Which of the following circumstances best reflects the position in relation to declarations of interest at the board meeting?
A) The Operations Director must declare her interest in the contract for the purchase of the premises.
B) The Operations Director must declare her interest in the contract for the sale of the field.
C) The Finance Director must declare his interest in the service contact.
D) The Finance Director need not declare his interest in the contract for the purchase of the grooming equipment as the contract is for less than £100.
E) A director who fails to declare an interests in a proposed transaction when required to do so will be guilty of a criminal offence.
CORRECT ANSWER B - On the facts, it appears that the other directors are unaware that the property developer has a daughter. The connection (step-daughter) is close enough that the Operations Director should declare her interest as required by s.177(1) CA 2006.
Option A is wrong as under s.177(6)(b), there is no need for a director to declare an interest where the other directors are aware of it. They know that she has married the property developer. Nevertheless, it is good practice for a director to declare known interests.
Option C is wrong. This is covered by the exception in s.177(6)(c) as it relates to the Finance Director’s service contract. Nevertheless, it is good practice for a director to do so.
Option D is wrong. The size of the transaction is not a relevant factor.
Option E is wrong. It is not a criminal offence to fail to make a declaration of interest in a proposed transaction. (This contrasts with s.183, where it is a criminal offence to fail to make a declaration of interest in an existing transaction.)
A company was set up last year. It has an issued share capital of 100 ordinary £1 shares. It has six directors, who were all granted fixed term service contracts for a term of five years when the company was set up. It has adopted Model Articles for private companies limited by shares with no amendments.
Which of the following decisions to be taken by the directors at their next board meeting requires shareholder involvement?
A) The allotment of an additional 500 ordinary £1 shares.
B) Borrowing £1.5 million from the bank to purchase new office premises.
C) Changing the company’s registered office.
D) Appointing a new director.
E) Dismissing one of the directors.
CORRECT ANSWER E - A director can only be dismissed before the expiration of their period of office by an ordinary resolution of the shareholders (s.168 Companies Act 2006).
Option A is wrong. The directors of a private company with one class of share, as here, can allot shares without the approval of the shareholders (s.550 Companies Act 2006).
Option B is wrong. The company has Model Articles for private companies limited by shares. Borrowing falls within the directors’ general powers under Model Article 3. As there are no amendments to the articles, there is no cap on the amount that the directors can borrow, so this is within their authority.
Option C is wrong. The directors can take the decision to change the company’s registered office (s.87 Companies Act 2006).
Option D is wrong. A director may be appointed either by the board or by an ordinary resolution of the shareholders (Model Article 17), so shareholder approval is not necessarily needed. It is usually quicker and more convenient for the board to make the appointment.
