UNIT 4 - Shareholders and Directors Flashcards
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.
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.
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.
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.
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.
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.
It is early 2025. The client had a flourishing business until December 2024. In December 2024, the client’s managing director forgot to renew the fire insurance policy for the client’s warehouse. Shortly afterwards the warehouse burned down, destroying nearly all of the client’s stock. From then on, the managing director took every step she should have done with a view to minimising the potential loss to the client’s creditors if it went into insolvent liquidation. However, the client has just gone into insolvent liquidation as a result of the fire.
In December 2024 the managing director was working both as managing director and buildings manager.
Assuming that the court accepts the facts stated above, which of the following best describes whether the managing director will be liable for wrongful trading?
A) No, she will not be liable for wrongful trading because she made an innocent mistake.
B) No, she will not be liable for wrongful trading because she has a defence.
C) Yes, she will be liable for wrongful trading because she was negligent and this resulted in the client going into liquidation.
D) Yes, she will be liable for wrongful trading because she should not have been carrying out two jobs at once.
E) Yes, she will be liable for wrongful trading but the client will incur liability instead as her employer.
CORRECT ANSWER B - Liability for wrongful trading is personal to the director, and the employer is not vicariously liable. It may be that the managing director’s mistake will result in liability being established for wrongful trading under s 214 IA 1986, but in any event
the managing director will be able to use the defence under s 214(3). This is that she took every step she should have done with a view to minimising the potential loss to the client’s creditors if it went into insolvent liquidation – and we are told in the question that she
did do this.
The client is a director of an electronical wholesale company and a shareholder in an electronical retail company.
If the client failed to mention their interest in the electrical retail company when the electrical wholesale company transacted with it, which of the following best describes their liability for breach of duty?
A) The client will not have breached their duties to the electrical wholesale company because their relationship with the electrical retail company cannot be regarded as giving rise to a conflict of interests.
B) The client is in breach of the duty to avoid conflicts of interest.
C) The client is in breach of duty, but the electrical wholesale company’s directors may be able to authorise the breach as long the client is not counted in the quorum and does not vote when the decision is taken.
D) The client may be in breach of their duty to declare an interest in a proposed transaction or arrangement.
E) The client is in breach of duty, but this breach can be ratified by the shareholders by ordinary resolution.
CORRECT ANSWER D - Options A and B are wrong because we do not know enough about the situation to be able to say for sure whether there is or is not a conflict of interest. If the client’s shareholding in the electrical retail company is very small, the situation is unlikely
to give rise to a conflict of interest, but we do not have enough facts to know whether this
is the case. Option D is correct: the client should declare their interest unless it cannot be regarded as likely to give rise to a conflict of interest, and we do not know whether this is the case, so the client ‘may’ be in breach. Option C is wrong because it is not possible for the board to authorise a breach of the duty to declare an interest in a transaction. Option E is wrong because while the shareholders could ratify any breach by ordinary resolution, we cannot say for sure whether there is even a breach.
The client is a manufacturing company with three directors, an IT director, a managing director and an operations director. The client has the Model Articles with no amendments and its net asset value is £95,000. The IT director has 49% of the shares in a distribution company. The IT director wishes to sell a van to the client for £6,000 and the distribution company wishes to purchase a warehouse from the client for £80,000.
Assuming that there are no agreements in place and no relevant resolutions have been passed, which of the following best describes what shareholders’ resolutions the client would need to pass in order that the transactions described above could validly go ahead?
A) An ordinary resolution to authorise the sale of the warehouse.
B) Two ordinary resolutions, one to authorise the sale of the warehouse and one to authorise the purchase of the van.
C) An ordinary resolution to authorise the purchase of the van.
D) A special resolution to authorise the IT director’s involvement in the purchase of the warehouse.
E) A special resolution to authorise the IT director’s involvement in the purchase of the warehouse and two ordinary resolutions, one to authorise the sale of the warehouse and one to authorise the purchase of the van.
CORRECT ANSWER A - The purchase of the van does not need to be authorised by the shareholders because its value is less than £100,000 and less than10% of the client’s net asset value of £95,000. The sale of the warehouse is a substantial property transaction (‘SPT’) and therefore does need to be authorised by the shareholders, by ordinary resolution under s 190. It is an SPT because:
* It is a transaction between the company and a person connected to the company (the distribution company, because the IT director owns over 20% of the shares in the distribution company);
* It involves a non-cash asset (the warehouse); and
* It is of substantial value (over £5,000 and over 10% of the client’s net asset value of £95,000)
The IT director’s involvement in the sale of the warehouse does not need to be authorised as a separate issue from the ordinary resolution to authorise the sale of the warehouse.
Which of the following best describes the minimum requirements for a person to call a poll vote under the model articles for private limited companies at a general meeting?
A) The chairman, or two or more people with the right to vote, or a shareholder with at least 10% of the shares able to vote on the resolution.
B) Any director, five or more people with the right to vote, or a shareholder with at least 5% of the shares able to vote on the resolution.
C) The directors, three or more people with the right to vote, or a shareholder with at least 20% of the shares able to vote on the resolution.
D) Three or more people with the right to vote, or a shareholder with at least 5% of the shares able to vote on the resolution.
E) The chairman or a shareholder with at least 20% of the shares able to vote on the resolution.
CORRECT ANSWER A - Model article 44 states that:
“ (2) A poll may be demanded by—
(a) the chairman of the meeting;
(b) the directors;
(c) two or more persons having the right to vote on the resolution; or
(d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution.”
DS1, DS2, DS3 and DS4 are all individuals who have just set-up a private company limited by shares. They are all shareholders and also all directors of the company.
DS1 owns 25% of the voting shares, DS2 owns 46% of the voting shares, DS3 owns 24% of the voting shares and DS4 owns 5% of the voting shares. The company has Model Articles with one amendment. Under a Special Article, DS4 has the right to appoint or remove a majority of the board of directors of the company.
DS1, DS2, DS3 and DS4 would like advice to as whether any of them are ‘Persons with Significant Control’.
Which of the following is correct?
A) DS2 and DS4 are both ‘Persons with Significant Control’. DS1 and DS3 are not ‘Persons with Significant Control’.
B) DS1 and DS2 are both ‘Persons with Significant Control’. DS3 and DS4 are not ‘Persons with Significant Control’.
C) DS2 is a ‘Person with Significant Control’. DS1, DS3 and DS4 are not ‘Persons with Significant Control’.
D) DS1, DS2 and DS4 are all ‘Persons with Significant Control’. DS3 is not a ‘Person with Significant Control’.
E) DS1, DS2, DS3 and DS4 are ‘Persons with Significant Control’.
CORRECT ANSWER A - A ‘Person with Significant Control’ is defined in Section 790C of and Schedule 1A to the Companies Act 2006. It covers individuals/corporate entities who:
(a) Own or control more than 25% of the voting rights in the company; or
(b) Have the right to appoint or remove a majority of the board of directors of the company; or
(c) Have the right to exercise, or who actually exercise, significant influence or control over the company.
Option A is therefore the correct answer as DS2 owns more than 25% of the voting shares and DS4, whilst owning only 5% of the voting shares, has the right to appoint or remove a majority of the board of directors.
Options B to E are all incorrect as the criteria listed above is not satisfied.
A private company limited by shares has one addition to the model articles. It says “The company may not borrow more than £100,000 without approval from the shareholders”. The directors are negotiating a loan from a bank for £300,000. They have not received shareholder approval.
What is the status of the loan?
A) The loan between the company and the bank will be valid, but only if the bank did not know that the company was forbidden from entering into the loan.
B) The loan between the company and the bank will be void, but only if the bank knew that the contract was outside the scope of the company’s articles.
C) The directors of the company have breached their duties but the contract is valid and cannot be avoided.
D) The contract between the company and the bank will be void.
E) The shareholders of the company will be able to obtain an injunction if they wish, preventing the company from entering into the contract.
CORRECT ANSWER E - If the company intends to act in breach of its objects (e.g. by the directors deciding to enter a contract), there is a right for the shareholder to go to court to seek an injunction under s40 (4) CA 2006 to restrain the company from taking this action. This injunction must be sought before the act is undertaken (i.e. a legal obligation has been incurred). If the act has already been done i.e. the contract has been concluded, the shareholder can only take action against the directors for breach of their duty to the company (s40 (5) CA 2006). In this scenario the contract has not already been concluded so the injunction will succeed.
The shareholder can obtain an injunction as a contract has not already been formed. Under the Companies Act 2006, s 39(1), a contract cannot be called into question on the ground that it is ultra vires, but it is likely that the directors will have breached their duty to act in accordance with the company’s constitution (found in the Companies Act 2006, s 171(a)). Further, s 39 of the (CA 2006) effectively abolishes the ultra vires doctrine with regard to third parties dealing with the company. In other words, s39 provides that an act undertaken by the company with an outsider (such as entering into a contract) is almost immune to challenge even if it is beyond the powers granted in the company’s constitution. Both the company and the other party to the transaction are bound by the act. This is backed up by s40 (1), which states that the powers of the directors to bind a company (e.g. by entering a contract) are deemed to be free from any limitation under the company’s constitution in favour of a party dealing with the company in good faith. Bad faith is very difficult to prove.
Option D is wrong - the contract between the company and the bank will be valid, but the directors of the company will have breached their duties as explained above.
Option C is wrong - The contract between the company and the bank will be valid if entered into, and the directors of the company will have breached their duties. However, the contract has not yet become legally binding so the contract can be avoided (e.g. if an injunction is granted).
A shareholder owns 1% of a private company’s shares. The company has model articles.
What rights does the shareholder have?
A) The right to call a general meeting.
B) The right to notice of a general meeting.
C) The right to demand a poll vote.
D) The right to prevent the articles being changed.
E) The shareholder has no rights.
CORRECT ANSWER B - Shareholders acquire greater rights as they acquire higher percentages of the voting shares. However, all shareholders have certain basic rights such as the right to vote, to receive dividends and the right to receive notice of general meetings.
A company has a director who inherits £100,000 from his deceased mother. His mother ran and owned a company that was in competition with the director’s company.
Which of the following best describes the situation with regard to the director’s duties?
A) The £100,000 breaches the duty not to receive a benefit from a 3rd party.
B) The £100,000 requires a declaration of interest.
C) The £100,000 breaches the duty to avoid conflicts of interest.
D) The £100,000 breaches the duty to exercise independent judgement.
E) The £100,000 does not breach any director’s duties.
CORRECT ANSWER E - There are no breaches of duty by inheriting the £100,000.
Option A is wrong because although this benefit came from a 3rd party (s176), the money was not given because the director was a director, or because they took a particular course of action as a director - the money came from the director’s mother by way of inheritance.
Option B is wrong because this is not a transaction with the company. Option C is wrong because this does not create a conflict with the company. Inheriting money is not a conflict despite where the money may have come from.
Option D is wrong because there is no suggestion that this is impacting the director’s decision making.
Option C is wrong because this cannot be a conflict of interest that could have been avoided- it was an inheritance gift.
A private limited company has five directors and two shareholders. The larger shareholder owns 60% of the shares and the smaller shareholder owns 40% of the shares. The company has model articles of association. The directors and the smaller shareholder are in favour of appointing another director so there will be six directors. The larger shareholder does not approve of this course of action.
Are the directors able to appoint the new director against the larger shareholder’s wishes?
A) Yes, because there are more directors than shareholders and will outvote them.
B) Yes, because the directors are able to appoint another director.
C) No, because the shareholder is able to direct the directors to take, or refrain from taking any specified action.
D) No, shareholders must appoint directors.
E) No, because shareholder 1 controls more than 50% of the shares.
CORRECT ANSWER B - MA17 allows the directors to appoint another director. Whist this is possible and it is correct, the likely longer term outcome is that the larger shareholder could remove the new director under the powers granted by s168. Further, if the larger shareholder is feeling vindictive, he or she may also remove some of the original directors as well.
Option C is wrong because model article 4 does grant a power to do this but it requires a special resolution in order for it to be effective. Option D is wrong because although shareholder can appoint directors, it is not the only way to appoint directors.
A company wishes to change its articles from the model articles. It uses a special resolution (“SR”) to do so.
When will the change to the articles be effective? What must be filed at Companies House? When must these be submitted?
A) Articles change when the company adopts them by SR. The SR must be filed at Companies House within 14 days. The articles must be kept at the registered office.
B) Articles change when the company adopts them by SR. The SR and the new articles must be filed at Companies House within 15 days.
C) Articles change when registered by the Registrar. The SR and the new articles must be filed at Companies House within 15 days. The articles must be kept at the registered office.
D) Articles change when received by Registrar. The SR must be filed within 14 days. The articles must be kept at the registered office.
E) Articles change when accepted by Registrar. The SR and the new articles must be filed at Companies House within 15 days.
CORRECT ANSWER B - The SR will change the articles, there is no requirement to wait for them to be sent to or approved by the registrar. The special resolution must be filed within 15 days as well as the new articles sent to Companies House within 15 days. If the company were adopting model articles these would not have to be sent to the registrar (see s21, s26, s29 and s30 CA 2006.)
What are the three main types of claim an executive director may bring if they are dismissed under employment law?
A) Unfair dismissal, redundancy, wrongful dismissal
B) Unjust treatment, unreasonable behaviour, compensation
C) Unfair dismissal, unreasonable behaviour, wrongful dismissal
D) Unjust treatment, unreasonable behaviour, wrongful dismissal
E) Unreasonable behaviour, compensation, redundancy
CORRECT ANSWER A - The three main forms of employment claim are unfair dismissal, redundancy, wrongful dismissal. Wrongful dismissal is a common law claim and is, at its heart, another name for suing for a breach of contract. The other two claims unfair dismissal and redundancy are statutory claims and have associated requirements as set out in the statute.
An executive director is removed as a director by the shareholders in a private limited company with model articles. In the employment contract, the director’s job title is “sales director”.
Does the removal of the director as a director of the company also terminate the director’s service contract?
A) No, unless the contract includes an express term that it will terminate in these circumstances
B) No, removal by the shareholders is not possible.
C) Yes, the director is employed to be a sales director. Removing them as a director makes their job impossible.
D) Yes, an executive director is paid to be a director, being a director and being paid for the role are one and the same thing.
E) Yes, removal by the shareholders cannot be prevented by an employment contract.
CORRECT ANSWER A - It is important to remember that the position of director and employment as a director are separate things. Option C has a grain of truth in it. The contract will not automatically terminate unless there is an express term to that effect, but the removed director may well be able to resign and claim he or she was constructively dismissed, since the removal as a director prevented them from doing their job effectively.
