Chapter 2 Business Law

2.2 Decision Making - Directors

• Directors make decisions in Board Meetings (called Board Resolutions)

• Not all day-to-day decisions need a board resolution, directors can also delegate decision making power

General rules for board meetings provided by Model Articles:

Notice

• When a director calls a board meeting, notice must be given to all other directors

• Notice time must be reasonable - circumstances dependent

Quorum

• A quorum (minimum) of 2 directors must be present at all times in board meeting

• If there are 2 directors at a meeting then the meeting is quorate

Personal Interests

• This is model article 14 - the most frequently excluded by companies

• A director cannot be part of quorum or vote in a decision if the decision relates to a transaction which the director has a personal interest in

• (Just the interest area they can’t vote in - they can vote in other matters within the same meeting)

• Where there is a personal interest, the director must declare the nature and extent of this interest to the board

• This is model article 15 - which cannot be excluded

• Does not have to make this declaration if: the interest will not reasonable cause conflict of interest, other directors are already aware, if it concerns terms of a service contract which have been or are to be considered by meeting of directors

Voting at Board Meetings

• Board resolutions are passed by a simple majority (50% or more needed)

• If there is a chair of the board, they get an extra vote if there is a tie

• As an alternative to voting at board meetings, directors can get a resolution through written resolution - which must be signed/agreed by all directors

2.3 Shareholder’s resolutions

• Two types of shareholder resolution: Ordinary and Special

• Ordinary resolutions need over 50% of shareholders at the meeting to vote in favour

• Special resolutions need over 75% of shareholders at the meeting to vote in favour

• Shareholders resolutions can be passed by general meeting or written resolution

2.3 Shareholder’s resolutions - General Meetings

• General meetings are called by the board of directors by passing a board resolution

  • Shareholders can request that directors call a general meeting

  • Public companies have to hold a general meeting at least once a year

Notice

• Notice must be given to every shareholder and director

• Notice must include:

  • Time, date, place of meeting

  • Nature of business to be dealt with

  • If special resolution - the exact wording of this

  • Each shareholder’s right to appoint a proxy to act on their behalf

• Minimum notice period is 14 clear days (so must be 14 days after day of notice before a meeting can be called - and it cant be on the 14th day)

• If notice is sent by email, another 2 days must be added to the 14 clear days requirement

Short Notice

• Sometimes the 14 clear day requirement can be bypassed and a short notice general meeting can be held validly if:

  • Majority of company’s shareholders are in attendance

  • Who between them hold 90% or more of the company’s voting shares (95% for public companies)

Quorum

• Generally quorum of a general meeting is 2, but if there is only one shareholder then this is 1

• Shareholders can vote in matters they have an interest in, apart from these situations:

  • A resolution to buy back some of that shareholders shares

  • A resolution to ratify (forgive) a directors breach of duty if the director is also a shareholder

Poll Voting

• Normal voting = 1 person is 1 vote

• Poll Voting = 1 vote for each share a shareholder has

• A poll vote can be demanded by:

  • Chair of the meeting,

  • Directors,

  • Two or more people who are voting for the resolution,

  • Any person representing more than 10% of total voting rights of all the shareholders involved

• Poll vote can be selected to use before or during the meeting - if there is a normal vote and a poll vote - the poll vote will preside

2.3 Shareholder’s resolutions - Written Resolutions

• Written resolution is alternative to general meeting

• Document will set out the contents of the ordinary/special resolution

• Document will be sent to every voting shareholder

• Shareholders who agree with the resolution will have to sign and return the resolution

• Unless stated otherwise, the lapse date for the resolution is 28 days after

• With written resolutions, shareholders have 1 vote per share they own

2.5 When shareholders take matters into their own hands

Shareholders request for the company to circulate a written resolution

• Any shareholder who has 5% or more of the voting rights is entitled ti require the company to circulate a written resolution

• Shareholders who request this must reimburse company expenses incurred by doing this

• Companies can amend this model article to make the % smaller, but not bigger

Requisitioning (demanding) a general meeting

• Shareholders can require directors to call a general meeting

• Directors must call meeting within 21 days - and the subsequent notice period must be no more than 28 days

Post-decision Requirements

• Filing at Companies House

  • Must notify Registrar of Companies when certain decisions are made

  • If they do not they will be fined

• Internal Administration

  • Some things must be documented but kept internally

  • Minutes of general meetings and outcomes of written resolutions at the company’s registered office for 10 years

Company decision-making in practice

• Important to remind companies to file certain documents at Companies House, maintain necessary registers and minutes to be kept for 10 years

• Failure to do so is a criminal offence

Companies annual responsibilities

• Directors are responsible for accounts being produced for each financial year (unless company is a micro-entity)

  • Micro-entity = a company with a balance sheet total of no more than £500,000 and a turnover of no more than £1 million

• Every company must file its accounts unless it is a small company or a micro-entity

  • Small Company = a company with a balance sheet total of no more than £7.5 million and a turnover of no more than £15 million

  • Time limit for filing accounts is 9 months from the end of the accounting period for a private company, and 6 months for a public company

• Every company must file a confirmation statement within 14 days from the company’s confirmation date - which is the anniversary of its incorporation

2.6 The companies officers

Company Secretary

• Public companies MUST have a secretary - private companies do not need one but can have

• Normally have apparent authority to enter into administrative contracts - not trading contracts

• They can resign, or be removed by directors

• Company must notify registrar of companies within 14 days of appointment of secretary

• Every company must keep a register of secretaries - private companies can choose not to do this

• When a secretary resigns or is removed, registrar of companies must be notified within 14 days

• Must notify registrar of companies within 14 days of change of secretary particulars

Auditor

• Accountant whose main duty is to prepare a report on the company’s annual accounts

• Private companies are required to appoint an auditor - does not apply to small companies

• Auditor must not be connected to anyone involved in the company (independent)

• Auditor of a private company is considered to be automatically reappointed each year

• Auditors can be sued for negligence by company

  • However auditors do not a duty of care specifically to shareholders

• Shareholders can remove an auditor at any time by ordinary resolution

• Auditor can resign at any time

2.7 Shareholders

Becoming a shareholder

• Being one of the two people who sign memorandum of association as subscribers will become the first 2 shareholders

• Other ways to become a shareholder:

  • Buying shares from an existing shareholder - or new allotted shares

  • Receiving shares as a gift

  • Receiving shares by transmission when a shareholder dies or becomes bankrupt and elects to become a shareholder rather than transfer to a third party

Register of Members

• Every company must keep a register of shareholders

• Shareholders must be registered asap, but deadline of 2 months

Share Certificates

• Prima facie evidence of the holder’s ownership of shares

• Companies must issue certificates within 2 months

PSC - Person Significant Control

• Companies must notify Companies House of these changes:

  • If an individual becomes a PSC for the first time

  • If a legal entity becomes a PSC for the first time

  • If the details of an existing PSC change

  • Anyone who ceases to be a PSC

2.8 Shareholders Rights

Articles of Association

• The company’s constitution is a statutory contract between each shareholder and the company

• This can give rise to breach of contract if either party does not abide by the constitution

Shareholders Agreements

• Extra layer for shareholders - optional

• Will bind all the parties who sign the agreement - only shareholders who are party to the agreement (not necessarily all of them)

• Provides a remedy if a term is breached

• Shareholder agreement contents, unlike constitution, can be made privately (advantage)

Voting Rights

• As well as the right to vote in general meetings, shareholders also have these voting rights:

  • Right to send a proxy to general meetings

  • Right to a poll vote

  • Right to receive notice of general meetings

  • Right to requisition (demand) a general meeting

  • Right to apply to the court to call a general meeting

  • Right for a shareholder with 5% or more of voting rights to require a written resolution to be sent around

Other Rights

• Shareholders also have the following rights:

  • Right to receive dividends

  • Right to apply to the court for the company to be wound up

  • Right to remove a director by special resolution

  • Right to remove an auditor by special resolution

  • Right to inspect, without charge:

    • Minutes of general meetings and shareholder resolutions

    • company’s statutory registers

    • directors service contracts and directors indemnities

    • any contract relating ti the company’s purchase of its own shares

  • Right to receive a copy of the company’s annual accounts and reports

  • Right to seek an injunction to stop the company doing something prohibited by their constitution

2.9 Types of Shares

Ordinary Shares

• Companies are usually formed with ordinary shares only

• Generally give right to attend and vote at general meetings

• Ordinary shareholders are entitled to receive dividends (if declared)

• Sometimes different types of ordinary shares are separated - but the rights attached to each type of share must be set out in the company’s articles of association

  • If not, all shares rank equally

Preference Shares

• Preference shareholders receive enhanced rights - also set out in company’s articles of association

• Often people who are willing to surrender voting rights for greater financial return

• Cumulative/Non-Cumulative Preference Shares -

  • Cumulative means the shareholder has the right to be paid the dividend from previous years as well as the current years if there is profit enough to do so

  • Non-cumulative do not have this right

• Participating Preference Shares -

  • Further right to receive profit or assets as well as their other preference share rights

2.9 Types of Shares - Protection of Minority Shareholders

Unfair prejudice petitions

• Shareholder can apply to court for an order for a remedy where they feel they have been unfairly prejudiced as a shareholder

• Conduct must be prejudicial in that it causes harm, and must be unfair

• To determine whether there has been unfair prejudice, the court will consider whether a hypothetical bystander would believe the act or omission to be unfair (objective test)

• These claims are expensive to investigate

Derivative claims

• Claim investigated by a shareholder for a wrong done to the company arising from an act or omission of a director

• Needs board decision to begin proceedings

• Must involve negligence, default, breach of duty, breach of trust by a director

• 1st Stage - Shareholder applies to court for permission to continue the claim

  • Court will only permit if there is prima facie evidence

• 2nd Stage - If prima facie evidence Court will list a full hearing to decide whether the application should continue

  • Must consider:

    • Is shareholder acting in good faith - promoting needs of the company?

    • Is the cause of action arising from an action or omission that has already happened? Cannot be about future conduct

    • Whether the act/omission has already been ratified (forgiven) by the company?

• 3rd Stage - Court either give permission or dont - then they state what should happen in a trial (if consented to)