SQE 1 - Business Law and Practice (Company Decision-making, the Company’s Officers and Shareholders)

Who makes decisions for a company?

Since a company cannot make decisions for itself, it's directors and shareholders will make it on its behalf.

What are the main ways a company can make decisions?

1. Board meetings

2. General meetings

What are board meetings?

Meetings of directors, who pass board resolutions (BRs) to make decisions)

What are general meetings?

Meetings of the members/shareholders, who pass ordinary resolutions (ORs) and special resolutions (SRs) to make decisions.

What are the key questions related to decision-making between the directors and the member of a company?

1. Can the board, without reference to the members, make the decision

2. Must the member first sanction the decision of the board

What decisions can directors make without member permission?

Directors can make most day-to-day decisions.

However, key decisions must be approved/authorised by the members first. This can because of the provisions of the CA or the articles.

What is the process followed when directors seek permission from the members to make a company decision?

1. Directors will call the first board meeting

2. During BM, they will pass BR to call GM, original BM is closed or adjourned, pending the decision of the members of the GM.

3. Members pass relevant resolution(s) in GM to sanction decision(s)

4. GM is closed

5. Directors call a second BM or reconvene the first BM (if adjourned)

6. Directors pass BR(s) to implement decision(s) and deal with administrative/filing matters.

7. BM closed.

What are the powers of directors?

Laid down in the company's articles and MA3 - gives the directors wide power to manage the business of the company.

Who are directors?

Individuals who manage the company

Involved in day to day running of the company

Collectively known as the Board

In small private companies, directors are often also shareholders

How do directors make decisions at board meetings?

They generally make decisions by majority vote (MA7) or otherwise by unanimous decision (MA8)

Can directors delegate their powers?

Yes, it is common to give directors the right to delegate their powers (MA5).

This allows directors to delegate their powers to employees who are able to make decisions within their job description.

What are the key provisions of board meetings?

1. Calling and notice

2. Quorum at board meetings

3. Voting at board meetings

4. Resolution and majority

Calling and notice

- Key Provisions of BMs

Any director may call a BM at any time or require the company secretary to do so - MA 9

Reasonable notice must be given (not necessarily in writing unless the articles provide) - MA9(1)

All directors must be given notice, wherever they are - MA9(3)

Notice contents - date, time, place and means of communication (MA9(2)

Permitted forms of communication includes telephone, video calls, text and instant message (MA1(1)

- Director(s) can waive the right to notice (MA9(4)

- An agenda is not a legal requirement

- If notice is not made, a new meeting can be demanded

Quorum

-Key Provisions of BMs

A quorum is two directors who must be present at all times during the board meeting (minimum number of directors present) - MA11(2).

Requiring two directors to be present reduces the risk of one director turning up and making rash or fraudulent decisions without another director present to rein in that director or give an alternative point of view. If there is a quorum present at a board meeting, we say the meeting is quorate.

What is quorum?

The minimum number of people required to be present in order for valid decisions to be made. If the minimum number is not present, then the meeting is not 'quorate' and the decisions cannot be made.

What is meant by quorate?

If there is a quorum present at a board meeting, we say the meeting is quorate.

Resolution and Majority

-Key Provisions of BMs

Board resolutions - simple majority are required (deadlock if equality of votes and MA13 does not apply)

Voting

-Key Provisions of BMs

-Show of hands or oral assent (MA7(1)

- Chairperson's casting vote in the event of a deadlock (MA13)

- MA14 and s177 and 182 - specific rules regarding conflicts of interest

What is an example of a director having a personal interest in a decision?

A classic example of a conflict would be a director agreeing to buying property from, or sell property to, the company.

In these circumstances, the director will want the best possible deal for himself, nut this will conflict with the fiduciary duties he owes to the company.

What happens if a director breaches s182 CA?

If a director breaches s182, that is considered a criminal offence. (s183)

What are the rules regarding conflicts of interest?

- MA14, s177 and 182 CA

MA14 - prevents a director from voting or counting towards quorum on any decisions in which they have a personal interest.

s177 and 182 CA - require the director to declare a personal interest in a proposed (s177) or existing (s182) transaction or arrangement.

What is the exception to MA14?

MA14(3)(a) → allows a company to suspend or relax the general application of MA14 by ordinary resolution (OR)

MA14(4) → where the director subscribes for shares in the company.

What are the exceptions to s177 and s182 Companies Act?

s177(6) + s182(6)

- if director's interest cannot reasonably be regarded as conflict

- if the other directors are already aware

- if the director's service (employment) contract is being considered

Is declaration of a conflict of interest (s177 + s182 CA) separate from the requirement of quorum (MA14)

Yes, these are separate and distinct requirements.

e.g. a director can still declare conflict of interest but would not count as quorum

Hanne is a director and shareholder of Swing Entertainment Limited, a company with unamended MAs. She agrees to subscribe for some additional shares in the company and has been offered a new service contract, subject to board approval. The company has also agreed, subject to contract, to buy a commercial property from Elisabeth, an existing shareholder.

What is the position with regard to potential conflicts of interest?

As an existing director, Hannah must declare her interest in the proposed share acquisition but will be able to vote and count towards the quorum in relation to their issues at the BM, due to the exception in MA14(3).

She does not need to declare her interest in the proposed service contract, due to the exceptions in s177(6)(c), but she will be prevented from voting and counting towars the quorum in relation to it, under MA14.

Although Elisabeth clearly has a personal interest in the property transaction, ss177 and 182 and MA14 will only apply if she is also a director, as the provisions relate to BMs. If so, she would need to declare her interest at the BM and would be unable to vote and count towards the quorum on the decision.

What do s248 CA and MA15 require of board meetings?

Minutes must be kept of all BMs for at least ten years and will usually be signed by the chair of the BM.

Do decisions have to be done solely through board meetings?

No, MA8 provides that a procedure for unanimous decision-making may be used instead of holding a BM. This enables the directors to make a decision in writing or more informally, provided that they all agree.

Exercise of shareholders' powers: general meetings

The poers of the members are laid down in the CA and the company's articles and they generally exercise their power by passing resolutions in general meetings.

What are the two types of general meetings?

1. Annual general meeting (AGM)

2. Extraordinary general meeting ((E)GM)

What is an Annual General Meeting?

A private company formed after 1 October 2006 does not need to have an AGM, unless a special article provides so.

A company formed before 1 October 2006 is required to hold AGM, unless its articles have been amended.

AGMs can be useful if there are a number of shareholders who are not directors.

What is an (Extraordinary) General Meeting?

Any meeting of the members other than an AGM.

General meetings used to be referred to as extraordinary general meetings, however under the CA, they are now simply general meetings.

What are the two types of resolutions that can be made in a general meeting?

1. Ordinary resolution (OR)

2. Special resolution (SR)

What is an ordinary resolution (OR)?

An OR requires a simple majority (more than 50%) of shareholders attending and voting at a general meeting.

What is a special resolution (SR)?

A special resolution requires a 75% majority (i.e. 75% or more) of shareholders attending and voting at a GM.

What is the difference between the majorities in OR and SRs?

The majority for an OR is more than 50%, so if exactly 50% are in favour of passing it, it will not be passed and will result in deadlock.

The majority is 75% or more, therefore if exactly 75% are in favour of passing an SR, it will pass.

What are the key provisions of general meetings?

1. Calling and notice

2. Quorum

3. Voting

4. Resolution and majorities

Calling and notice

- Key Provisions of GMs

Usually the directors call the GM (s302)

- Written or electronic notice may be given (ss 308 and MA48)

- Shareholders' power to requisition a GM (see main text)(ss 303-305)

- 14 clear day's notice required (s307(1)) - in effect 16 days as you do not consider date of service and date of meeting (s360) to all members and directors (s 310)

- Short notice may be agreed by:

1. a majority number of members

2. holding at least 90% of voting shares (s307(4)-(6) BOTH CONDITIONS MUST BE SATISFIED

- Date, time, place and nature of business (s311)

- Full text of any SR proposed and sufficient detail regardings ORs (s238)

- Reasonably prominent proxy notice (s 325) - a notice informing the shareholder of their right to send someone to attend and vote in their stead (s324 and MA45)

What is the days notice for general meetings served via email or post?

Notice is deemed received after 48 hours after the notice was posted or emailed.

This means that 48 hours (2 days) must be added on to the 14 clear days to allow for posting or receipt.

Quorum

- Key Provisions of GMs

Two, unless a one-member company (s318(2))

What are the circumstances where a shareholder would not be classed as quorum?

- If they are rectifying their own breach (s239)

- buying back their own shares

Voting

- Key Provisions of GMs

Show of hands (one vote per member) (ss282 and MA42) - UNLESS poll vote demanded

Poll vote may be demanded by:

1. the chairpoerson

2. at least two voting members

3. any member(s) holding at least 10% voting share (MA 44)

One vote per share on a poll vote (s 284(3))

Resolutions and majorities

- Key Provisions of GMs

OR → 50%, simple majority of those voting

SR → 75% majority of those voting

Can members of the company call general meetings?

Yes, whilst it's typically the directors who call a GM, members of the company may indirectly call them (ss 303-305 CA).

Under these sections, the director must call a GM when members holding at least 5% of the company's paid-up share capital with voting rights requests them to do so/

The director has 21 days from the date of requisition to call a GM, which must be held within 28 days that the date is called.

What happens if a director fails to call a GM that members indirectly call?

ss303-305

If the meeting is not called, the shareholders may call the meeting themselves and recover the costs from the company.

What are written resolutions?

As an alternative to holding a GM, a private company may pass resolution in writing, with shareholders having one vote per share (ss 288-300 CA). i.e. a meeting on paper (all the same rules of general meetings apply)

What cannot be resolved in a written resolution?

Any resolution proposing to remove a director before the director's term of service expires requires a general meeting. This is because the director needs to be able to defend themselves in the meeting.

What is the time limit for a written resolution?

• 28 days

• A proposed written resolution lapses if it is not passed before the end of the 28 days beginning with the circulation date. The circulation date is the date it is first sent to the members.

What ate the formalities of a general meeting?

1. Minutes must be kept of all GMs for at least ten years - s 355 CA

2. A signed copy of every SR and some ORs must be filed at Companies House within 15 days of being passed.

3. Where the resolution alters the company's articles, a copy of the amended document must be filed

4. Any appropriate form must be filed at Companies House

5. Where appropriate, the company's statutory books must be updated.

What is the most important example of an OR that needs to be filed at Companies House following a general meeting?

An OR which authorises the issue of shares.

Your firm acts for Wurst Transformation Limited, a company that as adopted MAs, unamended. The directors whish to change the company's name to Phoenix Properties Limited and propose to call a GM to sanction this. They will personally hand over notices of the GM.

How much notice will be required?

At least 14 clear days' notice is required. Short notice may be agreed, but a majority in number of the members must sanction this and those members must hold at least 90% of the company's coting shares. If the notices were not physically being handed over, an extra two days' notice would need to be added to allow for the service rules.

Napoleon (Waterloo) Properties Limited has an issued share capital of 100k £1 ordinary shares held as follows;

- Sonia - 80k shares

- Bjorn - 5K shares

- Anni-Frid - 5k shares

- Gina - 4k shares

- Loreen - 4k shares

- Engelbert - 2k shares

The company has adopted the MAs unamended, and wishes to authorise short notice of a GM. What combination of shareholders will be required to do so?

The required percentage of shareholder (90%) is met with the support of Sonia, Bjorn and Anni-Frid (three shareholders), BUT this combination does not represent a majority in number of shareholders (ie the support of at least four of the six shareholders is required, who hold the requisite 90% shareholding).

Your client, Diva Developments Limited, has queried whether a company resolution needs to be filed on Companies House.

How would you advise them?

BRs never need to be filed, but SRs must always be filed at Companies House. The general rule is that ORs are not required to be filed, but an OR under s 551 CA 2006 (authority to issue shares) is an exception to that general rule.

Summarise decision making: change of company name

1. Check whether company name requires approval SR (s77)

Procedure:

- BM > GM > BM

DOI: Usually not required

Filing requirements:

- Copy SR

- Form NM01

- Change of name fee

Admin:

- Update company stationery

- BM and GM minutes

Summarise decision making: change of trading name

MA3 (BR)

Procedure: BM

DOI: Usually not applicable

Admin: Update company stationery

Summarise decision making: change of registered office

MA3 (BR) (s 87)

Procedure: BM

DOI: Usually not applicable

Filing requirements: From AD01

Admin:

- Update company stationery

- BM minutes

When will a change in registered office take place?

On the date when the change is registered by the Registrar of Companies. but until the end of the period of 14 days beginning with the date on which it is registered a person may validly serve any document on the company at the address previously registered. - s.87(2) of the Companies Act 2006 (CA)

Summarise decision making: change of articles

SR (s21(1))

Procedure: BM > GM > BM

DOI: Usually not applicable

Filing requirements:

- SR

- Amended articles

Admin:

- BM and GM minutes

Summarise decision making: appointment of chairperson

MA3 (BR)

MA12

Procedure: BM

DOI: s177 and MA14

Admin:

- Update company stationery

- BM minutes

Summarise decision making: change of accounting reference date

MA3 (BR)

Procedure: BM

DOI: Usually not applicable

Filing requirements:

- AA01

Admin:

- BM minutes

What are the rules permitted on directors under s 394 and s387 CA regarding accounts?

REPHRASE QUESTION

Directors must file accounts each financial year with Companies House (s 394 CA).

It is a criminal offence not to do so (s 387 CA)

What is the exemption small companies have regarding accounts?

Small companies are exempt from the requirement for accounts to be audited.

What are small companies?

Small companies are those that satisfy two ore more of the following:

- turnover of not more than £10.2m

- balance sheet of no more than £5.1

- Not more than 50 employees

What is the requirement under s384A?

Directors must also prepare a financial report for each financial year.

Small Companies and 'micro-entities'' are exempt (s384A)

When should accounts for private companies be filed with Companies House?

Accounts must usually be filed with Companies House within nine months from the end of the accounting reference period (s 442)

What is a confirmation statement?

SPLIT

A confirmation statement (form CS01) must be filed each yea within 14 days of the anniversary of the company's incorporation (s 853A). The form confirms that all information required to be delivered to Companies House has been duly filed and provides details of any changes (e.g. to shareholding)

This ensures that Companies House holds the most up-to-date information about the company and its composition.

Failure to do so is a criminal offence.

Formally known as 'annual return'

What are substantial property transactions?

Governed under ss 190-196 CA

A substantial property is where:

- a director, in their personal capacity, or someone connected with a director

- buys from or sells to the company

- a non-cash asset

- of substantial value

Who do SBTs cover?

Can cover both: --directors (and or connected persons) of the Company

- Directors (or connected persons) of the company's holding company. (s190(2) CA 2006)

How can the board enter into an substantial property transaction?

In order to enter into a SBT, the shareholder's consent by ordinary resolution is required.

Why do the board require shareholder consent for SPTs?

Consent is required because the SBTs occur in circumstances where a director could gain something at the company's exense.

e.g. A director sells office property to the company at an above market rate. Director gains financially whilst the company loses money.

What is a person connected with a director?

Set out in ss 252-254 CA.

Can either be a:

-family member

- a company in which the director/connected person:

- owns at least 20% of the body's corporate shares or

- is/are entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of the company

What is a non-cash asset?

A non-cash asset is classed as any interest other than cash, such as land, shares, machinery, property rights, fixed or floating charges.

How are members of a director's family defined?

- SBTs

- The director's spouse or civil partner

- The director's child or stepchild

- the director's parents

- Any person who lives in an enduring relationship with their partner and any children of that partner