Business Law: CH 8

De factor director

• Anyone who acts as a director, although not validly appointed as one

• A person who becomes liable as a director due to his or her conduct

De jure director

A person who has been appointed following the correct egal procedure

Shadow director

• A person in accordance with whose directions or instructions the directors of a company are accustomed to act

• Not a shadow director if directors only act on advice given by him or her in a professional capacity

Alternate director

• A director may appoint an alternate director to attend and vote at board meetings

• The alternate director may be another director or an outsider

• Some articles provide for such an appointment to be subject to the approval of the board

Executive director

• Likely to be a full-time employee involved in management

• Usually has a specific role, e.g. marketing director

Non-executive director

• Usually part-time

• Brings outside expertise to the board

• Not an employee

• Exerts control over executive directors

Managing Director

The board usually delegates to the MD the day-to-day management of the company’s business

Chairman

• Responsible for ensuring procedure in meetings is followed

• Usually a non-executive director

Director appointment

• By ordinary resolution

• Directors of public companies should generally be voted on individually

• A director’s actions are valid notwithstanding that his or her appointment was defective

Registrar must be notified within 14 days

Director removal

• Death

• winding up of company

• Removal

• Disqualification

• Resignation

• Not going for re-election

When a director should leave office:

Dictated by the articles

• He or she is prohibited from being a director by law

• A bankruptcy order is made against him or her

• He or she is the subject of a composition with creditors with regards to his or her debts

• A registered medical practitioner give a written opinion that he or she is physically or mentally incapable of acting as director

• Court passes an order that, due to mental health, this person should be presented from exercising the powers of a director

• The director gives notice as to his or her resignation of office

Removal of director - procedure

1) Special notice (28 days)

2) Notice of the meeting goes to the director and all members entitled to attend and vote
3) The director in question can require the company to circulate written representations to members

4) At the meeting, director can read out representations if there was no time for prior circulation. Director must be allowed to attend the meeting and speak. Orindinary resolution needed to remove

Removal of an executive director

Could be a breach of his or her service contract

Limitations on power of members to remove a director

• A director who is also a member - entitled to votes

• A shareholder agreement may state that shareholders holding each class of shares must be present at a meeting for the decisions to be valis

The division of power within a company

Directors must exercise their powers in accordance with the company’s constitution

The power to manage the business of the company is given to the board as a whole, not to the individual directors. Where a company’s articles delegate the management of the company’s business to the board, the members have no right to interfere in decisions not made b the board

Directors are not agents of the members and are not subject to their instruction as to how to act

Restrictions on power

1) General statutory restriction
2) Specific statutory restriction
3) Restrictions in the articles
4) Restriction of powers made by the members

General statutory restriction

CA06 states that directors must only use their powers for the purpose for which they are conferred

Specific statutory restrictions

CA06 states that there are certain decisions for which the directors must gain shareholder approval by way of an ordinary or special resolution (alteration of articles, reduction of share capital)

Restrictions in articles

Provision in article can restrict the power

Restrictions of powers made by the members

What members can do if they are not happy:

• A director can be removed at any time by an ordinary resolution of the members and they may see fit to exercise this right should their views be ignored

• The members can alter the articles by passing a special resolution. This power could therefore be used to restrict the directors’ powers

Transactions beyond the board’s powers

• Where directors act as if they have authority to bind the company, this will be treated as binding, even if it exceeds the board’s actual authority

• The power of the directors to bind the company, will not be limited by anything in the company’s constitution, provided the other party is acting in good faith

• Even if 3rd party has actual knowledge of the directors lack of express authority, this is not enough to demonstrate lack of good faith, so contract will be binding

• If 3rd party to the transaction is also a director of the company or a person associate with a director - Voidable

• For this case, the 3rd party director/associate and the director who authorised the transaction are liable to compensate the company for any profit made

A director must - act within powers

• A director must act in accordance with the company’s constitution and only use his or her powers for th purpose which they were given

• If a director carries out a transaction which he or she does not have authority for, the transaction will be void, unless it is approved by shareholders in a general meeting

A director must: promote the success of the company

• Must act in good faith, and in a way which benefits the members

Directors must have regard to:

• The likely consequences of any decision in the long term

• The interests of the company’s employees

• The need to foster the company’s business relationships with suppliers, customers and others

• The impact of the company’s operations on the community and environment

• The desirability of the company maintaining a reputation for high standards of business conduct

• The need to act fairly as between members of the company

The directors must: exercise independent judgement

This duty is not infringed by a director acting:

• In accordance with an agreement

• In a way authorised by the company’s constitution

The directors must: exercise reasonable care and diligence

Standard expected:

• General knowledge, skill and experience that could reasonably be expected of a director

• The actual knowledge, skills and experience held by the director

The directors must: avoid confilicts of interest

• Avoid situation which places director in conflict

• Unless articles expressly allow the authorisation

• Relevant director does not count towards a quorum and his or her vote is not included in determining whether authorisation has been given

The directors must: not accept benefits from third parties

• Unless acceptance cannot reasonably be regarded as likely to give rise to a conflict

The directors must: declare an interest in a proposed transaction or arrangement

• Must declare nature and extent of interest to other directors

• Can be made in writing, at meeting, or by general notice

S232 CA06

Any provision to exempt a director from or indemnify against any liability for breach of duty or negligence is void

In any action for breach of duty, the court may conclude the directors are not liable if it believes the directors acted honestly and reasonably and, considering all the circumstances of the case, they ought fairly to be excused

Fraudulent trading

Business is carried on with intent to defraud creditors and others

wrongful trading

On winding-up it appears to the court that the company has gone into insolvent liquidation and, before the start of the winding up, a director knew or ought to have concluded that there was no reasonable prospect that company could avoid insolvent liquidation, and did not take the suffucuet steps to minimise losses to creditors

FT: who is liable?

Anyone knowingly party to the carrying on of the business

WT: who is liable?

Directors and shadow directors (reasonably diligent director of their particular skill level)

Grounds or disqualification

• Persistent breaches of the CA06. Three convictions for default in five years is conclusive evidence of persistent breach

• Conviction of a serious offence in connection with the management of a company (max. 15 years disqualification)

• Investigation by secretary of state finds the director to be unfit (15 years disqualified)

• Liquidator’s report finds the company director to be unfit of management (2 years min, 15 years disqualification)

• SoS feels it is in the public interest (15 years max)

• Breach of competition law (max. 15 years’ disqualified)

Company secretary role

Office/employee of the company and face potential civil and criminal liability

Convene meetings of the board, issue the agenda, draft the minutes, filing documents with registrar

In smaller company, may act as general administrator and compliance manager

Secretary powers

• Has the power to contract in respect of administrative operations

• Can bind on the basis of implied actual authority

Members’ rights

• To be sent a copy of AA and reports

• To require directors to call a general meeting

• To appoint a proxy to exercise rights

Requires approval of the members in a general meeting

• Service contracts

• Substantial property transactions

• Loans to directors

• Payments for loss of office

Service contract

• Approval required if the contract is for a guaranteed period of two years or more

• If not approved, the contract is deemed to include a term allowing the company to terminate it by reasonable notice at any time

Substantial property transactions

• Director acquires from the company a substantial non-cash asset

• Asset is substantial if > £100k or exceeds 10% of the company’s asset value and is more than £5000

• Failure to obtain approval:

  • Transaction is voidable by company unless members approve

  • Director is liable to account to the company for any gain or indemnify it against any loss

Loan to directors

• Written memorandum setting out the details of the transaction proposed must be given to the members

• Failure to obtain approval:

  • Voidable unless approved

  • Director liable to account for gain or indemnify for loss

Loans which do not require approval

• Expenditure on company business

• Minor transactions or an in the ordinary course of business

• Intra-group transactions

• Where the business of the company is money-lending

Payments for loss of office

• Payments or benefits made on loss of office or retirement

• Written memorandum of the proposed payment must be sent to all members

• Payment held on trust for the company where approval is not sought

• Director who authorised the payment is liable

Rights of minority shareholder: Any member can

Apply to court to prohibit a payment out of capital by a private company

Can prevent the registration of a limited company as an unlimited company

Rights of minority shareholders: >=5% voting rights

Can force the inclusion of a resolution on the agenda of the AGM

Can require the directors to call a GM

Rights of minority shareholders: >=15% voting rights

Can apply to court to cancel a variation of class rights

Rights of minority shareholders: >25% voting rights

Can defeat a special resolution to alter name, alter articles, and reduce share capital or wind up a company

Derivative actions

A member may bring a derivative claim on behalf of the company against a director where there has been breach of duty or negligence. This requires permission from the court

Where a court will refused permission for a derivative claim

• The act was authorised beforehand or ratified

• A person acting in accordance with the duty to promote the success of the company would not seek to continue the claim

Court may relieve the director of liability if it considers that:

• He or she acted honestly and reasonably

• He or she ought fairly to be excused

If a claim for unfairly prejudicial conduct is succesful

• The petitioner must be a member of the company; and

• the complaint must be based on prejudice to them as a member

If successful the court may:

• Require the company or the members to purchase the shares of the petitioner at a fair price

• Authorise court action in the company’s name

• Regulate the future conduct of the company’s affairs, or

• Ordering the company to perform some act

When the court might order a winding up

• The company was initially formed for an illegal or fraudulent purpose

• There is complete deadlock in the management of the company’s affairs

• Shareholders have lost confidence in the company’s management

Annual general meeting

Held once a year, within 6 months following the accounting reference. For Plc’s

No AGM means a fine for the company and the officers

21 days notice is required unless all members attend and vote for a shorter period

Business:

• Consider accounts

• Appoint auditors

• Elect directors

• Declare dividends

Resolutions:

• Members can force the inclusion of a resolution on the AGM agenda if they:

  • Hold 5% of voting rights

  • 100 members each hold an average of £100 of the paid up share capital

General meetings

Held when required

Must be held by a plc if a serious loss of capital has occured

14 days notice

Class meetings

Meeting of a class of shareholders, usually to consider a variation of their class rights

14 days notice

Two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class

Who can call a meeting?

1) Directors

2) Members can require the directors to call a GM if they hold:

• At least 5% of the paid up voting capital

• At least 5% of the voting rights

• Directors (must call the meeting within 21 days of requisition. Meeting must take place within 28 days of the notice)

• If the directors don’t call it, the members who requested the meeting (or any member holding +50% of the total voting rights) may themselves call a meeting to take place within 3 months

3) Resigning auditor

4) Court

Notice

Must be made to all members and directors

Accidental failure to give notice does not invalidate the meeting

Include - date, time, place, nature, any special resolutions

AGM notice - 21 days

GM notice - 14 days (less if members holding 90% of shares agree)

Special notice

Requires 28 days notice

Required for the removal of a director or auditor

During this time the person in question can submit written representations and require them to be circulated

Special resolution

>=75%

File with registrar within 15 days

• Alter name

• Wind up company

• Alter articles

• Reduce share capital

Orndinary resolution

>50%

File with registrar if required by statute

Written resolution

Private companies only

File to registrar if 75% majority is required

For any decision apart from requiring special notice to remove a director

Date of resolution is the date when the necessary majority has been reached. Resolutions must be passed within 28 days of circulation