Weeks 6: Corporate Governance

Corporate Governance

Concerned with how the company is set up to run itself, with particular attention to shareholders and directors.

Who are considered the owners of a corporation in corporate law theory?

Shareholders are viewed as the owners of the corporation.

How do shareholders exert influence?

Only way they can do this is through shareholder meetings. They delegate power to Board of Directors.

In corporate law, what do agency problems refer to?

Agency problems arise due to the delegation of authority from shareholders to directors.

What is the primary responsibility of directors according to company law?

Directors owe their duties to the company, not directly to the shareholders.

What is a critical factor for good corporate governance?

Good corporate governance relies on both good structure and good culture.

Good structure

comes from shareholders - they are subscribers of the memorandum and the people who set up the company on day one.

Good culture

comes from the directors. They are the ones who run the company on a daily basis.

What can shareholders do if they are unhappy with the director's decisions?

They can remove directors at the next annual or extraordinary general meeting but cannot do anything in between these.

Ownership

Shareholders

Control

Directors - duty to company not shareholders

Can a shareholder and director be the one person?

Yes, but they still have separate responsibilities - lines can get blurred. Common with small companies.

Anglo Irish Bank

major shareholders were reported to have directly influenced the board of directors. Shareholders, focused on their own interests, pressured the board, even though directors are legally bound to act in the best interests of the company, not the shareholders. This interference contributed to poor decision-making and ultimately led to the exposure of concealed loans and improper transactions, damaging the bank's stability and reputation

Does the law explicitly state that shareholders are the legal owners of a company?

Not in the law but is a part of company law theory. When a company is set up, individuals subscribe to its memorandum and receive shares, which equates to ownership, even though the law does not explicitly state this. However, it is accepted in practice that shareholders "own" the company.

How can shareholding be structured in a company?

Shareholding can either be:

1. Concentrated: Owned by a family or small group of individuals (e.g., H&M, Mars).

2. Widely Dispersed: Owned by many shareholders (e.g., Apple), making it hard to track all owners. The more diverse the shareholding, the greater the divide between ownership and control.

What are some examples of different types of shareholders?

• Angel Investors: Like in Dragons’ Den, they buy shares and take a risk but are not involved in the company’s day-to-day operations.

• Broad Range of Shareholders: A company may have many different shareholders, even if small (e.g., Telecom Éireann).

How does the diversity of shareholders impact control?

The more diverse the shareholders, the greater the divide between ownership and control.

What is the contrast between Telecom Éireann and H&M in terms of ownership and control?

• Telecom Éireann: Had a dispersed shareholder base with no clear voice, making it hard to connect ownership and control.

• H&M: Has concentrated ownership, making it easier to manage shareholder interests and control, with a clear connection between ownership and the board of directors.

Eircom (Telecom Éireann) Flotation

Background: Telecom Éireann was Ireland's state-owned telecom company. In 1999, it was floated on the stock exchange as Eircom. The Irish public was heavily encouraged to invest, with promises of high returns. Over 500,000 citizens bought shares.

Outcome: Share prices quickly plummeted by 30%, leading to widespread financial loss. The company later sold its mobile division to Vodafone, leaving shareholders with diminished value. This saga highlighted the disconnect between small shareholders and the company's leadership

What is the issue of 'agency' in the relationship between shareholders and directors?

Agency problems arise when the interests of the board of directors (agents) conflict with those of the shareholders (principals). Shareholders may want directors to act in their best interests (e.g., issuing dividends), but directors must prioritize the company's overall interests.

How does the AGM illustrate the separation between shareholders and directors?

At the AGM, shareholders struggle to speak with a unified voice, as the board sets the agenda. Although shareholders can appoint directors and submit agenda issues, they have limited control over decisions. Directors have the discretion to act in the company's best interests, even if it conflicts with shareholder desires.

Dividend

a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility.

What is the conflict between shareholders and directors regarding dividends?

Shareholders often push for dividends (a share of profits), but directors may choose to reinvest profits if they believe it benefits the company long-term. This creates tension, as shareholders can vote to replace directors at the AGM if they disagree with their decisions.

What right do shareholders generally have concerning dividends?

Shareholders are not entitled to dividends, as this decision falls under the discretion of the directors and directors must act on what is of best interest for the company.

What is the principle of "fettering the discretion" in company law?

The principle of fettering the discretion means shareholders cannot force directors to follow a specific course of action through resolutions. Directors must have the freedom to make decisions that are in the best interests of the company. Shareholders may attempt to control directors’ actions (e.g., pushing for dividends), but directors are not obligated to follow these demands if they believe it harms the company’s future prospects.

What legal sources govern the interaction between shareholders and directors?

The interaction between shareholders and directors is governed by:

1. Companies Act 2014

2. Company Constitution (LTDs, DACs, PLCs)

3. Shareholders' Agreements (contracts between shareholders)

4. Common Law, Equity, and EU Law

Articles of Association, the Constitution of a Company under 2014 Act . S. 157

“Each subsequent provision of this Chapter (other than sections 166 and 167) applies save to the extent that the company’s constitution provides otherwise.”

Outlines default rules for company governance, which can be changed by the company’s constitution—except for Sections 166 and 167.

S. 166, and 167 of the Companies Act 2014

• Section 166: Mandates that minutes of board meetings must be recorded and cannot be altered by the company’s constitution.
  

• Section 167: Requires the establishment of audit committees, which also cannot be changed by the company’s constitution.

Section 158 of the Companies Act 2014 (Previously s.80)

states that directors manage the business of the company as they see fit. They can exercise any company powers not reserved for shareholders in general meetings. Their actions must comply with:

• The company's constitution,

• The Companies Act,

• Special resolutions passed at general meetings.

Shareholders can give directions, but directors' discretion cannot be fettered.

Can shareholders direct directors under Section 158?

Yes, shareholders can pass special resolutions at general meetings to direct directors. However, these directions must not conflict with the company's constitution or the Companies Act, and directors still retain discretion to act in the company's best interests

Section 159 of the Companies Act 2014

Section 159 allows the board of directors to appoint one or more of themselves as a managing director for a set period and on agreed terms. The appointment can be revoked by the board at any time. This role is not required by law, but many companies choose to have a managing director.

Is the Managing Director an employee under Section 159?

No, a managing director is not considered an employee. Directors are not protected by employment statutes, and their fees are not considered a salary. A managing director’s appointment can be revoked without the protections afforded to typical employees.

What are the duties of a Managing Director under Section 159?

The Companies Act 2014 does not define specific duties for the managing director. Their responsibilities are usually determined by the company's board, but they typically manage the day-to-day operations of the company.

What did Holdsworth v Caddies [1955] establish?

UK case where shareholders claimed the managing director was acting beyond his authority and sought to limit his duties. The court ruled that company law and the Companies Act do not define the role of a managing director. It is up to the company or the court, on a case-by-case basis, to decide the scope of the managing director's powers. There is no default list of duties for a managing director in law.

What does Section 159(4) of the Companies Act 2014 allow regarding managing directors?

Section 159(4) allows the Board of Directors to confer any of their powers to the managing director. However, this delegation doesn't absolve the board of its duties. The board can delegate authority but remains responsible for the company's actions.

Section 40 deals with the registration of those with authority to bind the company, but a managing director's appointment can occur outside of this registration

What does Section 160 of the Companies Act 2014 state about board meetings?

Outlines the general rules for board meetings, including that directors can meet to conduct business, regulate their meetings, and decide questions by a majority vote. The chairperson has a casting vote in case of a tie.

What is the role of the chairperson in a board meeting according to Section 160(2)?

May cast a second or casting vote to resolve a tie in decisions made during board meetings.

How is the chairperson of the board elected according to Section 160(8)?

May be elected by the board members. In some company types, shareholders may elect the chairperson, subject to ratification by the board.

What does Section 161(1) allow regarding board decisions?

Allows board decisions to be made through written resolutions signed by all directors, making these resolutions as valid as those passed in a formal meeting.

What is required regarding minutes of board meetings according to Section 166?

• Requirement for Minutes: Companies must take minutes to record the proceedings of board meetings.

• Nature of Minutes: Minutes do not need to be a verbatim account; they should provide a summary of discussions (e.g., “Sean spoke about governance”).

• Confirmation of Minutes: Minutes from the previous meeting must be confirmed and approved at the next meeting.

• Official Record: Confirmed minutes serve as the official record of what transpired during the meeting unless evidence suggests otherwise.

Main role of chairperson

oversee meetings and ensure rules are being followed. They do this with support of the secretary.

Part of this is making sure everyone is invited and that all agenda items are proposed correctly.

What are the main focuses of shareholders' rights?

Control and Participation; Financial Rights.

How do shareholders exercise control?

By appointing directors at general meetings.

What happens to shareholders' control between meetings?

They lose direct control over day-to-day activities until the next general meeting.

How can shareholders change company management?

They can voice concerns and influence decisions only during general meetings.

What was significant about the Eircom AGM?

It had the highest attendance for an Irish company, where shareholders, including Gay Byrne, expressed dissatisfaction but were told changes could only be made at a general meeting.

Why are general meetings important for shareholders?

They are the only opportunity to initiate changes, pass resolutions, or remove directors.

Annual General Meeting (AGM) Requirement

• As per Section 175(1) of the Companies Act 2014, every company must hold an AGM each year, with no more than 15 months between consecutive AGMs.

• Section 175(2) allows an exception for companies within their first 18 months of incorporation, meaning they don't need to hold an AGM within the year of incorporation or the following year.

Dispensing with AGMs for LTDs

• Section 175(3) allows LTDs to avoid holding an AGM if all shareholders sign a written resolution acknowledging receipt of financial statements, resolving all AGM matters, and confirming no change in the appointment of the statutory auditor.

• DACs and PLCs are required to hold AGMs as stipulated under Section 988 (DACs) and Section 1089 (PLCs).

Flexibility in Scheduling AGMs

AGMs must be held annually, but not necessarily every 12 months. Section 175(1) allows up to 15 months between AGMs, meaning a meeting could take place in January one year and March the next.

Notice and Accessibility of AGMs

According to Section 181(1) of the Companies Act 2014, 21 days’ notice must be given for an ordinary AGM, unless a company’s constitution provides otherwise.

NB: Meetings must be reasonable and accessible to all shareholders, ensuring fair opportunity to attend and participate.

Section 177(1) of the Companies Act 2014

• An Extraordinary General Meeting (EGM) refers to any company meeting other than the Annual General Meeting (AGM).

• EGMs are called to address urgent or specific matters between AGMs.

Sections 177(2) and 177(3) of the Companies Act 2014

• The directors of a company can convene an EGM whenever they think it's necessary (Section 177(2)).
  

• If there are not enough directors to form a quorum, any director or any shareholder of the company may convene the EGM (Section 177(3)).

Sections 178(2) - 178(5) of the Companies Act 2014: Members’ Rights to Convene an EGM

• Shareholders holding at least 50% of voting rights can convene an EGM at any time (Section 178(2)).
  

• Shareholders holding at least 10% of the voting shares can requisition the directors to convene an EGM, and if the directors fail to do so within 21 days, the members can convene it themselves (Section 178(3) - (5)).

Notice Periods for EGMs

• The directors must convene an EGM within 21 days of a member’s requisition and the meeting must take place within 2 months of that requisition date (Section 178(5)).
  

• If the directors fail to do so, the requisitioning members may themselves convene the meeting, and it must occur within 3 months of the requisition date.

Purpose of EGMs

• An EGM must be convened to discuss a specific issue (e.g., a drop in share price). Other unrelated matters cannot be raised during the meeting.
  

• The purpose of the EGM must be clearly stated in the requisition (Section 178(4)).

Court-Ordered Meetings

• The court may order a company to hold a meeting when it has failed to do so or when it’s otherwise impractical to call a meeting.

• The meeting follows normal rules, but is mandated by the court instead of being called by the board or shareholders.

• Source: Section 179(1), Companies Act 2014.

Grounds for Court Intervention

• The court can intervene if it's impracticable or undesirable for the company to call a meeting through usual procedures or as per the company’s constitution.

• Source: Section 179(2), Companies Act 2014.

Eligible Applicants for Court-Ordered Meetings

• The application for a court-ordered meeting can be made by:

  1. A company director

  2. A member with voting rights

  3. A deceased member’s personal representative

  4. The assignee of a bankrupt member
     

• Source: Section 179(3), Companies Act 2014.

Court-Imposed Rules for Meetings

• The court can impose specific rules, such as appointing a particular chairperson or setting unique quorum requirements to prevent manipulation (e.g., scheduling a meeting during a major event to reduce attendance).

• Source: Section 179(4) and (5), Companies Act 2014.

Validity of Court-Ordered Meetings

• A meeting held according to a court order is treated as a valid and official company meeting for all purposes, regardless of how it was called.

• Source: Section 179(6), Companies Act 2014.

What is the difference between Ordinary and Special Resolutions?

Ordinary Resolutions require a simple majority, while Special Resolutions require a supermajority (like 2/3 or 3/4) for approval.

What key changes did the Companies (Miscellaneous Provisions) (Covid-19) Act 2020 introduce?

It allowed virtual meetings and provided more flexibility for the timing and execution of meetings.

AGMs and Gathering Restrictions

Prior to Companies (Miscellaneous Provisions) (Covid-19) Act 2020. Law mandated AGMs within the first 3 months of the year, conflicting with criminal laws prohibiting gatherings of more than 2 people.

To resolve this conflict, the Companies Act was amended to accommodate new meeting formats.

Importance of Notices

• AGM Notice: 21 days (Section 181(1)(a))

• EGM Notice: 7 days (Section 181(1)(b))

• Special cases may require longer notice (Section 146).

Voting Procedures

• Proxies: Section 183(1) allows one member to vote on behalf of another.

• Show of Hands: Section 188, informal voting method based on visual assessment unless challenged.

• Poll Voting: Section 189, more formal method for collecting votes.

Cultural Shift in Voting - Companies Covid Act 2019

• Online voting allows for immediate results and clearer expressions of shareholder preferences.

• Majorities are based on the number of attendees at the meeting; absence during voting can lead to unintended abstentions.

Share Voting Rights

• Companies must maintain clear records of share types; some shares may have double voting rights.

• Investors may prefer non-voting shares if they are satisfied with company management.

Unanimous written resolutions

• Section 193 allows shareholders to agree on matters in writing, eliminating the need for a meeting.

• All shareholders must consent for the resolution to be valid

Buchanan v McVey [1954] IR 89

Shareholder claimed they did not receive notice of a resolution. The court ruled that as long as procedures were followed correctly, the absence of a response equates to a lack of opposition.

Ignoring the resolution does not invalidate it, similar to non-attendance at an AGM.

Majority Written Resolutions

• Section 194 allows for written resolutions where a simple majority (e.g., 50% + 1) is required.

• If 70% of shareholders agree, there's no need for a meeting, as the required majority is already achieved.

• Typically used for non-technical matters to streamline decision-making.

Directors' Authority to Call Meetings

• Directors are primarily responsible for convening shareholders’ meetings.

• They decide meeting schedules based on the company's best interests, without needing to consider shareholders' preferences.

• This can lead to strategic delays, particularly if bad news is anticipated.

Shareholders' Rights Under Section 178(2): Majority Shareholder

• Section 178(2) allows shareholders holding not less than 50% of the shareholding to call a meeting.

• This right can be restricted by the company’s constitution.

• Used primarily when the AGM is delayed or directors' actions are disputed.

Requirements to Call a Meeting (50% Shareholding)

To call a meeting, shareholders need:

1. Majority of paid-up shares (not just held shares).

2. No restrictions in the company's constitution prohibiting this action (can be banned)Shareholders' Rights Under Section 178(3)

Shareholders' Rights Under Section 178(3): Minority

• Section 178(3) allows shareholders holding not less than 10% of the shareholding to requisition a meeting.

• This right cannot be contracted out of in the constitution.

• Shareholders can request the board to call the meeting within 30 days.

• The board must respond and provide reasons if they choose not to proceed.

• gives leverage to minority shareholders by establishing a threshold of 10% for requisitioning meetings.

Paid-Up Voting Capital

• Rights referenced in Sections 178(2) and 178(3) pertain to paid-up voting capital, meaning shares that have been fully paid for, not those on loan.

• This ensures only committed shareholders can influence meeting decisions.

Voting Rights in Shares

• Different shares have different voting rights, outlined in the company’s constitution.

• Voting rights can vary by class of shares, including no votes, double votes, and casting votes.

Source: Companies Act 2014, Part 4, Chapter 4 (Board Meetings) and Chapter 6 (Shareholders’ Meetings).

Pre-emption Rights

• Pre-emption rights allow existing shareholders to purchase additional shares before they are offered to others.
  

• Typically outlined in the Articles of Association or the company’s constitution.

Sheehan v Breccia and Ors [2019] IEHC 410

Irish courts said it is legitimate to have sharetypes where there is no votes or double votes. The company act is not clear on this. It had tried to be cleared up in the companies act but with older companies it was harder to understand.

Court said as long as it was clear when the person bought the shares of their voting rights and it didn’t violate the companies act then it was open season.

Financial Rights of Shareholders

• Shareholders are not entitled to dividends; the directors decide if and when to distribute them based on the company’s best interests.

• Shareholders cannot force dividends but can argue that failing to pay them is oppressive to minority shareholders.

Dodge v. Ford Motor (1919)

Michigan Supreme Court ruled that withholding dividends to force out the Dodge brothers as minority shareholders was oppressive behavior. The case illustrates the tension between control (directors) and ownership (shareholders), as non-payment can be used to manipulate or disadvantage minority shareholders.

Class Differences and Shareholding

• Different share classes can lead to variations in shareholder rights, including the right to purchase additional shares.

• Example: A shareholder in Facebook lost opportunities due to differing share classes affecting pre-emption rights.

• Courts confirm the validity of varied share classifications as long as they are well-documented and understood.

Do shareholders have rights to dividends?

Shareholders do not have an automatic right to dividends (Section 117), though they may have a veto over the directors' decision to declare dividends, as seen in Burland v. Earle [1902].

Convertible Loans and Treasury Shares

• Shares can become convertible loans, allowing loans to convert into equity after a certain period.

• Treasury shares involve the company repurchasing shares at a higher price at a future date.

• Different rights reflect the distinction that shareholders own the company but do not run it.

Power Dynamics in Shareholding

• A 60% shareholder may exert pressure on directors, impacting decision-making despite the directors' fiduciary duties.

• Directors often align with shareholder interests, even though they do not have to, affecting governance and compensation structures e.g ANGLO.

What are dividends?

share of a company's profit paid to shareholders, but they must come from distributable profits, not turnover, as per Part X of the Companies Act 2014.

Could not paying dividends lead to oppression of shareholders?

Consistent non-payment may amount to oppression of minority shareholders under Section 212 of the Companies Act 2014

Who are considered members of a company?

All shareholders in a company that has share capital (LTD, PLC, DAC, ULC, or PUC) are members

How does one become a member of a company?

1. By being an original subscriber to the company's constitution.

2. Applying for and receiving an allotment of shares.

3. Receiving a transfer of shares from an existing member.

4. Acquiring shares through transmission, such as inheritance or bankruptcy.

What is the Register of Members, and what information does it contain?

• a record of a company's members that is required by law.

• It must include details such as the member's name, address, number of shares held, date they became a member, and the amount paid on the shares.

• Notice of trust cannot be entered

Where is the Register of Members kept, and who can inspect it?

• must be kept at the registered office of the company, its primary place of business in Ireland, or another location within Ireland.

• It can be kept electronically or in a bound volume.

• It is open for inspection by members and the public, with members having free access and the public paying a small fee

What happens if a company refuses to allow inspection of the Register of Members?

• The company and any officer responsible may face prosecution for a category 3 offence.

• A member or creditor can apply to the High Court for an order to remedy the refusal.

Can the Register of Members be closed?

Yes, for up to 30 days per year, but the company must give public notice.

Can the Register of Members be rectified?

• Yes, the court can order rectification if there is an error or omission, such as a name being wrongly included or excluded.

• The company can also rectify errors, but not if it negatively affects a person without their consent

What are the obligations of directors to disclose their interests in shares and debentures?

Directors, secretaries, and their families must disclose their holdings and any dealings in the company’s shares or debentures. This includes interests held in trust, options, and other indirect methods of control.Failure to comply can result in unenforceability of rights and criminal penalties.

When are shareholders required to disclose their interests in a company?

Any person or group acquiring a shareholding above a certain threshold (usually 3%) must disclose their interest to the company. This applies to both individual and group acquisitions. Failure to disclose can result in unenforceability of rights and criminal penalties.

What is the Register of Beneficial Ownership, and who can access it?

• It’s a central register containing information on the beneficial owners of companies, established to combat money laundering.

• Access to the register is restricted to designated persons such as law enforcement agencies and financial institutions.

• The general public does not have access to personal details on the register.

How do shareholders exercise control over a company?

• Primarily through resolutions passed at shareholder meetings, such as the Annual General Meeting (AGM) and Extraordinary General Meetings (EGMs).

• By appointing or removing directors

What are the different types of shareholder meetings?

• Annual General Meeting (AGM): A mandatory yearly meeting with a longer notice period (usually 21 days).

• Extraordinary General Meetings (EGM): Meetings called on an as-needed basis for specific purposes, with a shorter notice period.

What are the different types of resolutions that shareholders can pass?

• Ordinary Resolution: Requires a simple majority vote (more than 50%).

• Special Resolution: Requires a supermajority vote (e.g., 75% or 2/3rds depending on company type) and a longer notice period (21 days).

• Unanimous Written Resolution: All shareholders agree in writing, bypassing the need for a meeting.

• Majority Written Resolution: A majority of shareholders agree in writing (threshold depends on the type of resolution).