Division of Powers

There are different types of shares, e.g. in a medical practise, the doctors will have A class shares, and therefore be able to control the company, and B class shares for income that can be owned by other people of trusts.

Powers of Directors and Shareholders (Prior to 1993 Act)

  • The company is an artificial person so it must be managed and represented by human agents.

  • The decision making powers are exercised by the (board of) directors and shareholders in general meetings.

  • The powers exercised by each are separate.

    • The division of powers between directors and shareholders has long been defined by company law.

  • The decision made by either the directors or shareholders in the decision of the company.

  • Default control rested with shareholders because they have the financial interest.

Directors

Management Power - S128

•“(1) The business and affairs of a company must be managed by, or under the direction or supervision of, the board of the company.

•(2) The board of a company has all the powers necessary for managing, and for directing and supervising the management of, the business and affairs of the company.

•(3) Subsections (1) and (2) are subject to any modifications, exceptions, or limitations contained in this Act or in the company's constitution.”

Basically directors have all the powers to run the company, unless the shareholders object.

  • Have the power to bind the company. (Contracts, transactions etc.) (ruled by Section 18 from previous lecture)

It is possible for you to be deemed a director if you are acting like a director even if you haven’t been appointed.

Simple: If you are a director, you have the powers to run the company how you please. You should run it responsible even though you have the protection from limited liability. No restrictions, broad powers, but there are duties and if you breach them then you can be held personally liable. E.g. entering into obligations (buying things) even when you know the company can’t afford to pay is a breach of duties.

Shareholders decide who directors are, and can vote out a director.

Delegation of Powers

  • Directors can generally delegate their powers, but;

  • Directors cannot delegate primary powers, including: (noted in schedule 2 of Companies Act)

    • Change of name of company;

    • issue of shares;

    • distribution

    • transfer of shares

    • etc.

  • Delegation can only be made to people who is responsible enough to carry out the task.

    • A board that delegates a power is responsible for the outcomes of that exercising of power as if it had been done by the board, unless:

      • They believe on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on the directors and;

      • has monitored, by means of reasonable methods properly used, the exercised of the power by the delegate.

Powers reserved to shareholders

  • Management Review - S109

    • The chairperson of the AGM must allow time for shareholders to give questions or feedback.

  • Choice of directors - S156

  • Ratification of actions of directors - S177

  • Appointment of Liquidator - S241

  • Major transactions - S129

    • More than the value of half of the assets.

    • Cannot enter unless there is special resolution (75% of shareholder vote).

  • 5% of shareholders can demand a meeting. - S121

Unanimous Assent S107

Allows a company to bypass certain formal procedures (like board meetings or formal resolutions) if all entitled persons (shareholders) agree.

  • Allows some of the procedures in the Act to be avoided. E.g.:

    • Shareholder discount schemes

    • Share Buybacks

    • Entering into a transaction where a director is interested

    • remuneration or benefits to directors.

  • Only if all entitled people agree

  • The procedures includes distribution, issues of shares, and share buyback.

  • Allows companies with a small number of shareholders to reduce compliance costs, BUT if one shareholder changes their mind, section 107 can no longer be used.

The Constitution (Similar to Partnership Agreement)

  • Document is registered and publicly available. Either made when forming a company, or at any other time by special resolution.

  • Can alter rules of the Companies Act

  • Tool for establishing balance between directors and shareholders.

  • Is under control by shareholders.

  • Adoptions and alterations require special resolution (75% of shares)

  • Some provisions cannot be altered (entrenched).

  • Can include certain rights - authorising provisions.

  • Can extend or limit certain rights contained in the Act.

Entrenched Provisions

  • Must have one shareholder, one director, and a name.

  • s133 directors must exercise their powers for a proper purpose:

    • There is no right in the section to negate, modify or limit this provision;

    • Therefore the provision is entrenched and cannot be changed by the constitution.

  • Other entrenched provisions include:

    • the requirements for special resolution s106(1);

    • the requirement the company pass the solvency test before making a distribution s52.

Authorising Provisions

  • Some actions can only be taken if specifically authorised by the constitution. Including:

    • Share buybacks s59(1);

    • issuing redeemable shares s68(1).

Extending or Limiting Rights

  • Pre-emptive rights

    • 2 people in company, running events venue, check toilets at night. One person dies, shares are likely to go to spouse, who the remaining does not want to go into business with.

      • Pre-emptive means that if ones wants to sell out, or dies then the remaining gets rights to buy shares before anyone else.

    • When new shares are issued they must first be offered to existing shareholders of the company;

    • the company is permitted to negate, modify or limit the requirements of this provision in its constitution.

  • Other requirements which may be altered include:

    • the ordinary resolution requirement s105;

    • the right of shareholders to include provisions limiting the powers of directors s128

    • the special resolution majority of 75% of votes may be increased.