Directors: appointment, removal, and duties

Question 1

what are the disclosure requirements regarding directors?

Answer 1

(1) identity of directors - in:

• internal register of directors (with service addresses) available for inspection at the registered office by members for free and by the public for a fee
• companies house must be notified of changes in directors - available for the public

(2) in annual accounts:

• salaries, bonuses, pension entitlement
• compensation for loss of office
• persons connected to directors: payments given to them by the company or received by them from the company
• salary advances and credit given to directors
• if the company guarantees a director’s personal obligations

(3) company must keep an internal register of all directors’ service contracts = for 1 year after expiration

(4) send to companies house forms AP01 for appointing new directors and TM01 for termination of appointment as director

(5) annual confirmation statement = who the current directors are

Question 2

what are executive vs non-executive directors?

Answer 2

• executive directors = officers and employees pursuant to a service contract - involved in day to dat running of company
• non-executive directors = officer but not employee - not involved in day to day running

Question 3

how are directors appointed under the MA? (2 ways)

Answer 3

ordinary resolution of shareholders

or

board resolution of directors

(procedure is governed by the articles - no procedure in MA)

Question 4

what is a service contract?

Answer 4

a written contract of employment for executive directors including the terms and conditions of their employment

the board determines the terms and approves service contracts (except for a long-term service contract)

Question 5

are directors entitled to a salary?

Answer 5

Directors have no automatic right to remuneration so this must be a term in the service contract

Question 6

what is a long-term service contract? can the board provide one? what are the validity requirements?

Answer 6

• A LTSC is a service contract that provides for a guaranteed term MORE THAN 2 YEARS (including shorter terms with unilateral discretion to renew)
• The board cannot unilaterally authorise a LTSC
• Shareholders must approve the provision on length in a LTSC by ordinary resolution
• otherwise:

1) the term on duration is void

2) the contract is deemed to contain a term allowing the company to terminate the employment at any time by serving reasonable notice

Question 7

how can directors be removed from office?

Answer 7

by ordinary resolution of shareholders (not by other directors unless articles allow)

company cannot use the written resolution procedure

Question 8

what are the matters the company must deal with after a director leaves office? (2)

Answer 8

1. update internal register of directors
2. give notice to Companies House (Form TM01)

Question 9

what is the procedure if a shareholder wants to remove a director from office?

Answer 9

• SH must serve a SPECIAL NOTICE on the board giving 28 clear days notice to hold a GM = asking the board to add the removal resolution on the agenda
• the board can either:

1) accept = call a GM giving 14 clear days’ notice (GM must be held within 14 clear days of calling it AND 28 clear days of the SH’s special notice)

2) decline = SH holding at least 5% of paid up voting capital can use the s303 request procedure to call a GM

• in practice = SH serve both special notice and s303 request at the same time to ensure the resolution is heard ASAP

Question 10

outline the s303 procedure shareholders must follow to call a GM to remove a director from office

Answer 10

• shareholders holding at least 5% of the paid-up voting capital can serve a s303 request to require directors to call the GM.
• This will require the directors to call a GM within 21 days of receiving the request to be held not more than 28 days after the s303 request.
• If they do not, shareholders who submitted the s303 request can call a GM themselves to be held within 3 months of serving the s303 request and giving at least 14 clear days’ notice (can use the normal notice procedure here)
• Shareholders can recover costs from the company which can recover from directors

Question 11

can the written resolution procedure be used to remove a director from office?

Answer 11

no

Question 12

can directors who are also shareholders vote in the resolution to remove them as directors?

Answer 12

yes

Question 13

what safeguards can directors facing removal have? (5)

Answer 13

1. the director immediately be informed when the board receives special notice and be sent a copy of the notice (even if the board does not intend to put the removal resolution forward)
2. the director has the right to make representations in writing which must be circulated to the members before the GM or read at the GM + the director has the right to be heard at the GM
3. bushel v faith clause if director is also shareholder
4. shareholder’s agreement requiring unanimous consent of shareholders to remove a director or stating that no other directors are appointed
5. provisions in service contract = termination before a fixed term allows director to sue the company and claim damages + compensation for loss of office term can deter company from terminating director

Question 14

bushel v faith clause - how can this protect directors?

Answer 14

a bushel v faith clause can be inserted in the Articles which gives a director who is also a shareholder weighted voting rights at the general meeting voting on a resolution for their removal

this may mean that the ordinary resolution to remove them may not be passed

Question 15

how can directors who are also shareholders be protected under a shareholders agreement? what are the remedies? what are the limitations of this safeguard?

Answer 15

• A shareholders’ agreement may raise the voting threshold required to pass a removal resolution or require unanimous shareholder approval
• but this does not remove the statutory right to remove a director by ordinary resolution - although it can deter it
• if a removal resolution is passed without the required unanimity then the resolution is still valid but the director would have recourse to claim against other shareholders for breach of the shareholders agreement OR the director can apply for a prohibitory injunction
• a shareholders agreement may also state that no more directors can be appointed

Question 16

how can a service contract safeguard a director from removal from office?

Answer 16

• fixed term = if D is fired before fixed term expires, D can sue company for damages
• compensation for loss of office provision if D is fired before term expires = detracts company from firing D

Question 17

if a director is removed from office but they are also a shareholder, what might happen to their shares?

Answer 17

the articles or a shareholders agreement may contain TRANSFER PROVISIONS requiring a director/shareholder who was removed from office to transfer their shares to other shareholders (otherwise, director/shareholder cannot be forced to do so)

Question 18

does compensation for loss of office have to be approved by shareholders?

Answer 18

shareholders must approve compensation given to a director for loss of office by ordinary resolution - unless:

1) the payment does not exceed 200 pounds, or

2) the payment is in good faith:

• to discharge a legal obligation or
• for damages for breach of service contract or
• for a settlement of a claim re the termination
• for pension for past services

Question 19

what are the procedural requirements for a resolution to approve compensation for loss of office?

Answer 19

a memorandum setting out particulars of payment must be available to shareholders for 15 days before the general meeting at which the ordinary resolution is passed

Question 20

if a company is a wholly owned subsidiary of another company, does the holding company need to approve compensation for loss of office for a director of the subsidiary?

Answer 20

no - wholly owned subsidiary exception

Question 21

who do the directors owe their duties to?

Answer 21

the company - for the benefit of the shareholders as a whole not to individual shareholders

except for insolvency where duties are owed to creditors

Question 22

what types of duties do directors owe?

Answer 22

• statutory duties
• fiduciary duties at common law

Question 23

what are the 7 statutory duties?

Answer 23

1- duty to act within powers

2- duty to promote the success of the company

3- duty to exercise independent judgement

4- duty to exercise reasonable care, skill, and diligence

5- duty to avoid conflicts of interests

6- duty not to accept benefits from third parties

7- duty to declare any interest in a proposed transaction

Question 24

what is the duty to act within powers?

Answer 24

1. duty to act with authority and within what the articles and SH resolutions allow = e.g., committing to borrow more than articles allow without SH approval
2. duty to exercise powers for the purposes for which they were conferred = not for personal gain or in excess of authority

Question 25

what is the duty to promote the success of the company?

Answer 25

• a director must act in such a way they consider would most likely promote the success of the company for the benefit of the members as a whole
• success means financial and long-term increase in value
• the director MUST consider a range of factors when exercising this duty

Question 26

what factors must the director consider when exercising its duty to promote the success of the company? (6)

Answer 26

• the likely long-term consequences of decisions
• employee’s interests
• fostering relationships with suppliers, customers, etc.
• the impact of the company’s operation on the community and environment
• company maintaining a reputation for high standards of business
• the need to act fairly as between the company’s members

Question 27

what can a director do to ensure compliance with its duty to promote the success of the company?

Answer 27

ensure board minutes clearly note this duty was considered when decisions are taken

this provides a written record of compliance with duties if a decision is challenged

Question 28

what is the duty to exercise independent judgement?

Answer 28

directors must exercise their powers independently and not fetter their discretion

directors can accept advice from others but make their own judgements and cannot blindly follow advice without considering the interests of the company

Question 29

what is the duty to exercise reasonable care, skill and diligence? how is the level determined?

Answer 29

a director is assessed based on the level of reasonable care, skill and diligence which would be exercised by a REASONABLY DILIGENT PERSON with:

1. the general knowledge, skill and experience that may reasonably be expected of someone in that director’s role (objective consideration),

AND - could be increased or decreased based on:

2. the general knowledge, skill and experiences of that director

Question 30

what is the duty to avoid conflicts of interest?

Answer 30

• directors must avoid a situation where they have or can have a direct or indirect interest that conflicts with the company’s interests
• they must not exploit property, information, or opportunities that would have benefited the company EVEN IF the company would not have exploited them itself
• the directors can authorise breach of this duty
• this duty is not infringed if it relates to a transaction between the director and the company
• the duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest

Question 31

if a director expects to breach the duty to avoid conflicts of interests, how can it avoid liability? (2)

Answer 31

1. provide full disclosure and obtain authority to breach from the directors (but cannot vote or count in the quorum)

or

2. if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest

Question 32

what is the duty not to accept benefits from third parties?

Answer 32

A director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing (or not doing) anything as a director

but this duty is not breached where accepting the benefit cannot reasonable be regarded as giving rise to a conflict of interest

Question 33

can directors avoid liability for accepting benefits from third parties by obtaining the approval of the other directors or shareholders?

Answer 33

directors cannot authorise this breach but shareholders can

Question 34

what is the duty to declare an interest in a transaction?

Answer 34

Directors must disclose to other directors:

1. interests in proposed future transactions with the company
2. interests in existing transactions

this includes direct and indirect interests involving a person connected to the director (the director does not have to be a party to a transaction for their duty to arise)

Question 35

when does a director NOT have to disclose their interest in a transaction? (3)

Answer 35

1. director is not aware of the interest
2. the interest cannot reasonably be regarded as likely to give rise to a conflict of interests
3. other directors knew or should have known

BUT even where other directors already know of a director’s interest in a proposed transaction, it is always advisable to disclose

Question 36

can a director vote on a board resolution on a transaction in which they have an interest?

Answer 36

no - the director cannot vote or count in the quorum

unless the articles disapply this rule, the interests cannot reasonably be regarded as giving rise to a conflict of interests, or the conflict of interest arises from a permitted cause

Question 37

what are the company’s remedies and options for directors breaching their duties? (5)

Answer 37

(1) bringing a personal claim against the director for breach of duties:
- Damages
- Setting transaction aside
- Restitution and account for profits
- Restoration of company property
- Injunction

(2) Breach may be grounds to terminate a service contract without payment of compensation for loss of office

(3) Breach may be grounds to disqualify a director

(4) ratify the breach by ordinary resolution of shareholders (if D is also SH, they cannot vote)

(5) remove a director from office by ordinary resolution of shareholders

Question 38

can shareholders approve breaches of directors duties?

Answer 38

• BEFORE THE BREACH: yes in advance so long as acts are lawful and the director gave full disclosure
• AFTER THE BREACH: yes shareholders can ratify the acts of the director by ordinary resolution

BUT:

• a D who is also a SH or anyone connected to D will not count in the quorum for such a resolution
• unlawful acts cannot be ratified e.g., declaring dividends with no distributable profits
• SH cannot ratify breaches in insolvency because directors will owe their duties to the creditors not SH

Question 39

do directors who are also shareholders count in the quorum of a general meeting voting to approve the breach before they occur or ratify their breaches after they occur?

Answer 39

no - the director and persons connected with them will not count in the quorum on this vote

Question 40

what breaches can directors approve?

Answer 40

duty to avoid conflicts of interest only

Question 41

if a director is transacting directly with the company, will it breach its duties?

Answer 41

no - so long as it declares its interest in the transaction to the other directors although the other directors would have already known but it is best practice to disclose and have this reflected in board meeting minutes

(this situation has nothing to do with duty to avoid conflicts of interest)