4. Shareholders and Directors

Question 1

What are the three available actions for minority shareholders?

Answer 1

1. Unfair prejudice
2. Just and equitable winding up
3. Derivative action - i.e. investigation by a shareholder for a wrong done to a company which has arisen from an act or omission of a director

Question 2

What is required for a minority shareholder to bring an action for unfair prejudice under s 994 CA?

Answer 2

The conduct of the company’s affairs must be unfair and prejudicial

Petitioner must be affected in their capacity as a shareholder

Question 3

What court orders are available in response to a minority shareholder action of unfair prejudice?

Answer 3

Any the court see fit - usually ordering company or other shareholders to purchase impacted shareholder at a fair price

Question 4

What kind of test will the courts apply when assessing for unfair prejudice?

Answer 4

An objective test

Question 5

What is required for a minority shareholder to bring an action of just and equitable winding up under s 122 IA?

Answer 5

The petitioner must prove a tangible interest in the company (i.e. must be able to get some money back if company is wound up), and that it is just and equitable to so do

Question 6

What is required for a minority shareholder to instigate a derivative claim?

Answer 6

An actual or proposed act or omission involving negligence, default, breach of trust by director of company

Question 7

What is the process for a minority shareholder bringing a derivative claim?

Answer 7

1. Apply to court
2. Court consider whether there is evidence to allow claim to continue (prima facie case for continuing)
3. Either court allow claim to continue or dismiss it
4. If allowing continuation of claim, will give directions for trial of issues raised in claim

(2 stage claim at court)

Question 8

Regarding a derivate claim, what are the circumstances in which a court MUST, at hearing stage, refuse permission to continue?

Answer 8

1. Where court is satisfied that defendant is acting in accordance with s 172 (promoting success of the company)
2. Where cause of action arises from act / omission that has not yet occurred but has already been authorised by the company
3. Where act / omission has already occurred and it was authorised, or has been ratified since it occurred

Question 9

If it is likely that an action will be ratified, but has not yet been ratified, how must the court take this into account when considering a derivative claim?

Answer 9

When the court considers whether permission can be granted to continue a derivative claim, the court must take into account whether the act is likely to be ratified by the company - i.e. not obliged to dismiss derivative but should consider likelihood of ratification

Question 10

How many directors do a public company need to have?

Answer 10

At least 2

Question 11

What are the two types of director?

Answer 11

Executive director and non-executive director

Question 12

What is the difference between executive and non-executive director?

Answer 12

Executive directors have service contract with the company

Non-executive directors have no service contract and do not receive a salary

Question 13

What is a de facto director?

Answer 13

A person who acts as a director even though they have never been appointed

Question 14

What is a shadow director?

Answer 14

A person in accordance with whose directions or instructions the directors of the company are accustomed to act, but has not been formally appointed as a director

Question 15

What are the administrative requirements for when a new director is appointed?

Answer 15

Must notify Companies House within 14 days of the appointment by filing form AP01 (individual) or AP02 (corporate)

Must also enter director on company’s register of directors, and register their residential address

Question 16

How can a new director be appointed?

Answer 16

By board resolution (simple majority required unless MAs are amended)

OR

By ordinary resolution of the shareholders

Question 17

Does terminating a director’s service contract also end their directorship?

Answer 17

No, they are two separate things

However, often the the service contracts will include clauses detailing that the it can be terminated in the event of removal as a director by shareholders

Question 18

What form must a director complete in the event of their resignation / removal? And when must they be filed?

Answer 18

TM01 (individual) or TM02 (corporate)

Within 14 days of the resignation / removal

Question 19

What kind of resolution is required to remove a director?

Answer 19

Ordinary resolution

Question 20

What else is required in order to remove a director?

Answer 20

Special notice - i.e. the ordinary resolution to remove the director is not effective unless notice of the intention to pass it has been given to the company at least 28 clear days before the general meeting at which the resolution is proposed

Question 21

Can a director be removed by written resolution?

Answer 21

No, as they must be able to prepare and present a defence at the general meeting

Question 22

What does a Bushell v Faith clause do in relation to the removal of a director?

Answer 22

Protects directors who are also shareholders from being removed

Facts of the case - clause said “On a poll on a resolution for the removal of a director, any shares held by that director shall have three votes per share.”

3 shareholders with 100 shares each, and vote of 2 to remove one defeated by 300 votes to 200

Question 23

What is a director’s duty under s 171 CA?

Answer 23

Duty to act within powers

Question 24

What is a director’s duty under s 172 CA?

Answer 24

Duty to promote the success of the company

Question 25

What are 6 factors which a director must have regard for in ensuring compliance with their duty under s 172?

Answer 25

1. Likely consequence of any decision in the long term
2. Interests of the company’s employees
3. Need to foster the company’s business relationship with suppliers, customers and others
4. Impact of the company’s operations on the community and the environment
5. Desirability of the company maintain a reputation for high standards of business conduct
6. Need to act fairly between members of the company

NOTE that this does not include requirement to have regard to interests of the creditors

Court will apply a subjective test to establish if duty under s 172 has been breached

Question 26

What is a director’s duty under s 173 CA?

Answer 26

Duty to exercise independent judgment

Question 27

What is a director’s duty under s 174 CA?

Answer 27

Duty to exercise reasonable care, skill and diligence

Question 28

What is the two part test under s 174 in order to assess whether a director has acted with the care, skill a diligence that would be exercised by a reasonably diligent person?

Answer 28

1. The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director (objective)

2.The general knowledge, skill and experience that director has (subjective) - note that standard can only be made higher, and not lower, by the subjective test

Question 29

What is a director’s duty under s 175 CA?

Answer 29

Duty to avoid conflicts of interest with the interests of the company

Must relate to a contract in which the company is NOT involved

Question 30

What is a director’s duty under s 176 CA?

Answer 30

Duty to not accept benefits from third parties

Question 31

What is a director’s duty under s 177 CA?

Answer 31

Duty to declare interest in a PROPOSED transaction or arrangement

Note the difference to s 182, which is for existing transactions

Question 32

What is the difference between a director’s duty under ss 175 and 177?

Answer 32

s 175 - relates to when the transaction DOESN’T involve the company

s 177 - relates to when the transaction DOES involve the company

Question 33

What are the exceptions to a director’s duty to declare their interest under 177?

Answer 33

Director not aware of the interest or of the transaction or arrangement in question

If interest cannot reasonably be regarded as likely to give rise to a conflict of interest

If, or to the extent that, the other directors are already aware of it (or ought reasonably to be aware of it), or

It concerns the terms of the directors’ service contract

Question 34

What are the civil consequences for a breach of directors’ duties under ss 171-177 CA?

Answer 34

Account of profits

Equitable compensation for the loss suffered by the company

Recission of any contract entered into as a direct or indirect result of the breach

Injunction

Restoration of property transferred as a result of the breach

NOTE THESE DO NOT APPLY TO s 174

Question 35

What are the consequences of a breach of director’s duties under s 174?

Answer 35

Akin to negligence so remedy is common law damages assessed in same way as damaged for negligence

Question 36

How is a action taken against a director for breach of duty?

Answer 36

Civil claim (or criminal if relevant) - i.e. litigate through court and then any decision enforced by court

Can also reach an agreement with the relevant director

Question 37

How can a breach be ratified and what is the effect?

Answer 37

By shareholders by ordinary resolution (disregarding vote from relevant director / person connected to them)

Effect is to excuse a director after the breach has taken place

Question 38

What is a director’s duty under s 182 CA?

Answer 38

Declaration of interest in existing transaction or arrangement

Question 39

What exceptions apply to the duty under s 182?

Answer 39

Director not aware of interest / transaction or arrangement in question

Interest cannot be reasonably regarded as likely to give rise to a conflict

Other directors are already aware

Concerns terms of director’s service contract

Question 40

What are the two differences under s 177 and s 182?

Answer 40

s 182 - for existing transactions, and failure to comply is punishable by a fine

s 177 - for proposed transactions, and failure to comply is a civil matter

Question 41

What claims can be brought against directors or insolvent companies?

Answer 41

1. Wrongful trading - s 214 Insolvency Act 1986
   [Available when company gone insolvent + before commencement, director knew / ought reasonably to have known that there was no reasonable prospect of avoiding insolvency + were a director at the time]
2. Fraudulent trading - s 213 IA
   [Available when it appears that the company’s business has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose]
3. Misfeasance - s 212 IA
   [Available when breach of any fiduciary or other duty by directors]

Question 42

What defence is available to a director for wrongful trading, and what is the test for this?

Answer 42

Director took every step with a view to minimising the potential loss to the company’s creditors as they ought to have taken - 2 part test

1. General knowledge, skill and experience that may be expected (objective)
2. General knowledge, skill and experience that director has (subjective)

Question 43

Who can bring an action for fraudulent trading?

Answer 43

Liquidator or administrator

Question 44

What kind of resolution is required for a loan to a director from the company?

Answer 44

Ordinary resolution

Question 45

What are the exceptions to the need for an ordinary resolution in order to give a director a loan?

Answer 45

Expenditure on company basis – maximum £50,000

Expenditure on defending civil or criminal proceedings in relation to the company or an associated company

Expenditure on defending regulatory proceedings or defending himself or herself in an investigation by a regulatory authority

Minor and business transactions – under £10,000

Question 46

What happens if a company lends money to a director without the shareholders first passing an ordinary resolution?

Answer 46

The transaction / arrangement is voidable at the instance of the company - director who received the money & the directors who authorised it are liable to account to the company for any gain made & and loss or damage to the company (jointly and severally liable)

Transaction can be affirmed within a reasonable time by the company

Question 47

What is the limit on the length of service contract which a company can enter into with a director?

Answer 47

Guaranteed term of over two years (i.e. cannot be terminated with notice of two years or less - notice period)

Over 2 years - known as long-term service contract and requires an ordinary resolution

Question 48

If a company has Model Articles and only 2 directors, why can they not approve service contracts at board meetings?

Answer 48

The director in question will be prevented from counting in the quorum and voting by virtue of MA 14, because of their personal interest in the service contract

Solution - amend the Model Articles to either allow directors to vote on matter they have a personal interest in, or just on their service contract

Could also temporarily suspend MA 14 by ordinary resolution under MA 14(3) - must keep copy of the memorandum setting out the terms of the proposed service contract at the
registered office for 15 days prior to the general meeting, and at the general meeting itself

NOTE that even is have disapplied MA14, the duty to declare an interest under s 177 still applies

Question 49

What happens if a company enters into a service contract with a guaranteed term of more than two years without the approval of the shareholders?

Answer 49

The guaranteed term element of the service contract would be void (the rest of the contract would be enforceable)

Service contract would be capable of termination on reasonable notice

Question 50

What is the limit on how much a director can be paid for loss of office?

Answer 50

£200 (unless higher amount approved by shareholders by ordinary resolution)

Question 51

What are the main 3 types of claim that an executive director may bring if they are dismissed under employment law?

Answer 51

Unfair dismissal
Redundancy
Wrongful dismissal

Question 52

What are the grounds from disqualification of a director by the court?

Answer 52

• Conviction for an indictable offence
• Persistent breaches of companies legislation
• Fraud on a winding up
• Summary conviction for failure to file a required notice or document
• Being an unfit director of an insolvent company
• Following an investigation and a finding of unfitness
• Fraudulent or wrongful trading
• Breach of competition law

Question 53

When considering disqualifying a director, what factors would count against them?

Answer 53

Using money mean for paying VAT, PAYE or national insurance contributions as the company’s working capital (trading on Crown monies)

Paying excessive directors’ remuneration, and

Recklessly trading while insolvent

Question 54

When considering disqualifying a director, what factors would count in their favour?

Answer 54

Employing qualified financial staff

Taking professional advice, and

Personal financial investment in company

Question 55

How long can a director be disqualified for?

Answer 55

Between 2 and 15 years

(The band of 11-15 years is reserved for particularly serious cases)

Question 56

What limitations are placed on a disqualified director regarding working in a directors role again?

Answer 56

A disqualified director cannot take part in the promotion, formation or management of a company without leave of the court

Question 57

When passing a resolution, who is considered in the vote?

Answer 57

Shareholders present and voting at the general meeting