COMPANIES OWNERSHIP AND MANAGEMENT Flashcards
(34 cards)
Types of director (6 types)
Anyone who occupies the role of the director (even if not formally appointed)
Director:
Articles
Existing director
ORINARY RESOLUTION (PLC should vote on directors individually)
De facto directors:
Acts as director even if not formally appointed
Same powers as a formally appointed one
Shadow director:
Acts as a director because of instructions given
Must act in accordance of a director
QUESTION OF FACT
Alternate director:
Usually in articles
When a director is unable to attend a board meeting
Executive director:
Performs a specific role
Usually an employee
Articles usally say that they can appoint one or more execs, on remuneration and powers they see fit.
If ceases, office will also terminate, can claim for breach of service contract
Non-exec director:
Does not have a particular function
Attends board meetings usually
Chairman is usally non exec
Managing director:
Articles usually allow appointment of one or more
Day to day management functions
Key points
16 years and over
Must not be disqualified under companies disqualification act or articles.
Required to have at least one director who is a natural person (not a corporate director), PLC must have 2.
Directors actions are valid even if appointment is found to be defective / void.
Changes in directors of a company should be recorded in the companys register of directors, MUST NOTIFY REGISTRAR WITHIN 14 DAYS
Why removal of a director
Death
Removal
Disqualification
Resignation
Required to do by the articles: prohibition by law, bankruptcy or medical opinion.
How to remove a director
ORDINARY RESOLUTION WITH SPECIAL NOTICE (28 days before a meeting)
Director then has opportunity to address meeting and request written representations he has made to be handed out at meeting.
If directors has a service contract he may be able to sue for breach of contract e.g. damages of not getting job back.
Director who is also a member may also have weighted voting rights, therefore he cant auto defeat to remove him.
May be a shareholders agreement requiring someone who holds each class of share be present to create a quorum, therefore a shareholder not attending could prevent removal.
Directors powers
Defined by company articles - generally authorised to exercise all powers of the company.
Directors are not agents of the members but of the company.
No rules governing board meetings - directors do not need to be physically present.
Statutory (general):
Bound to exercise powers ‘for the purpose for which they are conferred’
Statutory (specific):
e.g. alternation of articles and reduction of capital need a SPECIAL RESOLUTION, must be retained before in a meeting before they can act.
Articles:
May set a max amount directors are entitled to borrow, greater amounts need approval in general meeting.
Members: can exercise control over directors powers
SPECIAL RESOLUTION to alter articles, reallocate powers between board and general meeting.
Or remove directors from office (special notice / written resolution)
Directors authority
Express actual:
To directors binds company
Implied: formal
Managing director has implied usual authority to enter into business contracts.
Company sec may have limited authority to enter into contracts.
Restrictions need to be communicated to third parties.
Ostensible: informal
Board may permit a director to act as an MD therefore assume ostesentile / apparent authority to enter into business contracts.
Authority under companies act
Seeks to protect a third party in good faith, even where directors authority was limited.
- Third party is deemed to be acting in good faith unless proved otherwise (not deemed in bad faith even if knowing of limitation)
- Limitations on directors authority will be disregarded
- Not apply when person is connected, contract could be voidable e.g. party should account for gain and compensate party for any loss.
Directors duty
ASPIRIN
Accountability
Success
Powers (act within)
Independent judgement
Reasonable skill and care
Interest (declare any)
No benefits
Directors duty - Powers (act within)
- Act in accordance with articles etc
- Exercise powers only for purpose for which they are conferred e.g. unless a shareholder overrides
If directors exercise their rights for a collateral purpose - INVALID unless ratified at a general meeting.
If used irregular use of powers to allot shares - votes attached to new shares may not be used in a decision at general meeting.
e.g. cant use powers to destroy existing majority or creating a new majority.
Directors duty - Success promotion
Good faith for the benefit of the members as a WHOLE
- Long term consequences of any decision
- Interests of a companies employees (as employees help co success)
- Foster relationships with suppliers, customers and others
- Impact on community and environment
- Maintain reputation for high standards of conduct (desirability)
- Need to act fairly as between members of the company
Directors duty - independent judgement
Does not mean he is not exercising independent judgement when:
- Agreement entered by the company restricts future exercise of discretion by members
- Companies constitution
- Accept if shareholders tell you to
Directors duty - reasonable skill and care
Reasonably diligent person.
General knowledge, skill and experience e.g. valid amount
Just attending meetings is not sufficient.
Directors duty - avoid a conflict of interest
Must avoid this situation
Duty still applies when authorised by directors:
- LTD companies articles does not disallow these transactions
- PLC articles must expressly allow for authorisation
Relevant directors votes are not counted and cant go towards a quorum in determining whether authorisation should be given - duty does not apply when director has declared his interest in a transaction.
Not to accept benefits from third parties
- Being a director
- Doing or not doing anything as a director
Unless acceptance of benefit can’t be reasonably regarded as likely to be a conflict of interest.
Declare an interest in the proposed transaction
If the director or ought to reasonably be aware of, must be declared to directors (unless reasonably regarded that it does not give rise to a conflict of interest)
Notice can be made:
- At a board meeting
- Notice in writing e.g. specific transaction
- General notice, must take reasonable steps to ensure this is taken up in board meeting e.g. ongoing.
If notice is made, no need for approval of members UNLESS:
- Articles say so
- Arrangement between a director and the company for a transfer of a ‘substantial non-cash asset’
Breach of directors duty
Directors duty is owed to the company and not the individual shareholders.
Consequences of breach:
- Make good any loss suffered by the company including secret profits
- Contract entered into by company and director may be voidable
- Property taken by director from company can be recovered if still in possession
- Injunction (court order to stop doing something) if the breach is continuing
- More than one director liability is joint and several
- Dismissal
Other statutory controls on directors’ behaviour
Penalise directors responsible for mismanagement, often results in the company wound up.
Administrators, receivers and liquidators must consider what action should be taken:
- Apply for court order under wrongful or fraudulent trading, director is required to contribute to assets ‘just and reasonable’ amount.
- Statutory duty to report to department for business, inovation, skills - where conditions for disqualification have been met.
- Sec of state then decides whether to apply for a court order, MUST BE WITHIN 2 YEARS on the date at which the company become insolvent.
Wrongful trading
Only ever in liquidation.
Directors knew or should have known there was no reasonable prospect that the company would have avoided liquidation.
- Reasonably diligent person similar post to a director would have know.
- If has a special skill may be judged on relevant capcity.
- Wrongful trading WILL NOT be passed in court if court can see that director took every relevant step to minimise loss to creditors.
CONSEQUENCE:
- Director found liable may have to contribute to company assets.
Fraudulent trading
e.g. pyramid scheme (recruiting new members to make money rather than trading)
- Carried on with intent to defraud creditors etc. for a fraudulent reason.
- Any person who is a knowing party can commit the offence.
- Only persons who decide to carry on business are liable.
CONSEQUENCE:
- CRIMINAL OFFENCE
Whether of not co. is liquidated.
FINE AND / OR IMPRISONMENT UP TO 10 YEARS - CIVIL OFFENCE
Only on liquidation
Order director to make contribution to assets.
Disqualification of directors
Company directors disqualification act:
- Stops directors failing companies
UP TO 15 YEARS:
- Serious offence e.g. promotion, formation, management or liquidation
- Fraudulent trading (in course of winding up)
- In public interest
- Breaches of competition law
- Wrongful trading
UP TO 5 YEARS:
- Persistently in default in legislation e.g. late filing
- 3 convictions in 5 years is considered persistent
2 YEARS TO 5 YEARS:
- Director of a company that has become insolvent (at the time of being director or subsequently) AND conduct of that business makes him unfit to manage a business (may take into account conduct of other business)
- Can be disqualified even if take no active part in the business.
ALTERNATIVE TO DISQULIFICATION:
- Court may accept an undertaking that director will not act in the management of a company where pled guilt in a case.
Disqualification of directors - consequences
Breach can lead to FINE OR IMPRISONMENT.
Lower period of disqualification (given by court): e.g. 2 years instead of 5
- Lack of dishonesty
- Loss of directors own money in company
- Absence of personal gain
- Efforts to mitigate situation
- Low likelihood of reoffending
Members
Anyone entered on companies register is a member (shareholders)
Regulation:
- Articles
- Shareholders agreement (maybe)
Rights:
- Copy of annual account / reports
- Require directors to call a general meeting
- Appoint a proxy (exercise member rights to vote, speak, attend meetings) in writing.
Members approval of directors actions
MATTER REQURING APPROVAL AND CONSEQUENCE OF BREACH
Directors service contracts with a term of 2 years or more:
- Terminated giving reasonable notice
Substantial property transactions (also relates to stock / furniture) - director acquires ‘substantial non-cash assets’ - aggregate value must be more than the lower of 1. Exceeds 10% of companies asset value and is more than 5k 2. Exceeds 100k (not in service contracts or loss of office):
- Voidable unless members give approval in a reasonable period.
- Liable to account for any gain and indemnify co against loss / damage.
Loans to directors (approval is required for any loan by a co to a director or any guarantee or security of a co):
- Voidable unless approved by the company in a reasonable period.
- Liable to account for any gain and indemnify co against loss / damage.
Payments for loss of office (approval required for payments or benefits to be made on loss of office or retirement) - exempt under £200 & discharge of legal obligations (contractual):
- Payment is held on trust (co become beneficiary) for the co. - director who authorises payment is liable to indemify co for loss of damage.
Minority protection
Rule in Foss Vs Harbottle
- Majority of shareholders control, GENERALLY minority have no course of action.
- Shareholders have no duty to act in the interests of the company.
Shareholder sued the directors for selling land at an inflated price to the company
Company must take actions against directors not shareholders.
May exceptions to this rule……
