Directors

Question 1

What is the minimum number of directors needed for:
- private limited companies?
- public companies?

Answer 1

Private limited companies: 1 director

Public companies: 2 directors

Question 2

What is the minimum age for a company director?

Answer 2

16

Question 3

Can a company be a director for another company?

Answer 3

Yes

Question 4

What is the caveat for having non-natural persons as directors?

Answer 4

A company must have at least 1 director who is a natural person (e.g. not company)

Question 5

Larger companies will distinguish between 2 types of directors. These are…

Answer 5

1. Executive directors
2. Non-executive directors

Question 6

What is an executive director?

Answer 6

Most common forms of directors
- They are legally directors/officers of company and are typically full-time employees responsible for day-to-day management.
- E.g. CEO, COO, CFO,CTO.
- Titles are flexible. Board can divide responsibilities as they see fit

Question 7

Do executive directors have to have service contracts?

Answer 7

No

Question 8

What are the rules in relation to service agreements for executive directors?

Answer 8

1. Exec directors need authorisation from the shareholders if they wish to extend period of contract for >2 years.

• Companies must retain copies of all directors’ service agreements, which must be made available for shareholder inspection.
• Directors must consent to act (formality) on AP01 form, which must then be sent to CH noting appointment.

Question 9

What are non-executive directors?

Answer 9

non-exec directors are legally directors, but have no involvement in day-to-day management in practice.
- Not typically employees but may have contract of service and can be classed as ‘employee’ for legislation purposes.
- Generally independent and can advise other board members. (provides independent oversight)
- Rather than manage day-to-day, they bring diversity of thought and experience and a different perspective to corporate governance.

Question 10

Do Directors have to be formally appointed in order to be considered as directors in law?

Why?

Answer 10

No, they don’t need to be as broadly speaking, a “director” is any person occupying the position of director, by whatever name called

• These directors are called Shadow directors and de facto directors

Question 11

What is a shadow director?

Answer 11

Not formally appointed director but whose instructions or directions the formally appointed directors of a company habitually follow.
- Doesn’t need to be involved in all of company’s business.
- doesn’t include professional adviser e.g. solicitor, unless they are effectively controlling company

Question 12

What is a de facto director?

Answer 12

Not formally appointed director but who ACTS as a director.
- must have real control over company and able to act on equal footing with directors.
- whether they are held out as director may be relevant but not decisive.

Question 13

What is the major difference between shadow directors and de facto directors?

Answer 13

For shadow directors, it matters whether other directors habitually take instructions from you.

For de facto, it doesn’t matter whether other directors habitually follow your instructions, it matters whether you hold the roles and responsibilities of a director.

Question 14

Can someone be both a shadow director and a de facto director?

Answer 14

Yes if they assume the functions of a director in some areas of the company while also giving instructions to the board in other areas, which the board is accustomed to follow

Question 15

What is the caselaw test for establishing whether someone is a de facto director?

Answer 15

Consider:

1. Whether [individual] undertook functions which could only properly be discharged by a director.
2. Whether he participated in directing affairs of the company as an EQUAL.
3. Whether he exercised “real influence” and assumed status and function of director.

Question 16

Can executive/non-executive directors be shadow or de-facto directors?

Answer 16

Yes

Question 17

What is the difference between a PSC and a shadow director?

Answer 17

A PSC is just someone who owns 25%+ shares whilst shadow directors have an influence over whether other directors follow their instructions.
- They can sometimes overlap but it is also possible for someone to be a PSC without having the same functions, influence, status, and role as a shadow director.

Question 18

What is a Chairperson?

Answer 18

A director can appoint of their number as Chair and that person leads Board Meetings and shareholders’ meetings.
- The powers of the Chair are defined by the AAs and directors can vote to remove a Chair.

Question 19

How are directors appointed?

Answer 19

1. By OR
2. A decision of the directors

The exact method will be set out in AAs

Question 20

Who can be appointed as director?

Answer 20

Anyone who is willing and permitted by law

Question 21

Who is NOT permitted by law to be directors?

Answer 21

1. Anyone under 16.
2. Bankrupts (unless court allows)
3. Disqualified directors (unfit directors can be disqualified under Company Directors Disqualification Act (CDDA) 1986 from 2 to 15 years.

Question 22

what formalities need to be followed after new directors are appointed?

Answer 22

1. register of directors and residential addresses must be kept at company’s registered office (until ECCTA comes into effect).
2. Company must inform registrar of new appointment within 14 days on form AP01
3. Identity check on directors requires (together with PSC and all officers interacting with CH)

Question 23

How is ID checked when directors are newly appointed?

Answer 23

Either by use of a photograph and primary ID docs or a verification agency may be used.

Question 24

How can a Director be removed from office?

Answer 24

1. an OR
2. Vacation according to AAs, e.g. MA states director is removed if bankrupt, or declared mentally or physically incapable by doctor. AAs may also give board power to remove director.
3. Resignation
4. Disqualification under CDDA 1986.

Question 25

What circumstances could lead to a mandatory disqualification under the CDDA?

Answer 25

For 2-15 years and mandatory Where director has been director of a company which has become insolvent, or where his conduct makes him unfit to manage the company.

Question 26

What circumstances could lead to a discretionary disqualification under the CDDA?

Answer 26

Up to 15 years and based on courts discretion after considering all facts Where director: - committed indictable criminal offence - consistently breached company legislation regarding returns and notices (e.g. failed to file accurate tax returns) - committed fraud - or if disqualification found to be in public interest following investigation.

Question 27

Other than disqualification, what other sanctions may be imposed on directors?

Answer 27

Fine, imprisonment, compensation order of personal liability for debts of company.

Question 28

Can a director entrench his position to prevent removal?

Answer 28

No he cannot but he can include a clause in the AAs to give him weighted votes in any vote to remove him (Bushell v Faith clause) - e.g. clause may entitle director to exercise 3 votes for every 1 share owned, allowing him to block vote.

Question 29

How can you remove a director by OR in front of a cooperative board?

Answer 29

Directors call BM. At BM, they must agree to call GM. Members must give "special notice" of resolution to remove director via OR. Special notice of intention must be given: - To company 28 CLEAR days before GM - notice of intention must be given in same manner + same time as it gives notice of meeting, but where not practicable, it can be given 14 days before GM via advert in newspaper with appropriate circulation and in accordance with AA. Director has right to speak against removal and make written representations in advance of meeting

Question 30

Can companies use the written resolution procedure to remove a director?

Answer 30

No

Question 31

How can you remove a director by OR in front of a UNcooperative board?

Answer 31

Board can refuse to cooperate with members in effort to remove director. - If Board refuses to call GM, it may be requires to do so if members requiring more than 5% of paid-up share capital request. - Board must call GM within 21 days of request and meeting must be held within 28 days of notice. - If Board still refuses, members may call GM directly if more than half agree to do so. 28 day special notice must be given. - GM must be held within 3 months of request - members can recover reasonable cost of calling GM if Board failed to do so.

Question 32

What kind of commercial considerations should companies consider before removing directors?

Answer 32

Whether removing the director will breach the term's of the director's service contract. The remedies available will depend on reasons for removal ,how long they worked for company, and terms of contract they have with company. - e.g. exec directors may be able to make claim for wrongful or unfair dismissal and redundancy. However, non-execs most likely will only be able to make claim for wrongful or unfair dismissal.

Question 33

*review the flowchart for removing a director*

Answer 33

*page 65*

Question 34

What are the 7 main Director's Duties?

Answer 34

1. Duty to act within powers. 2. Duty to promote success of company. 3. Duty to exercise independent judgement. 4. Duty to exercise reasonable care, skill and diligence. 5. Duty to avoid conflicts of interest. 6. Duty to not accept benefits from TPs. 7. Duty to declare any relevant interest in proposed transaction/agreement.

Question 35

Who do Directors owe duties to?

Answer 35

The company only, not members or other persons (unless there is a special relationship between shareholders and the director

Question 36

Can the director's duties be made less onerous via AAs?

Answer 36

No they cannot be made less onerous, they can only be made MORE onerous.

Question 37

What does the 'duty to act within powers' entail?

Answer 37

Duty to act within powers: Directors must: a. Act in accordance with company's constitution. - less significant as no longer any requirement of objects clause. b. Only exercise powers for 'proper purpose' for which they were conferred. - whether duty met hinges on this requirement.

Question 38

How does a Court determine a proper purpose' (duty 1)?

Answer 38

If directors exercise powers for several purposes, court will consider DOMINANT purpose. If dominant purpose is proper, even if other purposes are improper, there will be no breach. NOTE: Honest acts can still be for improper purpose.

Question 39

Are the directors duties statutory or common law duties?

Answer 39

Both

Question 40

What does the 'duty to promote success of company entail'?

Answer 40

Directors must act in a way that they consider (in good faith) would likely promote success of company for benefit of members as a whole. They must have regard to: 1. Likely long-term effects 2. Interests of employees 3. Need to foster company's business relationships with suppliers, customers, and others. 4. Impact on community and environment. 5. Maintaining rep for high standards 6. Acting fairly between members.

Question 41

What is the test for whether a director acts in good faith, in the interests of the company (duty 2)?

Answer 41

Test is SUBJECTIVE: In assessing director actions, ask: "Whether an intelligent and honest man in position of director could, in the same circumstances have reasonably believed that actions were for benefit of company" Different caselaw interpretations: - reasonableness not necessary, as long as they honestly believed actions were for company's benefit. - Allowing disqualified director to act as shadow director would be breach of duty, regardless of beliefs.

Question 42

What does the duty to 'exercise independent judgment' entail?

Answer 42

- Directors must each exercise independent judgment and not be manipulated by other director. - Directors can still be independent even if they act in accordance with previous agreement of company that restricts decision, or in line with constitution. - Director should not place limits on their future discretion (e.g. make agreement that they will always support a TP's planning application in return for company receiving payment) unless that limit is bona fide in interests of company.

Question 43

What does the 'duty to exercise reasonable care, skill and diligence' entail?

Answer 43

Directors must exercise "care skill and diligence that would be exercised by reasonably diligent person with: a. General knowledge, skills and experience that might reasonably be expected of person carrying out functions [of company director] - objective element b. General knowledge, skill and experience that the director ACTUALLY has - subjective element. NOTE: Directors must possess minimum level of skill and knowledge i.e. even if they delegate tasks to subordinates, they must supervise delegation to ensure it is carried out effectively.

Question 44

What does the 'duty to avoid conflicts of interests' entail? When would this duty not arise?

Answer 44

Directors must avoid any situation where they have/may have a direct or indirect interest that conflicts (or COULD conflict) with interests of company. - conflicts could involve exploiting property, info or opportunity, regardless of whether company would have been able to have taken advantage of it. NOTE: breach of duty does not arise if situation "cannot reasonably be regarded as likely to give rise to a conflict of interest"

Question 45

How can a director avoid breaching the 'duty to avoid conflicts of interest' if a conflict arises or may arrive?

Answer 45

If the matter is authorised by the other directors, then there is no breach. NOTE: director in question not allowed to vote.

Question 46

What question should you ask yourself when deciding whether there is a conflict of interest?

Answer 46

ASK: "whether a reasonable person looking at relevant facts and circumstances would think there is a real and sensible possibility of conflict.

Question 47

What must a director do if an opportunity is available to a company, that would also benefit him personally?

Answer 47

1. He must NOT pass a resolution declaring that the company is not interested and still proceed to exploit the opportunity. 2. When he becomes aware of potential opportunity for company, he must inform them even if they know the company won't be able to take advantage. 3. If director profits from a transaction that arose due to their directorship, they may have to account for profits. 4. Sometimes, director is under duty to disclose to company info which comes to their possession.

Question 48

Can a director avoid breaching the duty to avoid conflicts by resigning from company and taking up another position?

Answer 48

Not necessarily. Although there is no general rule prohibiting director from leaving and setting up in competition, if he used specific info about clients and company that he had gained during directorship to grow business ( thus depriving company of maturing business opportunities), it is likely to be regarded as breach.

Question 49

What does the 'duty to not accept benefits from TPs' entail?

Answer 49

Director must not accept benefit from TP, given to director by reason of them: - being/acting as director - taking an action or refraining from taking action as director (i.e. if you do/don't do this, I will reward you with this) NOTE: duty only breached if it would also reasonably be regarded as giving rise to a conflict of interest i.e. the director acts in a way that benefits him, at the expense of the company.

Question 50

Does accepting benefits from the company, i.e. salary, breach the duty to not accept benefits?

Answer 50

No it does not

Question 51

What does the 'duty to declare interests in proposed or existing transaction' entail?

Answer 51

If a director is directly or indirectly interested in a proposed or existing transaction, he must declare nature and extent of that interest to other directors, even if the interest is obvious.

Question 52

What are the acceptable means of making a declaration of interest?

Answer 52

1. Written 2. Orally 3. If it is a long-term interest that is likely to be of recurring relevant to company, director can give general notice, stating nature and extent of interest (so no need to bring up every time).

Question 53

If a director failed to disclose an interest as he wasn't aware of it, will he be penalised for this?

Answer 53

Possibly. The test is objective: "was he ought reasonably to be aware'. If he reasonably SHOULD have known, then he would be penalised.

Question 54

When is a declaration (of interest) not required?

Answer 54

1. Where the potential issue cannot reasonably be regarded as likely to give rise to a conflict of interest. 2. If other directors are already aware of it. 3. When it concerns terms of director's service contract (as these terms are often subject to negotiation between board members so any potential conflicts can be resolved)

Question 55

If a director declares his interest in a loan transaction, does the board still need shareholder approval of the transaction?

Answer 55

Yes, this is still mandatory

Question 56

What is the effect of declaring an interest to the company?

Answer 56

These directors cannot vote or count towards quorum in the meeting relating to that issue.

Question 57

What are the exceptions to the rule that 'directors with an interest cannot vote in relation to that transaction'

Answer 57

EXCEPTIONS: - If company disapplies MA 14 by OR. - Interest cannot reasonably be regarded as giving rise to conflict - Interest arises from 'permitted clause' in MA 14(4), e.g. when subscribing for shares in company.

Question 58

*What are the steps when considering an MCQ on director's duty to DECLARE interests'?*

Answer 58

1. Examine facts. Is there an actual or potential conflict of interest? - If yes, is it proposed or existing transaction? 2. Analyse situation: do any of legal exceptions to need to declare apply? 3. Determine whether director declared interest 4. Has director attempted to vote or count towards quorum? Would meeting have been quorate without him? 5. Identify whether director needs to be excused or whether an exception applies. 6. Conclude: Is any approval of transaction by board valid?

Question 59

What remedies are available to a company if a director breaches his duties?

Answer 59

1. To require director to account for profits. 2. To require return of company property. 3. To obtain equitable compensation from director. 4. To secure recission of contracts. 5. To obtain injunction to prevent future breaches. NOTE: for duty to exercise reasonable care, skill or diligence, only remedy is damages as this obligation does not create fiduciary duty.

Question 60

How can directors avoid liability for breach of directors' duties?

Answer 60

1. Authorisation from board (conflict of interest breach) - authorisation possible for private company provided AAs do not preclude it. - For public, AAs must specifically permit authorisation. 2. Ratification of breach: - Members can ratify breach by OR or written resolution. - director votes don't count - ratification not possible if done unfairly/improperly and is oppressive to minority. 3. Insurance: - Company can purchase insurance relating to liability for breach of duty. 4. Relief by court. - Where director acted honestly and reasonably and where court considers director should be excused.

Question 61

How would you answer an MCQ on both director's duty to AVOID conflicts of interest and declare interest?

Answer 61

1. Identify situation that may cause breach - i.e. is director with interest about to enter into transaction? 2. Analyse - is conflict actual or potential? - If so, is it to do with proposed or existing transaction? 3. Declaration: Has it been declared through acceptable means? - Do any exceptions to declare apply? 4. Other duties: Is duty to not accept gifts relevant? 5. Consider effect of directors interest - unable to vote/count towards quorate? - Is there an exception? 6. Is there a breach?: Can liability be avoided i.e. receiving authorisation. 7. Any remedies? 8. Conclude - how this will affect transaction, director, and company in given scenario..