Directors - Long-Term Service Contracts

Question 1

What are the three categories of regulated transactions between a company and its directors

Answer 1

1. Directors’ long term-term service contracts (s188-189)
2. Substantial property transactions (s190-196)
3. Loans, quasi-loans, and credit transaction (s197-214)

Question 2

When is a shareholder approval required under s188 - Directors long term service contracts?

Answer 2

When a director’s service contract is, or may be, for a guaranteed term exceeding 2 years

Question 3

What does the ‘guaranteed term’ include?

Answer 3

• period where the company cannot terminate the contract
• period where the company can only terminate in specific circumstance
• Notice period exceeding 2 years
• Any aggregate of the above

Question 4

What type of shareholder approval is required under s188?

Answer 4

An ordinary resolution, which can be passed at a General Meeting or by written resolution

Question 5

What happens if a company cannot terminate for 18 months and then must give 9 months’ notice?

Answer 5

The aggregate period exceeds 2 years, so s188 applies and shareholder approval is required

Question 6

Is shareholder approval required if the company is wholly owned subsidiary?

Answer 6

No - member approval is not required for wholly owned subsidiaries

Question 7

If the director is also a director of the holding company, what then?

Answer 7

Approval is also required from the holding company’s shareholders

Question 8

What are the consequences if a company breaches s188 CA?

Answer 8

• The contract term is void to the extent of the contravention
• The contract is deemed to allow termination at any time on reasonable notice

Question 9

Does a director have to declare an interest under s177 in their own service contract?

Answer 9

No, there is no requirement. However, disclosure is still best practice for transparency

Question 10

Can an interested director vote on a resolution approving their own service contract?

Answer 10

No, they cannot vote or count on quorum

Question 11

What does s188 require when approval is by General Meeting?

Answer 11

A memorandum of the proposed contract must be:
- Available at the registered office for 15 days before the GM
- Available at the meeting itself

Question 12

What does this mean for timing?

Answer 12

Even if using short notice for the GM, the 15-day memorandum requirement effectively overrides and delays approval

Question 13

What if the approval is by written resolution ?

Answer 13

The memorandum must be sent to every eligible member at or before the time proposed resolution is circulated