Directors/Officers/Minority Protect Chp 16-19

Question 1

Can unanimous and informed agreements be treated as equivalent to formal resolutions?

Answer 1

Yes, Duomatic 1969

Question 2

What happens if one of two shareholders refused to attend a general meeting?

Answer 2

s306 CA 2006 court can order a meeting to be held and specify quorum. It can use s306 to permit a meeting to take place with single member.

Union Music v Watson 2003 - court ordered single member meeting but only to conduct one item - election of additional director.

Question 3

What is a director?

Answer 3

s250 CA 2006 includes any person occupying the position of a director by whatever name called

Question 4

What is a de jure director?

Answer 4

A de jure director is one formally and properly appointed as a director.

Question 5

What is a de facto director?

Answer 5

A de facto director is:

A person not appointed but acting as a director Re Hydrodam 1994

A person must be part of governance structure, essentially attending and voting at board meetings

Sec of State for Trade v Hollier 2007

Question 6

What is a shadow director?

Answer 6

s251 CA 2006 a person in accordance with whose directions or instructions the directors are accustomed to act

Must instruct (not suggest). Board must act (if ignore, not a shadow). More than single instance

Can be held liable for wrongful/fraudulent trading

General director duties apply to extent capable of applying - Vivendi v Richards 2013

Question 7

How are directors removed from their position by general meeting?

Answer 7

s168 CA 2006 shareholders by ordinary resolution can remove a director, notwithstanding anything in any contract with the director.

However:

Director may have weighted votes, preventing ordinary resolution to be passed Bushell v Faith 1970

If director has service contract he may be able to claim compensation for breach of contract s168(5)

Director who is also shareholder may be able to bring proceedings under s994 (unfairly prejudicial)

Question 8

What are the two ways directors can be disqualified?

Answer 8

1. Under provision in articles (i.e. bankruptcy, but this is an offence anyway without court’s leave)
2. Under CDDA 1986 (convicted indictable offence/fraudulent trading)

Most important is under s6 CDDA - company gone into insolvent liquidation and court judges their conduct unfit to be concerned in management of the company (no discretion, must disqualify 2-15yrs, can also make compensation order for loss to creditors if applicable)

Unfitness = more than misjudgement = gross incompetence

i.e. failing to read accounts Continental Assurance 1996

Court can grant leave to disqualified director to act (can insist on safeguards)

Question 9

Which Model Article states ‘the company is managed by its directors’?

Answer 9

Article 3 Model Articles

Question 10

What role do non-exec directors have?

Answer 10

Limited role. Little authority (express or implied) to act, or bind it in transactions with third parties.

Hold executive directors to account.

UK Corporate Governance Code recommends at least one half of directors be independent non-execs. Listed companies must declare they comply or explain why not.

Question 11

Where an offence has a mens rea element, the company will be found liable only if the ‘directing mind and will’ of the company had the necessary mens rea.

What three ways have the courts been prepared to accept may be sufficiently senior to constitute the directing mind and will of the company?

Answer 11

1. Board of directors
2. Individual directors
3. Some cases, senior manager. In Tesco v Nattrass 1971 court refused to accept manager of individual branch was ‘directing mind and will’.

Question 12

What is the offence of corporate manslaughter?

Answer 12

Corporate Manslaughter and Corporate Homicide Act 2007

statutory offence committed where:

the way in which activities are managed or organised a) cause death b) amounts to gross breach of relevant duty of care owed by organisation to deceased

Does not require directing mind be responsible. Liable if way in which activities are managed/organised by senior mgmt is susbstantial element in events that caused death.

Question 13

Under Article 3 Model Articles, it states that authority of the directors is all the powers of the company.

What are the three caveats?

Answer 13

1. Shareholders can only interfere with board decisions if CA 2006 or articles give that right, although under Art 4 they can direct the board to take/refrain from action on spec. resolution
2. Board must exercise powers for lawful purposes and to promote the success of the company, else lacks authority
3. Articles may limit general authority (individual type of transaction, or capacity as a whole due to objects clause)

Question 14

A third party dealing with the board may be unaware of any limits on board authority. In this situation the transaction is voidable at the company’s option. What two ways are the third party protected so that the transaction will still be binding?

Answer 14

1. s40 CA 2006, in circ. where a person in acting in good faith, the power of directors is free of any limitation under company’s constitution. (presumption of good faith. not required to enquire re authority)
2. Outsider entitled to assume internal matters of procedure have been followed Royal British Bank v Turquand 1856

Question 15

Can directors enjoy implied authority?

Answer 15

Yes, in the absence of expressly delegated authority, they enjoy the usual authority that a person occupying their position would be given.

Question 16

To whom are directors duties owed?

Answer 16

Directors duties are owed to the company s170 CA & Percival v Wright 1902

It is the company which must take action to enforce the duties Foss v Harbottle 1843

Question 17

Who can decide if the company will sue for breach of directors duties?

Answer 17

1. Board
2. If being w/up - liquidator
3. Art 4 - Shareholders by spec. resolution
4. Individual shareholders can bring a derivative claim on behalf of the company

Question 18

What is the director duty to promote the success of the company?

Answer 18

s172 CA 2006 Directors must act in bona fide/good faith to promote the success of the company Smith v Fawcett 1942

Duty is subjective - did they honestly think would promote success - Regentcrest v Cohen 2001

Promote success - run for benefit of members

Factors directors must have regard to include long term consequences, employees, suppliers, operations, reputation, acting fairly between members

If insolvent/verge of directors must prioritise interest of creditors (know/should know insolvency likely BTI v Sequana 2019)

Question 19

What are the directors duties (five)?

Answer 19

Promote success s172

Act within powers s171

Exercise independent judgment s173

Avoid conflict of interest s175

Care, skill & diligence s174

Declaration of interest s175

Question 20

What is the director duty to act within their powers?

Answer 20

s171 CA 2006 - act in accordance with constitution & only exercise powers for purposes which they are conferred

Objective. Court to decide what purposes are for power conferred and did they exercise power for that purpose Howard Smith v Ampol Petroleum 1974 (allotting shares to thwart takeover)

Question 21

What is the director duty to exercise independent judgment?

Answer 21

s173 codification of former duty directors must not fetter their discretion Fulham FC v Cabra 1994

Question 22

What is the director duty to avoid conflicts of interest?

Answer 22

s175 CA 2006 must avoid situation where has/can (in)direct interest that conflicts/may.

in particular to property, info or opportunity (immaterial whether company could take advantage)

Where director makes personal profit the courts apply this rule strictly

Regal v Gulliver 1942 (irrelevant that company benefitted & acted in good faith)

Industrial Developments v Cooley 1972 (persons ceasing to be directors still subject to duty)

Question 23

What is a directors duty of case, skill & diligence?

Answer 23

s174 CA 2006 - reasonable care, skill & diligence.

objective (minimum) - all directors general knowledge, skill and experience reasonably expected Re D’Jan of London 1994

subjective - director capable of higher standard than objective min. will be judged subjectively against the knowledge, skill and experience that the director has

Question 24

What is the duty regarding directors’ interests in contracts with the company?

Answer 24

s177 where company itself is entering into a contract. Director must disclose interest and provided they do, will not be voidable and any profit made by director not accountable.

Sometimes law requires disclosure and approval by shareholders (ord. resolution)

• Substantial property transactions (dir acquires/sells to company non-cash asset over £100k or 10% of net asset value)
• Long service contracts (exceeding two years)
• Loans to directors (but not to enable them to perform duties)
• Compensation for loss of office (not for bona fide payments i.e. damages for breach of directors contract)

Question 25

When can a director be relieved from liability for breach of duty?

Answer 25

Not possible for articles or service contract to exempt. May be relieved in one of two ways 1. Shareholder vote to authorise or ratify breach 2. Court under **s1157 CA 2006** if honest and reasonable and ought fairly to be relieved (inc. shadow dir). Court reluctant to relieve **Towers v Premier Waste 2011** Does not apply to wrongful trading under **s214 IA 1986**

Question 26

What is the voluntary code of practice for public companies with premium stock exchange listing?

Answer 26

**UK Corporate Governance Code 2018**

Question 27

What role does a manager have in a company?

Answer 27

Senior employee not on board. Sometimes treated as fiduciary and will therefore owe director duties **Canadian Aero v O'Malley 1973** May be regarded as ‘directing mind/will’ when establishing mens rea for criminal offence May count as part of senior mgmt under **Corporate Manslaughter and Corporate Homicide Act 2007** Will be liable jointly with company when personally involved in commission of tort **MCA Records v Charly Records 2003**

Question 28

What is a company secretary?

Answer 28

Public required. Private optional Service board meetings, comply with filing requirements, maintaining registers Implied authority to bind in relation to secretarial functions and running of the company **Panorama v Fidelis 1971** (vehicle hire contract binding)

Question 29

What are auditors?

Answer 29

All companies, except small companies defined in **s382 CA 2006** are required to appoint auditors. They report to members on whether accounts are true view of financial performance and have been properly prepared. If they think not, statement at shareholders meeting. Removed by ord. resolution on special notice (28 days) where they can make written representations. Liable if perform negligently - breach of contract with company or negligent misstatement Duty is to existing holders as general body but not individual or prospective **Caparo v Dickman 1990**

Question 30

What are the advantages of majority rule?

Answer 30

Stops minorities blocking desirable change Quick and cheap way of resolving disagreements Avoids judge involvement in disagreements between shareholders

Question 31

What cannot be excused by any majority of shareholders?

Answer 31

Unlawful actions e.g. unlawful dividend

Question 32

What can a shareholder do to enforce their personal rights under the articles?

Answer 32

Remember each shareholder has a personal right under **s33** to enforce articles **Pender v Lushington 1877** Three problems minority shareholders have: 1. Courts have refused to enforce articles which are regarded as giving rights to holders in their capacity other than as a member (i.e. company solicitor) 2. Courts sometimes view breach as a ‘mere internal irregularity’ MacDougall v Gardiner 1875 3. Articles can always be altered (spec. res) to remove provision minority may have wished to rely They can also apply under **s994** that company affairs are unfairly prejudicial to interest of member(s). More effective than **S33.**

Question 33

Can individual, minority shareholder bring personal action directly against director for that director's misbehaviour? If they could, they would secure personal remedy for themselves and avoid persuading company to sue.

Answer 33

Yes, but rarely allowed. 1. Must who duty owed personally to them has been infringed (but remember duties of directors are owed to the company, not members). 2. Must show loss is not reflective loss (that which merely reflects a loss to the company itself) **Johnson v Gore Wood 2001** unless breach caused company to become insolvent and therefore could not sue **Giles v Rhind 2003**

Question 34

What is a derivative claim?

Answer 34

**Chapter 1 Part 11 CA 2006 ss260-264** Derivative claim is brought by a shareholder/group **on behalf of the company** Enforce action that company itself has e.g. director duty breach Any damages/profits belong to company Based on actual/proposed negligence, breach of duty, default or breach of trust by director **s260 CA 2006**.

Question 35

How does a shareholder bring a derivative claim?

Answer 35

Apply to court for permission. _Mandatory bars (court must refuse permission)_ a person acting to promote success of company would not continue the claim **Iesini v Westrip 2010, Kleanthous v Paphitis 2016** (continuing would result in experienced directors being lost, reputation harm, trading performance harm) Act was authorised/ratified by company _If none then consider discretionary factors_ member acting in good faith importance someone with duty to promote would attach to proceedings authorisation/ratification likely whether company has already decided not to pursue whether member could bring personal action (**Franbar 2008** refused as complaint would be better under **s994**) (**Wishart 2010 s994** not better way, claimant wanted to remain a shareholder)

Question 36

Obtaining permission for derivative claim chart

Answer 36

Concern breach of directors breach of duty, trust negligence Is claimant member Has act been authorised/ratified Would hypothetical director promoting success NOT continue the claim The discretionary factors i.e. good faith, importance of claim, likelihood of authorisation/ratification/ has board decided not to sue, does claimant have personal remedy?

Question 37

What must a shareholder claimant show to bring a claim under **s994 CA 2006** (unfair prejudice)

Answer 37

**Their interest as a member** (broad interpretation - compared with narrow in **s33**, most likely to apply in ‘quasi-partnerships where the courts will look at what the parties themselves have agreed **O'Neill v Phillips 1999**’) **have been prejudiced** (found when treatment goes against their interests, unless they are to blame) **and unfairly so** **by the conduct of company's affairs or act/omission** (not private behaviour of managers/shareholders)

Question 38

What is a ‘quasi-partnership’?

Answer 38

**Ebrahami v Westbourne Galleries 1973** states following characteristics * company formed on basis of personal relationships and mutual confidence * agmt/understanding all/some holders would have expectation of participation in mgmt * restriction on transfer of shares

Question 39

What are the remedies for a successful **s994 CA 2006** claim (unfair prejudice)

Answer 39

As court sees fit Preferred is buyout **(Grace v Biagioli 2005)** Valuation must be independent (not company auditors) **O'Neill v Phillips 1999** and on a pro rata basis Advantage: laying down clear criteria for orders given avoids protracted legal proceedings

Question 40

What other statutory remedy other than s994 (unfair prejudice) does a shareholder have to claim against the company in a personal capacity?

Answer 40

Just and equitable winding up under **IA 1986.** No criteria but examples include: Inability to achieve company's main object **Re German Date Coffee 1882** Shareholder deadlock **Yenidje Tobacco 1916** Loss of confidence in mgmt **Lock v John 1924**

Question 41

When does the BEIS carry out an investigation?

Answer 41

**Dept for Business, Energy & Industrial Strategy** (BEIS) can carry out investigations into company affairs. Slow and expensive **200 shareholders** or those who hold 10% issued shares must band together to request and provide up to **£5k security.**