Shareholders and Directors

Question 1

What is the minimum number of directors a private limited company can have?

Answer 1

1

Question 2

What is the minimum number of directors a public company can have?

Answer 2

2

Question 3

Do company directors need to be a natural person?

Answer 3

No, however all companies must have at least one director that is a natural person.

Question 4

Is there an age limit to be a director?

Answer 4

Yes - a director must be at least 16 years of age.

Question 5

Define model article 3.

Answer 5

Directors have the powers to run the company (ie make day to day decisions), and exercise such powers by passing board resolutions at meetings.

Question 6

Explain model articles 7 and 8.

Answer 6

Directors can exercise their powers unanimously without a meeting, as long as they indicate to each other the common view.

Could be resolution in writing (or even text messages indicating each directors agreement to proposed resolution/ decision).

Question 7

Explain model article 5.

Answer 7

Directors can delegate their powers at their discretion.

Question 8

Do shareholders have a general right to override the decisions of directors?

Answer 8

No (although they can veto director decisions in certain circumstances).

Question 9

Give an example of a situation where shareholders can veto (override) the decision of a director.

Answer 9

If directors want to enter into a SPT, the shareholders must pass an ordinary resolution consenting to it.

Failure to obtain an ordinary resolution of the shareholders means the SPT cannot be entered into.

Question 10

Can a person be a director if they are not formally called/ appointed as a director?

Answer 10

Yes.

s250(1) CA 2006 defines director as any person occupying the position of a director by whatever name they are called.

Question 11

Explain the provision in model article 19.

Answer 11

The board has the right to determine which services the company’s directors undertake.

They also have the power to decide on levels of director remuneration and benefits.

Question 12

What are the two types of directors?

Answer 12

Executive directors or non-executive directors.

Question 13

What is an executive director?

Answer 13

Those who have been appointed to the board of directors and also have an employment contract with the company (known as a service contract).

Question 14

What does a service contract set out?

Answer 14

1) director’s job title; and
2) duties and responsibilities.

Question 15

Do directors’ duties apply to NEDs?

Answer 15

Yes.

Question 16

What is a non-executive director?

Answer 16

NEDs are appointed to the board and are registered as directors at companies house, but do not have service agreements.

They don’t receive a salary but do receive fees for attending board meetings.

More common in public companies, as sometimes it is required by law to have a NED present to prevent poor decision making.

Question 17

Explain the provision of MA12(1).

Answer 17

The board have the power to appoint a chair to board meetings and can do so by passing a board resolution.

Question 18

Explain the provision of model article 13.

Answer 18

The chairperson has a casting vote at board meetings.

This means if there is a tie, chair can use their casting vote to ensure the resolution passes (or decide not to if they do not want the resolution to be passed).

Question 19

What does a tied vote in a board resolution mean?

Answer 19

The resolution will not pass (unless the chair uses their casting vote to break the tie).

Question 20

Explain the provision of MA39(1).

Answer 20

Chairman will chair the general meetings if they are present and willing to do so.

Question 21

What is a de facto director?

Answer 21

A person who acts as a director even though there have never been appointed or validly appointed.

De facto directors can fall within the definition of a director under s250(1) CA 2006.

Question 22

What is a shadow director?

Answer 22

A person whose directions or instructions on which a director of the company are accustomed to act (s251 CA 2006).

Shadow directors not formally appointed.

Question 23

Give some examples of people who may be a shadow director.

Answer 23

• A major shareholder;
• A lender;
• A management consultant.

Question 24

Summarise the roles of de facto directors and shadow directors.

Answer 24

De Facto Directors: generally carrying out the job of a director even though they have not been formally appointed.

Shadow Directors: more likely to bet in the background and not carrying out the normal functions of a director, but will have a lot of influence and control over the other directors’ actions in practice.

Question 25

Can a sole director validity make decisions on behalf of the company?

Answer 25

Yes - model article 7(2)(a) provides this power to sole directors.

Question 26

What is an alternative director?

Answer 26

Where a director can’t attend a board meeting, they will often appoint an alternative director to vote in their place.

This right is not provided for in the model articles and therefore the articles need to be amended accordingly to allow this.

Question 27

What are the two ways directors can be appointed, in accordance with MA17?

Answer 27

1) By the board; or
2) By an ordinary resolution of the shareholders.

Question 28

Explain the provision of MA 18.

Answer 28

1) A person will cease to be a director if a bankruptcy order has been made against them; or

2) Doctor gives a written opinion to company stating they have become mentally/physically incapable of acting as a director, and may remain so for more than three months.

Question 29

How long does the company have to notify companies house of the appointment of a director?

Answer 29

14 days from the date of appointment (by filing either and AP01 for a person director or AP02 for a corporate director).

Director and their residential address should be added into the directors register in the statutory books.

Question 30

Define express actual authority.

Answer 30

Director acting in a way which has been expressly provided for in their service contract or verbally on the agreement of the other directors.

Question 31

Define implied actual authority.

Answer 31

Where a director is acting in a way which has not been expressly agreed (either in service contract or otherwise) but has acted in a similar way in the past without the board trying to stop them doing so.

Question 32

Define apparent authority.

Answer 32

Where director acts without the prior consent of the company (whether either express or implied) but still binds the company to a contract.

It is based on a representation made by the director on behalf of the company to a third party by words or conduct that the director is acting with the company’s authority

Question 33

What happens if the director does not have authority (apparent or actual)?

Answer 33

Director is personally liable for the liabilities arising under the contract or agreement they entered into.

Question 34

When is an ordinary resolution required in relation to approving director service contracts?

Answer 34

Ordinary resolution of the shareholders is required when the service contract if for a guaranteed fixed term of more than two years.

Note that if the company has the power to terminate the contract to terminate it with notice of two years or less, this will not be in this definition and willNOT require shareholder approval.

Effectively it is the guaranteed element of the service contract which needs the approval.

Question 35

Do the following service contracts require shareholder approval:

1) 10 year service contract with a notice period of one year; and
2) 3 year fixed term service contract with no provision for early termination.

Answer 35

1) No (as there is no fixed term guaranteed for more than 2 years due to there being a termination window);

2) Yes (as fixed term guaranteed for more than two years)

Question 36

For service contracts permitted to be approved at board meetings, how can this be done where there are only two directors and one of the directors is interested (ie is the one being awarded the service contract) and therefore cannot vote?

Answer 36

Either:

1) Permanently change the articles (by special resolution) to allow directors to vote and count as part of the quorum in transactions they are personally interested; or

2) The shareholders can temporarily suspend the operation of MA14 by way of ordinary resolution (MA14).

Question 37

What happens if the directors approve a service contract with a guaranteed term of more than two years without the approval of the shareholders?

Answer 37

The guaranteed element of the contract will be void but the rest of the contract will be enforceable.

The contract was also be terminable on reasonable notice.

Question 38

Do shareholders have the right to see service contracts?

Answer 38

Yes - they can request to see them during the time they are in force and for up to a year after they are terminated.

They have the right to inspect them within 7 days of making the request s229 CA 2006) and have the right to inspect them without charge.

Question 39

Can shareholders remove a director?

Answer 39

• Yes - by way of ordinary resolution passed at a general meeting (s168 CA 2006).
• However special notice is required for a resolution to remove a director.
• Special notice means 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 days prior to the general meeting at which the resolution is proposed.

Question 40

What is a Bushell v Faith clause?

Answer 40

Gives someone who is both a shareholder and a director greater voting rights as a shareholder if the resolution in question is a resolution to remove that person as a director.

Question 41

Explain the director’s duty under s171 (to act within powers).

Answer 41

A director of a company must:

1) act in accordance with the company’s constitution; and
2) only exercise powers for the purposes for which they are conferred.

As directors are also under a duty to promote the success of the company, any action they take to promote their own personal interest would breach s171, as they would not be acting within their powers for the purposes of which they are conferred.

Question 42

Explain the director duty to promote the success of the company (s172).

Answer 42

Directors must act in a way they consider good faith and is most likely to promote the success of the company for the benefit of its members as a whole.

The court will apply a subjective test to determine whether this duty has been breached.

Effectively where the court is satisfied the director acted in good faith, they will not be found in breach of this duty.

Question 43

List the 6 factors directors should be considering when trying to act in a way which promotes the success of a company.

Answer 43

1) Likely consequences of any decision in the long term;

2) Interests of the company’s employees;

3) The need to foster the company’s business relationships with suppliers, customers and others;

4) Impact of the company’s operations on the community and environment;

5) The desirability of the company maintaining a reputation for high standards of business conduct; and

6) The need to act fairly between members of the company.

Note that even if they contravene any of the above, a director will not be found to breach s172 if the court is satisfied they acted in good faith.

Question 44

Explain the director duty to exercise independent judgement (s173).

Answer 44

• Directors must exercise independent judgement.
• This will not be infringed by acting:

1) In accordance with an agreement duly entered into by the company, which restricts future exercise of discretion by its directors; or
2) In a way authorised by the company’s constitution.

• Effectively they should make their judgement’s free from external pressure or interests.

Question 45

Explain the duty to exercise reasonable care, skill and diligence (s174).

Answer 45

This refers to the care, skill and diligence that would be exercised by a reasonable diligent person with:

1) General knowledge, skill and expertise that may reasonably be expected of a person carrying out the functions carried out by the director;
2) General knowledge, skill and experience that the director has.

Question 46

Explain the duty not to accept benefits from third parties (s176).

Answer 46

• Directors must not accept a benefit from a third party either for doing or not doing anything as a director.
• Directors breach this duty if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
• Eg accepting a free holiday from a client after they say ‘ I know you always do what you can for us when it’s time to renew our contract’ would amount to a breach. It would be irrelevant whether or not the director actually included the favourable terms in the contract, as they have already accepted the benefit knowing it was effectively a bribe.

Question 47

Does corporate hospitality being accepted by a director amount to a breach of s176 (duty not to accept benefits from third parties)?

Answer 47

No

Question 48

Explain the duty to avoid conflicts of interest (s175).

Answer 48

Directors must avoid situations in which they have or can have a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company.

In particular applies to exploitation of any property, info, or opportunity (and it is irrelevant whether the company could also take advantage of such).

A board resolution to authorise the transaction is not a sufficient defence. However, the breach can be ratified by the directors. If the breach is being ratified by directors, that director cannot count in the quorum or vote on ratification of their own breach.

Question 49

Give two common examples where a director may breach their duty to avoid conflicts of interest.

Answer 49

1) Director receives communication about an opportunity from a supplier wanting to work with their company. The director instead directs that opportunity to a different company they/ family members hold shares in.

2) Director takes up an opportunity which has been refused by the company for himself, or a different company he is connected to (eg owns shares in).

Question 50

Explain the duty to declare an interest in a proposed transaction or arrangement with the company (s177).

Answer 50

If directly or indirectly interested in proposed transaction, directors must declare the nature and extent of their interest to the other directors.

Declaration must be made before the company enters into the transaction or arrangement.

Question 51

Does a director need to declare their interest in a proposed transaction if directors already know of their interest?

Answer 51

No - but always good practice to do so.

Question 52

List the exceptions to the duty to declare interest under s177.

Answer 52

1) Director is not aware of the interest, or the transaction or arrangement in question (although directors are treated as being aware of matters they ought to reasonably have known);

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

3) If the other directors are already aware of it (or ought to reasonably be aware of it);

4) It concerns the terms of a directors’ service contract.

Question 53

Explain the difference between model article 14 (director not being counted in their quorum for voting purposes on transaction they are interested) and the duty to declare the nature and extent of their interest under s177.

Answer 53

MA 14 can be disapplied, but even if it is the obligation to declare the nature and extent of their interest remains under s177.

Question 54

Explain the remedies for breach of section 174 CA 2006.

Answer 54

Breach of a director to act with reasonable care, skill and diligence is akin to negligence so the remedy is damages assessed in the same way as damages in negligence.

Question 55

List the potential remedies for sections 171,172,173,175,176 and 177 CA 2006.

Answer 55

1) An account of profits;
2) Equitable compensation for the loss suffered by the company;
3) Recession of any contract as a result of a contact entered into as a direct or indirect result of breach;
4) An injunction to prevent further breaches/ a continuing breach;
5) Restoration of property transferred as a result of the breach of duty.

Question 56

Explain how a breach of a director’s duty is ratified.

Answer 56

Shareholders can ratify the breach of a directors duty by ordinary resolution.

Whether proposed at a general meeting or by written resolution, the director (if also a shareholder) is prevented from voting on the vote where the ratification of their breach is being decided.

Question 57

What is the effect of a ratification of a breach of directors’ duty?

Answer 57

It means the breach is treated as though it did not occur.

Question 58

Explain the duty under s182 to declare an interest in an existing transaction or arrangement.

Answer 58

Applies where director is directly or indirectly interested in a transaction or arrangement that has already been entered into by the company.

The declaration must be made as soon as reasonably practicable.

It does not apply if the director has already declared their interest under s177.

The declaration under s182 must be made at a meeting of directors or by notice in writing sent to all of the other directors.

Question 59

List the exceptions to the duty to declare under s182.

Answer 59

1) If the director is not aware of the interest, transaction or arrangement in question.
2) if interest is not reasonably regarded as a conflict;
3) if the other directors already know of the interest;
4) if it concerns the terms of the director’s service contract.

Question 60

What is the potential consequence of a breach under s182?

Answer 60

Criminal offence punishable by a fine (in contrast to the remedy for s177 which is a civil matter).

Question 61

When will a court order a director to contribute to the company’s assets if there is claim against that director for wrongful trading?

Answer 61

1) The company has gone into insolvent liquidation or insolvent administration; and
2) Before commencement of winding up of the company , the director knew or ought to have concluded there was no reasonable prospect that the company would avoid insolvent liquidation; and
3) That person was a director of the company at the time.

Question 62

What is the defence available to a director when issued with a claim for wrongful trading?

Answer 62

Director won’t be liable if they took every step with a view to minimising the potential loss to the company’s creditors, as they ought to have taken.

Two part test here which examines whether the director ought to have known or ascertained, the conclusions which they ought to have reached or the steps which they ought to have taken.

The standard is therefore that of a reasonably diligent person having both:

1) The general knowledge, skill and experience that may reasonably be expected of a
person carrying out the same functions as are carried out by that director in relation to the company; and

2) The general knowledge, skill and experience that that director has.

Question 63

What advice should be given to directors in order to minimise the likelihood of a successful claim against them for wrongful trading?

Answer 63

1) Seek professional advice from solicitors or accounts when problems arise;
2) Limit spending;
3) Check the company’s accounts regularly;
4) Keep records of their own actions.

Question 64

Who typically brings a claim for wrongful trading against a director?

Answer 64

Liquidator or administrator.

Question 65

When will a director be liable for fraudulent trading?

Answer 65

If it appears the company’s business has been carried on in such a way in which there is intent to defraud the creditors of the company, creditors of any other person, or for any other fraudulent purpose.

Very difficult to prove this fraudulent intent. An example would be carrying on spending in the knowledge that hat creditors would not get paid.

Directors found guilty of fraudulent trading risk a criminal conviction under s993 CA 2006.

Question 66

What is misfeasance?

Answer 66

Breach of a fiduciary duty or other duty by directors.

Directors can be ordered to contribute to the company’s assets by way of compensation in respect of the misfeasance.

May also be ordered to repay, restore or account for any money or property or any part of it that has been misapplied in breach of duty.

Question 67

List the requirements needed to be present for a transaction to constitute an SPT.

Answer 67

1) director, in their personal capacity, or someone connected with a director;
2) buys from or sells to the company;
3) a non-cash asset;
4) of substantial value.

Question 68

What is a director or person connected with a director for the purposes of a SPT?

Answer 68

Either a director, or a member of their family, or a company in which the director or a person connected with the director (or the director and the connected person together) who:

1) owns at least 20% of the body corporate’s shares; or
2) is/ are entitled to exercise or control the exercise of more than 20% of the voting power at a general meeting of the company.

Question 69

How are members of a directors family defined for the purposes of SPTs?

Answer 69

• director’s spouse/CP;
• director’s child or step child;
• the director’s parents;
• any person who lives in an enduring relationship with the director as their partner; and
• any children of a person who lives in an enduring relationship with the director as their partner.

Question 70

Would a loan constitute a non-cash asset for the purposes of an SPT?

Answer 70

No

Question 71

What makes an asset substantial for the purposes of an SPT?

Answer 71

Either:
1) an asset valued at over £100,000; or
2) an asset of more than £5,000 which is more than 10% of the company’s net asset value.

Question 72

List the exceptions where an ordinary resolution is not required to approve an SPT.

Answer 72

1) SPT where the company in question is a wholly owned subsidiary of any other company;
2) a transaction between a company and a person in his character as a member of the company;
3) a transaction between a holding company and its wholly owned subsidiary; or
4) a transaction between two wholly owned subsidiaries of the same holding company.

Question 73

Explain the effect of entering into an SPT without the ordinary resolution consent of shareholders.

Answer 73

• The transaction will be voidable.
• The following individuals may also be ordered to account to the company for any gain they have made and to indemnify the company for loss/damage resulting from the agreement or transaction:

a) any director of the company with whom the company entered into the arrangement;
b) any person with whom the company entered into the arrangement who is connected with s director of the company or its holding company, and the director with whom ant such person is connected; and
c) any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an arrangement.

Question 74

Explain the provision of s197 CA 2006.

Answer 74

A company may not make a loan to a director of the company or its holdings company (including security guarantees) unless the transaction has been approved by the Company’s shareholders by ordinary resolution.

If the director is a director of the company’s holding company, the holdings company must also pass an ordinary resolution.

Question 75

List the main exceptions to the requirement of an ordinary resolution approving a loan to director of the company (s204 CA 2006).

Answer 75

1) Expenditure on company business. Covers expenditure for the purposes of the company or enabling the director to properly perform his duties. Note this only applies to loans up to a value of £50,000;

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

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

4) Minor and business transactions as long as the transactions and any other relevant transaction or arrangement does not exceed £10,000.

Question 76

Explain payments for loss of office.

Answer 76

• Directors are sometimes entitled to payments under the terms of their service contract or for wrongful termination or discrimination. The company will therefore have to pay these sums if legally required.
• Note however that payment over £200 requires consent from the shareholders by ordinary resolution. This rule also applies to:

a) payments to past directors;
b) payments to a person connected with a director; and
c) payments to any person at the direction of, or for the benefit of a director or a person connected with a director.

Question 77

List the grounds for disqualification of a director.

Answer 77

• Conviction of 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 a solvent company;
• following an investigation, a finding of unfitness;
• Fraudulent or wrongful trading;
• Breaches of competition law.

Question 78

What is the effect of disqualification on a director?

Answer 78

This will mean that director cannot (without leave the court) be a director or in any way concerned in the promotion, formation or management of a company.

Leave to be a director following disqualification is rare, but may be granted if, for example, the director has not been dishonest, the business in question is possible and there are other directors in place who can provide checks on the actions of the director.

Question 79

What happens if a director breaches their disqualification order?

Answer 79

This is a criminal offence and the director can be fined or sentenced up to 2 years in prison.

A disqualified director is personally liable for debts of the company if they are involved in its management whilst disqualified.