Shareholders and Directors

Question 1

What are the two types of directors?

Answer 1

Executive
Non-executive

Question 2

What is an executive director?

Answer 2

They have an employment contract with the company known as a service agreement.

Involved in the day-to-day running of the company.

Question 3

What is a non-executive director?

Answer 3

They are not involved in the day to day running and are not employees of the company.

They do partake in votes to prevent poor and biased decision-making.

Question 4

What is a de facto director?

Answer 4

Someone who acts as a director although they have never been appointed.

They will carry out the job of a director.

Question 5

What is a shadow director?

Answer 5

A person who has significant influence over the company’s affairs but has not been formally appointed as a director.

Question 6

How can a sole director make decisions?

Answer 6

They are not required to call board meetings hence why they can make decisions.

Question 7

Can a director appoint an alternative director to attend and vote in their absence at a board meeting?

Answer 7

Only if there is a special article in the articles as the Model Articles do not allow for it.

Question 8

How can a new director be appointed?

Which is the quickest option?

Answer 8

They can be appointed by the board or by an ordinary resolution of the shareholders.

The quickest will be a board meeting.

Question 9

What are the restrictions on directors?

Answer 9

They cannot take office if they are disqualified.

They will cease to be a director if a bankruptcy order has been made against them.

They will cease to be a director if a doctor gives a written opinion stating they are physically or mentally incapable of acting as a director for more than three months.

Question 10

What is the administrative procedure when a new director is appointed?

Answer 10

Notify Companies House within 14 days of the appointment.

Update the register of directors and register of directors’ residential addresses.

Question 11

What are the two types of authority that directors have?

Answer 11

Actual authority
Apparent authority

Question 12

What is actual authority?

Answer 12

Where a director has authority from other directors to act in a certain way.

This can be express or implied.

Question 13

What is apparent authority?

Answer 13

Where a director acts without the company’s prior consent, but it still binds the company to the contract.

Question 14

What are the requirements for apparent authority?

Answer 14

When the transaction is related to the business carried out by the firm

The partner in the firm would usually act on such matters

The other party did not know they didn’t have authority to act

The other party deals with a person who they know or believe to be a partner

Question 15

What happens if there is no apparent or actual authority with a decision?

Answer 15

The director is personally liable.

Question 16

When must a director’s service contract be approved by shareholders?

Answer 16

Where there is a guaranteed term of more than two years (i.e. notice to terminate for two years).

Question 17

Can a director who is the subject of the service contract vote in the board meeting?

Answer 17

No - they will not count in quorum.

This is per the Model Articles. This can be amended.

Question 18

What is the administrative procedure to approve a service contract?

Answer 18

A copy of the memorandum setting out the terms must be kept at the registered office for 15 days and at the general meeting itself.

Question 19

How long must directors’ service contracts be kept for inspection by shareholders?

Answer 19

During the term and until a year after termination.

They have a right to inspect without charge within seven days of a request.

Question 20

How can a directorship end?

Answer 20

A director can resign.

A director can be removed.

Question 21

How can a director resign?

Answer 21

They should complete the TM01/TM02 form within 14 days of resignation.

Question 22

How can a director be removed?

Answer 22

Shareholders can remove by a director by ordinary resolution, but special notice is required.

Once special notice has been received by the company, it must inform the director and give 14 days notice of the general meeting.

Question 23

What is special notice in respect of removing a director?

Answer 23

Notice of intention which is given to the company at least 28 days before the general meeting.

Question 24

What are the director’s rights when there are proposals to remove them?

Answer 24

To represent themselves in front of the shareholders.

If they are also a shareholder, they have a right to vote against their own removal.

Question 25

What is a Bushell v Faith clause?

Answer 25

Where someone is a shareholder and a director, and as a result will have greater voting powers as a shareholder when voting to remove that person as a director.

Question 26

What are director's duties? (7)

Answer 26

To act within powers To promote the success of the company To exercise independent judgement To exercise reasonable skill and care To avoid conflicts of interest To not accept benefits from third parties To declare an interest in a proposed transaction for arrangement

Question 27

Can a director infringe their duty to avoid conflicts if they are authorised by the directors?

Answer 27

If a board resolution is passed, but the director in question does not count in the quorum for the vote.

Question 28

What happens if a company disapplies the MA to declare an interest?

Answer 28

There is still a duty to declare under the CA.

Question 29

What are the exceptions to a director declaring an interest?

Answer 29

If the director is not aware If the interest cannot reasonably give rise to a conflict If the other directors are aware If it concerns the terms of a director's service contract

Question 30

What happens if a company enters into a contract where there is a conflict and the director still does not declare their interest?

Answer 30

There may be a criminal offence committed.

Question 31

What are the civil consequences of a breach of directors' duties?

Answer 31

Account of profits Equitable compensation Rescission of contracts Injunctions Negligence claim for a breach of reasonable care and skill

Question 32

How can a breach of directors' duties be ratified?

Answer 32

By ordinary resolution

Question 33

Can a director in breach vote as a shareholder to ratify a breach?

Answer 33

No, neither in written resolution or at the general meeting.

Question 34

What claims can be taken against directors of insolvent companies?

Answer 34

Wrongful trading (where a director knew there was no prospect of the company avoiding insolvency) Fraudulent trading (business is carried on with intent to defraud creditors) Misfeasance (breach of fiduciary duty)

Question 35

What is a substantial property transaction?

Answer 35

A director/someone connected with a director buys from or sells to the company a non-cash asset of substantial value (over £100,000 or more than £5,000 AND 10% of the company's value)

Question 36

What is required to enter into a substantial property transaction?

Answer 36

Ordinary resolution

Question 37

Can a company make a loan to a director?

Answer 37

By ordinary resolution, yes. If it relates to expenditure defending proceedings in relation to the company, or defending themselves as long as they do not exceed £10,000.

Question 38

What actions can minority shareholders take against directors?

Answer 38

Derivative action - taking action for a breach of a director's duty, but the remedy will go to the company. Unfair prejudice - directors not declaring dividends Just and equitable winding up - selling off assets and winding up the company.

Question 39

What should be sent to HMRC after a stock transfer form has been executed and when should this be done?

Answer 39

The stock transfer form should be sent to HMRC with payment of stamp duty within 30 days of the effective date of transfer. The stamp duty should be paid by the purchaser