Read Aloud the Text Content

This audio was created by Woord's Text to Speech service by content creators from all around the world.

Text Content or SSML code:

Save the following text Q.1. Can the board of Fusion Payroll Solutions FPS enter into the contract for the sale of the land at Earth without involving the shareholders Yes. The sale of the existing premises is a decision that can be made by the board of FPS as it falls within the directors general powers conferred by Model Article 3 MA. Q.2. Can the board of FPS enter into the contract for the purchase of the land at Wilburton without involving the shareholders The purchase of the land from Megan Brookes father, however, comes within the definition in section 190191 of a substantial property transaction SPT because it is an arrangement involving the acquisition of a noncash asset, the land, the value of which is substantial as it exceeds £100,000, from a person connected to a director, here the father of a director, Megan. The definition of a connected person, includes the parents of a director ss. 252 and 253. Under s. 190, the transaction must be approved by an ordinary resolution of the shareholders. Failure to obtain shareholder approval will mean that the transaction is voidable, and the directors and Richard may be liable to indemnify the company for any resulting loss or damage. Q.3. How many board meetings must be held Where a contract requires shareholder approval, two board meetings may be held the first to call the general meeting and the second to enter into and execute the contract once shareholder consent has been obtained. Q.4. What are the notice requirements for the board meetings to be validly convened Have these requirements been met MA 9 states that a board meeting may be validly called by any director. It may be sent by email, as here. The length of notice must be reasonable. What amounts to reasonable notice is a question of fact Re Homer. Here Tom Maskell, who is the Chair of the board, has already called the meeting for next week, which should be plenty of notice. The directors know that Esi Asante cannot attend, but the notice must still be sent to her. From the email and agenda, it is clear that Tom has given the others notice of the time, date and place as required by MA 9. The same must be done for the second BM. Q.5. How do the rules governing notice for a general meeting differ from the rules governing notice for a board meeting Apply these rules to the facts. The rules governing notice for a general meeting are set out in the Companies Act 2006. s.310 provides that the notice must be sent to all the shareholders as well as the directors, so it must be sent to Tom, Megan, Sadiq, Esi and Richard and to the auditors if relevant s502. The notice may be sent electronically, as here. The general rule, under ss.307 and 360, is that directors must give 14 days clear notice of the meeting as opposed to reasonable notice. Clear notice means that the day that the notice is sent and the day that the meeting is held will not be counted. Where notice is sent electronically, the notice period will be extended by 48 hours s.11471. There is no need for students to give dates. Under s311, as with board meetings, the notice must include the time, date and place of the meeting. In addition, it must include an explanation of the general nature of the business to be conducted at the meeting here the approval of the contract for the purchase of the land at Wilburton There is further information that is required. Under s.325, it must also clearly state the right of any of the shareholders to appoint a proxy. This is particularly important as far as Esi is concerned to give her the opportunity to vote. Short Notice. Toms email suggests that they are keen to deal with these matters as quickly as possible and may not want to wait for the notice period to expire. It is possible for shorter notice to be given if a majority of the shareholders entitled to attend and vote at the meeting consent and, as FPS is a private company, between them, that majority holds 90 of the shares. They must sign a consent to short notice.
Here, Tom, Megan, Sadiq and Richard hold 90 of the shares, so provided that Sadiq agrees to this, the meeting can be held on short notice. They should give Esi enough time to return the proxy notice see below. Q.6. Will all the relevant meetings be quorate • BMs 1 and 2 Under MA 11, at least two directors will have to attend the board meeting to satisfy the quorum requirement. On the facts, it seems that three of the directors, Tom, Megan, and Sadiq will all attend. However, where a director has an interest or involvement in the transaction, this will have an effect on the quorum and on how the directors can vote. Megan clearly has an interest in the contract to purchase the land from her father. Under Model Article 14, this prevents her from counting in the quorum and from voting on any resolution in relation to this transaction only. As Sadiq and Tom will attend, the meeting will still be quorate in relation to all matters. Her interest does not affect any other of the resolutions • General Meeting Under s.318, at least two shareholders must attend. If all the shareholders, apart from Esi, are able to attend, the meeting will be quorate. Q.7. Can you explain whether the directors owe any dutys to the company in respect of either transaction Under s177, there is a general duty for directors to declare the nature and extent of their interest in a proposed transaction. Any interest, direct or indirect such as Megans, in a proposed transaction or arrangement with a company triggers this duty, so the general rule is that she must declare her interest. However, there are exceptions and under s. 1776b no declaration is needed if the other directors are aware of the interest. Here the directors, who are all close friends, are aware of the family relationship, but it is still prudent and good practice to make the declaration. In addition, the directors should ensure that they have considered s.172, the duty to promote the success of the company for the benefit of the members as a whole when they are discussing both transactions. The fact that they have had regard to s.172 should be recorded in the minutes. Q.8. How many resolutions will need to be passed at the first board meeting Will these resolutions pass Two board resolutions will then need to be passed To approve the draft terms of the contract to purchase the land, subject to obtaining the necessary members resolution to approve the SPT. To call a general meeting so that the shareholders can pass the OR relating to the SPT. In addition a further resolution may be passed • To approve the terms of, enter into and authorise one director to execute the contract for the sale of the existing premises. As this is a simple contract, this complies with s.43 in relation to the execution of documents. However, they may do this at BM2. Under MA 7, board resolutions will be passed if a simple majority on a show of hands are in favour. On the face of it, there may be a problem with the contract for the purchase of the land. Tom and Megan are in favour, but Sadiq is opposed to the proposal. Megan cannot vote on this resolution, so there will be deadlock. The general rule is that where there is deadlock, the negative view will prevail. However, Tom is the chair of the board, and under MA 13 has a casting vote, which he can use to break the deadlock, and so the resolution will pass. One important point here is that only the votes of those present will be counted. An email from Esi will not count as a vote. All three directors support the sale of the existing premises, and none have an interest in the transaction, so they can all vote. This the resolution will pass unanimously. The resolution to call a general meeting is procedural. Its purpose is to get the shareholders together to vote on the resolution to approve the purchase contract, so in terms of interests, it is neutral. All the directors can vote on this. Sadiq wants the matter to be discussed at a meeting of the shareholders and it seems that the others will support this, so again this will pass unanimously. Q.9. How many resolutions will need to be passed at the second board meeting Will these resolutions pass This answer will depend on your answer to Q8. • Although the shareholders must approve the terms of the contract to purchase the land, it is the directors who make the decision to enter into the contract, and it must be validly executed, so they must now pass a further resolution to enter into the purchase contract and, as this is a simple contract, to authorise one director to execute of the contract in accordance with s.43. If not dealt with in Q8. • To approve the terms of, enter into and authorise one director to execute the contract for the sale of the existing premises. Again, this is a simple contract, so this complies with s.43 in relation to the execution of documents. Voting as above, unless Sadiq changes his mind on the purchase of the land. Q.10. How many resolutions will need to be passed at the general meeting Will these resolutions pass The shareholders will vote on a resolution to approve the SPT. The rules on voting are set out in s.321 and MAs 42 and 44. Voting is on a show of hands but any shareholder or group of shareholders holding 10 or more of the shares demand a poll, which means that the shareholders have one vote per share. All the shareholders can vote, including Megan and Richard. Shareholders can generally vote as they wish. There are only limited circumstances where a shareholder who has an interest in a matter cannot vote, and there are no restrictions in relation to an SPT. As with board meetings, it is the votes of the shareholders who are present which are counted, but shareholders have a right to appoint a proxy if they cannot be present in person. Under MA 45, this must be done by means of a signed notice in writing. The proxy will very often be the chair of the meeting, if there is one, or Esi may decide to appoint Sadiq. The proxy must vote in accordance with her instructions. This means that Esi can vote through her proxy. The resolution is an ordinary resolution, so a majority of more than 50 is required. We know that Tom, Megan and Richard all support the proposal, so on a show of hands there will be a simple majority and it will pass, whether or not Sadiq and Esi votes against it. The outcome will be the same on a poll Sadiq and Esi only hold 30 of the shares so it would be pointless for Sadiq to demand one. PART B The topic for analysis was as follows ...one of the big problems faced by company law is the opportunity that directors of a company have to misuse the company to benefit themselves. One of the ways of preventing misbehaviour is to make the directors subject to duties and take away any profits they make from breach of duty and require them to return any company property taken in breach of duty. French, D., ed., Mayson, French Ryan on Company Law, 37 ed., OUP, 2021. You should be prepared to answer questions that test your ability to analyse the doctrine of separation of power within companies and the duties of directors contained in ss.171 177 of the Companies Act 2006 . You should also be able to evaluate the scope and effectiveness of these duties in preventing abuse of power by the directors. Note to students You will be asked questions on this area of the law and your answers should demonstrate your ability to understand and critically analyse these issues. 1. What do we mean by separation of power or balance of power within companies Subject to any restrictions in the articles, the directors of a company are responsible for the daytoday management of the company and have the power to carry out their functions without interference from the shareholders. The shareholders are the investors in the company and the owners in the sense that their shares entitle them to a share of the assets of the company when it is wound up and do not take part in the management of the company. They do however have some rights, in relation to management, in that there are certain decisions that only the shareholders may make, and other decisions that the directors must refer to the shareholders to approve before committing the company to a course of action. These rights are designed to prevent the directors from abusing their power. 2. How effective do you think that requiring shareholder approval for a substantial property transaction is in preventing directors in small private companies from abusing their position • There is clearly a danger that a director or someone connected may take advantage of an opportunity to either purchase or sell an asset from or to the company on favourable terms, and inevitably that director will have conflicting interests and loyalties when deciding the terms of the contract. Whether or not the director has any dishonest intention, there is going to be a question mark over their impartiality, the more so in that SPTs can involve, as the name suggests, large amounts of money. s.190 puts in place protections by giving the shareholders the opportunity to veto the contract if a director appears to be abusing their position. But In small private companies, the directors and shareholders are very often the same people and there is no constraint on how shareholders vote, so a director who is also a shareholder with an interest in an SPT can still vote at a shareholder meeting. If the director has a majority shareholding or a strong influence on the other shareholders, as with the oral scenario, they will be able to push the transaction through. The protection offered is wide. s.190 also includes connected persons, as in the oral scenario, giving further protection from directors seeking to hide behind, for example a member of the directors family. Although SPTs will usually involve a contract between with the director or connected person, it also covers loose arrangements such as understandings and informal agreements which are not necessarily contractually binding, so it also prevents directors trying to evade the need to gain shareholder approval by not entering into a formal contract. But The other shareholders need to know about these They may not be aware of a connection with, e.g., a family member and there is no requirement for a shareholderdirector to declare an interest at the shareholder meeting and those who did not attend the board meeting if the interest has been validly declared under s. 177 would not know and see below.
These types of loose arrangement could easily slip through the net and never come to the attention of the shareholders. A shareholder meeting gives the shareholders the right to scrutinise the transaction and brings the matter to the attention of a wider audience, leading to wider discussion and greater awareness of what is going on and thus a more objective decision. But Again, the matter will have been discussed and minuted at the board meeting, but where the company is made up mainly of directors who are also shareholders, there is no wider audience. Even where there are more nondirector shareholders, these shareholders will not necessarily attend meetings or have little commercial awareness or interest in commercial decisions which do not directly affect their investment. Conclusion The requirement for shareholder approval can help to prevent outright abuse, although this will not in itself necessarily lead to a commercially sound decision. 3. From the facts of the oral scenario, do you think that either Tom or Megan have breached any of the general duties set out in ss.171 ss.177 Tom and Megan may potentially be liable for breach of the s.172 duty to promote the success of the company. A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard to six factors set out in s. 1721af. Here a relevant factor would be the longterm consequences of the decision. However, good faith is difficult to disprove and provided that a director honestly believed that his actions were in the best interests of the company, however poor the decision, the director will not be in breach of the duty. Tom and Megan do appear to believe that the purchase of the land from Richard is a good opportunity for the company. Megan may also be liable for breach of the s.173 duty to exercise independent judgement. A director should not be influenced by anyone else either from inside or outside the company and make decisions based on what they really think is best for the company. If Megan always relies on Richards advice and opinion, it is likely that she will be in breach of the duty. We would probably need more information on how far Tom was influenced by Richard, but the facts state that he is his own man. Students may mention s.174 duty to act with care, skill and diligence. There is an objective and subjective test. Objectively, the question is what a reasonably diligent director in that position would have done in the circumstances. The directors have had the land valued. Arguably, they could have looked further into the planning situation. Subjectively, the question is how that particular director would act, given their own particular skill or knowledge. None of the directors have any expertise that would be relevant here. It is less likely that they would be in breach of this duty. 4. Do you consider any of the general duties of the directors ss.171 177 add an extra layer of protection in preventing directors of small companies from abusing their position by entering into an SPT • Under s177, any director with an interest in a proposed transaction must declare that interest to the other directors, and that declaration will be minuted and the minutes are on record. However, under s. 1776b, if the other directors are aware of it, there is no need to do so although it is good practice. • The interest will prevent the director from counting in the quorum or voting on the terms of the contract, so that they will be unable to vote to further their own interests. But • The declaration is limited in that it is only required that it is declared to the other directors, and once it has been made the interested party need not • dos trie ielly in the case of small companies where the diectors a know each other that they will be aware of the interest, so often there will be no declaration and no record. Under s.172, the directors have a duty to promote the success of the company for the benefit of the shareholders as a whole. Arguably, this does provide a control on directors and again, the fact that the directors have had regard to the duty in a board meeting should be minuted, so it is a matter of record. But The limitation of this as an effective control is that the test for whether or not it has been complied with is, generally subjective. If the directors honestly believe that the transaction is for the benefit of the company, there is very little that can be done about it. The s.174 duty of care, skill and diligence should ensure that directors will thoroughly investigate the viability, and therefore, the impartiality, of a transaction, for example, a reasonably diligent director would obtain an independent valuation of the property to be acquired bought or sold. However • The problem with breach of duty is that an action can only be brought by the company, which is the proper claimant. This means that the directors must decide whether to bring the action. Shareholders cannot bring an action on behalf of the company and, often, directors will be reluctant to bring an action against one of their own as one commentator put it Turkeys dont vote for Christmas so this undermines the effectiveness of these protections. Their only way to seek redress for the company is by means of a derivative action, an action for unfair prejudice or asking the court to wind up the company on the just and equitable ground. Such actions are rare. 5. If not explained above What is the proper claimant principle See above. 6. If there is a breach of duty, can the directors avoid liability Under s.239, the shareholders of a company may ratify a breach of duty by ordinary resolution. However, if the director or anyone connected with the director is a shareholder then they cannot vote on the resolution. So, neither Megan nor Richard can vote to ratify her breach, and Tom cannot vote to ratify his own breach. Students may mention that a director can apply to the court for relief s. 1157. 7. li not mentioned above Explain why the directors in the Part A scenario are not in breach of their duty to act within their powers Directors must act in accordance with the companys constitution. The company was set up two years ago post2009 and has Model Articles for private companies limited by shares unamended. These do not impose any restrictions on what the company can or cannot do, so even though the company is a company providing payroll services, there is nothing preventing it from investing in land. Here, this falls under their general power of management conferred by Model Article 3. The directors must use the powers conferred by the articles for their proper purpose, but provided that they are acting in the interests of the company and not in their own interests. There is no suggestion that any of the directors are acting out of selfinterest. 8. Give an example of what practical steps directors should take to protect themselves against allegations of breach of the s.172 duty to promote the success of the company For all relevant decisions taken at board meetings, it should be minuted that the directors had regard to the factors set out in s.172. However, this on its own may not be enough. Directors must do more than pay lip service to their s.172 duty. They should document and keep records of all their discussions in relation to a matter, showing how they have done so. In the event of an action for breach, this would be evidence that they have had regard to the relevant factors. 9. Do you think that, in the Part A scenario, Richard is either a de facto or shadow director A de facto director is someone who, although they have not been appointed as a director, nevertheless acts as one. Richard does not take part in the management of the company, so this is unlikely. Under s.251, a shadow director is someone, although not appointed as a director, in accordance with whose instructions the directors of a company are accustomed to act. Although Richard appears to have considerable influence over Megan, and does try to influence the directors, it does not appear that they are accustomed to act in accordance with his instructions. Tom is his own man, and Esi appears to weigh things up for herself. It is unlikely that he falls within the definition.