CH14 Management of a company PDF

Preview

Summary

MANAGEMENT OFTHE COMPANY❖ Management of thecompany:➢ board of directors■ actcollectively■ the articlescan providefordelegations● s Companies Act2006○ ‘Includes anyperson occupyingthe position ofdirector bywhatever namecalled’● s Companies Act2006○ minimum numberof directors:■ Publiccompanies● Two■ P...

Description

MANAGEMENT OF THE COMPANY

POSITION OF THE BOARD

➔ The Companies Act 2006 does not attribute specific roles to the company directors

❖ Management of the company: ➢ board of directors ■ act collectively ■ the articles can provide for delegations

● s.250 Companies Act 2006 ○ ‘Includes any person occupying the position of director by whatever name called’ ● s.154 Companies Act 2006 ○ minimum number of directors: ■ Public companies ● Two ■ Private companies ● One ● s.156A Companies Act 2006 ○ incorporated by the Small Business, Enterprise and Employment Act 2015 ○ Directors must be natural persons

➔ It does not provide for the structure and form of corporate management either

●

Until the end of the 19th century ○ the general meeting of the company had constitutional supremacy ○ the board was deemed its agent

●

By the early 20th century ○ articles of associations gave boardrooms greater independence ■ The board should no longer be viewed as the agent or servant of the general meeting

Automatic Self-cleansi ng Filter Syndicate Co Ltd v Cunningha me (1906)

Gramopho ne and Typewriter Ltd v Stanley (1908)

➔ Balance of power between the shareholders and directors ●

Article 3 Models Articles of Association (similar to article 70) Directors’ general authority ●

Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company. ➽ Board virtual managerial autonomy

●

Article 4 Models Articles of Association ● Shareholders’ reserve power: ‘The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. ➽ Shareholders’ power to ‘give directions’ to the board. ●

The shareholders can instruct the board to act in a certain way ➢ a special resolution must be passed

1. Whether the directors cere bound to give effect to an ordinary resolution of the general meeting requiring them to sell the company’s undertaking to a new company incorporated for this purpose. 2. The Company’s articles of associations, similarly to article 3 of the model article, provided that ‘the management of the business and the control of the company’ was in the hands of its directors’.

Held: The board should no longer be deemed the general meeting’s agent. Collins MR, having reviewed the relevant article, explained that: “ it is not competent for the majority of the shareholders at an ordinary meeting to affect or alter the mandate originally given to the directors by the articles of association… the mandate which must be obeyed is not that of the majority – it is that of the whole entity made up of all the shareholders.”

Held: Lord Cozen and Hardy MR “The fact that an individual by himself or his nominees holds practically all the shares in a company may give him the control of the company in the sense that it may enable him by exercising his voting powers to turn out the directors and to enforce his own views as to policy, but it does not in any way diminish the rights or powers of the directors, or make the property or assets of the company his, as distinct from the corporation’s. Nor does it make any difference if he acquires not practically the whole, but absolutely the whole, of the shares. The business of the company does not thereby become his business.” ➜ Even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the company's affairs

John Shaw & Sons (Salford) Ltd v Shaw (1935)

1. P, J and Pe Shaw had a company together. 2. They had an argument over owing the company money, and the result was a settlement. P and J would resign as governing directors, promised they would not take part in financial affairs, and independent directors would be appointed and given control over the company's financial affairs. 3. When the independent directors required J and P to pay money to the company, they refused. 4. The independent directors resolved to bring a claim against them. Just before the hearing, an extraordinary general meeting was called, where as the majority shareholders P and J procured

Held: The Court of Appeal upheld the judge, so that the shareholders could not circumvent the company's constitution and order the directors to discontinue litigation.

➔ The Companies Act 2006 empowers shareholder to take a number of decisions in the company: ●

S. 21 CA 2006 ● power to alter the articles of associations

●

S. 617 & 641 CA 2006 ● deal with share capital

●

S. 549 & 551 CA 2006 ● deal with allotment of shares

●

S.168 & 14.1.5 CA 2006 ● power of shareholders to remove a director they disapprove, by ordinary resolution

a resolution to discontinue the litigation. 5. The company, and Percy, contended the resolution was ineffective.

Barron v Potter (1914)

1. Directors of company were deadlocked; were two factions of directors, both of whom refused to turn up to board meetings called by the other side in order to prevent there being a quorum. 2. General meeting of shareholders purported to appoint an extra director to break deadlock; one group of directors challenged this decision on grounds that only directors had power to appoint directors.

Held: The appointment was valid It is a default common law rule that annual general meeting has power to appoint directors where board is incapable of acting due to deadlock. ➜ Executive power will revert to the general meeting where the board of directors is deadlocked so that it is incapable of managing the company

·

APPOINTMENT OF DIRECTORS ➔ Statutory provisions give little direction to the appointment of directors ◆ the Articles of Associations deals with this issue

●

●

Section 16(6) CA 2006 ○ the persons named in the statement of proposed officers are, on the company’s incorporation ■ deemed to be its first directors and secretary

s.154 CA 2006 ○ minimum number of directors ■ Public companies ● Two ■ Private companies ● One

●

s.160 CA 2006 ○ for public companies the appointment of directors shall be ■ voted on individually ● unless there is unanimous consent to a block resolution

●

s.157 CA 2006 ○ the minimum age for appointment as a director is ■ 16

Morris v Kanssen (1946)

1. On 1 Feb 1940, C and K were the only directors and the only shareholders in a company. 2. The articles of association incorporated art 88 of Table A (repealed). 3. C and one S falsely claimed that at a meeting held on that date S was duly appointed a director and a minute was concocted to record the alleged appointment. 4. On 9 April, C and S, in purported exercise of the power conferred by the art of assos, requested K to resign his office and on 12 April, they purported to hold a meeting of directors and to issue one share to S and seven more shares to C. 5. On 26 April, an extraordinary general meeting of the company was held at which C, K and S were present; C moved and S purported to second a resolution to confirm the appointment of S as a director. 6. C voted in favour of the resolution and K against it and S having purported to vote in favour of it, it was treated as carried, so that S thereafter purported to act as a director. 7. No general meeting was held in 1941 and accordingly, by the effect of art 73

Held: the invalid appointment as a director and the invalid allotment of shares to him were not validated by s 143 of the Act (repealed), nor by art 88 of Table A (repealed), since these were designed as machinery to avoid questions being raised as to the validity of transactions where there had been a slip in the appointment of a director and not to override substantive provisions relating to such appointments. This was not a case where there was a defective appointment in the case of C and S but one where after 1941 there was no appointment of them as directors at all, so that their acts could not be validated.

Lord Simonds said: “‘There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, in other words, a defective appointment, and (b) no appointment at all. In the first case it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate for the purpose ; in the second case there is not a

➔ Beyond these provisions the CA 2006 is silent on boardroom appointments ◆ the issue is thus dealt with by the Articles of Associations

●

s. 12 CA 2006 ○ provides for the appointments of the first directors ■ Their successors are elected ● by shareholders in a general meeting

●

Article 20 of the model Articles of Associations for Public Companies Art 73 Table A 1985 ○ at the first annual general meeting (AGM)

=

■ ○

of Table A (repealed) as varied by art 22 of the company’s articles of association, there were thereafter no de jure directors. 8. In March 1942, C and S purported to hold a meeting of directors and thereat to appoint one M a director; all three then purported to allot 34 shares to M; 32 more shares to S and 24 more shares to C. 9. Subsequently S transferred 17 of his shares to M:

❖ Invalid appointment (defective) ➢ acts not invalidated

all the directors ● shall retire from office

and at every subsequent AGM ■

defect, there is no act at all. The section does not say that the acts of a person acting as director shall be valid notwithstanding that it is afterwards discovered that he was not appointed a director. Even if it did, it might well be contended that at least a purported appointment was postulated. But it does not do so, and it would, I think, be doing violence to plain language to construe the section as covering a case in which there has been no genuine attempt to appoint at all. These observations apply equally where the term of office of a director has expired, but he nevertheless continues to act as a director, and where the office has been from the outset usurped without the colour of authority.”

❖ No appointment ➢ acts invalidated

any directors who have been appointed by the directors since the last AGM or who were not appointed at one of the preceding two AGMs, ● must retire from office. ➽ Not required for Private Companies

●

s. 161 CA 2006 replacing s. 285 CA 1985 ○ the acts of a person acting as a director are valid ■

notwithstanding that it is afterwards discovered that ● there was a defect in his appointment, ● that he was disqualified from holding office, ● that he has ceased to hold office, ● or that he was not entitled to vote on the matter in question

DIRECTOR’S REMUNERATION

➔ Directors are not entitled to be paid ◆ Unless it is provided otherwise by ● the Articles of Associations, ● or a service contract

Re George Newman & Co (1895)

1. N, the chairman of a company in which substantially all the shares were held by himself and his family, purchased on behalf of the company the right to a building agreement to be obtained from certain commissioners. 2. The commissioners objected to the company as tenant, and proposed to

Held: N was not liable for the £7,000, but was liable for the £3,000 and the £3,500, because the shareholders for the time being had no power to authorise the making of presents to directors out of money borrowed by the company, and because if there had been such power it could be exercised only at a general meeting.

● ●

Article 18 Model Articles of Association for Private Companies Article 22 Model Articles of Association for Public Companies ○

directors shall be entitled to such remunerations as they determine ■

Issues of transparency and accountability 3.

●

●

DTI consultative documents, Directors’ Remuneration (URN 99/923) (London, DTI, 1999) and (URN 01/1400) (London DTI, 2001) ○ BIS (formerly the DTI) proposals for reinforcing the accountability of directors to shareholders over boardroom pay awards

s. 420- 422 CA 2006 ○

mandatory requirement for quoted companies to add ■ a statement of remuneration policy and ■ details of remuneration of each director ● to their annual report

➜ Recommendation of the DIT implemented by Statutory Instrument ●

s. 422(1) CA 2006 ○ ○

●

The remuneration report must be approved by the board of directors and signed on behalf of the board by a director or secretary of the company ■ Used to be only ‘advisory’

s. 439 CA 2006 ○

makes the shareholders’ vote binding as to the company’s remuneration ‘policy’.

⟹ Each quoted company must have its policy on executive remuneration approved by shareholders every three years, ➥ and the company can only then pay its executive directors in accordance with the approved remuneration policy.

●

s. 412 CA 2006 ○ requires disclosure in the annual accounts of directors’ emoluments, including present and past directors’ pensions and compensation for loss of office.

4.

5. 6.

substitute N, who thereupon sold the benefit of the agreement to the company at an advance of £10,000, of which £7,000 was spent upon commissions and otherwise in order to obtain the agreement from the commissioners, and £3,000 was applied by N to his own use. A further sum of £3,500 was spent by N out of the assets of the company upon his private house. These payments were made out of money borrowed by the company for the purpose of its business; they were sanctioned by resolutions of the directors, and were approved of by all the shareholders. The articles contained no power to make presents to directors. Upon a summons taken out by the liquidator in the winding up of the company against N under s 10 of 1890 (Winding up) Act (repealed):

A registered company cannot do anything which all its members think expedient, and which, apart from the law relating to incorporated companies they might lawfully do Lindley, LJ. ➽ Directors cannot pay themselves for the services, or make presents to themselves out of the company’s assets, unless authorised so to do by the instrument which regulates the company, or by the shareholders at a properly convened meeting.

●

s. 228- 330 CA 2006 ○ provide that the terms of a director’s service contract must be made available for inspection either at its registered office or the place where its register of members is kept if other than its registered office. ■ Breach of this requirement may result in a fine on conviction.

REMOVAL OF DIRECTORS ●

Section 168(1) CA 2006 ○ a company may by ordinary resolution remove a director before the expiration of his period of office, ■ notwithstanding anything in the articles ■ or any agreement between him and the company

➢ Special notice must be given

●

s. 168(2) & 312 CA 2006 ○ at least 28 days’ notice must be given before the meeting at which the resolution is to be moved

Bushell v Faith (1970)

1. Private company had 300 shares, divided equally between A, B and C. 2. Company’s articles provided that where a vote was called on the removal of a director, that director’s shares would have three votes per share (as opposed to the usual one). 3. A and B proposed ordinary resolution to remove C, and claimed it passed 200 shares to 100; C claimed that by virtue of articles, his shares had three votes each when voting on resolution and therefore the resolution was defeated 300 votes to 200.

Held: the articles provided that on a resolution to remove a particular director, his shares would carry the right to three votes per share. ➵ This meant that he was able to outvote the other shareholders who held 200 votes between them. In other words, the ordinary resolution could be blocked by him. The House of Lords approved the clause. Lord Upjohn reasoned that: ‘Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit.’

●

s. 168(5) CA 2006 ○ If a director has a service contract complying with s.188 ■ he may be entitled to remedies for his removal ■ Southern Foundries v Sirlaw

●

s. 169(2) CA 2006 ○ The director concerned is entitled to address the meeting at which it is proposed to remove him

He went on to state that in framing s.168 (s.303 CA 1985) all that Parliament was seeking to do was to make an ordinary resolution sufficient to remove a director and concluded that:

●

s. 169(4) CA 2006 ○ the director in question may also require the company to circulate to the shareholders his representations in writing providing they are of a reasonable length

‘Had Parliament desired to go further and enact that every share entitled to vote should be deprived of its special rights under the articles it should have said so in plain terms by making the vote on a poll one vote one share.’

⚠ Section 168(1) CA 2006 cannot be removed by the articles ⟹ However, directors can entrench themselves through a clause which would entitle him to weighted voting 🚩🚩 Weighted voting clauses are prohibited by the LSE Listing Rules NB: s. 549-551 CA 2006 entitles the company to issue additional share, which can compete with the weighted voting clause.

➥ This allotment can be challenged on the basis that it is for an improper purpose under Howard Smith Ltd v Ampol Petroleum (1974)

EXECUTIVE AND NON-EXECUTIVE DIRECTORS ❖ EXECUTIVE DIRECTORS ➢ Full- time officer ➢ generally has a service contract with the company ➢ has an overall responsibility for the running of the company ■ The articles provides for the appointment of a managing director (chief executing) ❖ NON -EXECUTIVE DIRECTORS ➢ Part-time appointment ➢ act as monitor of the executive management ■ Normally appointed to the board of larger companies

DE FACTO DIRECTORS

➔ A de facto director is a directors which has not been formerly appointed, ◆ but has nevertheless acted as a director

NB: It generally arises in relation to disqualification orders under r the Company Directors Disqualification Act (CDDA) 1986

Re Richboroug h Furniture Ltd (1996)

SoS for Trade and Industry v Tjolle (1998)

1. The court was faced with the question whether one of the three respondents, who was not a director of the company de jure, was nevertheless a director of the company de facto and as such liable to disqualification.

Held: Lloyd J stated that emphasis should be given to the functions performed by the individual concerned Applied in Secretary of State for Trade and Industry v Jones (1999)

Held: Jacob J stated that the essential test is whether the person in question was ‘part of the corporate governing structure’. This was approved by the Court of Appeal in Re Kaytech International plc

Re Kaytech Internation al plc (1999)

Held: A de facto director is one who has not been formally appointed but has nevertheless acted as a director Confirms that the question is whether the person was part of the corporate governing structure

SoSfTI v Hollier (2006)

Held: Etherton J, having made the point that no one can simultaneously be a de facto and a shadow director, went on to state that although various tests have been laid down for determining who may be ...