Unlocking chapter 9 Corporate governance PDF

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Chapter 9 Unlocking Company Law summary...

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Corporate governance Introductions and key organs of governance of a company Central concerns are who empowered to make decisions about the company’s affairs and how those decisions may legally be taken. The UK corporate governance framework UK corporate governance framework is described in the 2016 Green Paper and 2017 White Paper on cg reform as a ‘framework of legislation, codes, and voluntary practices’, key pillars are listed in green paper. (a) Robust framework of company and financial markets law which promotes accountability and transparency (b) Unitary board system which makes directors collectively responsible for the decisions of the board (c) Financial reporting council’s UK cg which sets out good governance principles and practices on issues such as board responsibilities, composition, remuneration and sh relations, it applies to leading listed companies on a comply or explain basis (d) FRC’s stewardship code which sets out the principles of effective stewardship by investors It is 2006 act and aoa that establish the unitary board system. Financial market law in cg is sometimes referred as securities regulation it applies most exclusively to companies with publicly traded shares. Cg is relevant to very few companies, only those with premium listing (rather than standard listing) of its shares on the main market of London Stock Exchange. Listing rules for premium companies to include their annual reports and accounts of statement on how they applied main principles of code and whether they have complied or not, if not, reason for non-compliance. Cg published and kept under review by FRC. Aim of stewardship code is to encourage institutional shs to play more active role in cg that had been the case leading up to the financial crisis and the involvement of FRC intended to give it quasi-official status to promote adherence to it. The key organs of governance of a company -

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BOD and shs. Shs are often referred as ‘the shs in gm’. Accurate for public company because shs must take place by resolutions being passed at a shs’ meeting s281(2). But not appropriate for private as there’s no requirement for them to hold shs’ meetings and private shs’ may make decisions without meetings, by written resolution s281(1). Efforts made to encourage enhancement of shs in governance of company, especially on publicly traded shares companies where there’s a divorce ownership control. Shs are looked to monitor the self-interested behaviour of directors, particularly in relation to director’s remuneration.

Sh governance Introduction Role of shs in governance is established by a combination of: (a) Constitutional rules of company (AOA) (b) Statute law (2006 act and IA1986) (c) Cases recognising power of the shs in certain circumstances Shs are sometimes referred as ‘residual controllers’ of company: (a) Law requires certain fundamental decisions made by shs (b) Articles normally entrust management to bod they also usually reserve rights for shs to direct board by special resolution or any specified matter (c) If bod unable to act, power will revert to shs (d) Shs have right to remove directors from office (and appoint) Shs in closely held companies Usually ‘owner managed’ companies. Decision-making can be very informal. Often major shs are directors who are also executives/managers. The shs/executives/manager are usually focused on running business, not figuring out which capacity the law requires him to take a particular decision. Shs in publicly traded companies Interest of shs is to see the price of shares increase and receive adequate dividends on their shares. Little or no interest is shown in filling out proxy form enclosed with invitation to the agm empowering another to exercise their vote on proposed resolutions, never mind in attending the agm. Attendance at sh meeting is very poor and in all shs have entrusted governance to the bod. Division of powers in the articles Art 3 of both ma for private and public establishes the bod as principal organ of management of company: Directors are responsible for management of the company’s business, for which purpose they may exercise all the powers of company. Powers of company can only be exercised by bod collectively, that is by majority in a meeting or unanimously outside meeting. This power also subject to provisions of 2006 act. Art 4 of both ma and ltd and plc establishes reserve power for the shs: (a) Shs may, by special resolution, direct the directors to take, or refrain from taking, specified action Attempts by shs to usurp bod powers by passing ordinary resolutions or acting in any other way inconsistently will not succeed. Case: Automatic Self Cleansing v Cunninghame 1906. Powers of general management were vested in bod subject to directions from shs by extraordinary resolution. 2 of shs passed an ordinary resolution directing bod sell company’s business. Director objected to the sale. Held: Bod could lawfully refuse to comply as direction by ordinary resolution is insufficient. Shs were only competent to intervene by extraordinary resolution. (Extraordinary resolution are no longer provided for in 2006 act. They required 75% support and had to be passed at an extraordinary gm) Case: John Shaw & Sons (Salford) Ltd v Shaw 1935. Articles vested general powers of management in “permanent directors”. Permanent directors resolved to institute proceedings against 3 “ordinary directors” who were shs. Shs passed a resolution to discontinue company’s legal proceedings. Held: shs had no power to overrule the decision of permanent directors. Options available are to change articles, or remove bod. Decision on whether or not a company should commence legal action is part of the management of the company so will ordinarily be vested in bod pursuant to art 3.

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Harman J retrained majority sh from taking any further action in litigation commenced by the sh without authority of the bod until a bod meeting could be held at which it could be resolved whether to continue or discontinue legal action.

Statutory powers of shs -

Mainly in 2006 but also arise from ia1986.

Power given to shs by the 2006 Main powers are: (a) Amend company’s constitution s21(1) (b) Resolve to re-register company, from private to public, vice versa (c) Remove directors by ordinary resolution s168 (d) Approve director service contracts if employment is guaranteed for more than 2 years (e) Approve substantial property transactions and loans between company and a director (f) Ratify directors’ breaches of duty (g) Authorise political donations in excess of 5k (h) Approve appointment of company auditor (i) Authorise bod to allot shares (although automatic for private) (j) Disapply pre-emption rights (k) Reduce share capital (l) Authorise company to purchase its own shares (m) Approve a payment out of capital for redemption or other acquisition of a company’s own shares Shs have statutory power to remove but no power to appoint directors. Appointment is provided in company’s articles. Power given to shs by insolvency act 2006 -

Main power, to decide by special resolution, to wind up company voluntarily, 1986 s84(1).

Default powers of shs Management power will revert to shs if bod is unable to act. Case: Barron v Potter 1914. Company had 2 directors and articles gave power to appoint additional directors. One director could not attend bod meeting at which the other was present. Held: general resolution appointing an additional director is valid. If directors have certain powers are unable or unwilling to exercise, there must be some power in the company to do itself that which under other circumstances would be otherwise done, in my opinion, company gm has power to make the appointment. How shs exercise their powers Resolution: formal way in which decision of shs or directors is proposed and passed. Shs exercise their powers by taking decision and rules governing how decisions are to be taken are determined by combination of articles, statute and common law. 2006 requires sh resolution and decisions are usually taken by resolutions in accordance with provisions. Common law preserved which leaves open the potential for sh decisions to be effective even if they are made otherwise than passing a resolution, s281(4)(a), common law may override statutory rules as to which resolution is or is not treated as having been passed and undermine the statutory rules insofar as common law may preclude the person from alleging that a resolution has not been duly passed. Common law rules are considered after statutory rules. Statutory provisions on resolutions 2006 states resolutions of shs of public must be passed at shs’ meetings held and conducted in accordance with the 2006 for which notice has been given in accordance with the act. Private shs must pass resolution either at similarly conforming shs’ meetings or by written resolution. It is only possible to determine whether or not a resolution has been validly passed if we know: (a) Shs have right to vote (b) Proportion of votes needed to pass the resolution (c) How votes are to be counted Voting rights Company must have at least one class of shares that carry right to vote. Unless articles provide otherwise, every share carries one vote on every resolution put to shs s284, except in a vote by show of hands. Articles may provide for weighted voting rights, Bushell v Faith 1970, rendered s168 by which sh may remove director by ordinary resolution, a presumptive rather than mandatory rule. Aoa resolution authorising allotment may state that a certain class of shares carries the right to vote on resolutions on matters affecting the rights of the class. Proportion of votes needed to pass resolution Ordinary resolution: resolution of members passed by a simple majority of 50% + 1 vote of those eligible votes, s282. -

2 basic types of resolution ordinary and special. Special resolution: resolution of members used for significant decisions requiring 75% majority of votes which must be described as special resolution and the text of which must be set out in any notice, s283.

Voting methods 3 methods, 2 at shs’ meetings and 3rd only available to private (written resolution). (a) Show of hands, shs in meeting raising hands, a simple majority of shs (including duly appointed proxy) who vote for resolution. Special resolution if passed by not less than 75% shs who vote. (b) Poll vote, vote in writing in gm, where shs or proxies vote in proportion to their voting shareholdings. Not based on number of shs but voting rights of shs who vote. A resolution passed on poll is general resolution if passed by shs representing a simple majority. Special resolution 75%. Person with more than 1 vote is under no obligation to cast all his votes or cast those he uses in the same way, s322. Written resolution vote

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Statutory -

Not based on number of shs who actually vote, but on voting rights of all shs eligible to vote. Voting on written resolution is calculated in the same way as on a poll vote: proportion of votes held by those shs. Private companies may not use written resolution procedure to remove a director pursuant to s168 or auditor before expiry of his term of office. provisions on sh meetings (ss301-361) Quorum: minimum number of people necessary for the transaction of business at general meeting or board meeting. Agm: gm of members which public must hold each calendar year within 6 months of the financial year end. If one individual present represents 2 or more shs, the meeting is not a duly constituted meeting and no business can be conducted.

AGM -

Stating that it is an agm must be given to all shs and directors unless all shs entitled to attend and vote agree to shorter notice.

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(a) (b) (c)

Gm: meeting of members of company. Special notice: notice required from the proposing shs to the company, of ordinary resolutions to remove a director or remove, appoint or reappoint an auditor. Directors may call gm and are required to call if holders of at least 5% of voting rights of shs having a right to vote at gm request the director to do so. If fail to call within 21 days or hold within 28 days, shs who made request may call a meeting and hold it within 3 months request. Special notice is required for 4 resolutions: Remove a director pursuant to s168 Appoint someone in his place at removal meeting Remove an auditor s511

(d)

Appoint a new auditor s515

GM

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Class meetings Meeting of shs of a particular class of shares. Court-ordered meeting Sh decisions recognised at common law Principle that shs of company may unanimously reach a decision without need for compliance with formal procedures is known as ‘Duomatic principle’. Re Duomatic Ltd 1969, Lord Davey referred to principle in Salomon to confirm that the company was bound by the purchase of boot manufacturing business because the unanimous agreement of shs of the company was an inevitable inference from the circumstances. Principle was applied in, Re Express Engineering Works Ltd 1920, purchase of property paid for by the issues of debentures had been approved by resolution of 5 directors at directors meeting. All director’s attendance at the meeting were disqualified from acting because they were all interested in the seller of the property, so director’s resolution was ineffective. Directors were also shs of company. Liquidator argued issue of debentures was invalid. Held: court refused to set debentures aside. Meeting was directors meeting, but it might be considered a gm it would have been within their powers to do so and it appeared to Lord Sterndale MR that was in fact what they did, and the company was bound by unanimous agreement of the shs. -

Duomatic principle is not available if the company is insolvent or will become insolvent as a result of the decision in relation to which the principle being argued to be applicable and it is for party seeking to invoke the principle to prove the company was solvent.

Judicial constraint on the exercise of voting rights by a sh Sh is required to think beyond his self-interest is unclear. BOD -

Bod as decision-making organ of company. Composition of board. Directors terms of service and remuneration.

Board powers and decision-making Art 3 of both ma for private and public establishes bod as the principal organ of management of company: Bod collectively that is entrusted by articles with responsibility to manage the company and it is the bod collectively, as an organ of government of the company, that is empowered to exercise all the powers of company for this purpose. Re Marseilles Extension Railway Company, ex parte Credit Foncier and Mobilier of England 1871. Although ma do not contain any limitation, it is not uncommon for articles of company to limit the general allocation of management and powers to the bod, by requiring sh approval before certain powers of company may be exercised. Delegation and authorisation Company powers are not only exercised by bod. Delegation of power is essential if company is to be run efficiently. Art 5 of ma empowers bod to delegate any power conferred on it by the art. -

Board’s power delegate is broad.

Board decision-making Sole director companies The remainder of this section on board decision-making is not relevant to a private company that has only 1 director and no provision in its articles requiring it to have more than one. Board decisions Statute does not regulate board decision-making. Part 2 of ma contain extensive rules. Plc -

Ma for plc governing taking of decisions by the board are straightforward. Art 7(1) provides subject to articles, decisions of directors must be taken:

(a) (b) -

At directors’ meeting In the form of directors’ written resolution Not to confused sh written resolutions, a form of resolution permitted only by ltd, with written board resolutions of public companies.

Private companies Ma governing taking of decisions by bod are not drafted as clearly as plc. Art7 sets basic rule and art 8 provides unanimous decisionmaking outside bod meetings. Unanimous informal decisions may be arrived at in a number of ways. Majority decision outside bod meetings will not be effective except where a specific provision permitting majority decisions to be taken outside meetings appears in the aoa of company. Definition and classification of directors Director: any person occupying the position of director by whatever name he is called. Individuals behave openly like directors without the formalities of appointment having taken place (defacto directors), individual does not patently behave as director but gives directions and instructions that the other directors of company follow (shadow directors). Are they regarded as directors for the purposes of owing directors’ duties to the company? Law commission explained the approach to be taken to determining whether a particular statutory provision extends beyond de jure directors. Customs commissioners v Holland (2010), de facto directors, in first instance, involved alleged BOT or fiduciary duty by allegedly de facto director. Smithton ltd v Naggar (2014), lady justice Arden set out a number of points of general practical importance in determining defacto. Defacto owe general duties of directors set out in part 10 of 2006 act and fall within meaning of director in ss212 and 214 of ia1986. Shadow directors Defined in s251. -

If directors of company act on advice of another given in professional capacity conferred by or under an enactment of Minister of the Crown, person will not be regarded as shadow director. SS for Trade and Industry v Deverell 2000, Morritt LJ reviewed the authorities and summarised them as follows:

Executive and non-executive NED: director who is not an employee of the company and who has no executive responsibilities. ED: refer to a director who usually has extensive powers delegated to him by reason of the role he performs in the company, his service contract will be separate from his appointment as a director. -...