Corporate Administration and Management 2008

8/9/2019 Corporate Administration and Management 2008

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Manchester Metropolitan University Business School

Economics and Law

Law Lecture Handout 8

Company Law: Corporate Administration and Management

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Corporate Administration and Management

A. Meetings

Types of Meetings

1. Board of Directors MeetingThis is a meeting of the Board of Directors. Usually all the directors of the company

(whether Executive or Non-Executive) will be present. Unless the Articles of the

company state otherwise, there are no special rules for calling a Board meeting.

Section 318 of the Companies Act 2006 states that there must be one qualifying person

in the case of a single member company, and, subject to the provisions of the Articles,two qualifying persons in any other case, for the meeting to be valid. The companys

Articles may set their own quorum for that particular company.

Quorum: This is the minimum number of people that must be present in a meeting for the

business to be validly transacted.

2. Annual General Meeting (AGM)

Companies hold such meetings to run the affairs of the company and to enable the Board

to conduct vital business, such as:

a) To obtain shareholders consent before certain decisions are made which bind thecompany.

b) Allowing the shareholders to question the Board on the progress of the company

and to express their views.

c) The appointment and removal of directors, the appointment and removal ofauditors.

d) The decision to award a dividend.

The law says that there shall be an Annual General Meeting every year and that no more

than 15 months shall elapse between one meeting and the next. The first meeting must be

held within 18 months of incorporation.

If no meeting takes place then the directors are liable to fines and the Secretary of State,

on the application of any member, can direct the calling of an AGM

A court can call an AGM or an EGM if for any reason it is impracticable to call a

meeting according to the Articles.

N.B: There is no longer a statutory requirement forprivate companies to hold an AGM.

3. Extraordinary General Meeting (EGM)

This is any general meeting other than the AGM.

There are no limits on the number of such meetings in a year or the intervals betweenthem. They will usually be called if

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a) The directors want some business to be approved by the shareholders, and they do

not want to wait a year until the next AGM.

b) The holders of 10% or more of the paid-up capital carrying voting rights ask for ameeting. If they ask for a meeting and one is not held then they can organize a

meeting themselves and their expenses must be paid for by the company

Proceedings at Meetings

A meeting may only proceed to deal with business if the following requirements havebeen satisfied:

1. The correct amount of notice of the meeting has been given (the Board must give 21

days notice of an AGM and 14 days for an EGM).

2. There is a quorum present at the meeting.The meeting is presided over by a Chairman. The Chairman of the Board of Directors

shall preside as chairman at every general meeting. If he or she is ill/ unable to attend,

then another director should act as chairman.

Resolutions

This is the method by which companies decide what they are going to do. When adecision has to be reached at a meeting the Chairman will ask the members to vote on a

resolution. The type of resolution used will depend on the type of decision to be taken.

There are 3 main types of resolutions. These are:

1. Ordinary Resolutions

An ordinary resolution can be passed by a simple majority of those voting i.e. 50% + 1.It should be noted that the rule is one vote per share, not one vote per person. Someone

holding 50% plus of the voting shares can therefore dictate what will be passed.

Ordinary resolutions are used for the appointment and removal of directors. They are alsoused for the appointment and removal of auditors.

2. Special Resolutions

A special resolution is a resolution passed by at least three quarters of the members. They

are normally used for reaching more significant decisions or carrying out significant

changes. They are used for:

Alteration of the Articles of AssociationAlteration of the Memorandum

Change of the companys name

There are some other types of resolutions that companies can use. These are usually used

by private companies only. These are:

Written Resolutions

Under sections 281(2) and 283(2) of the Companies Act 2006, a private company can

make important decisions without a meeting if there is a resolution signed by either 50%

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of the members entitled to vote (for ordinary resolutions) or 75% of the members entitled

to vote (for special resolutions).

Voting At a Meeting

All decisions are made at a meeting by shareholders voting to pass or refusing to pass

resolutions.

Voting can be done by

Show of hands- the problem with this is that it is 1 shareholder = 1 vote, and thisis unfair for shareholders who have more shares than the others.

Poll vote- a written record of each members vote. With this system, every

member gets one vote for each share they own i.e. a vote for every share (1 share= 1 vote).

An important point about company meetings is that shareholders do not always have to

appear at the meeting in person; they can appoint another person (called a Proxy) toattend the meeting and to vote on their behalf. This is called Proxy Voting.

The Board of the company sends out proxy forms, which allow shareholders to appoint

the proxy. Forms must be sent to everyone so that all shareholders have a free choice as

to whom they wish to choose to be their proxy.

The Articles usually provide that the proxy form appointing a proxy must be lodged at

the registered office not later than 48 hours before the meeting. If a shareholder changes

his mind and decides to attend the meeting in person then his personal vote will overridethat of a proxy.

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B. Directors

The Meaning of Director

Companies Act 2006, section 250: director includes any person occupying the positionof director, by whatever name called.

The law generally refers to the directors, but the terms the Board and the Board ofDirectors are also commonly used to refer to the directors acting collectively as one

body.

Types of Director

Executive Director

They play an active role in the company, normally as the companys managers (for

example the managing director, chief executive, finance director, etc). They are usuallyemployees of the company.

Non-Executive Director

Non-Executive Directors are those directors who have no role in the day to day

management of the company. They sometimes operate in a part-time capacity; their roleis generally to attend board meetings, advise with due diligence and in good faith, and to

take a constructive part in making decisions. Their prestige and business experience may

also be valuable to the company.

Terminology regarding Directors

a) De Jure DirectorA director that is appointed formally by a company in accordance with the relevantarticles and details of his or her appointment notified to the Registrar of companies. A

person must agree to his or her appointment.

b) De Facto Director

This is someone who acts as a director (e.g. by participating in board meetings). They

will usually perform the functions of a director even though they have NOT yet beenformally appointed, and because the Board permits them to perform the functions of a

director they are treated as directors by the law.

c) Shadow DirectorThis is a person, in accordance, with whose directions or instructions the directors of the

company are accustomed to act. They could, therefore, be liable to the company in the

event of its insolvency.

Number of Directors

According to the Companies Act 2006, section 154, a public company (PLC) must haveat least 2 directors.

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A private company (LTD) must have at least one.

A companys Articles may increase the minimum number of directors required, or set a

maximum.

Appointment and Removal of Directors

The appointment and removal of directors is governed by the companys Articles ofAssociation.

The first directors of the company are named in a statement filed when a company isformed.

Subsequent directors are normally appointed by shareholders in general meeting.

The shareholders have a guaranteed right to remove any director by ordinary resolution

(Companies Act 2006, section 168)

Liability of directorsWhile the company is operational:

a) Anyone disqualified by the court (under the Company Directors DisqualificationAct 1986) will be personally liable for the companys debts if he disobeys the

court order.

b) Any director who personally guarantees the debts of a company will be personallyliable.

When the company is insolvent, and is being wound up:a) A director may be personally liable if he has been guilty offraudulent trading

(Insolvency Act 1986, section 213). The director is liable (without limit) to

contribute to the companys assets when the company is being wound up.

b) A director may also be personally liable forwrongful trading (Insolvency Act

1986, section 214). A director who knows, or ought reasonably, to know that abusiness has no reasonable prospect of survival or recovery must take immediate

steps to minimize loss to creditors. Directors must be careful not to carry on

trading when the company is failing.

Directors Duties

There are two ways in which the duties that directors owe towards their companies areviewed.

1. Shareholder PrimacyCompanies to be run primarily for the benefit of their shareholders. The easiest way

to assess the benefit of the shareholders is to look at the companys financial

performance, i.e. profits.

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Views companies as profit-maximizing entities, with no other objectives other than

maximizing shareholders profits.

2. Enlightened shareholder Approach

This approach advocates that directors should operate companies for the benefit of

shareholders, however the benefit of shareholders is given a wide interpretation, sothat it includes considering the interests of employees, customers (consumers),

suppliers and the wider community.

This approach views all of these wider interests as enhancing the reputation of the

company and the quality of living in the wider community, and therefore in the best

interests of the shareholders.

As a general rule, directors owe their duties to the company itself, and they have to act in

the best interests of the company as a whole (Companies Act 2006, section 170(1)).

Directors do not owe any general fiduciary duties to the companys shareholders

personally. Their duties are owed to the company.

Directors do not owe any general duty of care to the companys creditors (but they might

be under a duty to minimize losses if the company becomes insolvent).

The duties that directors owe to their companies are:

1. Duty to act within powers (Companies Act 2006, section 171)

Directors must act in accordance with the companys constitution, and must exercise their

powers only for the purposes for which they were given. They cannot exercise their

powers for selfish reasons or for other ulterior motives. They are NOT allowed toexercise their powers for an improper purpose.

Howard Smith Ltd v Ampol Petroleum Ltd [1974]

Facts: Two shareholders who had 55% of the companys shares announced that they

would reject a takeover offer from a particular takeover bidder.

The Board of directors then decided to create new shares and issue them to the

takeover bidder (so as to reduce the shareholding of the rebel shareholders tobelow 50%), thereby removing their majority.

Held: The Board had acted with an improper purpose.

2. Duty to promote the success of the company (Companies Act 2006, section 172)

Directors must exercise their powers for the companys benefit. This means that theymust exercise their powers in the best interests of the company. They are bound to

exercise their powers bona fide in the interests of the company.

It is a duty of honesty and good faith.

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Traditionally the interests of the company were often linked to the interests of the

shareholders, BUT nowadays it extends to other members of the company. This is

because Corporate Social Responsibility (CSR) now requires directors take into accountof other matters in addition to shareholders profits. These other matters include:

(a) the likely consequences of any decision in the long term

(b) the interests of the companys employees

(c) the need to foster the companys business relationships with suppliers, customers and

others

(d) the impact of the companys operations on the community and the environment

(e) the desirability of the company maintaining a reputation for high standards of

business conduct

(f) the need to act fairly as between members of the company

(g) the interests of creditors (Companies Act 2006, section 172(3))

3. Duty to exercise independent judgment (Companies Act 2006, section 173)

Directors must exercise their independent judgment. This means they have to exercise

their own powers of judgment, and cannot merely copy other directors. They must NOTfetter their discretion (i.e. limit their discretion or their power) unless they act in

accordance with an agreement which has been duly entered into by the company or in a

way authorized by the companys constitution.

4. Duty to exercise reasonable care, skill and diligence (Companies Act 2006, section

174)

Directors must always exercise reasonable care, skill diligence when carrying out their

duties. According to the Companies Act 2006, reasonable care, skill and diligence is

defined as

a) the general knowledge, skill and experience that may reasonably be expected of aperson carrying out the same functions (objective element), AND

b) the general knowledge, skill and experience of that particular director (subjective

element).

Dorchester Finance Co. Ltd v Stebbing [1977]

Facts: There were three directors. One of them managed the company. He called noboard meetings; the other two rarely visited the business; they even signed blank

cheques for him.

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Held: The two had broken their duties. They had NOT acted as conscientious directors

and they had not made available their professional accountancy skills. By not

paying attention to what the managing director was doing, and by signing blankcheques without questioning what they were for, the two had failed to exercise

any skill and care in the performance of their duties.

5. Duty to avoid conflicts of interest (Companies Act 2006, section 175)

Directors must NOT put themselves in a position where their interests conflict with the

interests of the company.

This duty is similar to the fiduciary duty that a trustee would have with regards to a trust.

The duty to avoid conflicts of interest applies to the use of any property, information or

opportunity, whether or not the company could take advantage of such property,information or opportunity.

If a conflict of interest does arise, the director concerned must inform the Board of

directors promptly, and full disclosure of the conflict of interest must be made.

Cook v Deeks [1916]

Facts: The directors of a construction company negotiated a contract in the usual way, as

if they were making it for the company. However, they made the contract in their

own names, and took the profit.

Held: They had to account to the company for the profit.

6. Duty not to accept benefits from third parties (Companies Act 2006, section 176)

Directors must NOT accept any payments, favours, commissions or other advantagesfrom third parties without informing the company of such payments, favours,

commissions or other advantages.

It used to be known as the rule against secret profits, and it banned directors from making

undisclosed profits by virtue of their position as directors.

Any payments, favours, commissions or other advantages a director receives from a third

party must be disclosed to the company in general meeting, and all shareholders must

authorize it.

Third parties are defined as someone other than the company, an associated body

corporate or a person acting on behalf of the company or an associated body corporate

(Companies Act 2006, section 176(2)).

Boston Deep Sea Fishing and Ice Co v Ansell [1888]

Facts: A director received an undisclosed (secret) commission from the builders of anew boat for his company, and undisclosed bonuses from a company supplying

ice.

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Held: He had to account for the money because it was a secret profit, and this is NOT

allowed.

7. Duty to declare interest in a proposed transaction or arrangement (Companies

Act 2006, section 177)

Directors must NOT have personal interests in transactions involving the company.

A director must disclose any interest (whether it is direct or indirect), that he has in

relation to a proposed transaction or arrangement with the company.

Since the interest can be direct or indirect, the director does not need to be a party to the

transaction for the duty to apply. However, the interest must be one that can reasonably

be regarded as likely to give rise to a conflict of interest.

The director must declare the nature and extent of his interest to the other directors. It is

not enough to state merely that he has an interest. Disclosure can be made by written

notice, general notice or disclosure at a meeting of the directors.

Transvaal Lands Co v New Belgium Land and Development Co [1914]

Facts: A director of a company failed to inform his company that he had shares in

another company which his company was contracting with.

Held: He had an interest, and therefore should have disclosed it.

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Seminar Questions

1. What is an Annual General Meeting?

2. Discuss the methods by which companies decide what they are going to

do?

3. What are the functions of an Executive Director?

4. What are the functions of a Non-Executive Director?

5. What is the minimum number of directors that

(a) a public company must have

(b) a private company must have

6. Under what circumstances can directors be held personally responsible for

the debts of the company?

7. Explain what is meant by the shareholder primacy approach

8. Explain what is meant by the Enlightened Shareholder approach

9. Discuss the seven duties that directors owe to the company

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Documents

Corporate Administration and Management 2008