Summer Sessions Business Law Worksheet

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Explanation & Answer length: 7 Questions.

Business Law INTERNATIONAL ASSOCIATION OF UNIVERSITY SUMMER SESSIONS(IAUSS) June 21, 2021 Learning Objectives • To understand how meetings are requisitioned and explain the difference between different types of resolutions and the reasons for which they can be proposed • To understand the key issues surrounding directors in a company and to be able to explain in detail the duties of directors • To know understand the issues surrounding the disqualification of directors • To understand and be able to explain the roles of other company officers including; the company secretary and the auditor Company Law Company meetings and Resolutions The constituents of a company

•The shareholders •The directors and directors duties Other Company Officers •The company secretary •The auditor The shareholders • The shareholders of a company limited by shares are known as the members of the company; • Generally, the directors are given powers to run the company in the articles but certain decisions can only be taken by the shareholders, including: Only the shareholders can amend the company’s articles; The members can remove the directors from office; The members can petition to wind up the company. Company Meetings and Resolutions • Annual General Meeting (AGM) • Public companies must hold an AGM every calendar year • First no more than 18 months after incorporation (6 months after year end) • Subsequent, no more than 15 months after previous meeting • Private company members can request an AGM but it is not required • Minimum 21 days notice Company Meetings and Resolutions •

Annual General Meeting (AGM) Key agenda at the AGM Ordinary business:- (Primary purpose of an AGM) Formal presentation of the financial statements Reappointment of directors (retiring by rotation) Reappointment of auditors (for another full year) Approval of dividend proposed by directors Resolutions Ordinary Resolutions • simple majority (over 50%) • ordinary business and ( some ) special business • 14 days notice Special Resolutions • Special (not less than 75%) • 14 days notice • e.g. changing name, changing the articles, reduction in share capital, petition for Written Resolutio n compulsory liquidation, changing from private • Written resoluti nsto public or vice versa, • to require directors to take or not to take some action) Written Resolutions • allowed for private companies only • any resolution ( ordinary or special ) -except for removal of auditor or director • auditor needs to approve the wording

• Can be proposed by directors or members holding 5% of the voting rights • resolution passed on the date required majority is reached Ordinary Resolution requiring Special Notice • Special notice applies only to some ordinary resolutions • 28 days notice is given to the company • The company gives 21 days notice to the members • Ordinary Resolutions requiring special notice :- to remove a director (or appoint a person to replace a removed director) – to remove an auditor – to appoint a new auditor other than the retiring auditor – Appoint an overage director for a plc Rules for Member Resolutions • Rules for members requisitioning a resolution at the AGM Minimum shareholding • The members must represent at least 5% of the voting rights • be not less than 100 members holding on average not less than £100 each in paid up share capital Request

• The request should be in hard copy form, or electronic form • The request must be delivered not less than 6 weeks before the general meeting Statement • The members may request that a statement of reasonable length be circulated together with the notice of the meeting • Reasonable length is, as usual, not more than 1,000 words. Procedures at Meetings • Quorum must be present • Qualifying people – Members – Representatives of corporate members – Proxies • A proxy is a person appointed by a member to vote on his/her behalf • Two methods of voting – Show of hands (each member has one vote. General rule) – By poll (usually one vote per share) The Directors • A private company must have at least one director, and public companies must have at least two. • A director can be a natural or legal person, but every company must have at least one director who is a natural person. •The CA 2006 does not define what a director is, but s 250 provides that a director ‘includes any person occupying the office of director, by whatever name called’.

Directors • A shadow director is a person in accordance with whose instructions the directors are accustomed to act (power an influence of a director without legal responsibilities) • De facto director – a person who although not officially a director acts as though they were • Executive directors – work for the company full-time and are responsible for the day-to-day management; • Non-executive directors (NEDs) work part-time for the company (around 1-2 days per month) and are paid considerably less than their executive counterparts; • Although NEDs are involved in management, from a governance viewpoint, their key role is monitoring the activities of the executives; • Except for smaller companies, half a company’s board should consist of NEDs (UK Corporate Governance Code) Non – Executive Directors Integral element of corporate governance Bring an independent view Help in providing effective leadership Help to ensure the continuing effectiveness of the executive directors by providing a watchful eye on them Board of the Directors –Additional Roles

• Senior members of the board may take on additional responsibilities: • A director may be appointed as the ‘managing director’ also known as CEO; • A director may be appointed as the ‘chairman,’ whose role is to chair board meetings. • UK Corporate Governance Code provides for the separation of the roles of Chairman and CEO Directors – Number and Eligibility • Private company – at least one • Public company – at least two • Generally anyone may be a director ( but some restrictions ) – Must be over 16 – Must not be disqualified under CDDA ( see later ) – Must not be bankrupt – Must be a natural person – Must not be a company’s auditor Appointment of Directors • First directors are named in documents sent to registrar before incorporation • Subsequent directors may be appointed by :- Members in general meeting (Ordinary resolution) – Other directors – to fill a casual vacancy (if articles allow)

• Registrar notified within 14 days Remuneration • Directors to be paid for their services as directors, and for any other services that they undertake for the company • Quoted companies are required to include a director’s remuneration report as part as their annual report • A director may receive compensation for loss of office • Members can vote on the director’s remuneration report in quoted companies Termination of Office • May leave office due to: • resignation; • Retirement by rotation • not offering themselves for re-election; • death; • dissolution of the company; • removal; • Disqualification Removal of Directors – By Ordinary Resolution • • • • • • • • • • Ordinary resolution Special notice 28 days notice to company (before the meeting) 21 days notice to members (before the meeting) Opportunity to make written representations of reasonable length and not defamatory in nature Reasonable length Must also satisfy legal restrictions – 100 members holding ≥ £100 share capital on average or the holders of not less than 5% of shared capital or not less than 5% in number Notice to registrar Weighted voting rights can make removal impossible (Bushell v Faith [1970]) Company may have to pay substantial compensation to a removed director Company Directors Disqualification Act 1986 Gives the court the opportunity to ban people from holding of the position of director

. • for an indictable offence committed in the promotion, formation or management • where persistently in default ( 3 offences in 5 years ) of filing returns • when found guilty of fraudulent trading • When a director was involved in a breach of certain competition laws • when a director of an insolvent company has participated in wrongful trading Period of disqualification 2-5 years for not very serious conduct 6-10 years for serious cases Over 10 years for very serious cases (e.g. it’s the second time a director has been disqualified) • breaking the disqualification order is a criminal offence http://www.bbc.com/news/uk-wales-south-east-wales-33657034 https://www.theguardian.com/music/2017/sep/25/deep-purplsaccountant-banned-as-director Directors’ duties – Background • Historically, the duties of directors were derived from a mass of case law. As far back as 1895, it had been recommended that directors’ duties should be codified. In 1999, the Law Commission also recommended codification.

• The CA 2006, s170-181 codified the common law and equitable duties and set them out in a more accessible manner. The general duties • The codified duties set out in ss.171-177 are known as ‘general duties’. The codified duties have not been radically altered, and pre-CA 2006 case law will remain relevant. • The general duties are owed to the company, therefore, directors do not generally owe their duties to shareholders, creditors, employees or anyone else. Accordingly, only the company can usually sue for breach of duty. Duty to act within the company’s powers • This duty is an amalgam of two prior common law duties: • A duty to act in accordance with the company’s constitution, and • A duty to exercise powers only for the purposes for which they are conferred.

• Howard Smith Ltd v Ampol Petroleum Ltd [1974]p594 Duty to act within the company’s Where the directors cause the company to enter into a transaction outside the scope of the constitution, the transaction will be binding. However, a shareholder can apply to the court to restrain a proposed transaction that is outside the scope of the constitution. • Directors must exercise their powers for the purposes for which they are conferred. Many cases concerning ‘improper purposes’ relate to directors using their powers to benefit themselves financially or to retain control of the company. Howard Smith Ltd v Ampol Petroleum Ltd [1974] P594 Directors used their power to try to destroy a majority shareholding by issuing new shares • Where directors act for an improper purpose, such acts are voidable at the company’s instance.

• These consequences can be avoided if the shareholders ratify the breach of duty. Duty to promote the success of the company • A director 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’. • The interests of the company and members do no always align and, where a conflict arises, preference should be given to the interests of the company as a separate entity. Factors Directors need to Consider The directors must also have regard to: • The likely consequence of any decision in the longterm; • The ethics/morality of any decision they make • The interests of the company’s employees; • The need to foster relationships with suppliers and customers; • The impact of the company’s operation on the local community and the environment. Duty to exercise independent judgment • The duty to exercise independent judgment is a reformulation of the common law duty placed upon directors not to fetter their discretion.

• Fulham Football Club Ltd v Cabra Estates plc [1992] p599 Duty to exercise reasonable care, skill and diligence • A common law duty to exercise reasonable care and skill had long existed but was very subjective • A director who breaches this duty will be required to compensate the company for any loss sustained. • Re Cardiff Savings Bank [1892] p599 Duty to exercise reasonable care, skill and diligence • The standard is now based on that of a reasonably diligent person with: • (a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and • (b)the general knowledge, skill and experience that the director has. • The test in (a) applies to all directors and imposes a minimum, objective standard.

The test in (b) applies to directors with some form of special skill and imposes a higher, subjective standard. • Re Barings plc (No 5) [2000] p600 Duty to avoid conflicts of interest • A director ‘must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company’. • A director will breach this duty if he personally takes advantage of an opportunity that rightly belongs to the company. • Bhullar v Bhullar [2003]p601 • If a director engages in an unauthorized conflict, the act is voidable at the company’s instance, providing that the third party has notice of the director’s breach. The director will also have to account for any profit made.

Regal Hastings • Regal Hastings – Directors of the regal cinema were given the opportunity to buy another cinema. Directors discussed it and decided to purchase. They worked out that they needed to spend 5,000. But they only had 2,000. Directors and their friends personally bought the extra shares that the company couldn’t afford. They sold it and the directors made a gain. Regal though said no it’s our profit. Can they keep it or must they give it back? • They have to pay it back. They took advantage of their position as directors for personal gain. • It didn’t matter that the company couldn’t have taken advantage of the opportunity due to a lack of finances Regal (Hastings) Ltd v Gulliver [1942] UKHL 1 Duty to avoid conflicts of interest Directors not liable if: • Members authorised their actions • Situation cannot reasonably be regarded as likely to give rise to a conflict of interest • Actions authorized by other directors • Company explicitly rejected the opportunity they took up Duty not to accept benefits from third parties • A director is under a duty not to accept from a third party a benefit conferred by reason of his being a director, or doing anything as a director.

• However, this duty is not breached ‘if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest’ • Where a director accepts an unauthorized third-party benefit, the company can rescind the contract and the benefit can be recovered. • The company can also summarily terminate the director’s service contract. Duty to declare interest in proposed transactions or arrangements • If a director is, directly or indirectly, interested in a proposed transaction with the company, he must declare the nature and extent of that interest to the other directors. • A declaration is not required where the director is not aware of the interest, or where the other directors are aware of it. • A transaction that breaches this duty is voidable at the company’s instance.

Statutory Control over Directors • Service contracts > 2 years require approval by members • Acquisition of non-cash assets from the company (by directors or connected persons) need members approval if > 10% of company assets – but not if less than £5,000 – and always if > £100,000 • No company may lend money, provide security nor guarantee a loan to a director of itself, nor of its holding company unless approved by members • … relevant companies (plcs) cannot approve credit transactions to directors unless approved by members ( unless < £10,000 ) • Directors must seek approval of the members where the company loans them over £50,000 to meet expenditure required in the course of business. • Non-contractual payments to directors for loss of office must be approved by the members. Remedies against directors for Breach of Duties Remedies vary depending on the breach but may include • requiring the director to account for any profit made as a result of the transaction (account for personal gain) • damages or compensation where the company has suffered loss; (as a result of the company’s negligence) • rescission of a contract where the director failed to accepted an unauthorised benefit from the third party. • recovering the company’s property; Liability of Directors • Note that directors are not liable for the acts of the other directors (different from partnership) • May be held liable by the court looking behind the veil of incorporation • May be held liable by the court for fraudulent or wrongful trading • Liable for negligence? – Not if honest ( Pavlides v Jensen 1956 p 616 ) – But if negligence results in personal benefit? (Daniels v Daniels 1978 p 616) The company secretary •

The company secretary is an officer of the company, whose function is to carry out the administrative tasks imposed on companies by the Companies Acts. • Every public company must have one • Directors of a public company have a duty under to ensure that the person they appoint (a) appears to have the requisite knowledge and experience to discharge the functions of secretary and (b) has one or more of the following qualifications: – Employment as a plc’s secretary for three out of the five years preceding appointment – Membership of one of a list of qualifying bodies: ACCA, CIMA, ICAEW, ICAS, ICAI, CIPFA – Qualification as a solicitor, barrister or advocate within the UK – Employment in a position or membership of a professional body that, in the opinion of the directors, appears to qualify that person to act as company secretary. • Secretary of State can appoint if company fails to do so • Private companies aren’t required to have a company secretary The company secretary • The company secretary is an officer of the company, whose function is to carry out the administrative tasks imposed on companies by the Companies Acts.

• Every public company must have one • Should be appropriately qualified (ACCA, CIMA, ICAEW, CIPFA, Lawyer etc) Duties, determined by the board directors, are administrative in nature ( Panorama Developments v Fidelis Furnishing Fabrics [1971] p561 ) • Maintaining company statutory records • Filing returns with the registrar • Taking minutes of meetings • Ensuring the company complies with statutory requirements • Signing documents as required by law Under principles of corporate governance should also:• Advise the board on governance matters • Arrange the induction process for new neds •

Enable effective communication between board and its various sub-committees The Auditor • Each financial year, the directors must prepare accounts providing information of the company’s financial position; • To ensure these accounts are accurate, the law requires that they are subject to an independent third-party verification by an auditor; • Generally, all companies must appoint an auditor (unless small). • Small (must meet at least 2 of the following) – Turnover < £10.2 million – Balance sheet < £5.1 million – No more than 50 employees Auditors Appointed by:• Directors ( First and casual vacancies ) • Members ( subsequent and casual vacancies ) • Secretary of state ( if no-one else does ) • Must be appropriately qualified Cannot be :• Director or employee of the company • Partner or employee of the above • A person who is not a member of a recognized supervisory body; • A person who does not hold a recognized qualification. Professionally pr…

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