- Created by: Francesca Marks
- Created on: 11-01-17 15:48
Corporate control- who runs the show? How do we impose obligations and restrictions?
Model of clear division between directors (managers) and shareholders (owners and general policy).
Directors do virtually everything now. Shareholders mainly passive but still have residual powers. Key to this is in the articles.
Shareholders have powers in CA and articles but have no general right to interfere. Breckland Holdings v London 1989- shareholders have no right to interfere in management.
Private company- directors and shareholders are often the same people.
- What powers do majority shareholders have?
- Directors duties, powers and responsibilities?
- How you protect the minority?
Some majority powers are given in the CA. s168- have power to dismiss a director by ordinary resolution. Rarely exercised.
Can only exercise rights through resolution. Most cases all about meetings. Act give sped up form of resolution without meeting- written resolution. Private companies only. s281- any resolution to be done by written procedure. s285 to 300. Directors or 5% of shareholders can circulate a written resolution around the company. Must send to everyone. Hard or electronic. If proposed by members, can make statement explaining it. Must signify their consent. Once assented cant change your mind. Passed as soon as gone over threshold. Must be done with 28 days. Need 50% of all members, not just those that turn up.
Duomatic principle- Re Duomatic 1969- if everyone who could've voted, in someway indicates their consent, that is the same as if there has been a resolution. Has to be everyone- 100%.
Extrasure Travel Insurance 2003- confirmed 100% in Duomatic principle.
EIC Services v Phipps 2003- burden on company to show they assented with full knowledge. Tried to argue everyone wouldve agreed anyway. Didnt work.
Rolfe v Rolfe 2010- needs to be objectively construed as consent.
Can it apply to formal statutory procedure? Atlas Wright v Wright 1999- service contract needed to be approved. Argued they had done it by Duomatic. CoA said who is this to protect? If just shareholders who have already agreed, Duomatic is fine. Who would suffer?
Re Torvale Group 1999- Who's it for? If only internally then it is fine.
Accepted mantra now. Can't use when a special resolution is required, as needs to be registered and published.
Public companies have to have an AGM every year by law. s336- 15% or more of members may propose a resolution. Can now be held electronically. Any other meeting can be called by directors, or 10% or more of shareholders EGM- s303. If want to request meeting, you can ask directors to, must call within 21 days. Then must be held in next 28 days after that. If they dont, you can call it yourself at the companies expense. s306- court can order a meeting to be held.
Re El Sombrero 1958- 3 members of a company. A has 5%, B 5% and C 90%. A and B are directors. C wants to sack directors. All he has to do is call a meeting. Not valid meeting unless 2 people turn up. He then goes to court. Court says he is allowed a meeting of one.
Limits to s306- cant vary class rights. BLM Group.
Ross v Telford 1997- won't be used to break a deadlock eg where they have 50/50 each.
Alvona 2006- wont use to override substantive rights. Was right of shareholder to appoint a director.
Minimum notice periods- AGM's- 21 days. Normal- 14 days. Can be electronic notice. Resolutions requiring special notice- mainly dismissing director- 28 days.
How to exercise voting power?
CL rule is show of hands- have one vote. Can demand poll will be taken, have full voting weight. S321-22- not more than 5 members calling a poll. Can vote by proxy- s324. This is a right and cannot be excluded.
Trying to prevent this- wont recognise proxy if not sent immediately. Cant ask before 48 hours before the meeting.
Needs to be report on every poll taken and put on website. Powers of majority in public companies is largely theoretical. In small companies often just merged with power of directors.
How do you appoint?
s154- private must have at least 1 director and public at least 2. Minimum age of 16- s137. Dont need to be a natural persons, can have corporate director. The director isnt an employee, they are an office holder. But many directors have service contracts as well. Paid fees as a director, a salary as an employee.
Articles decides how to appoint- whether by general meeting or board. s160 says if youre appointing directors by resolution, you must vote on each one separately.
Improperly appointed? Not used formalities? They're called defacto directors. Act as though they are directors but not appointed.
Shadow directors- controls the directors but not a director themselves.
Dismissal- s168- any director can be dismissed at any time by ordinary resolution but it requires 28 days special notice. Doesnt happen in private companies as intertwined with members. Doesnt happen in public as breach of contract is expensive.
Have very wide powers. All the powers of management. Article 2 of the model articles shows this applies to the board collectively. If you want to give one more power, you need to put it in articles- Mitchell v Hobbs 1996.
Court devised doctrine, if board unable to exercise power for some reason it reverts back to the general meeting- Barron v Potter 1914. If directors abuse power it can always be ratified by general meeting- Bamford v Bamford 1970.
What are they in reality? They are agents of the company. The law has imposed fiduciary duties. Regarded as trustees. 2006 act decided to codify the duties to clarify the situation. Downside= fossilied as they in 2006.
All duties are in the act. No longer common law or equity.
3 types of duty-
- codification of duties that were in equity
- common law duty of negligence
- statutory duties that pre-dated 2006.
1) Fiduciary duties- s170 to 180- excluding s174. s170- statute takes place of previous case law- overrules it. See ss4- we still use common law to interpret and apply.
Eastford v Thomas Gillespie 2010- s170 allows evolution and can evolve the duties.
ss1- owed by the director to the company- the company means the shareholders as a body. Also obliged to consider other stakeholders such as employees. Means profit essentially.
Owe no duty to individual shareholders- Percival v Wright 1902- member wanted to sell shares. Directors knew this. They also know theres a potential buy for the whole company who will buy for £17 a share. Offered to buy P's shares for £12 to make profit. Offer never materialised. When P found out he said they should have disclosed. Absolute disclosure is an equitable rule. Court said only offer common law duty not to mislead. As long as they dont lie, theres no duty.
Upheld in Peskin v Anderson 2001- said fiduciary relationship could arise but only from a personal relationship.
What do they owe to individuals?
Sharp v Blank 2015- shareholder group of Lloyds Bank. L forced to take over other banks and was a disaster. Shareholders suffered huge losses. Brought action against directors for breach of duty and negligence. Could they be liable for individual losses on shares? No- no general duty to an individual shareholder. Only duty was not to mislead. If they gave advice, it must be clear and comprehensible. Must not conceal material information.
Unless you have a direct personal relationship, fiduciary powers and duties dont apply to individuals.
S171- duty to act within powers- 'Proper purpose doctrine'- need to use to power for purpose they were conferred. Positive duty.
Piercy v S Mills 1920- small company. P buying any shares that become vacant. Acquires enough to gain a small majority. Calls general meeting to get himself elected as a director. Board have power to issue new shares. Issue new shares to themselves meaning they have a majority again. He goes to court saying improper use of power. That was a breach. New shares are meant to be issued to raise funds.
Hogg v Gramphorn 1967- added to Piercy. Said it was irrelevant that the directors thought they were acting for the bona fide benefit of the company.
Howard Smith v Ampol 1974- Trial judge made two findings of fact. 1) primary purpose of issuing the shares was not to raise money. 2) there was no self interest. Wilberforce said have to attain primary purpose. That is the key. This power changed the structure of the company and there was a breach.
Lee Panavision v Lee Lighting 1991- P made a loan to L. As part of the deal, P had a right to appoint directors to L while loans outstanding. Came to end of agreement and money was still owed. L directors agreed extension of the deal, where directors could still be appointed by P. L shareholders challenged this as an improper purpose eg renegotiating the loan. Court said yes it was improper. They were interfering with the structure of the company. L's shareholders couldn't appoint to the board so interfered with constitution.
Runciman v W Runciman 1992- R set up by WR as his own company. Went public and he was managing director. Take over bid coming in and was going to win. Directors negotiated WR's service contract so that when takeover succeeded and he was sacked, he had a claim for compensation. He's suing for breach of contract. Courts said this was a management decision.
New variation- Eclairs v JKK 2015- directors of company. If they think shares are held as nominee for someone else, they can serve notice on legal owner to declare name of beneficial owner. Served notice and froze the shares. It was claimed they exercised the power for an improper purpose- that they didnt want information, they just wanted to freeze them. SC said that proper purpose doctrine is paramount. It is the only question.
Duty of loyalty- s172- must act bona fide for the success of the company. Enlightened shareholder value. Promote the success of the company for benefit of members as a whole. Shareholders are prime. Long term benefit, rather than short. Only doesnt apply on s3- where creditor interests come over shareholder. s172 is subjective. Depends on what the director considers is the best interest.
Regentrest v Cohen 2001- question is if director honestly believed act is in best interest of the company. Need to look at directors state of mind. Subjective. If it results in detriment, he will have a harder task of persuading it was for the benefit.
Colin Gwyer v London Wharf 2003- just because director benefits as well doesnt mean it is a breach. Should look at with care.
Ross River v Waverly 2013- judge accepted subjective but said if no evidence Director considered the issue, then it has to be objective. If payment by a company to a director, then the director will have to justify the payment.
As long as the director complies with s172 they will be fine. Department of Trade said there isnt a checklist, there are just general factors. Quoted Re Welfab 1990- Directors challenged as took a long term view. Would also benefit employees. Court said was perfectly rational and reasonable and you can take the long term view.
Wey Education v Atkins 2016- 2 man company. One negotiating contract renewal with customer. Unknown to him, the other one had set up another company and was negotiating to the customer for his own company. B didnt tell A and he didnt report the breach to the company. If A had known he may have negotiated with the customer differently. That was the breach, company suffered from how they conducted negotiation. Need to affect the well being of the company.
If you as a director know another director is in breach you then have a duty to report that to the company- British Midland Tool 2003- cant keep quiet. The duty of loyalty underpins everything.
s173- Duty to exercise independent judgement. Governments view said that does not prevent the director relying on the advice of others, but the final judgement must be his or her responsibility. Slavish reliance is not acceptable.
What about nominee director? Nominated by a shareholder to the board. 2 companies here, do they have to do what nominator says?
Re Neath Rugby- nominee director must always act for the main company. He can take instructions into account, but cannot rely on those exclusively.
Can a director agree not to exercise discretion? Yes within limits.
Fulham FC v Cabra 1994- deal to develop ground. Directors agreed not to oppose any planning application. They changed minds and wanted to opppose. Were they bound? Court said yes, as long as acting bona fide at time of agreement as it may be in company benefit.
Most litigated section is duty to avoid conflict of interest. s175- very old duty. Applies to situational conflict. Can't put self in a place of conflict of interest. Doesn't need to be real, just needs to be possible. Immaterial if company could have benefitted. ss3- doesnt apply in conflict in transactional contract with the company.
Comes from the no conflict and no profit principles. If have personal conflict that might conflict, there is a breach (no conflict). Cant make unauthorised profit from competition (no profit). Remedy of account for this. Duty is very wide. It applies to lots of things eg information.
Where is the information from and how are they using it? Aas v Benham- even if its company information and use for non company business, there is no breach if you use it for a different reason.
O'Donnell v Shanahan 2009- said Aas v Benham doesnt apply in company law. Source needed to be concentrated on. Investment co seeked to pursuade clients to buy property. 2 directors found out about property as a result and bought it for themselves. Source was corporate information so was a breach.
Where does situational conflict come from?
Boston Deep Sea Fishing 1888- fishing co used to buy loads of ice. A was director responsible for buying ice. Buy his ice from a company that he is a shareholder in. As a shareholder he gets 10% off. He doesnt pass that to Fishing Co. Action to make him account for the money he kept. Held breach of no conflict, no profit rules. No question of actual dishonesty. Company still paid the market price and any other director would have paid the same. Held to account for the unauthorised profit. Still complete law.
Regal Hastings v Gulliver 1942- Company owns cinema. Directors learn if they acquire the other cinema they can sell both at a profit. Decided to form subsidiary company to acquire the second one. They only said only selling if they had £5000 in the subsidiary. Co could only put £2000 in. Other 4 directors put in £500 each and the other £1000 came from elsewhere. Acquire second cinema. Sell both cinemas and companies that own them. Each subsidiary share sold for £3.80 but were bought for £1. Purchaser owns all shares and said they'd made a profit off a corporate situation. He wanted the £2.80 back. HoL said yes, they must account. No body deprived the main company of anything. Benefitted main. Said irrelevant that it saved the company. Directors were also shareholders so could have ratified at the time. Purchaser ended up with £2.80 back.
Absolute duty- cannot make any unauthorised profit from any information from the company.
Paso Silvermines 1966- Canadian case- Co approached to invest in a project, which company rejected. C, a director, thought good idea so he invested his own money. Proved to be very successful. Company sued C to account. Court said it would depend. Was the refusal by the company bona fide? Was the info given to the company purely for its use? If it wasnt then why not. It was a geniune rejection and not confidential.
IDC v Cooley 1972- C was engaged by the company as its chief executive because of his reputation in managing utilities. IDC wanted that kind of work. He begins negotiations for IDC to manage a project for a station. Became clear the board werent impressed by IDC but they liked C. When C realised he could do it without the company, he resigned in ill health and worked for gas board. Clear in evidence that IDC would never have got the contract. Judge followed Regal and said it wasnt about loss or fault. He had made an unauthorised profit from the opportunity that belonged to the company.
Use IDC not Paso. IDC developed the concept of corporate opportunity.
Island Export Finance v Umunna 1986- managing director of Nigerian Company. Built PO boxes in post offices. U resigned. He set up his own co. Next time the contract came up he tendered and got it. Was sued by Island. Judge distinguished IDC. When U resigned there was no
specific contract in mind when he resigned. Only if maturing opportunity will you be held to account. Island said he used corporate information. Court said no, that was too general, it wasnt specific information. Can't just be general industry knowledge.
Bhullar v Bhullar 2003- (crucial)- property company. Two directors found a property which would have been worthwhile for the company to acquire. They bought it themselves and didnt tell the company. FAmily suing each other. clear breach of conflict principle. Although the company wasnt aware of the opportunity they should have told it. Maturing includes potential. Remedy- had to transfer property to company at cost. Form of restitution. CoA said the test was- would a reasonable person on the facts think there was a real sensible opportunity of conflict?
Examples of the test-
Sharma v Sharma 2013- director is liable if exploit for their own benefit an opportunity that comes to you as a director. Also any other opportunity that you should exploit for the benefit of the company.
When can a director resign and what limits are there if you do?
Cannot just take clients with them- CMS Dolphin v Simonet 2001- S resigned, took 3 employees and 3 major accounts. Cannot do that as it is corporate property.
Foster Bryant v Bryant 2007- 1) resignation is not a fiduciary power. Don't have to exercise for the company benefit. Common law act. 2) fiduciary duty ends on resignation. Situational conflict won't arise, neither will no conflict rule. 3) you can use general information you have acquired. 4) but the no profit rule still applies in regards to opportunities before you resign. Thats corporate property.
Going to overlap with S172. Big difference. S172 requires good faith and will excuse you. Doesn't apply to s175- it doesnt matter if you act in good faith- Richmond Pharmacology v Chesters 2014.
s175 added things to the law- ss4,5 and 6 have no baring on the common law. s175(4)- conflict can be ratified by the board.
Eastford v Gillespie 2012- Scotland- Company was insolvent. Directors transferred right of action it had to themselves. D's disputed this as conflict of interest. CoA said no, as on the facts they'd have to pay costs themselves as company insolvent, so not likely to give rise...
s175 doesnt apply if the company is party to the contract. S175(5)- says cant be director of two competing companies. Can't serve two masters.
Re Neath Rugby 2009- nominee director must always act in companies favour. Can take advice.
s176- duty not to accept benefits from third parties. ss4 saves it.
s177- transactional conflict. Contract in which the company is a party. Corporate transaction. Can only be one or the other. Problem arises from basic equitable rule. If a director has any personal interest in corporate contract, the other party may void the contract.
Incredibly inconvenient. Use s180 to get around it. If comply with s172, the equitable rule goes out the window. If you dont it still applies.
Transactional- when a big corporate contract. Equity had the big rule of allowing it to be voidable. 2006 wanted to change this- if comply with s177 it is valid. Different from s175.
s177- need to declare nature and extent of the interest. Applies to proposed transactions, need to do before it takes place. Only need to disclose to the board- ss2 tells you how.
s184- notice in writing= hard or electronic.
s185- general notice- dont have to disclose in each contract but say you have an interest with any party and every contract. Only need to do once.
Full disclosure is required- Gwembe Valley Developments 2004- was piecemeal and incomplete information. Wasnt sufficient.
Has to be pre-emptive. ss5 and 6 are exceptions. Don't need to disclose if youre not aware of the interest or not aware of the transaction. Aware means ought to reasonably be aware. Can't use blind eye. It is an objective test.
ss6 - list of when youre not expected to disclose. If directors already know that you have an
you have an interest then you dont need to disclose. Lee Lighting- if renewing a contract, they'd already know.
Includes service contracts, dont need to make aware as obvious.
If sole director how do you disclose to yourself?
s231- contract needs to be in writing and signed. Can't have oral one in which they have an interest.
s177- about validating contract. Not necessarily director being liable for something.
Re Neptune 1996- company has one director and going downhill fast. Director has service contract, acting as a director he makes himself redundant as an employee and pays himself redunancy pay. Discloses interest in contract under s177. Liquidator gets involved. Held clear breach of the no profit rule. Made unauthorised profit under s172. Not for the company. Disclosure doesnt mean not liable.
What happens if dont disclose? Existing transaction. Switches from validating contracts to...
criminal offence. s182- only comes into play if you havent complied with s177.
Might not disclose if you didnt bother or didnt know. s182 kicks in when s177 not complied with. Still need to disclose after its been entered into. s183- if you dont do s182, this is a criminal offence. Rules for disclosure are exactly the same. If disclose under s182 does this validate the contract? Probably doesnt as under s180 doesnt mention s182. On the other hand there is pre-act case law that says no civil consequences under s182.
Hely Hutchinson- decided no civil consequences for breach of equivalent of s182.
Re Dominion International 1996- non disclosure under equivalent of s182. Court decided genuine informal information. Technical breach, and not a criminal offence.
Those are fiduciary uties that apply to all directors. Need to look at remedies.
Remedies- s178 doesnt help much. Says same as if equity and common law applied.
If profit made from breach, the remedy is account eg Royal Hastings. Not based on loss, purely on gain. CMS Dolphin v Simonet- based on what director got, not what company lost.
Unjust enrichment and purely equitable.
Can use this remedy to trace the money. Crown Dilmin 2004- directors company made profit. Traced and company held to account.
Only have to account for own profit, not others- Ultraframe 2005. Only liable for others in knowing reciept.
What if director didnt make a gain but the company made a loss?
- Common law of damages is limited by foreseeability.
- Equity- equitable compensation. Principle remedy. Comes from idea of restitution. Equity wants to put back to start position.
Gwembe Valley 2004- company lost a number of contracts it could have got, because K concealed his interest on purpose. Couldnt get contracts back. Put in postion they would have been if they had got contracts.
Extrasure 2003- fact director made no profit is irrelevant. Dealing only with loss.
AIB Group v Redler 2014- SC- very important decision. Equitable compensation doesnt require forseeability. Rules of remoteness of damage dont apply. Allowed to have benefit of hindsight- can look back. If theres a lost opportunity, we can now know consequences of that. There needs to be causation between the breach and the loss.
Breitenfled UK 2015- H was effectively sole director of company. His son and daughter in law set up similar company. H used his knowledge of business and trade connections to help them set up. Clear breach of duty. Used corporate information to help connected person. The new company made a profit of £80'000 as had had help. Given £20'000 of raw material from B. H sued by his company. He's made no profit, but his company has lost out on what it could've got paid for if he did it commercially. They could've had £100'000 so he had to compensate them that.
Hindsight not foresight.
Duty of care- common law- Directors must not be negligent- s174. Re City Equitable Fire Insurance 1925- considered standard of care. 1) director need not exhibit a greater..
a greater degree of skill than an ordinary person. Based on your knowledge and skill. Subjective. (Re Brazillian Rubber 1911). 2) not bound to give continuous attention to the company, ominous not negligent. (Re Denham 1883). 3) Dont have negligence if you reasonably rely on someone else. Reasonable- not put on notice.
Followed throughout 20th C. 1990's court changed mind. Came up with duty of care in s174. s174 has higher thresholds- objective test of what a skilled director would know. Still has subjective element. Based on skill you have and job you have.
If you reasonably rely on someone else- City Equitable Finance.
Norman v Theodore 1991- rogue partner set up channel islands company. Need to have a local director. Director has no knowledge of the fraud. Surplus of money to company. Want to recover from channel islands man for negligence. Court said no as he could rely on senior London solicitor.
Re D'Jan of London 1994- sole director. Made insurance contract. Failed to complete form properly.
Insurance wouldnt pay out on fire. Liquidator sued director for negligence. Court said busy person might fail to spot something on complicated document, but this wasnt. He was just careless.
Cannot be a non playing director. Re West Mid 1988- cant simply do nothing.
Minimum is to keep notice of accounts. Important in practise. If do have special skills then will be judged by them. AG (Manchester) 2008- finance director of large company. Failed to spot dividends paid wrongly. Clearly shouldve seen.
Failing to supervise employees- Re Barings 2000- working in Singapore bank. At night in UK he bankrupted the bank. Sued directors for allowing this to happen. Yes, should have been system of checks in place. Gross incompetence.
Non executive directors- all public companies required. Equitable Life Assurance 2003- went bust. Sued non executive director for allowing this to happen. Marketed product which was a disaster and bankrupt. Non executive directors should know. Need to supervise and be independent.
Need forseeability and remoteness of damage.
Lexiholdings v Larquiman 2009- directors allowed convicted fraudster to act on his own as managing director- he took £59 million. Was forseeable? Yes.
Pre-existing statutory duties- in addition to fiduciary duties.
Substantial property transaction- s190. Over and above, addition to to situational conflict. Transaction between company and director or anyone connected with director or any other company where the director is 20% shareholder.
British Racing Drivers Club 1997- where might have immediate transaction, might not be objective.
s190 when you have a transaction like this of substantial asset, anything over £100'000 or at least 10% of companys value as long as over £5000. Must be ratified by ordinary resolution. If don't, contract is voidable. s195- says remedies. Remedy of account if made profit or compensation if company made loss. Disclosing under s177 doesnt help here.
Duckwari case 1995 and 1998- company O, which C owned 25% of shares. Company D, which C was director of. O contracted to buy property from third party, assigned right to buy to D.
D bought land and property collapsed. D made a loss on the deal. Had financed via a loan. There had been no ordinary resolution. D wanted compensation from C and O. They weren't ripped off in the first place. Duckwari 2 was about remedy. Can't rescind as they had sold land on. Remedy was compensation under s195. What loss? Equitable compensation, not damages. Got the loss, got the planning permission. Didnt get interest on the loan back.
Murray v Leisureplay 2005- sale of a company. Fell foul of s190. Disasterous transaction for the buyer. Compensation but wouldve included interest.
Primary remedy is rescission- voidable. Dont have to rescind unless can go back to square one- Ultraframe 2005. If compensation can have joint and several liability.
Demite 1998- dont lose right to rescind via delay.
NBH 2006- only need to account for profit made after transaction. Only loss after.
Asset- at least £100'000. What if worth more to one person?
Micro Leisure 2000- worth over £100'000 to another director, but not to another. Can take that into account.
Ultraframe- was granting a lease, a non cash asset? Yes it is and value on what you sell lease for. Right over property is an asset.
Granada Group 2015- transaction between company and trustees of pension fund. Director beneficiary. Went for director. No, not a non cash asset, interest under trust doesnt count.
Can have Duomatic instead of resolution?
- Demite said no.
- Condegrade- couldnt see why not.
- Ultraframe- left point open.
- NBH- applied Duomatic.
Moral of s190- Spotting it. Disclosure under s177 doesnt solve this.
S1157- director can be relived of liability in court if acted honestly and reasonably and in the circumstances should be excused.
How can that apply to negligence? D'Jan of London 1994- excused him from large part of liability as he acted understandably.
Never applied that section to paying dividends from unlawful funds. Bairstow and Marini.