#19674 - 2. Directors, Shareholders And The Balance Of Powers - Company Law

TOPIC 2:

DIRECTORS, SHAREHOLDERS AND THE BALANCE OF POWER

Essential Reading:

Dignam and Lowry, Ch. 13 (up to para 13.51)

Additional Reading:

Hannigan, ch.7.

Outline of important content covered thus far—

1. Individuals responsible for making key strategic decisions – members of the board of directors

2. Separation of ownership and control / recognition of directorial autonomy.

Balance of powers are important for liability

3. Relationship between directors and the general meeting

4. How directors are appointed

5. Categories of directors

6. Principle and policy governing directors’ renumeration

7. Fiduciary nature of the office

8. Approach of company law in the UK re structure / functions of the BoD (board of directors)

9. Vacancy / vacation; removal from office

10. Disqualification of directors

11. Recent statutory reforms

1. The division of power between shareholders (collectively) and directors?

UK law leaves it to companies themselves to allocate the power to take decisions for the company.

The Act does not exhaustively define the term ‘director’ beyond ‘any person occupying the position of a director s.250 CA

• Whatever term the articles use to describe the members of a company’s board (governor, administrators, trustees), the law counts them as ‘directors’

Anglo-Saxon system / political dimension in England – balance of powers

a. Model Articles of Association:

Art 3: 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’.

Directors exercise control over the company in practice because of the model of the articles of association

• Growth of the company as a conglomerate corporation (modern companies are massive)

• Ownership is dispersed (shareholders vary and there are many!)

• Directors are executors of the company – they have qualifications to run their company, but shareholders may not (it is easy to buy shares in a public company!)

Court of Appeal in Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34, CA - the relationship between a board and the shareholders is a contractual relationship based on the articles which determine the extent of the management powers conferred on the board.

Majority of companies use this model, but may deviate from it and alter / add clauses

• Shareholders may by special resolution direct the directors to take, or refrain from taking, specified action.

In addition to the powers granted to the board by the articles, the statute in many cases confers powers on the directors and the CA 2006 shifted the balance further in favour of the board.

• The position under the CA 2006 is that the company (and therefore the directors in the exercise of their management powers) has the particular power unless prohibited by the articles.

b. Powers of shareholders:

• under the CA 2006 - eg? - s.168 - removal of directors

• under other articles - eg? appointing directors

  • Model Articles (17 for private, 20 for public, companies) –

    • Model Articles for Private Companies Ltd by Shares https://www.legislation.gov.uk/uksi/2008/3229/schedule/1/made Art. 17

    • Model Articles for public companies https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/431063/model_articles_for_public_companies_after28April2013.doc Art. 20

  • s.160 CA 2006 – Appointment of directors of a public company to be voted on individually

  • s.154 CA 2006 – private companies must have min. 1 director; public company min. 2 directors.

they can realign the direction of the company by replacing directors

• generally to interfere and tell directors what to do??

Art 4(1): Shareholders’ reserve power: ‘The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.’ Can interfere in a course of action; it is a difficult power to exercise. It is done by special resolution

by ‘special resolution’ - meaning? 75% majority in the general meeting. In a modern company, it is incredibly difficult (high threshold)

c. Residual powers of general meeting:

Barron v Potter [1914] 1 Ch. 895 the company’s 2 directors weren’t on speaking terms. Effective board meetings couldn’t be held. C had requisitioned a shareholders’ meeting at which additional directors were appointed to the board, but D objected on the grounds that under the articles, only directors could make such appointments.

Legal issue – Quorum; key/# of directors need to make a valid general meeting

Held –

• Barron refused to have a general meeting – so the board was deadlocked

• in the light of the deadlock, the power to appoint additional directors reverted to the general meeting and so the appointments were valid

• “In ordinary cases where there is a board ready and willing to act it would not be competent for the company to override the power conferred on the directors by the articles except by way of special resolution for the purpose of altering the articles.”

2. The director and the board of directors

1. Definition of director:

Some companies may have directors who have an advisory position

Why do we need a definition? For purposes of directors’ duties; directors’ authority; etc.

de jure director: one who has been formally appointed as a director

de facto director: CA 2006, s.250; ‘In the Companies Acts ‘director’ includes any person occupying the position of a director, by whatever name called.’ Need to exercise the same amount of power as de jure director; can be head of the legal department, but they’re directors more on an informal basis – they do not attend board meetings

no universal test / it is an objective test (examination of fact)

• Secretary of State for Trade and Industry v Hollier (2007) BCC 11.

• Re Gemma Ltd (in liq) [2008] BCC 812

Action brought against husband and wife for misfeasance in the management of the company that had entered into a creditors’ voluntary winding up

Issue – whether the wife, who was a company secretary but not appointed a director, was a de facto director who could be liable under s.212 for misfeasance (Insolvency Act 1986)

Held – husband liable, wife had to demonstrate she performed functions which could properly be discharged only by a director

• Popely v Popely [2019] EWHC 1507 (Ch)

Because of s250, a de facto director is generally treated as if she were a de jure director, so that provisions applying to ‘directors’ apply to both de jure and de facto ones.

Shadow director:

• Meaning of ‘shadow director’ - C.A.2006, s.251: shadow director means ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act.’ Does not participate, but has control over the governing (more internalised manipulative role).

• Can exercise influence over the board but without being formally appointed as a director

• Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638

• Giving ‘professional advice’ to directors doesn’t make one a shadow: (s251(2)(a)) Needs to have a level of control over the directors… test requires that there is ‘no choice’ but for the directors to follow the shadow director’s advise

• Their liability depends on whether a statutory provision extends itself to catch not only ‘directors’, but specifically ‘shadow directors’ too. Wrongful Trading, for example, does (see s214(7)). Regulated by the Insolvency Act; when the company is near being insolvent, but the company still continues trading / trying to make profit… shadow directors can be liable

  • s.170(5) CA 2006 extends each of the general duties of directors, in ss171-177 CA 2006, to shadows, but only to the extent that each such duty is ‘capable’ of applying to shadows. Duty to promote success, diligence, avoid conflict of interests…

  • 170(5) – capable of applying, not automatically extended to the duties of shadow directors

  • Standish v RBS Plc [2019] EWHC 3116 (Ch) bowling company chain. RBS was the financer of this company (Conglomerate bank, subsidiary companies with financial advisers). The bowling company was facing problems and they had been advised to seek advice from one of the subsidiary companies. Issue – the subsidiary company appointed observers who manipulated the situation to buy shares in the bowling company and take over

  • This does not mean they are shadow directors – they can only be bound if there is a causal relationship between the breach of duty and their conduct (which is quite difficult to do)

Can someone be both a de facto, and a shadow director? Traditionally mutually exclusive, but in more recent case law, they can be both but specific conduct cannot fall under either title. Lexis Nexis guidance states – a person could be both, e.g. If they assume the functions of a director as regards one part of the company’s activities and gives directions to the board in function to a different part of the company’s activities.

• Popely v Popely [2019] EWHC 1507 (Ch)

Specific conduct in question is important to establish liability (double derivative claim)

• C brought a claim against D for alleged fraud and breach of fiduciary duty as a de facto director in relation to company payments (dispute between brothers)

• C argued D was a de facto director of Casterbridge and hence was in breach of his fiduciary duty as well as having acted fraudulently

De facto director

An act would qualify as an act done in the capacity of a de facto director if the corporate governance of the company required an act of that nature to be done only be someone having the capacity of a de jure director

• An act could not be simultaneously carried out...