#5309 - Division Of Power - Company Law

Division of power

Every company will have directors and members.

The precise definition of power is defined by the articles, subject to the provisions of the Companies Act 2006.

The statutory rules may be either mandatory or default. If they are default rules then the company may exclude operation of the rule in its articles.

Generally the role of shareholders is merely to oversee, whereas the actual management of the company is delegated to the directors.

Model Articles, Article 3

• Subject to the articles, the directors are responsible for the management of the company’s business and for this purpose they may exercise all powers of the company.

Model Articles, Article 4

• The members may, by special resolution, direct the directors to take or refrain from taking particular action.

• No such resolution can invalidate actions taken by directors prior to the passing of the resolution.

There has always been a general principle of non-interference by shareholders.

Automatic Self Cleansing v. Cuninghame

1. Shareholders tried to force an action from directors by passing an ordinary resolution.

2. Held this was not sufficient to compel the directors.

Members

The members are the people whose names are included on the company register. (Companies Act 2006 s.112)

Shareholders are not always members, but very often are. They will not be if they hold shares merely by the operation of law, as they will not be included on the company register, this includes when a trustee in bankruptcy holds shares or an extender of a will.

Members have a right to a share of the surplus upon a solvent winding up of the company.

Other powers of members:

Power to appoint new directors

Model Articles for Limited Companies Article 17

• Members may appoint a new director by ordinary resolution.

Model Articles for Public Companies Article 20

• Members may appoint a new director.

Power to remove directors

Members may remove a director by an ordinary resolution. (Companies Act 2006 s.168)

Power to ratify breaches of directors duty

Members may, buy ordinary resolution; ratify any breach of directors duties. (Companies Act 2006 s.239)

Decision making by members

The General Meeting

This is the usual form for decision making, and all members may vote in the general meeting according to the Companies Act 2006 s.284 –members right to vote in general meeting.

The directors have the power to call a general meeting at any time. (Companies Act 2006 s.302)

Members with a total exceeding 5%of the total votes may summon a general meeting by requesting the directors organise one. (Companies Act 2006 s.303)

If members submit a request under section 303 then the directors must call for a meeting within 3 weeks, and then the general meeting must be held within 4 weeks of being called. (Companies Act 2006 s.304)

Public companies must hold an annual general meeting (this does not apply to private companies). (Companies Act 2006 s.336)

Rules for the general meeting:

Notice of meetings

At least 14 days notice must be given (21 for a plc AGM). (Companies Act 2006 s.307)

Notice must be given to members, directors, auditors and shareholders unless stated differently in the articles. (Companies Act 2006 s.310)

Notice must state the date, time, venue and also the general nature of business to be transacted at the meeting. (Companies Act 2006 s.311)

The articles may extend the notice period required for meetings. It is also possible to call a meeting early if it is supported by 90% of the votes in a Ltd or 95% in a plc.

Notices of meetings must be fair, accurate and reasonable.

Kaye v. Croydon Tramways

1. A meeting was called to agree the terms of a purchase, as part of this the purchasing company were going to pay compensation to the directors of the seller.

2. The notice said that it was for the purpose of confirming the deal, but did not mention the need to approve the compensation to directors.

3. Held that this made the meeting invalid because it had not been clear what business was to be transacted.

Conduct of meetings

Generally dictated by the articles with a few rules from statute.

Model Articles for Limited Companies

• Not a valid meeting if no quorum present. (Article 38)

• If there is not a quorum half an hour before the start of the meeting or if there ceases to be a quorum then it must be adjourned. Chairmen may also adjourn if the meeting consents or is an adjournment is necessary for the safety or orderly conduct of the meeting. If a meeting is adjourned then must specify when it will be rearranged to and give regard to any directions as to time and place which are given by the meeting. (Article 41)

• Voting is by show of hands unless a poll is demanded. (Article 42)

• No objections to a person’s vote will be upheld after the meeting. If allowed at the meeting then it will be valid. (Article 43)

• A poll may be demanded at any point before the vote by show of hands or immediately after. A poll may be demanded by the chairman, directors, two people who have a right to vote or one person with at least 10% voting rights. (Article 44)

All the same rules are in the articles for Public companies but they are 8 articles earlier.

Model Articles for Public Companies

• Not valid if no quorum. (Article 30)

• Adjournment rules. (Article 33)

• Voting by show of hands unless a poll is demanded. (Article 34)

• All votes allowed at the meeting are valid. (Article 35)

• Demanding a poll. (Article 36)

Companies Act 2006 has some default rules, which apply unless the articles say differently.

The default rule on a quorum is that this requires at least two persons except in a 1 man company. (Companies Act 2006 s.318(2))

• Where a vote is by show of hands, each member shall have one vote if present.

• Where a vote is by a poll then members shall have a vote per share.

(Companies Act 2006 s.284)

Also has mandatory rules which cannot be varied by the articles.

Protection for right to demand a poll on adjournment as the chairman. (Companies Act 2006 s.321)

Members do not have to vote their shares all the same way. (Companies Act 2006 s.322)

Members rights to appoint a proxy to speak and vote on their behalf. (Companies Act 2006 s.324)

Role and Powers of the Chairman

A member may be appointed chairman at the meeting by a resolution unless the articles state who may or may not be the chairman. (Companies Act 2006 s.319)

The chairman has powers to allow people to speak and to choose the order in which they speak. He may have a casting vote in the event of a tied resolution, and only the chairman may adjourn the meeting.

The chairman also has a common law power to stop the meeting if it is not practical to continue. However the chairman also has a duty to exercise his powers fairly and reasonably, otherwise decisions of the meeting may be overturned.

Byng v. London Life

1. A meeting was called to approve a merger. The meeting was in October, the merger had to be approved by March but it was more convenient if it was approved by January.

2. Special arrangements had been made with overflow rooms and another venue booked later in the day.

3. The equipment being used to transmit audio and visual to the overflow rooms stopped working so the chairman adjourned the meeting until later in the day when they could use the larger venue. However a lot of members were unable to attend the later meeting.

4. These members challenged the validity of the resolutions from that meeting.

5. Court of Appeal held the meeting was invalid. Although the chairman had acted in good faith he had a duty to ensure that all members who wanted to attend could attend and he had not take due account of this and weighed it against the fact that there was no need for the meeting to be held that day.

Power of the court to convene a general meeting

Allows a court to convene a general meeting upon the application of either a director or a member. This will be allowed whenever it is impractical to call a meeting by other means. (Companies Act 2006 s.306)

The court is able to vary any other rules regarding the general meeting, this includes the quorum rules. These are generally the reason why the court is needed, if the company cannot form a quorum. Another could be if there is a rule saying that a meeting may not be called unless all members are present or have given permission for the meeting to proceed in their absence.

Courts will intervene in order to break a deadlock when quorum rules are being used to frustrate the principle of majority rule, but only if the rule had not been intended to confer a power of veto on the members using it in that way.

Union Music v. Watson

• A company was in deadlock as the minority shareholder would not attend a meeting to enable the majority shareholder to appoint a new director and would break the deadlock and the articles required all the members to be present.

• Court of Appeal held that it would convene a meeting as the rule was not intended to be a veto rule; it was merely a quorum rule. Majority rule and ensuring proper administration were important. C of A also said that it would not break the deadlock if there were just two equal shareholders, but this was not the case.

Resolutions

Directors may propose resolutions when calling for a general meeting under Companies Act s.302. Or they may circulate and propose a written resolution under the Companies Act s.291

Directors may propose a written resolution by sending a copy to every eligible member. (Companies Act s.291)

Members may request a general meeting under Companies Act s.303 and propose a resolution. Members may also move for a written resolution under Companies Act s.292.

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