#3578 - Power Within A Company - Company Law

Company Law Supervision III – Notes

SHAREHOLDERS, DIRECTORS AND POWER WITHIN A COMPANY

Division of Powers

• Overarching principle one of contractarianism.

• I.e. powers of company are vested where articles say they are.

• Are only very limited mandatory rules imposed extraneously.

• Thus location of power determined by construction of the constitution.

Article 3: POWERS OF DIRECTORS

• Under Model articles, directors:

1. Are responsible for management of company

2. may exercise all the powers of the company for this purpose

Article 4: RESERVE POWER OF MEMBERS

1. Members may direct the directors to take, or refrain from taking, specified action.

• This must be done via special resolution (i.e. 75% majority amongst those voting)

2. However any special resolution of this kind CANNOT invalidate any action of directors before passing of resolution.

• i.e. members can only invalidate acts of directors prospectively, not retrospectively.

Interference by Shareholders

• The shareholders cannot interfere with a decision of the board, save where this is permitted by the articles or statute.

• Automatic Self-Cleansing Filter Syndicate [1906]

• Thus members cannot pass resolutions or take action on behalf of company where articles vest this power in directors

  e.g. Quin & Axtens Ltd v Salmon [1909]

  Shareholders’ agreements may act as evidence that members believe a particular power to be vested in board

  Breckland Group Holdings [1989]

Exceptions

• Rights of members under Model Articles/Companies Act include:

1. Appointment of directors (Art 17/20)

2. Removal of directors (s.168)

3. Change the company’s constitution (s.21)

4. Approval of certain “risky” transaction (see supervision 6)

5. Ratification of director’s breach of duty (s.239)

SHAREHOLDERS

• Members normally make decisions by means of a vote at general meeting;

• However they may in some circumstances act informally outside of a general meeting

General Meeting

1. Calling of Meeting

• Public companies must hold AGMs on an annual basis

• Section 336

• although private companies need not do so

• Other meetings may be called either by:

1. directors

• section 302

2. members

• sections 303-305

3. the court

• section 306

Notices

• Section 310: Notice of meetings must be given.

  Those who must receive notice include:

  members

  directors

  auditors

  Where shareholder does not receive any notice, resolutions passed at meeting are invalid

  Colin Gwyer & Associates [2003] (NB case concerned board meeting)

• Section 307:

  • Notice must be given at least 14 days before the meeting

  • However an AGM may be called at shorter notice if majority of those entitled to attend and vote, who also hold at least 95% of shares, agree to this.

Nature of Notice

• Section 311(2): notice must specify the general nature of business to be transacted

  it must be fair and accurate in this regard

  if notice is misleading or fails to make reference to any important business to be voted upon at meeting, resolutions passed at meeting may be invalid

  Kaye v London Tramway [1898]

  Schedule 4: Notice may be in electronic form, or hard copy form

Special Notice (Removal of Directors)

• Section 168:

  Special notice must be given from members to company where it is proposed that a director be removed.

  Special notice of such a resolution must be given at least 28 days before meeting.

Power of Court to Call Meeting

• Section 306: Court has power to both:

1. Call meeting of members; and

2. To establish its terms

• Will use this power in event of deadlock between competing shareholders

  i.e. will use power to enable general meeting to be called for specific purpose, and bar some members from attending it.

  e.g. to let certain members appoint a new director so as to break deadlock.

• e.g. company with two members, with quorum requirement of 2.

• Whether it is appropriate to call a meeting is matter of construction of articles or any shareholder agreements.

• Union Music v Watson [2003]

Reasons for Non-Use

• Court will not use s.306 where a quorum requirement has been deliberately adopted so as to produce deadlock in event of disagreement between members.

  Union Music v Watson [2003]

• Court will refuse to use power to break deadlock if:

1. shareholders have equal voting rights; or

2. one shareholder has class rights attached to his shares (e.g. right of minority shareholder to veto decisions by the majority shareholders)

3. entrenched rights

• Union Music v Watson [2003]

Use of Power

• Where shareholdings are not held equally, court will often use s.306 to allow majority shareholder to call meeting.

• Relevant factors in exercise of power are:

1. Ability of company to run its affairs

2. Right of majority shareholder to exercise his voting power

• Union Music v Watson [2003]

2. Conduct of Meeting

1. Various rules as to conduct of meetings laid down in Model Articles.

   Articles 37-47 (private companies)

   Articles 28-41 (public companies)

2. Statute also provides certain minimum requirements

3. Where situation not covered by Model Articles or statute, common law default rules apply.

4. Even if company’s articles purport to limit someone’s powers, common law will still apply where particular situation has not been provided for by articles or statute.

   E.g. Byng v London Life [1990]

1. Quorum

• Section 318(1)+(2)

1. Quorum for a company with one member is one qualifying person.

2. Quorum for company with 2 or more members (both private and public) is two qualifying people; unless either:

   unless the two people are both proxies of the same person

• Article 30/38: if quorum is not present, any resolutions passed at meeting are invalid.

Who May Vote?

• Section 318(3): People qualified to vote are:

1. Members

2. Representatives of corporations (s.323)

   corporations have right to appoint representatives to exercise corporation’s voting rights

3. Proxies appointed by members

Proxies

• Section 324:

• Member of company may appoint a proxy to vote on his behalf.

• Multiple proxies may be appointed on behalf of same person, provided each is attached to different shares.

• Section 325:

• Members of company must be informed of their right to appoint a proxy in the notice convening meeting.

• However if this not done, any acts taken at meeting are still valid

• Section 327: any appointment of proxy must be notified to the company in writing.

• Section 330: the authority of a proxy can only be terminated in writing

• if not, proxy’s acts at that meeting are valid.

• Section 329: Proxy is entitled to demand a poll on a matter in same way as member

• Section 324A: a proxy must vote in accordance with any instructions given to him/her by member.

2. Chairman

• Article 30:

1. The chairman of the board will always be the chairman of general meetings.

2. If there is no chairman of the board, or he is unwilling to chair general meeting, or not present within ten minutes of general meeting, then either:

1. directors present must appoint chairman

2. or if there are no directors, members must appoint a chairman

• Section 319:

• Where chairman need to be appointed, must be done via a resolution at the meeting.

• Unless articles provide otherwise

Powers

• Chairman can:

1. Art 33: Adjourn the meeting if it becomes it appears adjournment is necessary to protect safety of members or enable business of company to be carried on in orderly manner

2. Art 14: have final ruling on eligibility of any person to vote at meeting

3. Art 36: demand a poll

4. Art 40: rule on validity of an amendment to a resolution

• Common law: chairman has power to adjourn meeting where it is impractical to continue

  this power can only be excluded by articles via specific reference to it

  Byng v London Life [1990]

• Common law power of adjournment must be used

1. Reasonably

2. Bona fide for purpose of facilitating the meeting

• and NOT to disrupt voting on a resolution which chairman does not support

• Byng [1990]

3. Conduct of Meeting

   No need for all those present at meeting to be in same room or even face to face

   provided they can all take part in business of meeting.

   Byng v London Life Association [1990]

   Thus overflow rooms with audio-visual links for those not inside main venue are permitted.

   Byng v London Life [1990]

3. Voting at Meeting

• Article 281

  private companies (Ltds) have option of:

  written resolution outside of meetings

  or at a general meeting

2. however public companies (Plcs) can only pass resolutions at general meetings.

• At general meetings resolutions are decided in:

1. Art 34: in the first instance via show of hands

2. Art 36: however a poll may be demanded

• Two main types of resolution:

1. Ordinary resolution (s.282)

• passed on simple majority, either with show of hands or poll

2. Special resolutions (s.283)

• passed on 75% majority with show of hands or poll

• must be minimum 14 days’ notice

1. Proposition of Resolutions

• Members’ resolutions are generally proposed by directors

  section 302: meeting

  section 291: written resolution

  However members may also propose resolutions

  section 303-305: meeting

  section 292: written resolution

2. Voting Rights

• Section 284:

  Where resolution is voted upon outside of meeting (i.e. in private company), is one vote per share.

  Where resolution voted upon at a meeting:

1. where done by show of hands, is one vote per hand

2. where done by poll, is one vote per share

   • Thus advantageous for large shareholders to demand a poll

• Section 320: where vote is done on show of hands, verdict of chairman as to whether resolution has passed is definitive.

• Section 322: in a poll, multiple shareholders have right to:

1. not cast all their votes; or

2. cast them in different manners (i.e. both for and...