Resolution of a Director

In many ways a company is similar to a sole trader or partnership, except that it exists as a separate legal entity from the owners [1]. A company is owned by its shareholders and controlled by directors in most circumstances; personal assets of the owners cannot be touched to pay for the debts of the company. A company can hold shares in another company, be a director of that company, and even solely own another company [2] . A company has two main documents containing the rules which govern it. The Memorandum of Association which records the agreement that brings the promoters of the company together. Its principal significance is that it contains an ‘objects clause’, a clause which states what the company can do [3] .

The Articles of Association set out the company’s rules. It says how major decisions are to be made, what officers the company shall have and how they are elected [4] .

Directors have a duty to act in the best interests of shareholders’ investment and are not permitted to consider any other interests in the Australian case of Mills v Mills [5] states:

“[directors are] not required by the law to live in an unreal region of detached altruism and to act in the vague mood of ideal abstraction from obvious facts which must be present to the mind of any honest and intelligent man when he exercises his powers as a director.”

This states that directors must act honestly and in good faith. The test is a subjective one, and directors must act in what they consider is in the interests of the company [6] .

The main acts in use today are the Companies Act 1985 [7] and the Companies Act 2006 [8] .

One of the legal topics in the case study relates to the Resolution of a Director under s.250 [9] of the Companies Act 2006 a director is defined as someone who acts in the capacity of a director even if they are not called or formally appointed as a director [10] . There are different types of director shadow directors, de-jure directors, de-facto directors, executive directors, non-executive directors, alternate directors and nominee directors [11] . S.154 CA’06 [12] illustrates the number of directors that companies can have Private companies must have at least one director. Public companies must have at least two. Under ss.162 to 167 CA’06 [13] Directors do not have to be qualified in any way,

Under ss.9-16 CA’06 [14] there are formalities on the appointment of directors when the company is first formed and subsequently directors can be appointed by either members or directors. Since the CA’06 a director cannot be appointed if under 16 years-old as stated in s.157 (1) CA’06 [15] but there is now no maximum age. The acts of a director are valid even if there was a defect in their appointment as stated in s.161 CA’06 [16] .

The board of directors are chosen to govern the affairs of a company and directors operate as part of that board as demonstrated in the case of Re Marseilles Extension Railway Co Ex p. Credit Foncier and Mobilier of England [17] where it noted that `…a director is simply a person appointed to act as one of a board, with power to bind the company when acting as a board, but having otherwise no power to bind them’ [18]

Since the introduction of the Companies Act 2006 a company’s articles of association are now the key constitutional document under s.17 CA’06 [19] . They, along with any decision and agreements affecting the company, form the basis of the constitutional documents of the company. Examples of these include special resolutions and shareholder agreements [20] . In many company’s directors are not only shareholders but may even be majority shareholders so, they can dominate all aspects of the running of a company. Being the shareholder of one company, all the rights should be indicated and knowledgeable in all aspects of corporation. Every right should be known by director or shareholder of the company such as the selling of rights and up to what percentage that the shareholder or director of the company about the decision of when to sell it [21] .

The main duty of shareholders is to pass resolutions at general meetings by voting through their shareholder capacity. This duty is particularly important as it allows the shareholders to exercise their ultimate control over the company and how it is managed. Shareholders can vote in one of two ways: on a show of hands or through a poll vote where each vote will be proportionate to the amount of shares held by each shareholder. A show of hands is usually the preferred method of voting that takes place at general meetings [22] .

There are two resolutions that can be voted on at a meeting: an ordinary resolution, or a special resolution. An ordinary resolution is passed by the shareholders if a simple majority of the shareholders present at the meeting vote in favour of the proposal. Therefore more than 50% of the votes cast will have to be favour, usually displayed through a show of hands.

For a special resolution to be passed, a 75% majority must vote in favour. A special resolution is only required if it is stated in statute or it is in the company’s articles, which suggest a special resolution would have to be used for a particular vote rather than an ordinary resolution. If there is no specific mention of what type of resolution should be used, the presumption is that an ordinary resolution would be required [23] . The case of Puddephat v Leith [24] is an example of the first shareholder agreement as a binding contract. The case of Barron v Potter [25] is also one to consider here as it stands for the principle that when the board is incapable of taking action, power to conduct the company’s affairs will revert to the general meeting.

Secondly, the next legal topic covered in the case study is the dispute between the members referring to arbitration. Arbitration is an alternative to litigation as a form of dispute resolution. As with the court in litigation, the decision of the arbitrator is final and binding [26] . The arbitration clause will set out where the arbitration is to take place and the procedural rules governing it and will usually include provisions governing the appointment of the arbitrator and regulating his powers [27] . This enables the company to retain a degree of control over the dispute resolution procedure. The committees’ arbitration including the arbitration panels and councils should consist of persons rather than the other members with regards to the company.

In line with the protection of positions, the directors did some restructuring of their articles this is identified as the third legal topic present in the case study, The articles contained within Chapter 2 CA’06 [28] are essentially the rule book of the company. Some of the key issue set out in the articles are, Voting rights attached to different classes of shares, Powers of directors, Powers of the board [29] . The article also provide directors with powers to issue shares as shown in s.551 CA`06 [30] and may contain already set out rules such as refusals or agreements of buying and selling shares. The articles of a company operate in conjunction with statute and are likely to contain rules on allotment of new shares s.561 CA’06 [31] and rights to which to attach shares however a company may amend its articles under s.21 (1) CA’06 [32] by special resolution. As in the case of Taylor v Pilsen Joel and General Electric Light Co [33] . This requires a 75% majority vote (s.283). However a court also has limited powers to amend a company’s articles. Other ways in which articles can be amended is by a unanimous vote as in the case of Cane v Jones [34] .

The fourth issue identified is the selling of corporate shares as discussed in the case study a company’s Articles of Association may restrict the right of a member to transfer his shares and may require him, if specified otherwise, to offer his shares for sale. Such provisions would prohibit the transferring of shares to an outsider at a given price unless existing members have been given an opportunity to purchase the shares at the same price and such remaining members have refused to purchase the shares [35] as is the case in this scenario. Where a company’s Articles contain such a provision either the procedure laid down must be followed or a Special Resolution passed by the members relaxing the pre-emption provisions in respect of a specific transfer [36] .

In the case study, Amanda wanted the selling of rights when it comes to Fibre Ltd, but not to either Silverstone or Piers. This is somewhat illegal on the rights based on the company laws as stated in the Articles. As mentioned the articles of association stated that any disputes between member must be referred to arbitration as piers is refusing to consider dispute resolution Amanda could under CA’06 [37] notify the registrar about the company’s failure to respect the articles of association. Although the section states that the articles must be amended articles and in this scenario the provision regarding arbitration was in the original articles however under s.25 CA ‘06 [38] which states that the effect of alteration of articles on company’s members must not require them to take on more shares and they are not bound by the amended articles after the date on which he becomes a member [39] allows Amanda to inform the registrar as the refusal to go to dispute resolution will not increase either party’s shares and as they are the original shareholders from the beginning of the companies formation they are not duly bound by the amended articles. E+W+S+N.I. If Amanda was to inform the registrar under s.27 (a)(b) [40] she would need to send to the registrar a document making or evidencing an alteration in the company’s articles, or to send to the registrar a copy of the company’s articles as amended,

The registrar may give notice to the company requiring it to comply with articles it would state that the company must comply within 28days from the given date. If the company fails to comply under s.27 (4) [41] the company would be liable to a civil penalty .This would allow Amanda and Piers to consider dispute resolution as a way of avoiding further disputes and penalty which could cause more disruption within the company and therefore would not be acting lawfully this would again give Amanda a legal right to sue to make the company act lawfully.

As mentioned Amanda wants to sell her shares and under the new articles of association she is restricted to do so as she does not want to sell to her fellow shareholders but the articles state that she must give them first refusal. In order for Amanda to be able to consider transferring her shares elsewhere she may need to consider a special resolution. A special resolution is only required if it is stated in statute or it is in the company’s articles, which suggest a special resolution would have to be used for a particular vote rather than an ordinary resolution. If there is no specific mention of what type of resolution should be used, the presumption is that an ordinary resolution would be required [42] . However as it is unlikely that her fellow shareholder are going to allow her to transfer her shares elsewhere she could consider that s.27 CA`06 [43] could help prevent her fellow shareholders from gaining her shares as it states that any article which increases the shareholders share and was enacted after he became a member is not enforceable this would allow Amanda to sell her shares elsewhere and avoid disputes with her shareholders.

As a shareholders Amanda could also bring in a claim in the name of a company against those guilty of wrongdoing Amanda would bring the claim in the name of the company this is also known as a derivative claim [44] because Amanda’s right to claim derives from the company’s right to claim.  However any proceeds from the claim would belong to the company and not Amanda [45] .

Also Under S.122(1)(g) [46] of the Insolvency Act 1986 [47] A shareholder is entitled to apply for a winding up where they have a sufficient interest in the winding up. This would mean that Amanda would have to be a fully paid up shareholder and must be able to show that there would be surplus monies left over for the other members [48] . However under s.124 (2)(b) [49] it is stated that the shares must be held for 18months. Amanda would be able to apply for winding up if there is a deadlock within the company and no decision can be made or where the majority shareholders have ignored the rights of the minority [50] .

However the company as its own legal personality [51] may want the proposition of resolution in terms of removing the director giving the special notice of the company like for instance, the formal notice should be set out regarding the request made at the company’s office of the register. The period is about twenty-eight days before the said general meeting [52] .

Formalities on the dismissal of a director are contained in ss.168 to 169 CA’06 [53] and this can be by ordinary resolution over 50% required as defined in s.282 [54] . The normal position is that the company’s articles of association cannot override statute but see the way weighted voting clauses can be construed to in effect defeat the intention of statute as in the case of Bushell v Faith [55]

The CA’06 also provides for removal by written resolution by way of s.288 [56] , as directors may be employees as well as office-holders, dismissal may be a breach of contract which was demonstrated in Southern Foundries [57]