Source: https://www.oxbridgenotes.co.uk/revision_notes/law-company-law/samples/directors-duties-i
Timestamp: 2020-05-27 15:28:07
Document Index: 317017502

Matched Legal Cases: ['EWCA ', 'EWCA ', 'EWCA ', 'Art 9', 'Art 9', 'Art 9', 'Arts 303']

Directors’ Duties I | Oxbridge Notes
This is an extract of our Corporate Governance document, which we sell as part of our Company law Notes collection written by the top tier of Oxford students.
The Board of Directors and their Management Jurisdiction........................................................54
Gower Chapter 14: The Board............................................................................................................. 54
The Role of the Board......................................................................................................................... 54
Appointment of Directors................................................................................................................ 59
Remuneration of Directors.............................................................................................................. 60
Removal of Directors.......................................................................................................................... 63
Structure and Composition of the Board................................................................................... 65
Conclusion.............................................................................................................................................. 68
Cases.............................................................................................................................................................. 68
Bushell v Faith [1970] AC 1009..................................................................................................... 68
Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100
..................................................................................................................................................................... 70
Automatic Self-Cleansing v Cuningghame [1906] 2 Ch 34..................................................70
Shareholder Decision-Making.................................................................................................................. 70
Gower Chapter 15: Shareholder Decision-Making...................................................................... 70
The Role of Shareholders................................................................................................................. 70
Shareholder Decision-Making without Shareholder Meetings.........................................71
Improving Shareholder Participation......................................................................................... 73
The Mechanics of Meetings.............................................................................................................. 75
Conclusion.............................................................................................................................................. 80
Cases.............................................................................................................................................................. 80
Barron v Potter [1914] 1 Ch 895................................................................................................... 80
Quinn & Axtens v Salmon [1909] AC 442.................................................................................. 81
Byng v London Life Association Ltd [1990] Ch 170..............................................................81
EIC Services Ltd v Phipps [2004] BCLC 589............................................................................. 81
Re Express Engineering Works [1920] 1 Ch 466....................................................................81
Wright v Atlas Wright Ltd [1999] 2 BCLC 301......................................................................... 82
Schofield v Schofield [2011] EWCA Civ 154............................................................................. 82
Union Music Ltd v Watson [2003] 1 BCLC 453........................................................................ 82
Smith v Butler [2012] EWCA 314.................................................................................................. 83
Bonham-Carter v Situ Ventures Ltd [2012] EWHC 320.......................................................83
Madoff Securities International v Raven [2013] EWHC 3147...........................................83 Speechley v Allott [2014] EWCA Civ 230................................................................................... 83
Articles.......................................................................................................................................................... 83
Bainbridge, Director Primacy and Shareholder Disempowerment (2006) 119 Harv
LR 1735.................................................................................................................................................... 83
Bebchuck, The Case for Increasing Shareholder Power (2005) 118 Harv LR 833...84
Grantham, The Unanimous Consent Rule in Company Law [1993] CLJ 245...............84
Bushell v Faith [1970] AC 1009
Facts: Family holding company of real estate. Three directors: two sisters and one brother. AoA Art 9 provided that, on any resolution to remove a director, that director's shares to have three votes per share. CA S168 (now) provides that a director may be removed by ordinary resolution. Sisters wishes to remove brother. Was the weighting invalid meaning they removed him by 200 votes to 100, or was the triple weighting valid meaning that the resolution for removal did not pass so it failed 200 to 300.
Held: Provision valid. Drafters knew of common practice of weighting but did not seek to expressly exclude it.
Counsel for sisters:
Public policy argument against making a director's removal without his consent impossible
Would 'make a nonsense' of the law
Parliament has only picked a few situations where CA will override AoA - court should give effect to those circumstances by not allowing contracting out.
Otherwise, the Act would be frustrated.
Note restrictive approach to such contracting out approach in Australia: Pye v
Minister for Lands NSW [1954]
Counsel for brother:
Look at the language of the Act - legislative intent was actually 'limited advance of shareholder control'.
Historical context: prior to 1948, removal typically required ¾ majority
Intention was to reduce this to ½ primarily viz quoted companies, which has been achieved through twin effect of CA and LR
But a more protective approach may be valid for quasi-partnerships
Per Russell, the same effect could be achieved via SHA anyway
Note also that weighted voting is very common and is readily accepted in other areas of CA - what makes this different?
Ordinary Resolution simply means one passed with a bare majority of votes cast
- not incompatible with weighting
Reply by sisters: 
But here, Parliament did intend to interfere with voting rights in a way that was incompatible with weighted voting
Parliament could have restricted new rule to quoted companies but did not -
issue is CA not LR
Would dismiss the appeal (provision valid)
AoA Art 9 certainly appears to evade the Act
Effect is that no Director may be removed without his consent.
However, the law is not unfamiliar with weighted voting
Lord Morris:
Would allow appeal (would strike down AoA Art 9) - wrong to allow this because it would make director irremovable against his will
Lord Guest:
Would dismiss appeal - agrees with Lord Donovan
Lord Upjohn:
Would dismiss appeal
A company may issue shares with special rights
Act did not prevent such weighting in any way
"Normal" vote may be show of hands but that does not mean that weighted voting is not permissible 3:1 in other situations would be valid so why not here?
If Parliament's intention was to prevent this, they should have made it clearer
Some matters better to be left to business people to sort out themselves
Lord Donovan:
Look at true construction of the provision
S184 (today S168) overrides any AoA requirement for ¾ vote to remove director,
or irrevocable appointment as director for life - this is already extensive
But weighted voting is a normal part of Company law (how is this different from
¾?)
Drafters must have known of this possibility but chose not to include it
Sometimes, it is necessary to keep family quarrels within the home and not let them spill over to the boardroom in such quasi-partnerships or family companies
Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989]
BCLC 100
B Ltd owned 49% L Ltd; C Ltd owned controlling 51%. C Ltd and B Ltd had SHA - C Ltd to appoint 2 Directors; B Ltd to appoint 1 Director. SHA provided that, if L Ltd were to commence legal proceedings, it had to be approved by the B Ltd Director and at least one C Ltd Director in writing. L Ltd brought legal proceedings against controlling shareholder of B Ltd. This had not been approved by the board. B Ltd thus brought an action to restrain proceedings.
B Ltd director was not bound to vote to allow proceedings in interests of the company. Although he had fiduciary duties as director, it was impossible to say that he necessarily had to vote in favour of allowing proceedings.
B Ltd could not force General Meeting to vote to allow legal proceedings to continue by Ordinary Resolution. What the AoA had specified was a matter for the board would be a matter for the board, and what the AoA had specified was a matter for the members would be a division that would be respected.
Harman J thus ordered a board meeting to convene to sort this out; proceedings against
B Ltd controlling shareholder were not struck out.
Automatic Self-Cleansing v Cuningghame [1906] 2 Ch 34
Facts: Company gave Directors power to decide on whether or not to sell the company per Articles. Takeover offer - shareholders passed ordinary resolution to say that they wanted the company to be sold. Directors did not believe that the sale would be interests of company and therefore blocked sale. Could they be forced to allow sale?
Held: Appeal dismissed - the articles are a contract between the members and the company. The members may not unilaterally assume a power that is not conferred onto them. Directors are not simply agents of the company and it within their authority to block the sale as they honestly believe it would not be in the best interests of the company.
Shareholder Decision-Making
Gower Chapter 15: Shareholder Decision-Making
Shareholders have an important role to play even though most decisions would be taken by the board. There are some matters reserved for shareholders, and there is a strong method of shareholder accountability - annual accounts and reports must be presented to them, shareholders of public companies are entitled to attend and speak at the GM at least once a year, and they are meant to have the power to remove directors by ordinary resolution.
However, the norm is private shareholder pressure rather than direct general meeting activism. Ultimate safeguard is meant to be S168 (removal of directors).
The GM is an imperfect process. In small companies (quasi-partnerships), it can seem like an unnecessary encumbrance. For large companies, attendance is often poor,
meaning the GM can be 'captured' by shareholder-activists. The first issue is easier to address but the second one is harder; CLR made some general recommendations like providing for 'more effective machinery for dealing enabling and encouraging shareholders to exercise effective and responsible control'.
Preliminary issue: who is entitled to vote on shareholder decisions - different shares have different voting rights; some may have no voting rights (eg preference shares) so it is a democracy of shares rather than shareholders. However, where voting power and risk are not aligned, there may be a tendency for too much risk-taking. Or - used to entrench current management. This is not too much of a problem when the shares are freely traded - a lack of voting rights may lead to a lower share price to reflect the associated risk, so regulatory intervention is directed as disclosure rather than intervention.
Shareholder Decision-Making without Shareholder Meetings
In a small company, there is often a fusion of ownership and management. Out of convenience, decisions will usually be taken through the board. However, in a board meeting, each member has one vote while in a shareholders meeting, one share has one vote. If the directors have different shareholdings, then the result will be different depending on the mechanism used.
One solution is to collapse board and GM into a single organ, which is possible in parts of the US. CLR did not recommend this but instead the 2006 Act simply makes it easier for small companies to operate, but still with two decision-making bodies. To formally collapse the two, a going concern will have to operate as an LLP.
No more default rule of AGM, and resolutions of private companies can be made in writing by members rather than at a meeting - S336. S300 says AoA cannot be used to deprive company to make any decision save for two statutory exceptions by written resolution. S296(4): written resolution needs same percentage of support as would be needed for resolution to pass in a general meeting. Result has been formalisation of rules wrt written resolutions.
However, this means that a member of the company would not be able to force a meeting unless the AoA says he can. Default rules per Arts 303-306: must hold meeting if demanded by holders of at least 5% of company's voting share capital.
Where written resolutions are not available
S168 - removal of director before end of term - need meeting as director has right to be heard - cannot do written resolution
S510 - same for removal of auditor before end of term
The procedure for passing written resolutions
S296(4): written resolutions require same show of approval as would be needed to pass the resolution if it were proposed at a meeting, ie 50% or 75% depending on CA and
S292(4): re face-to-face meeting, thresholds refer to members present but re written resolutions, number relates to all 'eligible' members (meaning all on list). S291(3):
company to circulate proposed resolution to all members simultaneously as far as possible, though consecutive circulation is possible if it does not result in 'undue delay'.
This is important as it means the proposer cannot circulate the proposed resolution selectively to secure 50% before those opposing have had the chance to speak - as the resolution passes once the requisite threshold has been met - so if I send the resolution by email and only the 51% holder reads it and votes then it passes then.
S291(2)(a): response must be returned to company in requisite form; S291(6),(7) -
consent cannot be revoked once sent in. S296(3) - failure to comply does not make resolution invalid but every officer in default can be held liable for a criminal offence.
Written resolutions proposed by members
Resolutions may be proposed by directors or members - S288(3); members holding at least 5% (or X% per AoA) may request circulation of resolution (S292(4),(5)) plus statement in support of up to 1000 words (S292(3)). Once request made - company must initiate this written resolution procedure within 21 days - S291(1), (3).
This requirement is subject to three qualifications:
Proposers must tender sum necessary to cover costs of circulation unless company has resolved otherwise - S294.
Resolution must not be ineffective eg by inconsistency with AoA; no need to circulate a resolution with is defamatory, frivolous or vexatious - S292(2)(b), (c)
Company or any other aggrieved person may apply to court for an order that the company is not obliged to circulate the members' statement if the members'
circulation rights are being abused - S295.
Wider Written Resolution Provision under the Articles
It is likely that company has right to adopt alternative provisions to written resolutions through its articles - this was explicitly the case under the 1985 Act and likely to still be the case.
Unanimous Consent at Common Law
S281(4)(a) preserves common law rule that shareholders can make an effective decision within their sphere of competence through unanimous consent. Should not allow a company to resile from a decision where all those competent to vote had a formal meeting been called would have voted in favour - Baroness Wenlock v River Dee Co
But what counts as effective consent and what decisions can be made this way?
EIC Services Ltd v Phipps [2004]: effective consent - 'all members of the group…. Being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval'. Members of the group can 'give their consent in different ways at different times': OK.
o Re Duomatic: only the consent of those who would have been entitled to vote counts - note wrt class share rights
Re Express Engineering Works Ltd [1920]: where there is shareholderboard fusion, a meeting can be in both capacities simultaneously