The notion that shareholders, acting unanimously, should be able to take decisions without having to comply with the detailed procedural requirements in their articles or in companies legislation is not controversial. The difficulties with the unanimous consent rule surround its exact parameters.
A number of recent cases have discussed aspects of those parameters, and in doing so have highlighted the fact that the rule has its limits. In particular, the February 2012 decision of the High Court in Bonham-Carter v Situ Ventures Ltd contains useful guidance on the rule's application in the context of the removal of a director under s 168 of the Companies Act 2006. Although some of the court's comments on this point are technically obiter, they indicate that the rule will not rescue a s 168 resolution which does not comply with the formalities in s 169. By analogy, they also suggest that a sole shareholder cannot use the procedure in s 357 (records of decisions by sole member) to remove a director under s 168. Article continues below...
Whilst the decision not to attempt the potentially difficult task of codifying the common law rule in the Companies Act 2006 (the Act) was understandable, it is unfortunate that the Act does not at least use clear language to confirm that the rule has not been abolished. Section 281, which deals in general terms with the means by which shareholders take decisions, merely notes as follows: ‘(4) Nothing in this Part affects any enactment or rule of law as to - (a) things done otherwise than by passing a resolution ...'. It is left to the explanatory notes to the Act to state expressly that the effect of s 281 is to preserve the unanimous consent rule.[I]
Scope of the rule
It is traditional to begin any consideration of the scope of the unanimous consent rule by reference to Buckley J's observation in Re Duomatic Ltd  2 WLR 114 that ‘where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be'.[ii] There is no doubt that the rule (which is widely known as the Duomatic principle) is fundamentally a doctrine of wide application. For example, it allows shareholders to dispense not only with requirements in the articles, but also with requirements set out in statute[iii], and applies even where the shareholders' assent takes the form of acquiescence in a course of action rather than express approval[iv]. It must not, however, be regarded as a cure for every failure to observe formalities, or indeed as a licence for shareholders to conduct the company's business without any regard for the general law, for it is by no means without its limits. In Secretary of State for Business, Innovation and Skills v Doffman, Re Stakefield (Midlands) Ltd[v], which concerned an application for disqualification orders under the Company Directors Disqualification Act 1986, the High Court had occasion to consider the rule and took the opportunity to identify three limits to its scope which were potentially relevant on the facts. According to Newey J:
the rule applies only if the shareholders had actually addressed their minds to the relevant matter.
This limit is an intrinsic part of the rule, dating back at least to Re Duomatic itself, and in practice constitutes an important constraint on its application. As was noted last year in Tayplan Ltd v Smith[vi], a Scottish case, the Duomatic principle ‘goes to the reality of the situation there must have been a proposal of which all parties were aware and it must have been agreed to'.[vii] The courts will need to be persuaded that, on an objective analysis, the shareholders' agreement was real and unqualified.[viii]
the rule does not apply to an unlawful distribution.
It appears from his judgment that Newey J considered this limit to be part of a wider limit preventing the Duomatic principle from being used to circumvent restrictions and obligations imposed on companies by the general law. If, for example, a formal resolution at a general meeting cannot remedy a failure to comply with the accounting provisions of the Act, the informal agreement of the shareholders under the unanimous consent rule should not be able to do so either. In Re Frontsouth (Witham) Ltd[ix], the High Court considered whether, where the articles delegate management control to the directors in the usual way, the shareholders have the power to put the company into administration. Although this part of the judgment was obiter, Henderson J doubted whether, as a matter of the general law on the division of powers, the shareholders, whether acting formally in a general meeting or informally in accordance with the Duomatic principle, could usurp the directors' management role in this way.
the rule does not apply where the interests of creditors intrude as a result of the company's poor financial situation
What Newey J seemed to have in mind here was the specific scenario in which shareholders seek to approve a breach of duty by the directors in circumstances where, because of the company's financial situation, the directors were required to have regard to the interests of creditors. In such a situation, the shareholders may not be able to approve the breach, whether they seek to do so through a formal decision or otherwise. Another limit to the unanimous consent rule, related to the one set out in the bullet point immediately above, is that its application is precluded where requirements imposed in relation to the making of a particular decision are designed wholly or partly to protect the interests of other parties than the shareholders who are seeking to waive them. In Re Duomatic itself, Buckley J declined to apply the rule so as to waive a statutory obligation which was designed to protect the interests of all shareholders, whether voting or non-voting, on the ground that a non-voting shareholder had not been a party to the informal decision in question. In Atlas Wright (Europe) Ltd v Wright, the Court of Appeal held that, in determining whether compliance with particular statutory requirements could be dispensed with, it was necessary to consider ‘the purpose and underlying rationale of the particular formality in question'.[x]
Application of the rule to section 168
Section 168 provides for shareholders to remove a director ‘by ordinary resolution at a meeting', and s 169 gives the director in question the right to protest against his proposed removal. Section 288(2)(a) expressly excludes s 168 resolutions from the ambit of the private company written resolution procedure. The question arises as to whether the unanimous consent rule can be used to allow the shareholders to take an informal decision to remove a director under the statutory procedure. The test in Atlas Wright for determining whether statutory requirements can be dispensed with is, in this instance, easier to state than to apply. On one view, the s 169 obligation to allow the director to make representations is imposed for the protection of the director himself, in that it affords him the chance to state his case before he is removed. On another view, it is designed, rather, to protect the shareholders, by ensuring that they have all the information they need in order to make a balanced decision. Earlier this year, in Bonham-Carter v Situ Ventures Ltd[xi], the High Court was invited to apply the Duomatic principle so as to uphold an informal decision supposedly taken by a sole shareholder to remove two of the company's directors. In the event, this argument fell at the first hurdle, when Richard Sheldon QC, sitting as a deputy judge of the High Court, concluded that the shareholder had not taken any such decision, but Mr Sheldon took the opportunity to consider whether, in any event, shareholders are competent to waive compliance with the provisions of s 169. His view on this point, though obiter, was unequivocal: the provisions were designed, at least in part, to protect the director, and therefore shareholders are not competent to waive them. What is more, he suggested that a failure to comply with the provisions may well render a s 168 resolution (formal or otherwise) invalid.
The impact of Situ Ventures
In respect of any company with more than one shareholder, the effect of the decision in Situ Ventures, taken together with s 288(2)(a), is that the shareholders can only remove a director under s 168 by passing an ordinary resolution at a general meeting. What, though, of companies with just one shareholder? Sole shareholders, of course, have the option under s 357 of simply taking a decision and notifying it to the company. Is a s 357 decision by a sole shareholder to remove a director under s 168 effective? Applying Mr Sheldon's analysis, the conclusion must be that it is not. If the protections afforded to directors by s 169 cannot, as a matter of principle, be waived by the shareholders, an attempt to waive them by using s 357 must be as ineffective as an attempt to waive them through the use of the unanimous consent rule.[xii]
The unanimous consent rule can be justified on both pragmatic grounds and policy grounds. As to the former, the fact is that many small companies, in particular those which may be described as quasi-partnerships, do not have regular access to legal advice, and conduct their affairs largely on an informal basis. As to the latter, there is considerable force in the argument that, as long as they are acting unanimously, the owners of a business should not have to pay undue attention to procedural requirements concerning the manner in which they take decisions. Recent cases have, however, served as a reminder that the rule has its limits and indeed Situ Ventures has added to our understanding of exactly what those limits are. Advisers to smaller companies, in particular, may want to draw those limits to their clients' attention, and urge them to abide by the Act's formal decision-making procedures whenever possible. The implications of Situ Ventures in relation to s 357 will be of particular interest to group companies, which are often owned by a single shareholder. Although it is common for companies to provide an alternative to the s 168 procedure in their articles, there will inevitably be instances in which the only option is to use the statutory procedure, and advisers need to consider whether, in light of Situ Ventures, it is safe to recommend the use of s 357 in such circumstances.[xiii] Richard Sheldon QC's observations on the nature of the protections afforded by s 169 may have been obiter, but his analysis was sound, and most advisers are likely to take the view that it is not.
[I] Explanatory Note 523. [ii]  2 Ch 365 at 373. [iii]Re Oxted Motor Co Ltd  3 KB 32; Re Express Engineering Works Ltd  1 Ch 466. [iv] In Schofield v Schofield  EWCA Civ 154, the Court of Appeal was invited to conclude that a shareholder had agreed to a general meeting being held without the requisite notice, and to hold that therefore, in accordance with the Duomatic principle, the meeting had been validly convened. In the course of declining this invitation, Etherton LJ noted that the assent of the shareholder in question "could be express or by implication, verbal or by conduct, given at the time or later". See also Hussain v Wycombe Islamic Mission and Mosque Trust Ltd  EWHC 971 (Ch). [v]  EWHC 3175 (Ch). [vi]  CSIH 8. [vii] See also Bonham-Carter v Situ Ventures Ltd  EWHC 230 (Ch), where it was held that the filing at Companies House of TM01 forms in respect of certain directors in the mistaken belief that they had resigned did not amount to a decision to remove those directors. [viii]Schofield v Schofield  EWCA Civ 154; Rolfe v Rolfe  EWHC 244 (Ch) [ix]  EWHC 1668 (Ch). [x]  BCC 163. The court concluded in that case that a statutory provision which required an agreement by a company to employ a retiring director as a consultant for life to be approved by a shareholders' resolution could, indeed, be dispensed with by the sole member, since it was designed purely to protect shareholders. [xi]  EWHC 230 (Ch). [xii] Although Mr Sheldon did not expressly consider the position in relation to a decision made under s 357, his (obiter) conclusion on the effect of a failure to comply with s 169 was expressed in very broad terms: "it seems to me that a powerful argument can be made for contending that a failure to comply with any of the requirements of s 169 renders any resolution purportedly passed under s 168 invalid". [xiii] The implications of a purported removal being held to be ineffective are potentially serious. What, for example, might be the consequences for a transaction if it were found that a supposedly unanimous written resolution by the directors to enter into it in fact was not unanimous and was therefore invalid?