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Law for Business

Knowhow - guidance - precedents

16 DEC 2014

Ten things every director needs to know – Part 9

Ten things every director needs to know – Part 9
Directors and shareholders are subject to two distinct decision-making regimes.

(December 2014)

This is the ninth in a series of articles in which we explore the role of a director from various angles, some of them slightly unconventional. Each article identifies a fact of which directors need to be aware – whether concerning their duties, their relationship with other key players or their responsibilities under the Companies Act 2006 – and uses it as a starting-point to illuminate a particular aspect of their role.

This article examines the procedures by which directors and shareholders take decisions.

The division of powers and responsibilities

Directors and shareholders have very different roles. In most companies, the directors have a wide power to manage the company’s business. Article 3 of the model articles, for example, provides as follows: “Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.” The effect of such an article is that it is the directors who take most of the company’s decisions. It is they who decide what the company’s long-term strategy should be, whether it should expand into new lines of business or new jurisdictions and whether it should bring legal proceedings against third parties. The role of the shareholders, by contrast, is supervisory in nature. They have power under the Companies Act 2006 to alter the contents of the company’s articles, for example, and to remove from the board any directors of whom they disapprove.

Decision-making - overview

Just as directors and shareholders have different roles in the company, so too they carry out their functions in different ways. In other words, the means by which they take decisions are governed by two distinct regimes. Perhaps the most important fact of which a director needs to be aware in this connection is that decision-making by directors is governed almost entirely by the company’s articles, whilst decision-making by shareholders is governed chiefly by the Act.

Decisions by directors

Many boards will take decisions on a fairly regular basis. The articles may provide, for example, that the directors are to meet once a month or once a quarter. Of course, they may also need to meet on an ad hoc basis to deal with specific issues, such as an opportunity to acquire another company or a serious problem in the supply chain.

Since the rules governing board decisions are set out in the articles, the detail of the regime will vary from company to company. Most articles will, however, address the following questions:

  • what decision-making procedures are available to the board? - the articles will generally give the board the option of taking decisions by majority vote at a meeting or unanimously by means of a directors’ written resolution. Although there is no hard and fast rule on the point, most directors will take the view that the most important decisions should be taken at a board meeting rather than in writing, on the basis that a meeting will give them an opportunity to debate the proposals and, hopefully, reach a measured decision.
  • how is a meeting called?
  • can a director attend a meeting remotely?
  • what is the quorum for a meeting? – in other words, how many directors must be in attendance for the meeting to be valid?
  • does the chairman or any other director have a casting vote?
  • are there any restrictions on the ability of a director who has an interest in a resolution to vote on it? - it is common, for example, for the articles to prevent a director from voting on a transaction in which he has an interest (see, for example, article 14 of the model articles for private companies).
There is a statutory obligation to keep minutes of all board meetings (section 248, Companies Act 2006), and the articles will generally require a record to be kept of any directors’ written resolutions. Such minutes and records are internal documents, and are not available for public inspection.

Decisions by shareholders

Shareholders take decisions less frequently than directors. Their decisions are no less important for that, however, and care needs to be taken to ensure that the formalities set out in the Act are observed.

There are two types of shareholder decisions. An “ordinary resolution” requires the support of more than 50% of the shareholders (section 282). A “special resolution” requires the support of at least 75% of the shareholders (section 283). The provision of the Act or the articles which specifies that a shareholder resolution is required in respect of a particular matter will also specify whether what is required is an ordinary resolution or a special resolution.

There are three means by which shareholders may take decisions:

  • by means of a written resolution – the written resolution procedure, which is governed by Chapter 2 of Part 13 of the Act, is available only to private companies. The statutory regime is fairly prescriptive, but on the whole it provides shareholders of private companies with a simple and efficient means of taking decisions. All that is required, essentially, is that a proposed resolution is circulated to the shareholders; it is duly passed when a sufficient proportion of them notify the company that they support it. The written resolution procedure is widely regarded as the default means by which shareholders of private companies should take decisions.
  • by means of the section 357 procedure – section 357 of the Act provides a sole shareholder of a private company or a public company with an extremely easy means of taking a decision. In fact, the section does not deal with the taking of the decision itself, but simply requires the sole shareholder to notify the company of any decision it takes. Although it does not require the notification to be in writing, best practice is to provide the company with a formal written record of the decision.
  • at a general meeting – the general meeting procedure can be used in all situations and is available to shareholders of both private and public companies. The Act contains detailed provisions governing general meetings, and those provisions are often supplemented in companies’ articles. Public companies (other than those with just one shareholder) have no choice but to take all of their decisions at a general meeting. Shareholders of most private companies will rarely, if ever, take decisions at a general meeting.
There is a statutory obligation to keep minutes of all general meetings and a record of all other decisions by shareholders (section 355). Whereas board decisions are private, many shareholders’ resolutions have to be notified to Companies House, where they will be made available for public inspection.

Comment

Much of a director’s time will be taken up with the task of ensuring that he understands the company’s business inside out, and is in a position to make the right judgements as to how it should be managed. That is as it should be. It is vital, however, that he familiarises himself with the rules governing directors’ decisions. After all, there is no point in having good judgement if the decision through which that judgment is exercised has no effect because the necessary formalities were not observed.

It is vital, too, that a director understands the rules governing shareholders’ decisions. For one thing, it is a peculiarity of the regime that the directors play an important role in the process by which shareholders take decisions: they are responsible for initiating both the shareholders’ written resolution procedure (by circulating the proposed resolution) and the general meeting procedure (by calling the meeting). More generally, however, a director who understands the importance of the role played by shareholders in the smooth running of the company will want to do all he can to ensure that shareholders’ decisions, too, comply with all the relevant rules and therefore have effect as intended.

Nigel Banerjee can be contacted at nigel.banerjee@kcl.ac.uk.

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