shareholders are subject to two distinct decision-making regimes.
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.
article examines the procedures by which directors and shareholders take
The division of powers and responsibilities
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
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
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.
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
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).
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
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.
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.
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
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.
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
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.
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.