Short guidance from Ukincorp Ltd
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Effective Board Meetings:
The way you run board meetings speaks volumes about how you run the company. Successful companies use board meetings to create and improve key business strategies. Mediocre companies often fail even to set objectives for their board meetings. This briefing is aimed primarily at companies large enough to have board meetings. But it is also useful for smaller businesses, as many of the points apply to strategy meetings in general. The briefing outlines: The objectives of board meetings. Who should be on the board. Preparing for board meetings. Running and following up board meetings.
Selecting the Right Mix of People an Effective Board:
Each board director's role should be agreed in the first place. The choice of chairperson is crucial. While the managing director runs the company, it is the chairperson who runs the board. All boards need strong leadership. Appoint a chairperson who can: create a good team. Command respect from fellow board members, shareholders and employees. Understand the business. Listen to all opinions and then speak honestly.
Experienced non-executive directors can have a major positive impact. A team with complementary skills contributes to sound decision-making. For example, if you plan to expand, find someone who understands the financial implications. Similarly, blend optimism with pessimism, and experience with youth.
Board Members Should be Selected on Merit:
They need to be able to: Think strategically, with a long-term view and a level-headed, realistic approach. Work well with the rest of the board. Contribute to discussions outside their main area of expertise. Put the company’s best interests ahead of their personal best interests.
To be effective, the board should agree on the objectives and scope of the board meetings. Ask each board member to write down his or her views. Opinions will vary considerably, but you can then come to a workable consensus. This is the first step in getting the board to work as a team.
Resist pressure to appoint unsuitable people to the board. For example: the long-term manager, appointed as the only means of promotion; the chairperson’s friend, appointed as a non-executive to strengthen the chairperson's own position; or the shareholders' representative, who has little business experience.
All board directors should come to the meeting well briefed. Distribute board papers on an agreed date before the meeting. Board papers should include several standard elements. The agenda. A full agenda should: Fit the agreed objectives of the board meetings. Not be too long. Have specific items to discuss, rather than just a list of general areas.
For example, under the heading "Strategic issues" you might list "Proposal to start a direct sales team". Include cross references to the relevant items in the board papers. Minutes of the previous meeting. Papers relating to specific agenda items. For example, a major equipment purchase. A good summarising note enables the board to take such decisions swiftly. Generally speaking, the papers should not take much more than an hour to read and analyse. Stick to an agreed format, so the papers are easy to use. Review the format once a year, as your focus will change over time.
Running the Meeting:
The chairperson has the most influence on the meeting. As chairperson, your role is to: Determine the final content of the agenda, in conjunction with the managing director. Brief non-execs (and others) in advance on any sensitive issues. Allocate time to agenda items according to their importance. Create open discussions by introducing each item in a balanced, positive way.
Elicit the views of the quieter directors and prevent anyone dominating the discussion. Give your views on each issue after the others have given theirs. Summarise what has been decided, to check there are no misunderstandings. Be firm in allocating responsibilities and ensuring that they are carried out. Check at the next meeting that all decisions have been implemented.
A good location for the meeting is important. An off-site venue can help you focus more on strategic issues and less on operational ones. A good seating plan helps to draw everyone into the discussion. The date of future meetings should be agreed in good time. Larger companies generally have monthly meetings. Smaller companies may find quarterly meetings more effective. The impact of board meetings becomes diluted if there are too many.
For limited companies, one board meeting a year is the legal minimum. This meeting is used to sign off the annual accounts and to ratify any key decisions made by directors during the course of the year. At times of rapid change, increase the number of meetings. Board members should receive monthly management accounts, even when there is no board meeting.
There are no qualifications specified in the Companies Act 1985 which must be held in order to qualify to become a company director. A company's Articles of Association may, however, require the holding of a specified qualification. For example, a company carrying on business as a registered auditor may require that all directors are themselves capable of being appointed as auditors in their own right.
Alternatively, the directors of a residents' management company will often be required to be property owners or tenants of the particular development. The Act does however set out a number of conditions which, if met, prohibit the appointment of that person as a director, as follows:
A bankrupt person may not be appointed as a director. If a director becomes bankrupt after appointment, he must immediately resign as a director unless leave to continue is given by the courts. A person who has had a disqualification order made against him may not act as a company director. The auditor of a company cannot also be a director or company secretary of that company. A director of an insolvent company cannot, without the leave of the court, be appointed as a director of a company with a "prohibited" name.
The company secretary cannot also be the sole director of the company. A director aged over 70 may not be appointed to a public company or a subsidiary of a public company. This exclusion can be overcome if the company's Articles exclude Table A, Regulation 81 and the appointment is approved by the shareholders of the company. In addition the Act and Articles of Association may provide further instances where appointment may not be made or may cease, for example:
If the person is suffering from a mental disorder and is admitted to hospital under the Mental Health Act 1983 or a court order is made on the grounds of mental disorder. If a receiving order has been made against the director or proposed director or if they compound with their creditors generally. A minor may be barred from appointment. Failure to meet a share qualification or other qualifying criteria. If the maximum number of directors permitted by the articles has been reached.
Procedure for Appointment:
The first directors of a company are those whose names are entered on Form 10 on the incorporation of a company. Subsequent appointments as directors are governed by the provisions of the company's Articles of Association. These usually provide that the board itself may fill any casual vacancies or appoint additional directors up to the maximum number permitted by the Articles.
However, elections or re-elections of directors following retirement by rotation or removal of directors must be approved by the company in general meeting. Also, at the company's first annual general meeting all the directors retire from office and have to be re-elected by the shareholders at the meeting.
A casual vacancy is one arising from the death or resignation of a director. Once it has been established that the proposed replacement is willing to be appointed (consent is formally required by signature of a consent-to-act section of Form 288a), the procedure for appointing a director to fill a casual vacancy is as follows:
The board resolves to appoint the new director. The secretary writes to the newly appointed director confirming his appointment by the board and dealing with the following: requesting personal particulars, including date of birth, which are required to complete Form 288a and to make the necessary entry in the register of directors and secretaries. The date of birth is required for all directors and not just those subject to Section 293 (Section 289 as amended by Companies Act 1989, Schedule 19, para. 2 (2) (b)); asking him to sign the consent section on Form 288a; if the director will sign cheques on the company's behalf, requesting a specimen signature to be sent to the company's bank.
Informing the director of any share qualifications which he must acquire under the articles and the time allowed in which to do this; informing the director of his obligations to disclose his interests in shares and debentures of the company and ask him to provide the necessary information regarding such interests so as to make the relevant entry in the register of directors' interests in shares and debentures.
Inviting the director to give a general notice of his interests in contracts with the company; giving dates of forthcoming board meetings; enquiring how the director wishes his emoluments to be paid, e.g. sent to his home address or paid direct into his bank account, including information regarding his PAYE coding and National Insurance contributions (if he is already paying the maximum contributions in connection with another employment, he should obtain and submit to the company a certificate of exemption from contributions).
Providing general information about the business of the company if the newly appointed director is not already involved in the company. Copies of the Memorandum and Articles, reports and accounts for recent years and interim reports and circulars should be made available if required; providing a copy of the company's rules for securities transactions based on the Model Code and asking him to acknowledge receipt.
A Regulatory Information Service should be notified of the appointment by the end of the business day following the decision to appoint the director. Details of the director's other business activities must be disclosed to a Regulatory Information Service within 14 days.
If appropriate, a press announcement should be sent to newspapers or through the company's press agents. On receipt of the relevant information from the director, the necessary entries in the register of directors and secretaries and in the register of directors' share and debenture interests should be made. The completed Form 288a MUST be sent to the Registrar of Companies within 14 days of the date of appointment. There may also be other matters to be attended to, depending on the circumstances.
Table A does not contain any provision requiring directors to obtain a share qualification and this is not usually required by modern forms of articles. However, it is usual for a director to wish to have some share interest in the company of which he is a director and, in this event, a notice of his interests must be included in the company's report and accounts each year. Where a director is not required to have a share qualification it is usual for the Articles to provide that the director may receive notice of, and attend and speak at, general meetings of the company.
As a non-shareholder, he would not otherwise have such power except if acting as chairman of the meeting. If the company has in force an insurance policy covering directors and officers of the company against liabilities that they may incur in carrying out their duties, the insurance company should be notified of the appointment of the new director either at the time of appointment or at renewal, depending upon the wording of the policy.
Directors are required to give details of their usual residential address on Form 288a or any change in their usual residential address on Form 288c. Companies House VERIFIES the address details supplied against the Post Office database and will reject any that appear to be office addresses. Accommodation addresses and P.O. Box numbers CANNOT be used as clearly these are not residential addresses.
Under the Companies (Particulars of Usual Residential Address (Confidentiality Orders)) Regulations 2002, SI 2002/912, where there has been actual violence or intimidation or there is a serious risk that actual violence or intimidation will occur, a director may apply to the secretary of state for an order permitting the giving of a service address. Where granted, confidentiality orders lapse after five years unless extended or revoked.
There is no provision in the Act authorising a director to appoint an alternate to act on his behalf in his absence, so alternates may only be appointed if the Articles specifically provide for this. Regulations 65-9 of Table A make provision for a director to appoint another director to be his alternate, or he may appoint any other person as his alternate subject to that person being approved by the board of directors. Alternate directors are included in the definition of "director" in Section 741 and their particulars should be entered in the register of directors and secretaries and filed with the Registrar of Companies on Form 288a.
It should be noted that Form 288a does not differentiate between the appointments of a director or an alternate director, so a search of the records at Companies House will reveal alternate directors as appointed as directors. They are subject to the same rules as directors with regard to disclosure of interests in shares and debentures of the company and transactions with the company. Their names must also be shown on letterheads if it is company practice to show the names of directors on such stationery. An alternate director may only act in the absence of the appointing director: it is not a complete assignment by the director of his office under Section 308.
A person who either controls the management of a company or upon whose instructions the directors act is a "shadow director" of the company and is deemed to be a director of the company for all purposes. The appointment of a shadow director should be notified on Form 288a, although a shadow director may be unwilling to sign the "consent to act" declaration of the Form. In such circumstances an existing officer should countersign the form and it should be submitted to Companies House with a covering note explaining the circumstances of the "appointment".
Although directors will usually act upon the advice of their professional advisers this would not normally imply that those advisers were shadow directors as their advice is usually limited to a particular part of the business such as accounts or commercial property transactions.
Defective Appointment of Directors:
If the appointment of a director is found to be defective in any way, Section 285 provides that, for the protection of third parties, any earlier acts made by the person concerned acting as a director remain valid. Where the defect is discovered after a long period has elapsed, it may be advisable for a special resolution or ordinary resolution to be passed by the company in general meeting to give retrospective validation to the acts of the person whose appointment as a director was defective.
Managing Directors and Other Executive Directors:
The appointment of directors as managing or executive directors is usually governed by provisions contained in the company's Articles, giving the directors power to appoint such directors, to determine the terms of their appointment and remuneration and to delegate to them such powers of the board as may be desired.
Since the office of managing director is normally a full-time executive appointment it is good practice for this appointment to be governed by a formal service agreement so that the remuneration and other benefits associated with the appointment may be made clear. The agreement should also contain any restraints relating to confidentiality, with some control over the director's activity in the event of his leaving the service of the company. The contracts of directors who also hold salaried executive positions with the company should specify whether the remuneration stated in the contract is exclusive or inclusive of directors' fees.
For a smaller company, the terms of appointment could be set out in the minutes of the board appointing the director and a letter sent to him containing a copy of the minute and asking for his acceptance in writing of the proposed appointment. The Articles normally give the board of directors power to revoke any appointment of a managing director subject to the terms of any agreement which he has with the company. The appointment would also cease if the director ceased to be a director of the company for any reason.
Special Types of Director:
Some companies' Articles provide for the board to appoint persons to offices with the word "director" as part of their title, e.g. divisional director, associate director. Such a person is not a director within the meaning of Section 741 and is not entitled to attend board meetings. He is not subject to the statutory responsibilities and liabilities of a director, provided that he does not represent himself as being a director in his dealings with third parties.
It is clearly misleading to appoint officials with the word ''director" in their job titles when they are not actually subject to the legal duties of a director. However, companies sometimes follow the practice in order to give an added measure of status to senior executives to facilitate their dealings with customers and suppliers, especially if the company has substantial dealings in overseas territories.
Local boards are also sometimes formed by companies under provisions contained in their Articles. These persons are not full directors for the purposes of the Companies Act 1985.
Contracts of Employment:
An employment contract for a director that is not capable of being terminated other than for breach of contract within a period of five years must be approved by the shareholders in general meeting. Shareholders' approval may be given by an ordinary resolution passed at a general meeting, provided that a written Memorandum setting out the terms of the proposed agreement or a copy of the service contract is available for inspection by members of the company at the registered office for a period of not less than 15 days prior to the date of the meeting.
Companies are REQUIRED to keep copies of directors' service contracts available for inspection by members at the registered office of the company at all times. In accordance with the Combined Code, listed companies are encouraged to have service agreements with their directors with a notice period of not more than one year.
Powers of Directors:
The directors of a company are authorised by the Articles of Association to manage the business of the company and to exercise the company's powers. This seemingly unlimited authority is usually balanced by the fact that this authority is subject to the provisions of the Companies Acts, the company's Memorandum and Articles of Association and by resolution of the shareholders.
The power of the directors is given to the board collectively and not individually. Directors are usually also given power to appoint one or more of their number to executive office and to delegate any or all of their power to one or more committees consisting of one or more directors.
Directors only have authority to exercise the powers of the company as stipulated or restricted by the company's Memorandum of Association. For example the Memorandum of Association of a company limited by guarantee will often prohibit the declaration of a dividend. In this situation, regardless of the level of retained profits, the directors would be unable to declare a distribution to members.
If the director has not obtained any required share qualification within two months of the appointment or, if obtained, he subsequently disposes of his share qualification. In the case of a company subject to Section 293, where the director reaches the relevant age limit, the office of director would be vacated at the conclusion of the next following annual general meeting.
This will usually take effect from the date on which his letter of resignation is received by the company, unless this states some subsequent date on which the resignation is to become effective. Resignation does not need to be accepted by the board to be effective unless the articles otherwise provide.
If the director is absent from board meetings for some specified period (often six months) without leave of absence given by the board. In order to monitor the operation of any such Article, therefore, the secretary should arrange for the board to grant leave of absence where it is known that the director is likely to be absent for a period exceeding six months, e.g. because of overseas travel on the company's business or long illness.
If a receiving order is made against a director or he compounds with his creditors generally. If an order is made by the court on grounds of mental disorder. If the director is removed from office, e.g. by a notice signed by all his co-directors or by any holding company.
At the first annual general meeting of the company, all the directors must retire and be elected by the company in general meeting. At subsequent annual general meetings, one-third of the directors or, where the number is not an exact multiple of three, the number nearest one-third, retire from office. Directors who are retiring because they have been appointed since the last annual general meeting and directors - who are excluded from the retirement by rotation provision, e.g. managing directors, are not taken into account for this purpose.
Some companies' Articles differ from Table A by providing that the number of directors to retire by rotation shall be one-third of the directors or, if their number is not three or a multiple of three, then the number nearest to but not exceeding one-third shall retire. For example: in the case of a board of directors consisting of eight directors, under the Table A provisions, three directors would retire; under these alternative Articles, only two directors would retire.
The directors to retire at any annual general meeting are those who have been longest in office since their last election. If two or more persons became directors on the same day, those to retire (unless they otherwise agree among themselves) shall be determined by lot. Directors retiring by rotation are eligible for re-election but the company in general meeting may elect some other person to take that director's place provided that the provisions of Table A, Regulation 76, are followed. In the case of a public company, the resolutions at a general meeting for the appointment or re-appointment of directors must be voted on individually unless the meeting first agrees unanimously that the appointments or re-appointments may be made by a single resolution.
The reappointment of a director under these provisions does not affect the normal retirement by rotation so that, if a new director is appointed in his place, that person will be subject to retirement by rotation at the same time as the outgoing director would have retired.
Where a person has been appointed as a director after attaining the age of 70 he will retire by rotation in the normal way and it is not necessary for him to be re-elected in the intervening years. Special notice, of course, must be given when he comes up again for re-election following retirement by rotation.
A managing director who is not, therefore, subject to retirement by rotation must be re-elected on attaining the age of 70, unless the Articles provide otherwise, but thereafter need not be re-elected whilst holding the office of managing director. Disqualification in the public interest. The secretary of state has power to apply to the courts for a disqualification order on the grounds of public interest. This would usually follow from an enquiry by the Department of Trade and Industry inspectors.
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Directors properly exercising the powers of the company and acting as agent for the company will not incur personal liability in the event of a breach of contract. However, directors may incur personal liability if they have given personal guarantees or if they have not made it clear that they are acting as agent of the company and not in a personal capacity.
There are also a number of circumstances under which a director may be personally liable to the company or third parties from a breach of duty or statutory offence including: acting as a director whilst disqualified. A director of an insolvent company carrying on a business with a company with a prohibited name. Employing illegal immigrants. Evasion of VAT. Failure to show company name on correspondence, cheques etc. Fraudulent preference. Fraudulent trading. Irregular share allotment. Making false statement in a prospectus. Non-observance of pre-emption rights on allotment. Public company trading prior to issue of trading certificate. Trading with intent to defraud. Wrongful trading.
Unlike shareholders' meetings, which are strictly governed in terms of notice periods, who may attend and speak, rules concerning voting and the differing majorities required for certain resolutions, the Companies Act 1985 is silent on how directors should conduct meetings of directors. Table A, Regulation 88 permits directors to conduct their meetings as they see fit. Accordingly there is no specific notice period and all decisions are based upon a simple (50%) majority of those present or represented by an alternate.
There are detailed provisions obliging directors to disclose their interest in matters being discussed and preventing abuse of their positions by running the company for their own benefit but little else. Listed company directors are also required to comply with the Model Code and to meet the provisions of the Combined Code or explain any departures from the Code.
In practice, public companies with external shareholders and large private companies will hold regular board meetings at which executive management strategy is determined. For the vast majority of private limited companies, formal board meetings are seldom held, and any formal resolutions are approved as written resolutions. In this case, the management of the company is dealt with on a day-to-day basis by a series of informal discussions between the relevant directors.
Directors must ensure that they are fully aware of all decisions being reached in this informal manner as they are collectively responsible for the company's activities. Ignorance is no excuse and, as seen above, in extreme circumstances can lead to disqualification and personal liability.
Board meetings are in the nature of general discussion meetings and, unlike the formal structured nature of shareholders' meetings, usually proceed on an informal basis. The chairman assesses whether the general view of the meeting should be incorporated into the minutes of the meeting as the decision of the board, either in narrative form or, where appropriate, as a formal resolution. If, however, the views of directors are fairly evenly balanced on the pros and cons of a particular course of action, it is appropriate to put the matter to a formal vote.
Table A, Regulation 72, provides that directors may delegate their powers to committees with such powers as the board may decide. The proceedings of committees will follow those which apply to the board as a whole. Anything done at a meeting of directors is valid, notwithstanding that it may subsequently be discovered that there was a defect in the appointment of one or more of the directors. In certain circumstances it may also be desirable that the action taken by a committee should be validated by the directors or by the company in general meeting.
Frequency and Notice:
Board meetings do not have to be held at fixed intervals and are usually convened from time to time, as the directors think fit. Large companies will also usually have an executive committee, composed of executive directors, which meets between board meetings. If meetings are not held on fixed dates, the chairman will usually instruct the company secretary to convene a meeting. It is however open to any director, either acting independently or by instructing the company secretary, to convene a board meeting. There is no specific length of notice required.
For some companies reasonable or normal notice might be one week and for others the notice period might be much shorter. Even where meetings are held regularly in accordance with a fixed timetable, it is still appropriate to issue reminders, sending a copy of the agenda at the same time. The notice of a directors meeting will usually include the place, date and time for the meeting and an agenda of the general topics to be discussed. The notice can be circulated in any manner appropriate to the company, e.g. verbally, by letter, fax or e-mail or by hand.
Agenda and Minutes:
The matters to be discussed at a board meeting will naturally be dependent on the nature of the company's business and the number of directors. Depending on the size of the company, board papers and reports will either be circulated with the agenda or tabled at the meeting. Where any complex matters are to be considered it is of course helpful to the directors and in particular non-executive directors for board papers to be circulated in advance of the meeting.
It can be helpful to number minutes and resolutions serially in order to facilitate reference to any particular minute, if necessary. This may arise when the board is approving authorised cheque signatories, where it may be desired in the future to refer to the minute by its number and refer to the deletion or addition of certain names.
Table A, Regulation 91, permits the directors to appoint one of their number to be chairman of the board; in addition, some articles provide for the appointment of deputy chairmen and vice-chairmen. A person appointed chairman of the board will also usually take the chair at general meetings of the company and will be regarded as chairman of the company, although there is no actual provision for such an appointment.
Regulations 50 and 88 of Table A grant the chairman of the members' or of the directors' meetings a casting vote if there are equal votes for and against any particular resolution. This casting vote is in addition to any other votes that the chairman may have. It is normal practice for the chairman to use this casting vote to maintain the status quo on the grounds that there is no majority in favour of change. However, it is entirely the chairman's decision as to how to use the casting vote, if at all.
The quorum for board meetings is fixed as two directors by Table A, Regulation 89, unless the directors otherwise decide. If the company had only two directors and one were to resign or die, Table A, Regulation 90, provides that the sole continuing director may appoint another director. He should do this formally in writing by signing a suitable document, which is inserted in the directors' minute book.
Where the number of directors falls below the minimum required by the articles of association the remaining director(s) have no power other than to appoint another director or directors, or to call a general meeting of the company at which another director or directors could be appointed. It is increasingly common, however, for private companies to incorporate in their articles a provision vesting all the company's authority in the hands of a sole or surviving directors, even where their number has fallen below the minimum number stipulated elsewhere.
Resolutions in Writing:
It is sometimes necessary for the directors to make a decision urgently and Table A, Regulation 93, provides that a resolution signed by all the directors entitled to attend a board meeting is as valid and effectual as if passed at a duly constituted board meeting. If convenient, such a resolution could be a single document which is signed by each director in turn. Otherwise, a separate copy of the resolution could be sent to each director for signature. The document or documents signed by the directors should be inserted in the directors' minute book.
It is now common practice for companies to adopt articles allowing directors to conduct meetings by telephone, either by a conference facility or by the chairman ascertaining the views of the directors individually. In addition resolutions agreed by facsimile or e-mail are increasingly common, although it is desirable for a written resolution to also be signed to provide a permanent record.
Maintenance of Minute Books:
The directors are required by Section 382 to maintain minutes of all meetings of the directors and for these to be available for inspection by any director. There is no provision or right for the shareholders to have access to minutes of the meetings of the directors. Note that shareholders can, however, request to see minutes of shareholders' meetings. The taking of minutes, maintenance and safekeeping of minutes is one of the core duties of the company secretary.
Certification of Minutes:
Where a third party, such as the company's bank or landlord, requires to see a copy of a particular board resolution, it is clearly not advisable to submit the entire minutes of that meeting or even a particular page. If a director makes a comment about the wording of a particular minute, the alteration should be agreed with the chairman, who will then mention the amendment at the subsequent board meeting before signing the minutes. Since the chairman has agreed the amendment, it is unlikely that any director present at the subsequent board meeting will object to the alteration. It is not desirable in board minutes to include the individual expressions of opinion of any particular director, although it would be appropriate, at the request of a director, to record in the minutes that he had dissented from a decision taken by the board as a whole.
Interests in contracts. Where a director is directly or indirectly interested in a contract or a proposed contract with the company he must declare the nature of his interest at a meeting of the directors. Table A, Regulation 94, imposes restrictions on a director in voting on a matter in which he is personally interested. The type of interest relevant for this purpose is widely defined and would include contracts by the limited liability company with any other company of which the director was also a director. However, if the director's interest in a contract arises merely because he is a shareholder in another company, which is a party to the contract, this would not constitute a declarable interest provided the shareholding was small, e.g. less than 5% of the voting capital.
A useful procedure for a director to give general notice of his interests is given by Section 317(3). Material transactions between the company and its directors must be disclosed in the company's accounts. The Companies Act 1985 imposes restrictions on substantial property transactions by companies with their directors, as discussed below. In the case of listed companies it is usual to find that the articles include a provision prohibiting the directors to vote on all but a few matters in which they have an interest. Such allowable interests include arrangements for approved pension schemes and directors and officers insurance schemes. Non-disclosable transactions with companies, where the interest is in that company's share capital, are limited to holdings not exceeding 1%.
Substantial Property Transactions:
A director of a company or of its holding company may not enter into any arrangement to acquire from or transfer to the company a "non-cash asset" without prior approval of the members by ordinary resolution passed in general meeting. The restriction on substantial property transactions extends to persons connected with a director, to shadow directors and requires that where a director or connected person is also a director of the holding company that additional approval in general meeting of the holding company be sought.
Approval is required for acquisitions and disposals for valuable consideration, gifts and voluntary dispositions where the value of the "non-cash asset" is greater than £2,000.00. Transactions of less than £2,000.00 are not prohibited. Where the asset concerned is valued above £2,000.00 and it is in excess of 10% of the company net asset value or £100,000.00 (whichever is the lower) such transaction requires approval. A "non-cash asset" is defined in Section 739 as any property or interest in property other than cash and includes discharge of a person's liability and creation of an interest in property such as a lease.
Transactions not requiring approval: exemptions for transactions not requiring approval in general meeting include: a non-cash asset valued at less than £2,000.00. An arrangement between a wholly owned subsidiary and either the holding company or a fellow wholly owned subsidiary. An arrangement where the company is being wound up (except a members' voluntary winding up). Where the director is acquiring the asset in his capacity as a member of the company and not as a director i.e. issue of shares pursuant to a rights issue. Whilst such transactions do not require approval of the shareholders by ordinary resolution in general meeting, they must still be approved and formally recorded in the minutes of a meeting of the board of directors.
A transaction approved pursuant to Section 320 is likely to be "material" and will require disclosure in the company's audited accounts. The UK Listing Authority normally requires that, other than small transactions, transactions between directors and the company are the subject of a circular to shareholders and require prior approval of the shareholders in general meeting.
Loans to Directors:
Prohibitions on a company making loans or financial assistance to directors are imposed by Sections 330-340. With specified exceptions, a company may not make loans to its directors or to directors of its holding company nor may it give guarantees or other securities for such loans or enter into credit transactions for the benefit of the director. Although a loan which is outstanding when a person is appointed a director is permitted to continue, any additional amounts of principal or rolled-up interest would come within the prohibitions.
Additional restrictions apply to United Kingdom public companies (PLCs) and to companies that are members of a group containing a public company. Quasi-loans to directors and loans or quasi-loans to connected persons of directors of such companies are prohibited. A quasi-loan is a transaction under which one party pays a sum for someone else or agrees to reimburse expenditure incurred by someone else on the terms that that person will reimburse the person making the payment or where the circumstances give rise to a liability on that person to reimburse the payer.
A director's "connected persons" are his spouse, children under 18 years of age, partners, any company of which he has at least 20% control or the trustees or any settlement for the benefit of such persons. The exceptions which apply to a company making loans or quasi-loans to directors or persons connected with them are strictly limited and are as follows:
A quasi-loan is permissible provided that the amount concerned does not exceed £5,000.00 and is repayable within two months as amended by CA1989, Section 138. A credit transaction for an amount not exceeding £5,000.00 is permitted, as is a transaction entered into in the ordinary course of the company's business, provided that the value of the transaction and the terms on which it is made are not more favourable than those which would be offered to a person of similar financial status unconnected with the company.
An advance of up to £10,000.00 may be made to a director to enable him to meet expenditure incurred for the purpose of the company or to enable him properly to perform his duties, provided that prior approval is given in general meeting or approval is given at the next following annual general meeting. Failing this, the advance must be repaid within the following six months. Special exemptions apply for loans made by money-lending companies (including banks) in the ordinary course of their business where the limit is £100,000.00.
Notwithstanding the above, a company may make a loan to a director of the company concerned or of its holding company if the aggregate of the loans made by the company to the director does not exceed £5,000.00. However, details of the loan must still be disclosed in the statutory accounts. The provisions prohibiting loans to directors contained in the Act are detailed and reference should always be made to the detailed legislation in the Act and, if thought desirable, legal advice taken. In particular, care should be taken if reliance is placed on the exemption relating to advances to enable a director to properly carry out his duties as there is potential for this exemption to be abused.
Interests in Shares and Debentures:
A director must notify the company of his interests in the shares and debentures of the company and of its holding company and subsidiary companies, and of changes in those interests. The notification must be given within five days (excluding Saturday, Sundays and bank holidays) of the occurrence of the event affecting such interests. The following information must be given:
Particulars of the interests which subsisted on the date of his appointment as a director. Details of subsequent acquisitions or disposals by him giving price paid or received. Details of the assignment of any right granted by the company to subscribe for shares or debentures, giving the consideration received. This will include renunciation of rights for shares or debentures provisionally allotted on a renounceable allotment letter in a rights issue. Details of the grant by any other company within the group of a right to subscribe for its shares or debentures, the exercise of any such right or the assignment thereof, giving particulars of the consideration received in the case of an assignment.
A director is not required to give notice at the time of the original grant of a right to subscribe for shares or debentures or of its exercise since the company will be aware of the details and should enter them in the register of directors' share and debenture interests.
A listed company must inform a Regulatory Information Service of any notification received from its directors. Notification is required to be given no later than the day following the date of notification by the director concerned. Disclosure is also required of interests of connected persons. The interests of the spouse of a director (assuming the spouse is not a director in his or her own right) are aggregated with the interests of the director, as are the interests of directors' children under the age of 18 if not themselves directors. The interests disclosable under these provisions are widely defined in Schedule 13, Part I, and include, for example, the interests held by a body corporate if the director controls or exercises one-third or more of the voting power at general meetings of the body corporate concerned.
There are a number of exemptions from notification, which include the following: no disclosure is required of interests in shares or debentures of any person in his capacity as trustee or personal representative of any trust or estate of which the Public Trustee is also a trustee (other than as custodian trustee) or a personal representative. No disclosure is required of an interest of a person in his capacity as trustee or as a beneficiary under a trust relating exclusively to a retirement benefits scheme or similar scheme, provided it is an approved scheme or fund for the purposes of the income tax legislation. Notification need not be made to a company, which is the wholly owned subsidiary of a company incorporated outside Great Britain of interests in the shares or debentures of the foreign holding company.
Notification need not be made of an interest of a director of a wholly owned subsidiary, who is also a director of its holding company, in the shares and debentures of the holding company and any other group company (being a wholly owned subsidiary), provided that the holding company is itself required to keep a register of directors' share and debenture interests. This exemption simplifies the secretarial administration of groups of companies as directors of subsidiaries are often also directors of the holding company and have interests in the holding company's shares.
No disclosure is required in respect of shares in a wholly owned subsidiary which are held by a director as a bare nominee for the holding company. If (although it is probably unlikely) the director of a subsidiary also holds shares in his own right in the subsidiary company, the subsidiary company would be required to keep a register of directors' share and debenture interests and include the director's interest in that register.
If a director has interests (including family interests) in shares or debentures in a variety of different capacities he may merely disclose his total interest, provided that he separately discloses his interests in the various classes of shares or debentures. Alternatively he may disclose each interest separately, showing the nature and extent of the interest where applicable, and he may require the company to record that information in the register of directors' share and debenture interests.
In the case of listed companies, however, the continuing obligations require the statement of directors' interests in the share capital to be distinguished between beneficial and non-beneficial interests. However, the director can request that this information is not recorded in the register of directors' share and debenture interests, as it has been provided solely for the purpose of the UK Listing Authority requirement. A director has a defence for non-disclosure of any interests of which he may be unaware. For example, if the director is separated from his wife and is unaware of her acquisitions or disposals of shares in the company where her husband is a director.