General Meeting, Shareholders and Board of Directors: Keys to formation of Great Britain Companies

30 Sep

This article is a guide for those who want to form a company UK and to keep it as a progressive company. In this article we are discussing about the importance of General Meeting, significance of shareholders and directors.

Role of General Meeting

The GM can be helpful during a gridlock on the Board. Or in the absence of directors. Or when the votes are not sufficient to pass or discard a resolution.  Or where directors are generally deprived from voting.

The GM may approve actions of the directors that are reclusive to the GM. In Bamford case, a revocable act of directors for violation of fiducial obligation can be approved in GM in the following cases:

  • Company has authority over the act
  • GM has full knowledge and acts accordingly
  • Minorities are not oppressed

Significance of Shareholders in GM

For a successful formation of UK companies, trustworthy shareholders are must. It is the responsibility of Shareholders to utilise their power to keep the company consentient. CLR suggested the formalisation of unanimous agreement rule, which was rejected. Section 281(1)­(4) of Companies Act 2006 allots one vote for each Member, subjected to the Articles. Due to accord, minority shareholders get protection. Hence, the shareholders are capable of unanimously overthrowing the acts of directors that lie within his authority and is vested to the board generally, as in Salomon case. However, according to Gower & Davies shareholders do not have a fiduciary relation with the firm, so they are not conformed to protective fiducial responsibilities. 

Involvement of Shareholders in Company’s Decisions 

There are some cases where shareholders are obliged to indorse the decisions made by the Board. Such as those that have an impression on the rights of shareholders mentioned in law or contracts. For instance:

  • Modification of the form of Company
  • Modifications to Company’s Articles
  • Modifications of class rights (Section 630)
  • Disbursing shares (Section 549 CA) or prevent seizure rights(Section 569ff)
  • Strategy of orientation (Section 895)
  • Share Capital’s reduction, buying back of capital, saving shares
  • Deciding about Voluntary liquidation of the firm (Section 84 IA 1986)

Additionally, these four cases of fair governance of company require to be approved by the Shareholder:

  • Co-opt for Auditors of Company
  • Corporate chances being seized by Directors
  • Specific transactions with directors and connected companies as in chapter 4 of CA
  • Protective incentives when a takeover deal is prominent

Formation of UK companies & Directors Appointment

According to Section 12 of Companies Act 2006, companies should be constituted with Directors. As they are an important part of both local and offshore company formation UK. The modifications made must be given signed approval by new directors (Section 162ff).  It is not necessary for the Directors to be the members of the Company as long as articles do not require it. People entitled as Sales director are non-directors and play no part in acts.

Benefits to Directors

A director may be either paid a fee or granted monetary benefits via service contracts, as a return to their services. A director is an officer and not an employee, he may be given a fees by authorisation only. Reciprocally, a manager or director can benefit from remunerations approved by the company. As per Art 19, 14 Model Articles, the draft articles in private companies ratify remunerations to be ascertained by the Directors.

According to Gower & Davies, this is the cause of issues like “mutual back scratching”. That is also the reason of interruption in regulatory authorities. Courts are not eager to lead an inspection regarding the decision of remunerations of directors. The legislature does not define the extent to which an increment should be made in Director’s pay.  Additionally, Gower & Davies advise to preclude chief directors from deciding the remuneration and allow the rest of the committees to decide for it.

Significance of Shareholder for Approval of Remuneration Contract 

The former rule of Common law makes it mandatory for the remuneration contracts to get approved by the shareholders. Incentive pay schemes gave directors the option of subscribing for shares in advance at a market value of shares during the time of subscription. Corporate Governance code suggests increment in share value.

Elimination of Directors 

The issue of agency can be solved by making directors accountable to shareholders. Nonetheless, selection of directors is governed by articles. Hence, keeping shareholders out of the decision. It is interesting to note that shareholders have the authority to terminate an appointment via ordinary resolution, as allowed by Section 168 of Companies Act, 2006. Thus, overruling any pact between the firm and the director as shareholders may interfere at any time in the process of appointment.

The authority given by Section 168 has two capabilities:

  • Ratification of indirect procedure around the section
  • Preservation of the contract based rights of reimbursement for the director

Weight of votes per share:

In Bushell case, the weight of votes per share for the director was suggested to be increased such that no resolution in favour of his removal could be passed. The reason being the semi association in these small scale companies.

Rights in statute on Termination

Before any elimination of director takes place, a special notification should be given at least 28 days earlier to the firm, as stated in Section 168(2) and Section 312 of Companies Act. Moreover, the director authorised for voting must be notified about it as per Section 169(1).

Compensation rights after Termination 

If a director is being terminated, he will still have the right to claim for any losses he faced during his directorship (Section 168(5)(a) CA). This may hinder the company from dismissing a director due to large monetary susceptibilities. Nevertheless, the claim made by director can only be via justifiable contract that allows him to maintain his directorship for a certain duration or get eliminated after a notice.

Regarding the payment, it is stated that the director may only receive termination pay if mentioned in the contract. He may also receive recovery of any losses due to contractual violation. If the contract is constituted from company’s articles, modification in articles will not be termed as contractual violation. Director may have an exclusive contract formally or informally. If the shareholders utilise their power of statutory termination, the contract will be violated by the company and termination payments will have to be made by the company.  

Limiting Termination Payments

The director may not be prevented from removal via statutory termination right. However, all the deals made between the company and the director must be in a written version for members’ evaluation as stated in Section 228­229.

According to Section 423 CA, a remuneration report revealing company policies regarding contract durations, termination packages etc. should be generated annually and sent to the registrar.

Shareholders should vote on remuneration package but just to show their consent (Section 439 CA 2006). Service contracts greater than the duration of two years should be approved in general meetings. Else the contract is nullified (Section 188 CA).

Termination Remunerations

The directors may want to pay something to the director in gratitude upon his removal. However, it is illegal to grant any termination remunerations to the director without revealing the remuneration plan in front of the members (Section 217 CA). This restriction lifts from contract based compensation.

If there is any loss due to unauthorised payments, the directors have to compensate the company for the loss.

Formation of Board

After the formation of Great Britain companies, the next step is formation of board of directors. The standard is a one level Board, including supervisory and overseeing groups released by a single Body. However, an expansion in delegation was noticed by CLR, and given that Articles permit it, this is legitimate. In order to avoid breaking their obligation, the Board should govern successfully. Any "European Company" (SE) that selects to get registration in Britain, has the option of a one­ tier or a two­ tier board constituted from a supervisory and administration body, similar to the German style. Gower and Davies are of the view that it stays to be observed whether the registration by SEs in the UK of two tier boards creates an "Overflow" impact into local law. However, the number of registered SEs is less in UK. Hence, it seems improbable.

Decision Making of Shareholder 

The Shareholder General Meeting is considered as "unnecessary encumbrance" on frequent basis.

  • In small scale organizations, Directors/Members are the same people in routine.
  • However, in substantial companies, Members contribute little in the running the company.

Having a single decision making body in small scale companies is the most effortless way of determination. However, it was not sufficiently helpful for utilization in UK to CLR.

Gower and Davies express a choice is the utilization of LLP where the meetings of Board and Shareholders are moved into a single while maintaining constrained limits. Only the shareholders with voting shares (some might be "inclination shares") can vote.  Company Law does not need equitable rights to voting for shares. An AGM does not have a prerequisite for being held anymore. The resolutions may be in written form with an option of face to face voting or via proxy for ordinary or special resolutions (Section 296 (4) CA). Also, by adopting at a meeting of Members (Section 336 CA 2006).

The decisions of Members and Directors are of equitable significance. Although, excluding the above two, the Articles cannot prevent the Members of their statute decisions. Resolutions in mere written version are not allowed in the following two case:

  • Removal of Director, as he should be given a chance to speak in his defense (Section 168).
  • Removal of Auditor (Section 510).

Every member, eligible for voting, should receive a copy of the proposed written resolution. If there is no chance of delay, same copy should be sent to each member via circulation. The resolution is passed when a required majority of votes is received irrespective of all the voters have voted or not or the duration for period has ended. As in, if a shareholder with sufficient majority shares votes for the resolution before others, it will be passed right at that time.

Disobeying Section 291 by not providing complete information about the voting is a criminal offence. Nonetheless, it does not nullify the resolution if passed.

An AGM may be called by a Member given a board is not eager to interfere it, when in accord to Section 303­306 CA, he owns at least 5% share capital. A 1000 word statement supporting the resolution must be provided (Section 292(3)­(5) CA). Circulation must take a maximum of 21 days to complete. The member requesting for resolution should pay for circulation. The resolution must not include any unlawful action to be taken by the company. In addition, it should neither be notorious or defaming for the company (Section 295).

Common Law Unanimity in Consent Rule 

Section 281(4)(a) authorises unanimous consent given by members. In EIC Services case, Neuberger J stated that a complete knowledge about the resolution should be known by Members and should give their consent in a way that later their denial of the unanimous consent is clearly termed as inequitable. That is, their approval should be clear in its meaning. The approval can be taken in advance, or after pact, authorisation or waiver. Considering the case Re Duomatic, the consent should be given by only the shareholders entitled as voters. For instance, merely voting or class of shares etc. It should be noted that if all the directors are shareholders, they are allowed to act as directors in the meeting. They may simultaneously ratify or approve their own unratified acts as members.

There should be establishment of conciseness. The point that a member would have assented is insufficient; expression of complaint invalidates any assumption of assent. As there is a dependency of the interchange of silent submission, laches, and estoppel. For instance, In Re Bailey Hay, a resolution was approved by 2 with 3 refraining. Although, none was notified, three years later the nullification of resolution had been made practically unjust due too unanimous assenting.

Unanimous consent does not permit the members to override rules against illegal gifts, distribution of assets in an illegitimate manner or violate Companies Act or General Law. The Unanimous rule serves the purpose of passing a resolution without complying with the formalities. Therefore, in Precision Dipping case, unanimous assenting was insufficient to overrule the law of auditor’s approval of accounts for it was for the security of creditors. However, in Altas Wright, procedural formalities for approving a service contract spanning over a long duration is over ridden by unanimous consent of shareholders.

Gower & Davies express it to be improbable for the courts to permit unanimous consent rule for operation in the two cases:

  • Removal of director
  • Removal of auditor

Since these rules have been devised for the protection of the director and auditor and not the Members. 

Increasing the Participation of Shareholders 

To form a company UK that works and grow effectively, the shareholders must be willing to use their power against any wrong being done to the company. According to the study of Berle & Means on share ownership (1930s), it is assumed that the shareholders are less likely to exercise their power of accountability of the management. The reason is probably that the return they get on any modification of policy is negligible for their small number of shares. However, according to Gower & Davies, this can be compensated via greater investment by institutional firms such as insurance companies and pension funds. They also express that Pension funds have had little impact because of the following three reasons:

  • Exercise voting rights may lead to conflicts of concerns. However, shareholders do not enjoy a fiducial post
  • The pension funds trustees owe fiduciary regulations to the heir of that fund. However, the relation of trustees and their investors is not necessarily fiducial
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