ACC30050 Corporate Governance and Company Law 2024-2025 Lecture Slides PDF

ACC30050 Corporate Governance and Company Law Dr Charles Garavan [email protected] Lecture 5 - Directors – types, powers, meetings and duties  Introduction – course overview Course overview o Introduction o Formation of registered companies and the company’s constitution...

ACC30050 Corporate Governance and Company Law Dr Charles Garavan [email protected] Lecture 5 - Directors – types, powers, meetings and duties  Introduction – course overview Course overview o Introduction o Formation of registered companies and the company’s constitution o Separate legal personality o Shareholder’s rights and remedies o Corporate governance and directors’ duties o Accounts and returns o Auditors and flotation of public companies o Share capital maintenance o Charges o Insolvency o Compliance and enforcement  Shareholders’ rights and remedies Previous exam question – Q2, 2022-23 paper Burke Builders Providers Ltd (BBP) is an Irish private limited company which sells building materials to Irish construction companies. The shareholding of the company on 1 November 2022 was as follows: Ordinary shares Preference shares Jarlath O’Leary 1,000 None Mairead Smythe 1,000 None Kelly Burke 1,000 None Yvonne Burke 1,000 3,000 Ciaran Burke 1,000 3,000 The preference shares are entitled to a 5% non-cumulative dividend with no further dividend and have no voting rights or rights to participate in any excess on the winding up of the company. The directors of the company are Jarlath, Yvonne and Ciaran. Yvonne and Ciaran also own 100% of the shares in Burke Imports Ltd (BIL), a company that imports building materials and sells them to Irish companies, including to BBP. In September 2022 BIL sued BBP for non-payment of an invoice in relation to the supply of protective equipment. The equipment had been returned to BBP by its customer, who said that the equipment was defective.  Shareholders’ rights and remedies Previous exam question – Q2, 2022-23 paper On 1 November 2022 Yvonne and Ciaran called a board meeting. Jarlath was unable to attend, as he was abroad at the time. At that meeting, Yvonne and Ciaran approved a settlement of the case taken by BIL. Under the terms of the settlement, BIL agreed to withdraw its legal case provided BBP altered the rights attaching to the preference shares to give Yvonne and Ciaran the same rights as the ordinary shares, i.e. full rights to dividends, to vote and to participate in any surplus on a winding up. At the board meeting, Yvonne and Ciaran gave notice of an extraordinary general meeting (EGM) of BBP to ratify the settlement of the legal case. The EGM took place on 4 November and all five shareholders attended. The settlement of the case, and the alteration of the rights attaching to the preference shares, was approved by ordinary resolution, with Kelly, Yvonne and Ciaran voting in favour and Jarlath and Mairead voting against. Jarlath and Mairead are concerned that the settlement of the case has reduced their percentage shareholding in BBP and that the defence that the products supplied by BIL were defective was not properly explored. They also tell you that Kelly Burke is Yvonne and Ciaran’s daughter, and always votes whatever way her parents tell her to.  Shareholders’ rights and remedies Previous exam question – Q2, 2022-23 paper – outline solution Identification of key legal issues o Section 31 contract o Exceptions to rule in Foss v Harbottle o Minority oppression Law relating to key issues and application to the facts Calling of EGM and passing of resolution o Variation of rights attached to preference shares requires written consent of 75% of preference shareholders and separate special resolution (s88) Calling the meeting with insufficient notice is a breach of the s31 contract, though everyone did attend o Where a special resolution is proposed, 21 days notice of the EGM is required (s181)  Shareholders’ rights and remedies Previous exam question – Q2, 2022-23 paper – outline solution Calling of EGM and passing of resolution o Application to the facts An application can be made to Court to have the meeting and the resolution passed at it overturned, though as 100% of the holders of the preference shares support the change, this may only delay matters, though that delay may allow for an action for fraud on a minority or oppression Settlement of case and variation of rights attached to preference shares o Settlement of case and conversion of shares may constitute fraud on the minority – exception to the rule in Foss v Harbottle (Menier v Hooper’s Telegraph Works case) Yvonne and Ciaran acted in interests of preference shareholders and not ordinary shareholders in altering the rights (Re Holders Investment Trust Ltd case) May be fraud on minority even though Kelly did not benefit, may have voted with parents out of influence or apathy (Prudential Assurance Co v  Shareholders’ rights and remedies Previous exam question – Q2, 2022-23 paper – outline solution Settlement of case and variation of rights attached to preference shares o Settlement of case and conversion of shares may constitute oppression under s212 (Re Williams Group Tullamore Ltd case) Shareholders may have a legitimate expectation that status quo will continue o Settlement of case and reduction of value of shares Shareholders cannot sue for reflective loss – (Ryanair case) o Application to the facts Fraud on a minority case – most likely undoing of settlement and alteration of rights attaching to the shares Oppression case – may involve undoing of settlement and alteration of rights attaching to the shares, but other possibilities exist  Shareholders’ rights and remedies Previous exam question – Q2, 2022-23 paper – outline solution Conclusion and advice o Pursue case for fraud on a minority and seek a Court order to overturn the holding of the meeting and the resolution passed o A case for oppression under s212 may also be considered (especially as cases relying on exceptions to the rule in Foss v Harbottle are more difficult to win, particularly when another remedy is available) o Likely outcome – overturning the settlement and the purported ratification of it  Lecture 5 overview Directors o Types – executive, non-executive, de facto, shadow o Contracts and remuneration o Powers o Meetings Directors duties o Director’s substantial property transactions o Director’s loans Directors fiduciary duties o Introduction o Duty to act in good faith o Duty to act honestly and responsibly  Directors - types s2 defines director as including “any person occupying the position of director by whatever name called” Executive directors o Employees of company (eg MD) o An ordinary resolution is required if the company enters into an employment contract with a director for 5 years or more Non-executive directors o Hired from outside the company o Not involved in the day-to-day management of the company o Contribute an independent view to the board o Help with leadership and management o Ensure high standards of financial probity on the part of the company Directors - types De facto directors o Defined in s222 CA 2014 “a person who occupies the position of director of a company but who has not been formally appointed” o Re Hydrodam Ltd 2 BCLC 180 “A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such.” o Issue often arises because of defect in appointment o Has same duties and liabilities as de jure director Directors - types De facto directors o Re First Class Toy Traders IEHC 421 Liquidator applied to restrict three people – one of them not formally appointed as a director. Liquidator submitted was de facto director. Held - Crucial test is whether individual has assumed status and functions of director so as to make himself responsible as if were de jure director Director had accepted description of his position (finance director), met other directors at what considered board meetings, authorised signatory for company cheques - was therefore a de facto director Directors - types De facto directors o Re Keeping Kids Co Ltd EWHC 175 (Ch) Liquidator applied to restrict CEO of charity. She had never been appointed as a director. Board was made up of non-executive directors and she only attended board meetings on occasion when invited. Held: she was not on same footing as board members, but was subordinate to them and accountable to them as the higher level of management. - was therefore not a de facto director  Directors - types Shadow directors o Defined in s221 CA 2014 “a person in accordance with whose directions or instructions the directors of a company are accustomed to act…unless the directors are accustomed so to act by reason only that they do so on advice given by him in a professional capacity” - Must actually issue instructions to de jure directors - instructions must have imperative quality - must normally be followed eg Guilford Motor Co v Horne Ch 939 (lecture 3) o Have same liabilities and duties under the act as de jure directors Directors - types Re Hydrodam Ltd 2 BCLC 180 o To establish that a defendant is a shadow director of a company it is necessary to allege and prove: - Who are the directors of the company, whether de facto or de jure - That the defendant directed those directors how to act in relation to the company or that he was one of those persons who did so - That those directors acted in accordance with such directions - - That they were accustomed to so act Directors - types Fyffes plc v DCC plc IEHC 477 o Not necessary for directors to follow every instruction of the shadow director for a shadow director to exist Re Worldport Ireland Ltd 1 IR 398 o SC decided foreign company could be found to have acted as a shadow director, even though it could never have been de jure director Directors - types Re Devona Ltd IEHC 263 SC o Company in liquidation. Former bookkeeper and company secretary consulted by directors on making statement of affairs (company accountants no help as were owed money). o He advised board to amend statement of affairs and it did so, was primary contact for company on insurance matters, and signed two leases for office equipment on behalf of company. o Held: matters indicative of management and book- keeping, not enough to find was shadow director  Directors - types Professional advice exception – will not be shadow director where “directors are accustomed to so act by reason only that they do so on advice given by him in a professional capacity” (s221) Re Vehicle Imports Ltd (HC Unrep 6 December 2000) o Liquidator tried to have company accountant restricted as shadow director. o Director had signed blank cheques to be filled in by accountant. o Held: “this does sit with the definition of shadow director”. Court said it was for the accountant to offer a valid explanation and denial by affidavit (this was not done). Restricted with 21 day stay.  Directors – contracts and remuneration Executive directors likely to have an employment contract o May be written (usually is) or oral o Copy of contract must be available for inspection by members (s155) o Cannot enter into employment contract with director for in excess of 5 years without approval of members (ordinary resolution) (s249) o Unless can be terminated with notice Directors not entitled to remuneration per se – determined by board (s155(2)) o Includes travelling expenses o In PLC likely to be fixed by remuneration committee (non-execs) o Level of remuneration must be disclosed in financial statements Directors – contracts and remuneration Termination of director’s employment contract o If written contract, will provide for termination etc o Continued employment may be conditional on remaining a director of company Compensation for loss of office of director must be disclosed to members and approved by ordinary resolution (s251) o Does not include payment bona fide in discharge of an existing legal obligation (eg under employment contract or damages for breach of contract; pensions etc) (s251(3) and s255(5)) Directors may have rights under Unfair Dismissal legislation o Damages but not reinstatement  Directors - powers s158(1) The business of a company shall be managed by its directors, who may…..exercise all such powers of the company as are not, by this Act or by the constitution, required to be exercised by the company in general meeting, but subject to – (a) Any regulations contained in the constitution (b) The provisions of this Act; and (c) Such directions, not being inconsistent with the foregoing regulations or constitution, as the company in a general meeting may (by special resolution) give Directors - powers s158(3) (3) Without prejudice to the generality of that subsection, subsection (1) operates to enable, subject to a limitation (if any) arising under any of paragraphs (a) to (c) of it, the directors of the company to exercise all powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof  Directors - powers Unless the Constitution provides otherwise, directors can: o Allot unissued shares (s69(4)(a)) o Refuse to register a share transfer (s95(1)) o Make calls on shares (s77(2)) o Declare dividends (s124 – by ordinary resolution, but not above amount recommended by directors) o Call an EGM (s177(2)) o Fix own remuneration (for LTD only) (s155) Certain fundamental matters still require the assent of the members o reduction of capital (s84) o providing financial assistance for acquisition of company’s shares (s82) Directors - powers Members cannot interfere with directors’ exercise of powers Ryanair Ltd v Aer Lingus Group plc 3 IR 69 o Ryanair tried to use legislative right as shareholder to have matters tabled at general meeting o Included resolutions on dividends and payments to employee pension funds o Court held: matters delegated to the board, so could not table matters in an attempt to usurp the power of the board  Directors - powers Members’ powers will resurface where: o There are no directors capable of acting Mahony v East Holyford Mining Co (1875) LR 7 HL 869 Where no board of directors appointed, members could hold themselves out as directors o Where the directors exceed their delegated authority Re Burke Clancy (Unrep HC 23 May 1974) Members can ratify acts outside powers of directors but intra vires the company o Where directors act in breach of their duties Bamford v Bamford 1 Ch 212 Members can ratify acts of directors in breach of fiduciary duties  Directors - meetings Any director can call a directors’ meeting (board meeting) (s160) o All directors (unless abroad) entitled to notice (s160(4)) o Can meet by teleconference (s161(6)) o Quorum – 2 directors (unless 1-director company) (s160(6)) o Chairperson of board of directors chairs (s160(8)) o If none/not present – directors choose one for meeting o Can form committees (eg PLCs have audit committee, remuneration committee etc) o Decisions taken by majority (Chair has casting vote) (s160(2) and (12)) o Minutes of meetings must be kept (s166)  Directors and prohibited transactions – property transactions s238(1) Subject to subsections (4) and (5), a company (the “relevant company”) shall not enter into an arrangement under which— (a) a director of the relevant company or of its holding company, or a person connected with such a director, acquires or is to acquire, one or more non-cash assets of the requisite value from the relevant company, or (b) the relevant company acquires or is to acquire, one or more non-cash assets of the requisite value from such a director or a person so connected unless the arrangement is first approved— (i) by a resolution of the relevant company in general meeting s238(2) ‘Requisite’ means more than €65,000 or 10% of value of company’s net assets (and at least €5,000)  Directors and prohibited transactions – property transactions s238(3) An arrangement entered into by a company in contravention of this section and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) shall be voidable at the instance of the company, unless o restitution no longer possible o company has been indemnified for loss o rights acquired by innocent 3rd parties would be affected o company affirms the arrangement within a reasonable period of time s238(5) - doesn’t apply if director is a shareholder and entered into the transaction as a shareholder  Directors and prohibited transactions – property transactions s232(2) Director may be liable to account for any gain made to the company or indemnify the company for any loss suffered (or both) o s232(6)(a) and (b) – unless he or she shows that he or she took all reasonable steps to secure the company’s compliance or did not know the relevant circumstances constituting the contravention Elite Logistics Ltd v McNamara IEHC 246 Company sold stake in property to director in return for writing off of loan from director. Company was wound up shortly afterwards and liquidator applied to have transaction set aside. Held – as necessary approval never sought or received from members, transaction was voidable  Directors and prohibited transactions – property transactions Re K4S Real Estate Limited (In Liquidation) and Section 631 of the Companies Act 2014 IEHC 203 Property development company with 1 shareholder/director, though company set up by friend who was also a de facto director. Company sold a house to mother of company’s solicitor who transferred the contract to daughter of de facto director. Liquidator subsequently appointed and alleged breach of s238 (sale to person connected to director and not approved) and also sale at undervalue. Other parties argued that was at discount because large deposit and quick sale needed. Not cross examined on affidavits. Held: Liquidator did not prove sale in trust for person connected to director or undervalue. Also, as shareholder/director signed deed of transfer, was a sale approved by shareholders.  Directors and prohibited transactions – Directors’ loans s239(1) Except as provided by section 240 and sections 242 to 245, a company shall not— (a) make a loan or a quasi-loan to a director of the company or of its holding company or to a person connected with such a director, (b) enter into a credit transaction as creditor for such a director or a person so connected, (c) enter into a guarantee or provide any security in connection with a loan, quasi loan or credit transaction made by any other person for such a director or a person so connected s240 – prohibition doesn’t apply where o total of such arrangements is less than 10% of the value of the company’s net assets o is in ordinary course of business of company and value not greater than offered to ordinary person (eg bank) Directors and prohibited transactions – Directors’ loans s241 o Where value of company’s assets falls and value of arrangements exceeds 10% o and directors are aware, or ought to be aware, of this o company/directors must act to reduce arrangements below 10% within 2 months – otherwise arrangements are voidable s242 o Members of company can sanction arrangement under SAP  Directors and prohibited transactions – Directors’ loans – Summary Approval (SAP) s201(1) o SAP requires a special resolution and a declaration by the directors s202 special resolution – must not be > 12 months of arrangement s211(2) o If resolution not passed by more than 90%, delay of 30 days to allow dissenting members to apply to court to cancel resolution s203 declaration (not > 30 days before resolution) must include: o Nature, circumstances parties to and purpose of arrangement o The benefit to the company of the arrangement o That full inquiry into financial position of company made o Declaration of solvency (able to pay debts for following six months) Directors and prohibited transactions – Directors’ loans – Summary Approval (SAP) s210 – where director makes declaration without reasonable grounds, Court may hold him/her liable for debts of company on application of liquidator, creditor, member or ODCE If company wound up within 12 months of declaration, and debts not paid within another 12 months – presumption that declaration made without reasonable grounds Directors and prohibited transactions – Directors’ loans s246 If a company enters into a transaction or arrangement in contravention of section 239 the transaction or arrangement shall be voidable at the instance of the company unless o restitution no longer possible o company has been indemnified for loss o rights acquired by innocent 3rd parties would be affected s248 If a company enters into a transaction or arrangement that contravenes section 239, any officer of it who is in default shall be guilty of a category 2 offence  Directors and prohibited transactions – Directors’ loans s232(2) – if in breach of s239 Director may be liable to account for any gain made to the company or indemnify the company for any loss suffered (or both) o s232(6)(a) and (b) – unless he or she shows that he or she took all reasonable steps to secure the company’s compliance or did not know the relevant circumstances constituting the contravention s247 (not if SAP followed, does apply if loans under 10% of assets) o If company is being wound up and is unable to pay its debts, and the Court considers that any arrangement has contributed materially to the company’s inability to pay its debts or has substantially impeded the orderly winding up of it o the court, on the application of the liquidator or any creditor may make a declaration that any person for whose benefit the arrangement was made shall be personally liable, without any limitation of liability, for all of the debts and other liabilities of the company Directors and prohibited transactions – Directors’ loans Neville v Krikorian 1BCLC 1 Father and son directors both had loans in breach of prohibition. When company wound up, were held jointly and severally liable for each other’s debts, even though son’s debts were much bigger (> x10). Held – even if father did not know level of son’s borrowing, this was recorded in the accounts – signed by the directors Re Xnet Information Systems Ltd (Unrep HC 6 May 2004) o If borrow in breach of prohibition and company is subsequently wound up, directors may be restricted for not having acted responsibly Directors - duties Directors are fiduciaries o Act as agents of company – without interference of shareholders o Owe various duties of loyalty to company These duties which existed under the common law are now codified in the 2014 Act o s228(1)(a) to (f) – traditional fiduciary duties o s228(1)(g) – additional common law duty of care, skill and diligence  Directors - duties s228(1) a director of a company shall: o (a) act in good faith in what the director considers to be the interests of the company; o (b) act honestly and responsibly in relation to the conduct of the affairs of the company; o (c) act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law…… o (d) not use the company’s property, information or opportunities for his or her own or anyone else’s benefit o (e) not agree to restrict the director’s power to exercise an independent judgment o (f) avoid any conflict between the director’s duties to the company and the director’s other (including personal) interests o (g) exercise care, skill and diligence  Directors - duties s227: o (4) The relevant duties (other than those set out in section 228(1)(b) and (h)) are based on certain common law rules and equitable principles as they apply in relation to the directors of companies and shall have effect in place of those rules and principles as regards the duties owed to a company by a director. o (5) The relevant duties (other than those set out in section 228(1)(b) and (h)) shall be interpreted, and the provisions concerned of section 228 shall be applied, in the same way as common law rules or equitable principles; regard shall be had to the corresponding common law rules and equitable principles in interpreting those duties and applying those provisions.  Directors - duties Directors owe their duties to the company as a whole and not the individual members o Percival v Wright (1902) 2 Ch 421 Shareholders sold shares to directors, unaware that directors were in discussions to sell company to 3rd party for higher price per share. Sale didn’t proceed, but shareholders tried to have sale set aside – breach of fiduciary duty. Held: duty to company and company alone. “no good reason why it should be supposed that directors are, in general, under a fiduciary duty to the shareholders… directors have but one master, the company”. s227(1) “a director shall owe the duties set out in s228 to the company (and the company alone)”  Directors - duties Only the company can enforce directors’ duties Duties to shareholders may arise in very limited circumstances Coleman v Myers 2 NZLR 225 o Family company. Father and son were directors. Rest of family looked to them for business advice. o Formed new company and purchased shares in family company and forced sale of remaining shares. Suppressed information on true value of shares. o Held – owed duty to shareholders themselves – based on dependence on information and advice and relationship of confidence Members have other mechanisms to protect themselves in these positions (eg oppression of minority) Directors - duties Directors owe duty to creditors when company is insolvent o Kinsella v Russell Kinsella Property Ltd 4 NSWLR 722 “In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. … But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets.” o Approved in Re Frederick Inns 1 ILRM 387  Directors - duties Directors owe a duty to consider the employees under legislation (introduced in the 1990 Act) s224 (1) The matters to which the directors of a company are to have regard in the performance of their functions shall include the interests of the company's employees in general, as well as the interests of its members. (2) the duty imposed by this section on the directors shall be owed by them to the company (and the company alone) and shall be enforceable in the same way as any other fiduciary duty owed to a company by its directors. o Courtney – duty is of dubious value to employees as it cannot be enforced by them, but only by the company Directors - duties Duty to act in good faith o 228 (1)(a) A director of a company shall act in good faith in what the director considers to be in the interests of the company o Duty of loyalty not competence o Subjective duty – “in what the director considers” o Court will not substitute its own judgment o Irrelevant that turns out not to have actually benefitted company Directors - duties Regentcrest plc v Cohen BCLC 80 o Directors didn’t enforce provision in contract for land purchase permitting pay back of £1.5 million of purchase price. Argued was for sound commercial reasons (wanted to avoid protracted litigation) o Court – question is whether honestly believed in interests of company. o Where clear detriment to company, will be difficult to show that honestly believed. Directors do not have to provide reasons for actions o failure to do so may give rise to inference did not act honestly in good faith Directors - duties Interests of the company – as a whole Re W & M Roith Ltd WLR 432 o Controlling shareholder/director entered into employment contract with company with widow’s pension for life to wife on his death. o Company failed and refused to pay the pension. o Held – was not for benefit of company but of widow. Not binding. Directors - duties Duty to act honestly and responsibly o 228 (1)(a) A director of a company shall act honestly and responsibly in relation to the conduct of the affairs of the company o Previously existed as a common law duty in relation to insolvent companies o Borrowed from restriction and disqualification regime in 1990 Act which was designed to protect the public interest in relation to insolvent companies o Now applies to all companies o Will consider further when deal with restriction of directors For the next session Read o Callanan Irish Company Law o Ch 16 – Financial statements reporting and auditors o CRO information (on Brightspace) o Leaflet 23 – Annual returns and financial statements Directors and prohibited transactions Previous exam question – Q3, 2021-22 paper Richie Rooney is an executive director and head of marketing for Hervir Heating Systems Ltd (HHSL). The managing director of the HHSL, Bill Blaney decided to retire early in 2021. Bill found a replacement, Sally Stevens, and agreed a salary package with her. As part of that package, it was agreed that Sally would be allotted shares in HHSL. Sally was appointed as managing director and chairperson of the board of directors of HHSL on 5 August 2021.As Sally did not have the necessary funds to purchase the new shares to be granted to her in HHSL, a board meeting was held on 12 August when it was agreed that HHSL would lend Sally €200,000 to purchase the shares. Richie voted in favour of this resolution. Directors and prohibited transactions Previous exam question – Q3, 2021-22 paper Richie was recently talking to another member of the board of HHSL who has raised some concerns regarding the loan of €200,000 to Sally. Richard has sought your advice. Requirement Advise Richie of the company law issues, if any, that arise in relation to the matters outlined above, and advise him on any steps he should now take and the likely outcome of such steps. Refer to any relevant legislative provisions and/or case law in your answer