Corporate Management
Lecture
Aims and Objectives
1) Make observations on appointment, remuneration, retirement, resignation and vacation
of office of directors
2) Explain and evaluate relationship between directors and general meeting
3) Grounds for director disqualification under CDDA will be dealt with in lecture on directors’
liabilities on insolvency
Appointment of directors
4) A ‘co cannot act in its own person … it can act only through directors’: Ferguson v
Wilson (1866).
a) Role of directors and appointment necessary for legal running of coy
5) Under CA 2006, s 154, private companies must have min. one director and public
companies two.
6) While first directors are appointed under CA 2006, s 9, successors are elected by
s/holders at general meeting (GM).
a) S.9 talks about relevant docx, but need to say who the directors will be (proposed
officers)
b) S.12 fleshes out s.9 further
c) Under Model Articles 17 (private co’s) and Art.20 (public co’s), s/ holders in GM
have power to appoint directors by ordinary resolution – simple majority in favour
by those entitled & actually voting.
7) There is no provision in Model Articles (private cos) for rotation of directors. Indeed,
named directors might be appointed on a permanent basis: eg Lee v Lee’s Air Farming
Ltd (1961).
a) By contrast, Model Articles 21 (public co’s) provides for rotation.
8) There are few requirements governing appointment of directors.
9) In each co, a minimum of one of the directors must be a natural person: CA 2006, s
155.
10) Under CA 2006 s 157, the minimum age for natural person co directors is 16 years.
There is no upper limit.
11) The common law prevents bankrupts from serving as co directors.
, 12) Despite these criteria regarding appointment, board decisions are effective where
there has been a defective appointment: CA 2006, s 161.
a) But s. 161 only applies where there has been a purported appointment, and not
where there has been no such thing – such as where a person with no real
connection is pretending to be a director: Morris v Kanssen (1946). [appointed
director, but appointment not taken properly]
b) The provision does not protect outsiders who know of the defect or who have
been put on inquiry: Re New Cedos Engineering Co Ltd (1994) but see s.40
(protects bf 3P dealing with the company).
Categories of directors
1) Generally, CA 2006 provisions apply to ‘directors’
2) But Act does now recognise distinction between various kinds of director (ss 170(5) and
251 (shadow directors) ): see below
Formally appointed directors (exec, NEDs)
3) De jure directors are formally appointed; details appear in Companies Register. Divided
into 2 sub-categories – executive and non-executive directors.
4) Executive directors are full-time and serve under service contracts; they are senior
executives of co.
a) One of their number is usually appointed as the most senior executive – chief
executive officer (or managing director).
5) In addition to executive directors, non-executive directors are usually appointed –
externals who have part-time appointments.
a) In theory, such directors bring outside experience, and will be more objective in
reviewing management; they have a role in monitoring the performance of exec
directors.
6) Non-execs today perform key roles in public co’s (including listed co’s).
a) Must recognise the independence of NEDs
Non-formally appointed directors (de facto, shadow)
7) Next, there are directors who are not formally appointed. These are rare in public
companies, but they might exist for a number of reasons.
8) These directors owe DD and liabilities in insolvency, alongside DQ even if shadow.
9) It is important to identify the role that these persons play, in part because:
a) they owe ordinary duties to co under CA 2006,
b) they are subject to liabilities under Insolvency Act 1986, and
c) are subject to the Company Directors Disqualification Act 1986
,10) But note that statutory duties apply to shadow directors only to the extent capable of so
applying: CA 2006, s 170(5)
11) There are two categories of non-formally appointed directors here… (de facto, alternate)
12) De facto directors – not formally/validly appointed, but undertake functions of a director
in an open way.
a) Re Hydrodan (Corby) Ltd (1994) per Millett J: a person is a de facto director
when undertaking functions that can only properly be undertaken by a director
and when held out by co to have such status.
i) Must have access to relevant information (Secretary of State for Trade v
Hollier (2006)) and exercise ‘real influence’ in governance (Gemma Ltd v
Davies (2008)).
b) Its a rebuttable presumption that is raised when saying de facto director.
c) Implication: a controlling or substantial s/holder – esp. in a small co – might
over-step the line if s/he becomes too involved in management: Secretary of
State for Trade v Jones (1999).
13) Shadow directors - are persons who try to avoid public acknowledgement of their role
in co management – eg because they have been banned as co directors.
a) Are sort of the spirit that influences the coy
14) CA 2006 s 251 defines a shadow director as ‘a person in accordance with whose
directions or instructions the directors are accustomed to act’ - indicates the influence
on management that the person must have.
a) But the Act also provides that a ‘person is not to be regarded as a shadow
director by reason only that the directors act on advice given by him in a
professional capacity’: CA 2006, s 251(2).
15) There has been an on-going discussion about how to determine whether a person is a
shadow director in the required sense
a) In Hydrodam, could 2 directors of parent be shadow directors of subs
i) Held, that itself, not sufficient. But when recognising someone as shadow
directors
(1) Are 4 factors as listed below in reading
16) In Secretary of State for Trade and Industry v Deverell (2001), CA provided a
summary of the requirements:
a) … such directions and instructions do not have to extend over all or most of the
corporate activities of the co; nor is it necessary to demonstrate a degree of
compulsion in excess of that implicit in the fact that the board are accustomed to
act in accordance with them
b) … [I]t is not necessary to the recognition of a shadow director that he should lurk
in the shadows., though frequently he may, eg, in the case of a person resident
abroad who owns all the shares in a co but chooses to operate it through a local
board of directors. From time to time the owner, to the knowledge of all…, gives
, directions to the local board what to do but takes no part in the management of
the co itself. [S]uch an owner may be a shadow director notwithstanding
that he takes no steps to hide the part that he plays in the affairs of the co.
c) Not necessary for shadow director to have exercised control over all or sig
amount of control of coy. Just a bit is fine.
17) Another example of a shadow director is that of the CEO of a parent co who gives
instruction, perhaps openly, to the board of a subsidiary: Re Paycheck Services 3 Ltd;
Revenue & Customs Commissioners v Holland (2011) per Lord Walker.
18) Although in Re Hydrodan (Corby) Ltd (1994) Millett J thought that the categories of de
facto and shadow directors were mutually exclusive.
a) CA did not want to express an opinion on that in Deverell.
b) In Re Paycheck Services 3 Ltd (2011), Lord Collins elided a strict distinction
when observing that, in both cases, the person in question exercises real
influence on the company
19) Although shadow directors used to owe greatly restricted duties to their co’s, CA 2006 s
170(5) now provides that the general duties imposed on directors apply to the
extent to which they are capable of so applying.
20) Alternate Directors - are persons who stand in for directors otherwise indisposed and
where permitted to do so under the company’s constitution (eg, Model Articles 25
(public cos)).
a) [Note also another important officer – company secretary.
i) Compulsory for public cos: CA 2006 s 271; qualifications required: s 273
ii) Not compulsory for private cos: CA 2006 s 270(1)
iii) Does not have a well-defined role; but part of management – esp.
involved in internal co organisation, incl. meetings; maintaining registers
and books; filing annual returns
iv) Sometimes even referred to as the ‘corporate governance director’ – but
not usually a de facto director]
Directors’ remuneration
1) Under common law, directors have no automatic entitlement to remuneration for their
services unless (part of AOA or service ctt). This follows from an analogy with trust law
(trustee or agent?)
a) whereby a trustee is not entitled to remuneration unless the trust instrument so
provides – a director, being a fiduciary, is … in a similar position to a trustee.
This is because, in effect, the trustee would be applying funds for his own benefit
and not for the benefit of the beneficiaries (Dignam & Lowry).
2) Any such entitlement must be created by articles or service contracts.
