What Decisions Can Directors Make 7 FAQs
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The limited liability status of a Company is of great benefit to the UK economy as it enables entrepreneurs to operate businesses with their personal liability limited only to the investment they have made in the Company. It also provides clarity of financial information for members of the public who may have reason to deal with such companies.
Limited liability companies’ day-to-day affairs are managed by Directors. This role is separate to that of the owners of the Company, its Shareholders.
It is a great source of frustration for Shareholders, who are unable to control most of the Directors’ actions despite the Directors’ duties to act in Shareholders’ interests, to see decisions being made which they may not entirely agree with. In such circumstances there is often a conflict, particularly in small to medium-sized companies, where Shareholders consider that their expectations are not being adhered to, or where a separate group of shareholders appear to be controlling the decisions made by the Company’s Directors.
In this article we intend to clarify what decisions Directors can make as opposed to the decisions that are required to be made by shareholders, and what can be done to improve this position.
1. What Determines Directors' Decision-Making Powers?
Ultimately it is the Articles of Association (“the Articles”) of a Company which define the powers of a Director and how the Company should be run on a day-to-day basis.
The Articles will provide Directors with delegated powers to grant security over the Company’s property and will also govern the technicalities of how Directors make Company decisions. Directors will commonly convene a board meeting to make decisions for important or substantive matters, but there is not always such a restrictive covenant on Directors’ actions and they do have a statutory power (subject to any amendment to the Company’s Articles) to bind the Company into contracts with third parties.
As a result Directors bear a relationship of trust and confidence with the Company and its Shareholders, to act solely in the Company’s interests.
This relationship of trust and confidence is commonly referred to as the Director’s fiduciary duties and such duties are set out at Sections 171 to 177 of the Companies Act 2006, which codified the pre-existing common law guidance as regards such duties.
2. What Are A Director's Statutory Duties?
As stated above, Section 171 to 177 of the Companies Act 2006 has codified the specific duties that Directors have to a Company and its Shareholders.
These duties, in summary, comprise the following:
Section 172 A duty to promote success of the Company, subject to the interest of creditors in certain circumstances.
Section 173 A duty to exercise independent judgment free of all advice received and considered.
Section 174 A duty to exercise reasonable care, skill and diligence bearing in mind the standard expected of Directors and the qualifications or experience of that individual Director.
Section 175 A duty to avoid a conflict of interest between the Director’s own personal interests and those of the Company.
Section 176 A duty not to accept benefits from third parties where such benefits could or do potentially lead to a conflict of interest between the Director’s personal interests and that of the Company.
Section 177 A duty to declare a Director’s interest in a proposed transaction or arrangement, usually at a meeting of Directors.
The above duties are general duties which summarise all those responsibilities of Directors.
If a Director breaches any of these duties and causes loss then he can be sued in his personal capacity for any losses arising and such liability will often mean that any claim on the Directors’ liability insurance by that Director may be invalid because of the conditions applicable to the insurance policy.
3. Are There Any Other Documents Which Deal With Director's Duties?
From a Shareholder’s point of view, the main other document which may restrain or expand the scope of the Director’s duties is the Shareholders Agreement.
A Shareholders Agreement is a very important document and is an essential tool for all companies, to ensure that all Shareholders and Directors understand the reason why the Company was set up, the expectations of the parties who founded the Company (or who in any event were a signatory to the agreement) and to provide a mechanism for resolving any difficulties which may arise and which would otherwise cause the Company or its Shareholders serious problems.
Historically the Memorandum of Association, which is one of the key constitutional documents for a Company, existed to clarify the objectives of a Company but this has now largely fell into disuse and is a document which is rarely referred to nowadays.
A Shareholders Agreement can make any provision in respect of the management or running of a Company and can be amended at any time, but it remains a private document between the Shareholders of the Company (who may comprise some or all of its Directors) and is not a document which is publicly available at Companies House.
The usefulness of a Shareholders Agreement is not to be ignored. Failing to draft one, or ignoring the contents of any such document, can lead to severe consequences at a later date.
The decisions made by Directors is subject to the terms of the Shareholders Agreement but often the agreement will defer to the Articles of Association where there is any conflict.
4. What Is The Purpose Of Board Meetings?
As stated above, Directors do in their own right have the power to bind companies into agreements with third parties. However, in certain circumstances, the Articles usually require that such decisions haves to be made by a majority (or even unanimous) resolution of the Board of Directors to be valid.
Prudently it is wise to ensure that all decisions made by Directors (depending upon the type of Company, its size and the practicalities of constantly seeking Board approval) are made with the Board’s consent or endorsement and that such approval is recorded by a minute of the meeting, which is held within the Company records.
It is recommended, to ensure good management pervades throughout a Company, to have regular Board Meetings to review all company matters, and it is also recommended that every such meeting be subject to a detailed record of the discussions and resolutions (a minute).
The decisions by a Board of Directors is determined on the basis that one Director has one vote, and the decision will usually be passed by a majority of Directors present at such meetings voting in favour. Occasionally a unanimous vote will be required for a transaction to be approved.
Where a simple majority decides whether a decision is made, attendance at the Board meeting (either personally, by electronic means or by providing a proxy vote for another Director to vote on your behalf) is vital.
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5. What Duties Do Directors Have To Declare A Dividend To Shareholders?
6. What Decisions Must Have The Approval Of Shareholders?
7. What Can A Shareholder Do If S/He Suspects A Director Is Making A Decision Which He Is Not Authorised To Make?
Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.