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Lecture 5: Decision-Making by the 'Organs' of the Company
Company Law (6FFLK07)
King's College London
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Company Law Friday, 30 October 2020 Lecture 5: Decision-Making by the ‘Organs’ of the Company and Division of Power Between Them
1 Decision-making by group of persons AG v Davy (1741) “Wherever a certain number are incorporated, a major party of them may do any corporate act;’ ‘So if all are summoned, and part appear, a major part of those that appear may do a corporate act” (per Lord Hardwicke LC) But constitution may make further/other provision.
2 Recall the “organs” of the company Whilst the company is “healthy” (see below), the usual “organs” (who may, under the constitution act as the company) are:
- The members (shareholders in case of company with share capital); These operate in “General
Meeting” (hereafter ‘GM’)
- The director(s) (see s: company must have them); If more than one, called the “Board of
Directors” (hereafter ‘BoD’) These operate via 'Board Meeting' of BoD (a) ‘healthy’: means that it is functioning normally and is solvent. So, on liquidation, rights of creditors need protecting hence liquidator takes over running of company [to be considered in second semester]. (b) Note, in passing, lack of formal role/recognition of other “stakeholders” E. Creditors, Employees, Suppliers, Customers.
3 Recall the role of the Articles These form the backbone of the company’s constitution (recall s), and they (a) tell us where power lies & hence which ‘organs’ have powers to decide/act AND determine the division of power as between the two (the ‘who’ (can act) question) (b) provide how these organs act/decide (the ‘how’ (they act) question) Recall that we will concentrate on the Model articles for a Private Company limited by shares, in Schedule 1 to Companies (Model Articles) Regulations 2008 (hereafter referred to as “Model Articles”)
4 Role of the Companies Act(s) Although most of the relevant provisions are in the Articles, the Companies Act 2006 does contain:
- many “default” rules (which are expressed to apply “subject to any provision of the company’s articles”, eg. s (later))
- some mandatory provisions (eg. s (last wk) and s, see 10. below)
5 Division of Power between “organs” (the ‘who’ question) Matter for articles: See Model Articles (Provisions are identical in all 3 categories of ‘Model Articles’]
“Art 3: Directors’ general authority “Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company. [emphasis added]
Art: Shareholders’ reserve power (1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. [emphasis added] (2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.” Recall s and meaning of “special resolution” (see Art and hence s)
Note (being in the Model Articles) this is only a default provision and tailor-made articles can provide otherwise (although they rarely do).
6 Wording of predecessor ‘default’ provisions as to division of power (1) Original provision: In Companies Clauses Consolidation Act 1845, s, Directors were “subject.. the control and regulation of any general meeting especially convened for the purpose” [emphasis added] Hence, initially/historically, GM was ‘the company’ (the ‘principal’)and directors were viewed as ‘agents’ of GM , which the GM could control by ordinary resolution. Hence only one ‘organ’: the GM (2) Subsequent Model Articles: “shifted” the power away from the GM to the BoD E. Table A (1948), Art and Table A (1985), Art, Wording similar to 2008 Model Articles in that the BoD had managerial powers and GM only had “reserve power” – hence now (assuming articles are in Model form in this respect) there are two ‘organs’: GM and BoD
7 Hence move away from principal/agent analysis to notion that there was a division of power between the two organs effected by the constitution Isle of Wight v Tahourdin (1883) 25 Ch. 320 (on old 1845 provision) *Automatic Self-Cleansing Filter Co v. Cuninghame (CA) [1906] 2 Ch 34; Recall: (i) Quinn & Axtens v. Salmon [1909] 1 Ch 311 (CA) (aff.[1909] AC 442) Per Lord Loreburn: ‘The bargain made between the shareholders is contained in articles 75 and 80.. it amounts .. this.. the directors should manage the business; and the company, therefore, are not to manage the business unless there is provision to that effect..’ [by ‘the company’, he clearly means the members in general meeting] (ii) Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89,
8 Separation between “ownership” (members) and “control” (directors)): Note famous analysis of Bearle & Means ‘The Modern Corporation and Private Property’ (1932; revised 1967), noting this separation, esp in plcs. Hence ‘agency cost’ and its legal response: imposition of fiduciary duties on directors and the importance of the so-called ‘market for corporate control’. (And note ‘corporate governance’ developments/debate esp. in plcs, to be considered later).
9 Decisions whether to litigate Decisions whether to litigate (with company as claimant), being part of the “management of the business”, are prima facie to be made by BoD: John Shaw & Sons v Shaw [1935] 2 KB 113, 'If powers of management are vested in the directors they and they alone can exercise these powers.' [emphasis added] [Breckland Group Holdings Ltd v. London & Suffolk Properties Ltd [1989] BCLC 100, (1988) 4BCC 542 ] Mitchell & Hobbs (UK )Ltd v Mill [1996] 2 BCLC 10 ‘the power to manage the company (and in this respect the business of the company (to use the wording of regulation 70) must include the institution of proceedings in its name) is a power to be exercised by the board of directors’. Not the m/CEO unless power delegated to him. BUT, what if directors are to be the potential defendants (eg. they have broken their directors’ duties to the company)?
10 Matters reserved to members by Statute
(ii) “ordinary resolution” (and note procedural provisions: s(2); s) (iii) “notwithstanding anything in any agreement between it and him” But note s(5)(a): compensation or damages ‘in respect of termination’ preserved. (iv) Relationship with Model Articles, esp. Art (& need for special resolution to instruct directors). (v) 4 qualifications/limitations: (1) s(5)(a) disincentive. (hence recall ss, 217, above) (2) possible ‘unfair prejudice’ claim in ‘quasi-partnership’ Co (3) Bushell v. Faith [1970] AC 1099 (But Listing Rules prohibit weighted voting for listed Cos) (4) Shareholder Agreement as to voting to remove director? Recall: Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588
11 Instances where GM may act at common law (a) Appointment of directors GM has inherent right to appoint directors by ordinary resolution unless articles provide otherwise (as they did in Barron v Potter, below) Worcester Corsetry Ltd v Witting [1936] Ch 640 (b) If Board of Directors “deadlocked”/directors disqualified/ no Board Irvine v. Union Bank of Australia (1879) 2 App Cas 36. Barron v. Potter [1914] 1 Ch 895 Foster v. Foster [ l 916] 1 Ch 632, (c) Authorisation/ratification of unlawful act by Board of Directors We will consider this at greater length when we consider directors’ duties (see now (new) s(4)(a) and s). But for now, note, Grant v. U. Switchback Railways Co (1888) 40 Ch D 135; Bamford v Bamford [1970] Ch 212; [1969] 1 All ER 969 (CA),
12 The “Duomatic Principle” (or ‘informal unanimous consent rule’) For a collection of the (not so recent) case law (although not much analysis), see Burton, ‘Dispensing with formalities: The Duomatic Principle’ (2000) 21 Company Lawyer 186 (a) Scope Salomon v Salomon Ltd [1897] AC 22 per Lord Davey “a company is bound in a matter intra vires by the unanimous agreement of its members” And see the DTI Company Review, Final Report, Para.7: ‘the members of the company may, by unanimous agreement, bind or empower the company, regardless of any limitation in its constitution’ Despite these expansive words, the case law confines principle to situations where GM has power to act and principle only allows non-compliance with ‘formalities’ applicable to that GM power (on basis that unanimity means formalities (protective of minorities) unnecessary). So, doesn’t interfere with allocation of power: merely allows shareholders to dispense with formalities applicable to their decision making power. Re Duomatic Ltd (below) Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797, per Oliver J; 'the persons assenting [must be], in fact, competent to effect the act to which they have assented' (b) Applications of the principle: Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA) Parker & Cooper Ltd v. Reading [1926] Ch 975; *Re Duomatic Ltd [1969] 2 Ch 365, ‘where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be’ [emphasis added] Re Bailey Hay & Co Ltd [1971] 1 WLR 1357, [Compare: Schofield v Schofield [2011] EWCA Civ 103 And note Hussain v Wycombe Islamic Mission [2011] EWHC 971 (Ch)
And note the unusual recent CA case: Randhawa & Randhawa v Turpin & Hardy [2017] EWCA Civ 1201, noted (2018) Co Lawyer 56] *Cane v. Jones [1980] 1 WLR 1451 Wright v Atlas Wright (Europe) Ltd [1999] 2 BCLC 310 CA, Euro Brokers Holdings Ltd v Monecor (London) Ltd [2003] EWCA Civ 105; [2003] 1 BCLC (c) Limitations of principle: But what if interests of others (than members e. creditors) are at stake? Duomatic inapplicable as (obviously) members can’t waive/dispense with protections meant for those others. Precision Dippings Ltd v Precision Dippings Marketing Ltd,[1986] Re RW Peak (King’s Lynne) Ltd [1988] 1 BCLC 193, noted Re New Cedos Engineering Co Ltd [1994] 1 BCLC 797, Henry v Finch [2015] EWHC 2430 (d) Statutory preservation See Cos Act 2006, s. 281(4): ‘Nothing in this Part [i. Part of Act on GM resolutions and meetings] affects any enactment or rule of law as to: (a) things done otherwise than by passing a resolution; (b) circumstances in which a resolution is or is not treated as having been passed; or (c) cases in which a person is precluded from alleging that a resolution has not been passed.
Lecture 5: Decision-Making by the 'Organs' of the Company
Module: Company Law (6FFLK07)
University: King's College London
