Ensuring company decisions are legally and validly made can be an intricate process, which can cause significant problems for the unwary. This is certainly the case when a company does business with its own directors (including shadow directors).
As company decisions are generally made by its directors, the Companies Act 2006 requires the approval of a company’s members for certain transactions which may benefit the directors at the expense of the company. This article looks at three such transactions and the consequences of failing to obtain shareholder approval.
1. Substantial Property Transfers
This relates to the transfer of substantial non-cash assets rather than money transfers. This can be a transfer to the company from its director/a director of its parent company or vice versa.
The regime doesn’t just relate to directors but also extends to their connected persons. This can include not only family members but also other companies if the director in question has at least a 20% shareholding interest in it.
What is substantial? In this case, this means anything over £100,000 or anything more than 10% of the company’s net assets which is over £5,000.
Usually, the approval required is that of more than 50% of the shareholders (i.e. a majority). The members of the parent company may also need to provide approval depending on the circumstances. Approval is to be given either before the transaction or afterwards if the transaction is made conditional on approval being given. The voting shareholders also need to be provided with sufficient information.
2. Loans and Quasi-Loans
Member approval is required for loans by a company/parent company to a director or for the company providing a guarantee/security to any person for a loan made to a director. Again, a majority of the voting shareholders are generally needed to provide approval.
A memorandum setting out certain information in connection with the loan (including the amount, its purpose and the extent of the company’s liability) also needs to be made available. If the manner of approval is to be given at a general meeting then this memorandum needs to have been made available for 15 clear days.
In the case of public limited companies, the rules also extend to loans to connected persons, to quasi-loans (which are agreements to pay or reimburse) and to credit transactions (i.e. providing credit terms for goods/land).
There are some exceptions to requiring shareholder consent. In short, these include the loan being for:
- company business so long as it does not exceed £50,000;
- the purpose of defending certain proceedings against the person as a director of the company; or
- no more than £10,000 (£15,000 in the case of credit transactions).
3. Long Term Service Agreements
This relates to giving a director of a company or its parent company a guaranteed employment term of more than 2 years. This not only includes fixed term employment contracts over 2 years but also contracts where the company cannot terminate with notice within such a period.
The voting shareholders need to be provided with the contract and, generally, a majority need to provide approval.
If approval is to be given at a general meeting then the contract needs to have been made available for 15 clear days.
Failing to Obtain the Correct Member Approval
In relation to substantial property transfers and loans/quasi-loans, if the directors fail to get the right approval then it may sometimes be possible for the company to avoid the transaction (i.e. set it aside and have the property/cash returned).
Regardless, the director or person in question could be liable to account for any gain made by the transaction and to indemnify the company for loss. On the other hand, it may be possible for the shareholders to affirm the transaction so that it can no longer be avoided in the future.
In relation to director’s long-term service agreements, the particular provision in the contract is void and the contract is instead deemed to include a term by which the company can terminate on reasonable notice.
How Can BHW Help?
If you need advice on any of the topics covered in this article then our specialist corporate and commercial solicitors can assist you. While it may be possible to take post-transaction steps; early advice is strongly recommended. Further, and although not a focus of this article, director’s duties to the company should also be considered, and not forgotten, when a director transacts with the company.
For more information, contact BHW’s Corporate and Commercial team on 0116 289 7000 or email firstname.lastname@example.org.