Corporate governance


After reading this chapter you should be able to:

image  Identify the key organs of governance of a company

image  Discuss the division of power between the board of directors and shareholders

image  Discuss four methods by which shareholders make valid decisions

image  Call a company meeting

image  Discuss how boards of directors make valid decisions

image  Identify different types of directors and the roles each plays

image  Appoint and remove directors

image  Discuss how the law governs director remuneration

image  State the role of a company secretary

image  Identify the officers of a company

image  Appreciate the larger context of the corporate governance debate

9.1 Introduction and key organs of governance of a company

This chapter is about the constitutional system by which the affairs of a company are governed or controlled. This system is established by a combination of law and the constitutional documents of the company. The central concerns are who is empowered to make decisions about the company’s affairs and how those decisions are taken. The heading ‘corporate governance’ is used in this basic legal sense in the title of this chapter which is concerned as much with private companies as public and traded companies. This may be contrasted with use of the phrase ‘corporate governance’ in the USA, commencing in the 1970s and increasingly adopted outside the USA, including in the UK, as a rubric under which to examine management accountability mechanisms in companies with publicly traded shares and dispersed ownership. Corporate governance from a broader perspective is the subject of the final section of this chapter.

The key organs of governance of a company are the board of directors and the shareholders. As a governing organ or body of the company, the shareholders are often referred to as ‘the shareholders in general meeting’. This description is accurate for public companies because decision-making by public company shareholders must take place by resolutions being passed at a shareholders’ meeting (s 281(2)). The terminology is not particularly appropriate for private companies, however, because there is no requirement for a private company to hold shareholders’ meetings and private company shareholders may make decisions without meetings, by written resolution (s 281(1)).

Efforts have been made in recent years to encourage and enhance the engagement of shareholders in the governance of companies. These efforts have been focused on companies with publicly traded shares with dispersed ownership where there is a divorce of ownership and control (see Chapter 1 at section 1.2.4). Shareholders (investors) are looked to to monitor the self-interested behaviour of directors, particularly in relation to directors’ remuneration (see, for example, the new rules prohibiting the payment of remuneration to directors of quoted companies except in accordance with a directors’ remuneration policy approved in advance by shareholder resolution, which are covered in section 9.3.4). The structure of share ownership forming the context in which these efforts are being introduced is discussed under the heading ‘Shareholders in publicly traded companies’ in section 9.2.1.

In this chapter, the shareholders as a body and the board of directors are considered in turn followed by examination of the appointment and removal of individual directors. We then take a very brief look at the role of the company secretary and a company’s officers. The final section of this chapter steps away from core company law to consider corporate governance in a broader context.

9.2 Shareholder governance

9.2.1 Introduction

The role of shareholders in the governance of any given company is established by a combination of:

image  constitutional rules of the company (the articles of association);

image  statute law (the Companies Act 2006 and the Insolvency Act 1986);

image  cases recognising the power of the shareholders in certain circumstances.

Shareholders are sometimes referred to as ‘residual controllers’ of the company. Four main points support this:

image  the law requires certain fundamental decisions to be made by the shareholders;

image  whilst the articles normally entrust management to the board of directors they also usually reserve a right for shareholders to direct the board by special resolution on any specified matter;

image  if the board is unable to act, power will revert to the shareholders;

image  shareholders have the right to remove directors from office (and usually have the right to appoint directors).

It is important to distinguish clearly between a shareholder acting as part of the decision-making governance body of the company and a shareholder acting in an individual capacity to enforce his or her personal rights. The rights and obligations of a shareholder acting in his personal capacity were dealt with in part in Chapter 5 when we considered the rights of a shareholder to enforce provisions in the articles and are also considered in Chapter 14. They are not considered further in this chapter.

Shareholders in closely held companies

The role played by shareholders in a closely held company is typically very different from the role played by shareholders of a company with dispersed ownership. Closely held companies are usually ‘owner-managed’ companies. The practical difficulty here is that decision-making can be very informal. Very often, the major shareholders are the directors who are also the executives/managers of the company. The shareholder/director/manager individual is usually focused on running the business of the company, not figuring out in which capacity the law requires him to take a particular decision. He has no practical concern to ‘get the legal paperwork right’. Compared to the procedures in place for public companies, the law provides simpler, less formal procedures for decisions to be made by both shareholders (essentially no need for annual general meetings and the option to make written resolutions) and boards of directors of private companies.

Shareholders in publicly traded companies

The scenario outlined above is in stark contrast to a large public company with many shareholders in which the main, indeed virtually sole, interest of shareholders is to see the price of their shares increase and receive adequate dividends on their shares. Consider, for example, individuals who own shares in Vodafone Group plc, BT Group plc or in the parent company of a banking group, such as Lloyds Banking Group plc.

Invitations to shareholder meetings, received through the post, are often regarded by shareholding individuals of dispersed ownership companies as not unlike junk mail. Little or no interest is shown in filling out the proxy form enclosed with the invitation to the annual general meeting (AGM) empowering another to exercise their vote on the proposed resolutions, never mind in attending the AGM (or any other shareholder meeting). Consequently, attendance at shareholder meetings is very poor and, in all, shareholders have entrusted the governance of dispersed-ownership companies almost exclusively to the board of directors. However, most shares in listed companies are not owned directly by shareholders.

The Office of National Statistics (ONS) publishes annually estimated ownership figures for the shares of companies listed on the London Stock Exchange. Based on figures for the end of 2012, the percentage of total market value beneficially owned by different sectors of beneficial owner has changed dramatically over the last 40 years. Overseas investors (including foreign sovereign funds) are now reported to own the largest percentage, accounting for around 53 per cent (compared to 7 per cent in 1963). Individuals are reported to own the next largest percentage, although this is only 10.7 per cent, down from 54 per cent in 1963 but marginally higher than the lowest recorded figure of 10.2 per cent at the end of 2008.

This 10.7 per cent figure does not reflect all the shares in which individuals have beneficial interests. Registers of members (shareholders) record nominee (trustee) names, not the beneficiaries of shares, making it difficult to know who beneficially owns shares. Changes proposed in the SBEEB 2014–15, if enacted, will introduce the requirement for companies to keep a register of people who have significant control of companies, but this is aimed at individuals or groups controlling 25 per cent or more of the shares of a company. Nominee ownership is not the only difficulty faced when trying to determine who is the beneficial owner of shares. Even though it is possible to discover on whose behalf some nominees hold shares, just over 59 per cent by value of all shares recorded in CREST shareholder registers are in multiple ownership pooled nominee accounts where the owners are unknown.

Not including the catch-all ‘other financial institutions’ sector, the third largest percentage (behind overseas investors and individuals) is held in unit trusts (9.6 per cent), with insurance companies (6.2 per cent) and pension funds (4.7 per cent) taking fourth and fifth places. These figures contrast starkly with just 20 years ago when pension funds held one-third of the shares by value and insurance companies held one-fifth. The changing complexion together with the opacity of share ownership make it difficult to know who owns shares in companies at any point in time or to understand how shares are owned. The chain between the company and an individual who has made an investment in a pooled fund can have many legal links in it and the various property, fiduciary, contract, tort and statutory rights, interests, duties, obligations and liabilities operating in that chain can be extremely complex.

The legal structure and complexity of investment in shares make it even more difficult to engage shareholders/investors. The votes attached to shares are, in most cases, exercisable by a financial organisation, often a nominee, whose name is on the register of shareholders. Beyond this, precisely who in the equity investment chain has the responsibility to think about and exercise the votes attaching to shares is a fascinating area for research. It is not often the ‘ultimate providers of capital’ (a term used in the UK Stewardship Code). Efforts to engage shareholders in corporate governance have focused on the ‘institutional investors’ who reside between the company and the individuals who are the ultimate providers of the capital.

Institutional investors have faced severe criticism over the years for their failure to take their role as shareholders seriously and for failing to exert adequate influence over boards of directors of the companies in which they invest. In 2002, in response to criticism, the Institutional Shareholders Committee (ISC), an industry association, developed and published Principles on the Responsibilities of Institutional Investors and their Agents. Following further criticism of the ISC’s failure to act when they were ‘needed most’ (Lord Myners in 2008), the principles were developed, in 2009, into the Code on the Responsibilities of Institutional Investors. In the midst of the financial crisis and following the 2009 Walker review of governance in financial institutions, the Financial Reporting Council (FRC) took responsibility for institutional investor stewardship and, in 2010, the FRC published the non-statutory Stewardship Code (‘the Code’) based on the ISC code. The aim of the Code is to encourage institutional shareholders to play a more active role in corporate governance than had been the case leading up to the financial crisis. The involvement of the FRC is intended to give the Code quasi-official status in order to promote adherence to it.

In 2011, the Secretary of State for Business, Innovation and Skills (BIS) commissioned John Kay to conduct a review of activity in the UK equity market and its impact on the long-term performance and governance of UK quoted companies. Interim and final reports were published (and are referenced at the end of this chapter) (‘the Kay Review’). The principal concern of the Kay Review was ‘to examine how well the equity markets are achieving their core purpose: to enhance the performance of UK companies and to enable savers to benefit from the activity of those businesses through returns to direct and indirect ownership of shares in UK companies’.

The review sought to provide insight into and principles and recommendations ‘to help to deliver improvements to equity markets necessary to support sustainable long-term value creation by British Companies’. To this end, the review identified the decline of trust and the misalignment of incentives throughout the equity investment chain as the principal causes of concern and labelled these problems as systemic in nature, resulting in a tendency of executives to cause companies to under-invest and to engage in ‘hyperactive behaviour’ by which Kay meant executives focus on restructuring, financial re-engineering and mergers and acquisitions instead of developing ‘fundamental operational capabilities’ of their businesses. The 17 recommendations made in the final report reflect ten key principles that establish a broad framework within which future law reform relating to shareholder engagement in quoted companies will be developed. The review strongly endorsed the development of shareholder stewardship responsibilities. Its number one recommendation was that ‘the Stewardship Code should be developed to incorporate a more expansive form of stewardship, focusing on strategic issues as well as questions of corporate governance’.

The Code was revised in September 2012. The term ‘institutional investors’ is used in it to describe ‘asset owners and asset managers with equity holdings in UK listed companies’. Compliance with the Code remains voluntary but is becoming best industry practice. The Code contains a voluntary ‘comply or explain’ requirement in relation to seven stewardship principles.


‘The Principles of the Code

So as to protect and enhance the value that accrues to the ultimate beneficiary, institutional investors should:

1.  publicly disclose their policy on how they will discharge their stewardship responsibilities.

2.  have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed.

3.  monitor their investee companies.

4.  establish strong guidelines on when and how they will escalate their stewardship activities.

5.  be willing to act collectively with other investors where appropriate.

6.  have a clear policy on voting and disclosure of voting activity.

7.  report periodically on their stewardship and voting activities.’

Financial Reporting Council, ‘The UK Stewardship Code’ (September 2012) at p. 5

In addition to the non-statutory Stewardship Code, attempts to improve shareholder engagement in the governance of quoted and traded companies include changes made to the:

image  Companies Act 2006 by the:

image  Companies (Shareholders’ Rights) Regulations 2009 (SI 2009/1632) (the Shareholder Rights Regulations) (implementing the Shareholder Rights Directive (2007/36/EC)); and the

image  Enterprise and Regulatory Reform Act 2013 ss 79–82 on payments to directors of quoted companies; and

image  Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) by the 2013 amending regulations, introducing a substituted Sched 8 setting out the information required to be shown in directors’ remuneration reports (SI 2013/1981).

In April 2014, the European Commission published a proposal for a Directive, (COM(2014) 213), to amend the Shareholder Rights Directive (2007/36/EC) by:

image  requiring a ‘say on pay’ for shareholders of listed companies – a similar right has already been introduced into UK law (see section 9.3.4), although the detailed requirements differ, for example, the EU proposal requires disclosure of the ratio of directors’ pay to that of its employees in general;

image  requiring shareholder approval of related party transactions representing more than 5 per cent of the company’s assets or which can have a significant impact on profits or turnover, and independent third party assessments confirming the fairness and reasonableness of related party transactions representing 1 per cent of the above;

image  giving companies the right to identify the beneficial owners of its shares; and

image  imposing various transparency and other obligations on institutional investors, asset managers and proxy advisers, including making their voting intentions clearer.

The European Commission has also published a communication (COM(2014) 208) providing guidance to companies to improve the quality of corporate governance statements, including the reporting of Corporate Governance Code compliance on a ‘comply or explain’ basis.

Interesting questions regarding the implications of law reform designed to enhance shareholder engagement are raised by the structure of investment in equities in the UK, the importance of institutional investors and the consequent, inevitable, focus on institutional investors to perform the engaged shareholder role. The root of the argument for enhanced shareholder engagement is the need to monitor and control the self-interested behaviour of directors. In economic terms, legal reform designed to enhance shareholder engagement is part of the response to the ‘agency problem’. Enhanced disclosures and new laws subjecting director remuneration policies to shareholder approval are obvious examples illustrating this. That being the case, is it a sensible move to create and empower a new set of intermediaries or agents (the institutional investors) who will themselves, one can surmise, seek generous remuneration for their stewardship services? Two articles containing an interesting exchange of views between a US Judge (Leo E. Strine Jr) and a US academic (Professor Lucian Bebchuck) on the implications of shareholder empowerment and activism are referenced at the end of this chapter.


‘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.’


‘The shareholders may, by special resolution, direct the directors to take, or refrain from taking, I specified action.’

9.2.2 Division of powers in the articles

Article 3 of both the Model Articles for Private Companies Limited by Shares and those for public companies establishes the board of directors as the principal organ of management of the company:

Do not make the common mistake of assuming that Art 3 empowers an individual director to exercise the powers of the company: it does not. The powers of the company can only be exercised by the board collectively, that is, by decision by majority in a meeting, or unanimously outside a meeting.

In addition to being expressly subject to the company’s other articles, this power is also subject to the provisions of the Companies Act 2006. Article 4 of both the Model Articles for Private Companies Limited by Shares and for Public Companies establishes a reserve power for the shareholders:

Attempts by shareholders to usurp board powers by passing ordinary resolutions or acting in any other way inconsistently with the articles will not succeed.



Automatic Self Cleansing v Cuninghame [1906] 2 Ch 34

Powers of general management were vested in the board subject to directions from the shareholders by extraordinary resolution. Two of the shareholders passed an ordinary resolution directing the board to sell the company’s business. The directors objected to the sale. Held: The board of directors could lawfully refuse to comply as direction by ordinary resolution was insufficient. On a true construction of the articles the shareholders were only competent to intervene by extraordinary resolution. (Note that extraordinary resolutions are no longer provided for in the Companies Act 2006. They required 75 per cent support and had to be passed at an extraordinary general meeting.)



John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 (CA)

Articles vested general powers of management in ‘permanent directors’. The permanent directors resolved to institute legal proceedings against three ‘ordinary directors’ who were shareholders. The shareholders passed a resolution to discontinue the company’s legal proceedings. Held: The shareholders had no power to overrule the decision of the permanent directors. The options available to the shareholder were (i) to change the articles, or (ii) to remove the board of directors.

The decision whether or not a company should commence legal action in given circumstances is part of the general management of the company so will ordinarily be vested in the board of directors pursuant to Art 3. The applicability of the basic rule against usurpation by shareholders to the decision to litigate or not was confirmed in Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100. Harman J restrained the majority shareholder from taking any further action in litigation commenced by the shareholder without authority of the board until a board meeting could be held at which it could be resolved whether to continue or discontinue the legal action.

9.2.3 Statutory powers of shareholders

The statutory powers given to shareholders are mainly in the Companies Act 2006 but also arise from the Insolvency Act 1986.

Powers given to shareholders by the Companies Act 2006

The main powers given to shareholders by the Companies Act 2006 are:

image  to amend the company’s constitution (s 21(1) and see Chapter 5);

image  to resolve to re-register the company, e.g. from private to public or vice versa (ss 90 and 97 and see Chapter 4);

image  to remove directors by ordinary resolution (s 168 and see section 9.3.3);

image  to approve director service contracts if employment is guaranteed for more than two years (s 188(2) and see section 9.3.4);

image  to approve substantial property transactions (s 190(1)) and loans (s 197) between the company and a director (see Chapter 12);

image  to ratify directors’ breaches of duty (s 239 and see Chapter 13);

image  to approve the directors’ remuneration policy (s 439A);

image  to authorise political donations in excess of £5,000 (s 366 and see Chapter 8);

image  to approve appointment of the company auditor (s 489(4) and see Chapter 17);

image  to authorise the board to allot shares (s 551) (though board power to allot is automatic for a private company with only one class of shares, s 550) (see Chapter 7);

image  to disapply pre-emption rights (ss 569–571 and see Chapter 7);

image  to reduce share capital (s 641(1) and see Chapter 8);.

image  to authorise the company to purchase its own shares (ss 694, 701 and see Chapter 8);

image  to approve a payment out of capital for redemption or other acquisition of a company’s own shares (s 716 and see Chapter 8).

Note that whilst the shareholders have a statutory power to remove directors (s 168), shareholders have no statutory power to appoint directors. Appointment of directors is provided for in the company’s articles.

Power given to shareholders by the Insolvency Act 2006

The main power given to shareholders by the Insolvency Act 1986 is to decide, by special resolution, to wind up the company voluntarily (Insolvency Act 1986 s 84(1)).

9.2.4 Default powers of shareholders

Management power will revert to the shareholders in circumstances where the board is unable to act.



Barron v Potter [1914] 1 Ch 895

A company had two directors and the articles gave directors power to appoint additional directors. One director would not attend any board meeting at which the other was present. Held: A general resolution appointing an additional director was valid. Per Warrington J, ‘If directors having certain powers are unable or unwilling to exercise them … there must be some power in the company to do itself that which under other circumstances would be otherwise done … in my opinion, the company in general meeting has power to make the appointment.’

9.2.5 How shareholders exercise their powers

Shareholders exercise their powers by taking decisions and the rules governing how decisions are to be taken are determined by a combination of the articles, statute and common law. The 2006 Act requires shareholder resolutions in a number of situations and shareholder decisions are usually taken by resolutions in accordance with the provisions of the Act (ss 281–299). The common law is, however, preserved which leaves open the potential for shareholder decisions to be effective even if they are made otherwise than by passing a resolution (s 281(4)(a)). The common law may also override the statutory rules as to the circumstances in which a resolution is or is not treated as having been passed and undermine the statutory rules insofar as the common law may preclude a person from alleging that a resolution has not been duly passed (s 281(4)(b) and (c)). The common law rules are considered after the statutory rules.


The formal way in which a decision of the shareholders or the directors is proposed and passed

written resolution

A resolution of the members of a private company proposed and passed in accordance with the Companies Act 2006

Statutory provisions on resolutions

The 2006 Act states that resolutions of the shareholders of a public company must be passed at shareholders’ meetings held and conducted in accordance with the 2006 Act for which notice has been given in accordance with the Act (ss 281(2) and 301). Private company shareholders must pass resolutions either at similarly conforming shareholders’ meetings or by written resolution (s 288(1)).

It is only possible to determine whether or not a resolution has been validly passed if we know:

image  which shareholders have the right to vote;

image  the proportion of votes needed to pass the resolution; and

image  how votes are to be counted.

ordinary resolution

A resolution of the members of a company passed by a simple majority of 50 per cent plus one vote of those eligible to vote

Voting rights

A company must have at least one class of shares that carry the right to vote. Unless the articles provide otherwise, every share carries one vote on every resolution put to shareholders (s 284), except in a vote by show of hands, when, regardless of the number of shares he owns, a shareholder has only one vote (see voting methods below). Articles may provide for weighted voting rights which can give rise to surprising outcomes. The decision in Bushell v Faith [1970] AC 1099 (HL) has rendered s 168, by which shareholders may remove a director by ordinary resolution, a presumptive rather than mandatory rule of law (see the discussion in Chapter 5), and the decision in Amalgamated Pest Control v McCarron [1995] 1 QdR 583 permitted incorporators to use weighted voting rights to give a less than 25 per cent minority shareholder a veto on any special resolution.

Even where a company has different classes of shares, the starting point is that all shares carry the right to one vote. The articles or resolution authorising allotment may state that a certain class of shares carries the right to vote on resolutions on matters affecting the rights of the class. Even if it is not stated expressly that these are the only voting rights attaching to the shares, the court may use the principle of exhaustion of rights to construe such a provision in the articles as excluding any other voting rights (see Re Bradford Investments Plc [1991] BCLC 224 and section 7.3.2).

special resolution

A resolution of the members of a company used for significant decisions requiring a 75 per cent majority of the votes of those eligible to vote which must be described as a special resolution and the text of which must be set out in any notice

Proportion of votes needed to pass resolutions

The two basic types of resolution passed by shareholders are ordinary resolutions and special resolutions. Ordinary resolutions must be passed by not less than a simple majority (50 per cent +1) (s 282) and special resolutions must be passed by not less than 75 per cent (s 283). Provisions of the Companies Act 2006 mandating shareholder approval of certain acts or empowering shareholders usually require a special resolution or a general resolution.

Curiously, s 282 appears to have inadvertently changed the law in relation to the right of the chairman of a shareholders’ meeting to have a casting vote. The chairman is usually a director of the company who may or may not be a shareholder. Nonetheless, traditionally, it was common for articles to provide for the chairman to have a casting vote in the event of an equality of votes for and against an ordinary resolution and reg 50 of Table A contained just such a provision. Without more, s 282 overrides an article giving the chairman a casting vote.

This outcome has been partly reversed by a provision in the Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007) (SI 2007/3495) which provides that companies whose articles contained a provision giving the chairman a casting vote immediately before 1 October 2007 may continue to rely on that article notwithstanding s 282. Companies incorporated after 1 October 2007 may not rely on such a provision in their articles, nor can such a provision be introduced by a company that did not have such a provision before 1 October 2007. This saving has no application to traded companies (as that term is defined in the Companies Act s 360C), and traded companies cannot allow the chairman of a shareholders’ meeting to have a casting vote (see reg 22 of the Shareholders Rights Regulations (implementing the Shareholder Rights Directive)).

Voting methods

Three different voting methods are used to pass resolutions. Two are used at shareholders’ meetings and the third, available to private companies only, is used for written resolutions.

Vote on a show of hands

A vote on a show of hands is very simple, being based on shareholders in attendance at a meeting raising their hands to indicate support for, or opposition to, a resolution put to the meeting. A resolution passed on a show of hands is a general resolution if it is passed by not less than a simple majority of the shareholders (including duly appointed proxies) who vote on the resolution (being eligible to do so). It is a special resolution if passed by not less than 75 per cent of shareholders (including duly appointed proxies) who vote on the resolution (being eligible to do so).

Example 1

Ten shareholders attend a meeting and are eligible to vote on a resolution. Six shareholders raise their hands in support of the resolution. The resolution has been passed as a general resolution.

If only three shareholders had raised their hands in support, the chairman of the meeting would have been required to ask those who wished to vote against the resolution to raise their hands. If only two shareholders voted against the resolution, the resolution would have been passed as a general resolution because a simple majority (three) of those who voted (five) supported it. If three or more shareholders had voted against the resolution, it would not have been passed.


A vote in writing at a general meeting where shareholders or their proxies vote in proportion to their voting shareholdings

Poll vote

A poll vote is not based on the number of shareholders who vote, but on the voting rights of the shareholders who vote. A resolution passed on a poll is a general resolution if passed by shareholders representing not less than a simple majority of the total voting rights of shareholders who vote (in person or by proxy) on the resolution. It is a special resolution if passed by shareholders representing not less than 75 per cent of the total voting rights of shareholders who vote (in person or by proxy) on the resolution. A person with more than one vote is under no obligation to cast all his votes or to cast those he uses in the same way (s 322).

Additional provisions apply to quoted and traded companies in relation to poll votes, including the obligation to make the results and associated information about poll votes available on the company’s website (s 341).

Example 2

The same ten shareholders as appeared in Example 1 attend the same meeting and are eligible to vote on the resolution. There is a call for a poll vote on the resolution. Nine of the shareholders own ten ordinary shares each. The tenth shareholder owns 910 ordinary shares in the company. The number of votes that can potentially be cast at the meeting is 1,000. The six shareholders who passed the general resolution in Example 1 each have ten shares. They vote in favour of the resolution. They represent only 6 per cent of the voting rights of shareholders who could vote. The holder of 910 shares votes against the resolution. The resolution is not passed. If the holder of 910 votes attended the meeting but decided to abstain from voting in the poll vote, the six shareholders could pass the resolution as a general resolution.

Written resolution vote

A written resolution is based not on the number of shareholders who actually vote, and not on the voting rights of the shareholders who actually vote, but on the voting rights of all shareholders eligible to vote. The relevant date for determining eligibility to vote on a written resolution is the date on which the written resolution is sent to shareholders (ss 289 and 290). Essentially, copies of a proposed written resolution are sent to shareholders who sign the copy of the resolution and send it back to the company, although any signed or otherwise authenticated document referencing the resolution and indicating the shareholder’s agreement to it, sent or emailed to the company, suffices (s 296).

In one respect, voting on a written resolution is calculated in the same way as on a poll vote: it is the proportion of votes held by those shareholders who support and oppose the resolution that counts. Calculation of votes differs from a poll vote, however, in that a written resolution must be passed by shareholders representing no less than a simple majority (for a general resolution) or no less than 75 per cent (for a special resolution) of the total voting rights of eligible shareholders. In contrast, a poll vote is based on the voting rights of only those shareholders who are in attendance at the meeting (in person or by proxy) and who actually vote on the particular resolution.

As indicated above, written resolutions can only be used by private companies (s 288) and even private companies may not use the written resolution procedure to remove a director pursuant to s 168 or to remove an auditor before expiry of his term of office (s 288(2)).


A person appointed by a member entitled to vote at a general meeting to attend the meeting and vote in his place. The proxy can speak at the meeting and vote on a show of hands and on a poll. The proxy need not be a member of the company

Proxies and corporate representatives

A shareholder is entitled to appoint another person as his proxy to exercise all or any of his rights to attend, speak and vote at a meeting of the company (s 324). Proxies are entitled to vote on votes by a show of hands as well as on poll vote. The availability of proxy voting has been expanded and the rules improved by the 2009 regulations. A clear statement of the obligation of a proxy has been introduced as a new s 324A to the Act.


‘Section 324 Obligation of Proxy to Vote in Accordance with Instructions

A proxy must vote in accordance with any instructions given by the member by whom the proxy is appointed.’

The changes to the proxy rules applicable to all companies essentially allow proxies for more than one shareholder to cast votes both for and against a resolution where their instructions from different shareholders requires such. Some of the changes apply only to traded companies which must provide an electronic address for the return of proxies and, although the appointment and termination of a proxy’s authority must be in writing, for these purposes, writing includes by electronic communication (ss 327 and 333A).

Companies, being artificial entities, cannot attend meetings of the companies in which they own shares. For this reason the Companies Act provides for companies to appoint corporate representatives. A corporate representative is an individual who has been authorised by resolution of the directors of a company (Company A) to represent Company A at any meeting of a company of which Company A is a shareholder (s 323). The individual is then empowered to exercise the same powers on behalf of the company as if it were an individual member of the company, i.e. from the company’s perspective, the corporate representative is, for all intents and purposes, the member/shareholder and has the full rights of the corporate shareholder he or she represents.

Note that, following confusion, s 323 has been amended by the Shareholders’ Rights Regulations 2009 and it is now clear that where a shareholder company appoints more than one corporate representative, the corporate representatives are permitted to vote in different ways from one another in respect of different blocks of shares.


The minimum number of people necessary for the transaction of business at general meeting or board meeting

Statutory provisions on shareholder meetings (ss 301–361)

Rules governing shareholder meetings, also called company meetings, are an important part of shareholder decision-making. A company with only one shareholder may hold a properly constituted meeting (s 318). Apart from that circumstance, and unless the articles require a higher number, two shareholders (or corporate representatives or proxies) present at a meeting are a quorum (s 318). This means that even if one individual present represents two or more shareholders, the meeting is not a properly constituted meeting and no business can be conducted.

annual general meeting (AGM)

A general meeting of the members of a company which public companies must hold each calendar year within six months of the financial year end

Annual general meetings

Every public company must hold an annual general meeting (AGM) within six months of the end of its financial year and if the company fails to do so a criminal offence is committed by every director and the company secretary (s 336). At least 21 days’ notice of an AGM, stating that it is an AGM, must be given (s 307(2)) to all shareholders and directors (s 310) unless all shareholders entitled to attend and vote agree to shorter notice (s 337(2)). Except for the longer minimum notice of meeting period (21 days rather than 14), the need for unanimous consent to short notice (rather than 90 per cent (for private companies) or 95 per cent (for public companies)) and the rules requiring the company to circulate notice of shareholders’ resolutions to be moved at the AGM (s 338), the rules for general meetings set out below apply to AGMs.

general meeting

A meeting of the members of a company

General meetings

The directors may call a general meeting (s 302) and are required to call a general meeting if holders of at least 5 per cent of the voting rights of shareholders having a right to vote at general meetings request (in writing or electronic form) that the directors do so (ss 303 and 304). If the directors fail to call a general meeting within 21 days of such a request, or to hold the meeting within 28 days of the request, the shareholders who made the request may call a meeting and hold it within three months of the request, in which event their reasonable expenses are reimbursable by the company (s 305).

If it is impracticable for a meeting to be called or conducted in accordance with the articles of the company or the 2006 Act, the court may, on application by a director or any shareholder who would be entitled to vote at the meeting, or of its own volition, order a meeting to be called, held and conducted in any manner the court thinks fit (s 306).

All shareholders and directors are entitled to receive notice of every general meeting unless the articles provide otherwise (s 310). At least 14 days’ notice of a meeting must be given unless shareholders holding not less than 90 per cent (for a private company) or 95 per cent (for a public company) of the nominal value of the shares held by those entitled to attend and vote at the meeting agree to shorter notice. A notice must state the general nature of the business to be dealt with as well as the time, date and place of the meeting (s 311). If notice is given of a meeting any accidental failure to give notice to one or more shareholders will not render the notice invalid (s 313).

Shareholders with at least 5 per cent of the voting rights of shareholders eligible to vote on the proposed matter may require the company to circulate a statement of up to 1,000 words relating to a proposed resolution or any other business to be dealt with at the meeting (s 314). A similar right exists in relation to written resolutions (s 293).

Special notice is required of four resolutions:

special notice

The notice required from the proposing shareholders to the company, of ordinary resolutions to remove a director or remove, appoint or re-appoint an auditor

image  to remove a director pursuant to s 168;

image  to appoint someone in his place at the removal meeting;

image  to remove an auditor (s 511); and

image  to appoint a new auditor (s 515).

Special notice is given by the shareholder to the company of his intention to move the resolution and must be not less than 28 days before the date of the meeting at which the resolution is to be voted on (s 312). Be sure to distinguish special notice of a resolution given by a shareholder to the company from notice of a meeting given by a company to shareholders.

The rules governing general meetings were altered for trading companies by the Shareholders’ Rights Regulations 2009. Amongst other rights, the shareholders of a traded company have the right to ask questions at a general meeting (s 319A). The obligation of the company to answer shareholders’ questions is circumscribed; in addition to not being required to answer if to do so would involve the disclosure of confidential information, no answer is required if, ‘it is undesirable in the interests of the company or the good order of the meeting that the question be answered’.

Class meetings

Meetings of holders of a particular class of shares are called class meetings. The rules governing class meetings are essentially the same as for general meetings, being applicable ‘with necessary modifications’ (s 334).

Court-ordered meetings

If it is impracticable for a meeting to be called or conducted in accordance with the articles of the company or the 2006 Act, the court may, on application by a director or any shareholder who would be entitled to vote at the meeting, or of its own volition, order a meeting to be called, held and conducted in any manner the court thinks fit (s 306).

Shareholder decisions recognised at common law

The principle that the shareholders of a company may unanimously reach a decision without the need for compliance with formal procedures is known as the ‘Duomatic principle’. The principle was in fact established long before it was applied in Re Duomatic Ltd [1969] 2 Ch 365. Lord Davey referred to the principle in Salomon to confirm that the company was bound by the purchase of the boot manufacturing business because the unanimous agreement of the shareholders of the company was an inevitable inference from the circumstances. The principle was applied in the very simple circumstances of Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA).



Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA)

The purchase of property paid for by the issues of debentures had been approved by resolution of the five directors of the company at a directors’ meeting. All directors in attendance at the meeting were disqualified from acting because they were all interested in the seller of the property, so the directors’ resolution was ineffective. The directors were also the shareholders of the company. The liquidator of the company argued that the issue of the debentures was invalid. Held: The court refused to set the debentures aside. The meeting was a directors’ meeting but it might be considered a general meeting. If the five persons present had said, ‘We will now constitute this a general meeting’ it would have been within their powers to do so and it appeared to Lord Sterndale MR that that was in fact what they did and the company was bound by the unanimous agreement of the shareholders.

The principle has been applied in a wide range of circumstances, including when different types of resolutions would otherwise have been required, such as a special resolution (Cane v Jones [1980] 1 WLR 1451). Mummery LJ described the principle in the following terms in Euro Brokers Holdings Ltd v Monecor (London) Ltd [2003] BCLC 506 (CA).



‘[The Duomatic principle] is a sound and sensible principle of company law allowing the members of the company to reach an agreement without the need for strict compliance with formal procedures, where they exist only for the benefit of those who are agreed not to comply with them. What matters is the unanimous assent of those who ultimately exercise power over the affairs of the company through their right to attend and vote at a general meeting. It does not matter whether the formal procedures in question are stipulated for in the articles of association, in the Companies Acts or in a separate contract between the members of the company concerned. What matters is that all the members have reached an agreement. If they have they cannot be heard to say that they are not bound by it because the formal procedures were not followed. The position is treated in the same way as if the agreed formal procedure had been followed.’

Judicial constraint on the exercise of voting rights by a shareholder

Tension exists between two lines of cases relevant to the exercise of shareholder voting rights. There is no principle that the position of shareholder gives rise to fiduciary obligations to the company but the range of decisions in relation to which a shareholder is required to think beyond his own self-interest is unclear.

The Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA) line of cases focuses on when voting shareholders are exercising a power conferred on majorities enabling them to bind minorities. They apply the general principles of law and equity applicable to such powers and require a shareholder to exercise his votes bona fide for the benefit of the company. With the exception of Oliver J (as he then was) in Re Halt Garage (1964) Ltd [1982] 3 All ER 1016 explaining the decision in Hutton v West Cork Railway Co (1883) Ch D 654 (CA) as an application of these general principles, cases asserting the requirement that a shareholder must exercise his votes bona fide for the benefit of the company appear to be confined to cases amending the articles.

In contrast, a number of cases, reaching back to Pender v Lushington (1877) 6 Ch D 70, have emphasised the unrestrained right of a shareholder to vote in his own individual interest. In the words of Sir George Jessel MR in Pender:



‘There is, if I may say so, no obligation on a shareholder of a company to give his vote merely with a view to what other persons may consider the interests of the company at large. He has a right, if he thinks fit, to give his vote from motives or promptings of what he considers his own individual interest.’

Subsequent cases have stressed the individual property nature of the voting rights attaching to shares. In Re Astec (BSR) plc [1998] 2 BCLC 556, Jonathon Parker J stated:



‘The starting point is the proposition that in general the right of a shareholder to vote his shares is a right of property which the shareholder is free to exercise in what he regards as his own best interests. He is not obliged to cast his vote in what others may regard as the best interests of the general body of shareholders, or in the best interests of the company as an entity in its own right.’

Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 2 All ER 625 seems to be the high-water mark of this approach. The question in issue was whether or not shareholders would be in contempt of court if they voted against a resolution that had to be passed if the company was to comply with an undertaking it had given to the court. Walton LJ (sitting in the Chancery Division) held that not even a shareholder who was also a director was required to vote in anything other than his own interest.



‘When a shareholder is voting for or against a particular resolution he is voting as a person owing no fiduciary duty to the company and who is exercising his own right of property, to vote as he thinks fit … a shareholder who casts his vote in general meeting is not casting it as an agent of the company in any shape or form. His act therefore, in voting as he pleases, cannot in any way be regarded as an act of the company.’

In Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, Harman J attempted to reconcile the Allen and Pender lines of cases by asserting the freedom of the shareholder in strong terms but emphasising the distinction between the act of a shareholder in voting for or against a resolution and the resolution itself.



‘It is important to remember that shareholders’ rights to deal with or vote their shares are separate from the rights of the company as a corporate entity and shareholders’ relationships with it. Shareholders are entitled to sell their shares, to vote their shares, to take any course they like in general meeting without regard to any other person’s rights or position. In my judgment the law is that a shareholder may act with malice in voting his shares against a particular resolution and there can be no objection to that.’

Where self-interested voting behaviour results in a special resolution to amend the articles, it is the special resolution which is an act of the corporate entity, Harman J appears to be saying, that may be challenged as not bona fide for the benefit of the company. Harman J’s analysis implicitly emphasises the substantive rights of minority shareholders. Although it is a valiant attempt to reconcile apparently irreconcilable case law, his approach is difficult to reconcile with the language of the Allen cases.



Division of powers and shareholder decision-making

Division of powers

Company powers allocated in articles:

management and all powers of the company vested in board of directors;

Model Art 3 (public and private)

shareholders may direct board to take specified action by special resolution;

Model Art 4 (public and private)

shareholders may not usurp power by ordinary resolution or otherwise contrary to the articles.

Automatic Self Cleansing v Cuninghame (1906)

Shareholders also have:

statutory powers;

Companies Act 2006 and Insolvency Act 1986 (listed at section 9.2.3)

common law default powers if board is unable to act.

Barron v Potter (1914)

How shareholders exercise their powers

Presumption that shares have equal voting rights unless articles provide otherwise.

Birch v Cropper (1889) and s 284

Shareholder resolutions:

s 284

vote on show of hands;

1 vote per shareholder at meeting,

poll vote;

1 vote per share of those present or represented at meeting

written resolution (private company).

1 vote per share

Ordinary resolutions: simple majority, special resolutions: 75%.

ss 282, 283

Unanimous informal decisions are effective.

Re Duomatic Ltd (1969)

Re Express Engineering Works

Ltd (1920)

Shareholders are entitled to vote in their own self-interest, subject to: requirement to exercise votes bona fide for the benefit of the company applies when amending the articles unclear whether of wider application.

Northern Counties Securities v Jackson & Steeple (1974)

Allen v Gold Reefs of West Africa Ltd (1900)

Re Halt Garages (1964) Ltd (1982)

9.3 Board of directors

We turn away from the shareholders of a company now to look at the board of directors. In the first part of this section we focus on the board of directors as a decision-making organ of the company; on the powers vested in the board and how the board exercises those powers by taking decisions. In the second part of this section we consider the composition of the board of directors and how directors are appointed and removed. Board composition, particularly the gender diversity of boards, is the subject of extensive ongoing discussion. Finally, we focus on directors’ terms of service and remuneration, a subject that has attracted a great deal of attention as it is in relation to this that boards of directors may be most keenly tempted to behave not in the best interests of the company, but rather in their own best interests.

9.3.1 Board powers and decision-making

Powers of the board

As stated above, Art 3 of both the Model Articles for Private Companies Limited by Shares and those for public companies establishes the board of directors as the principal organ of management of the company:


‘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.’

< div class='tao-gold-member'>

Only gold members can continue reading. Log In or Register to continue