Learning Outcomes
After studying this article, you will be able to identify and explain the legal duties and powers of company directors, understand the mechanisms by which companies make decisions, and advise on shareholder rights and remedies. You will also be able to describe key aspects of corporate compliance, including statutory filing and record-keeping obligations, and assess how professional and regulatory requirements affect business organisations in England and Wales.
SQE2 Syllabus
For SQE2, you are required to understand corporate governance and compliance as they apply to business organisations. Focus your revision on the following key syllabus points:
- the statutory and fiduciary duties of company directors and officers
- corporate decision-making procedures, including the role of the board and shareholders
- statutory filing, record-keeping, and disclosure obligations for companies
- remedies available for breaches of directors' duties
- the protection of minority shareholders and related compliance issues
- the legal and regulatory requirements affecting company operations and management
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What are the main statutory duties owed by directors under the Companies Act 2006?
- Who is liable for company debts where a director causes a company to trade while insolvent?
- What are the two principal decision-making organs in a company, and how do their roles differ?
- Name two remedies available to minority shareholders if they are unfairly prejudiced by the way a company is run.
- What are the consequences if a company fails to file its annual accounts with Companies House?
Introduction
This article examines the governance and compliance requirements for companies, covering how companies are managed, how decisions are made, the responsibilities of directors and officers, and how companies comply with statutory obligations in England and Wales. Understanding these rules is essential for the SQE2 exam and for advising clients on best practice in business law.
Directors and Corporate Management
Who manages a company?
A company's board of directors is responsible for the day-to-day management and strategic direction. Shareholders (members) are not directly involved in daily management but exercise control through their voting rights at general meetings.
Key Term: board of directors
The group of appointed individuals who collectively manage and control the company’s business on a daily basis.Key Term: shareholder (member)
A person or entity who owns shares in a company and exercises certain rights, such as voting at general meetings and receiving dividends.
Types of directors
- De jure directors: Formally appointed and registered.
- De facto directors: Unregistered but act as directors in practice.
- Shadow directors: Persons whose instructions the board is accustomed to following, even if not officially appointed.
Key Term: shadow director
A person in accordance with whose instructions or directions the company’s directors are accustomed to act, but who has not been formally appointed as a director.
Director appointment and removal
Company articles usually specify how directors are appointed and removed. A simple majority of shareholders can usually remove a director by ordinary resolution, subject to notice requirements and certain procedural rights.
Directors’ Powers
Directors are agents of the company. They can bind the company in contract if acting within their actual or apparent authority.
Key Term: actual authority
Authority that a director or agent has been expressly or implicitly granted to act on behalf of the company.Key Term: apparent authority
Authority a third party reasonably believes a director or agent has, based on the company’s conduct or communications.
Worked Example 1.1
A board with three directors, all properly appointed, holds a board meeting. One director enters into a supply contract without a board resolution, but has routinely signed similar contracts in the past with the company’s knowledge. Is the contract binding on the company?
Answer:
Yes, the director has likely acquired apparent authority from the company’s repeated conduct, so the company will be bound.
Directors’ Duties
Directors owe statutory and fiduciary duties under the Companies Act 2006 and general law. The main statutory duties include:
- Acting within the company’s powers as set out in the constitution
- Furthering the success of the company for the benefit of its members as a whole
- Exercising independent judgment
- Exercising reasonable care, skill, and diligence
- Avoiding conflicts of interest
- Not accepting benefits from third parties
- Declaring interests in proposed or existing transactions
Key Term: fiduciary duty
A legal duty requiring a person in a position of trust (such as a director) to act in good faith, for the benefit of the company, and to avoid conflicts of interest.
Duty to further the success of the company
This duty is central to director decision-making. Directors must consider the long-term consequences of decisions, the interests of employees, and the community.
Key Term: duty to further the success of the company
A statutory duty under s.172 Companies Act 2006 requiring directors to act in good faith for the benefit of the company as a whole, while considering specific factors.
Consequences of breach
If directors breach their duties, the company may bring proceedings for compensation or to remove the director. In certain cases, shareholders (with Court approval) can bring derivative claims on behalf of the company.
Worked Example 1.2
A director arranges for a company to enter into a large contract with a supplier owned by her partner but fails to declare her interest. The company suffers a loss because the supplier overcharges. What is the likely legal outcome?
Answer:
The director has breached her duty to declare an interest and to avoid conflicts of interest. She may be liable to the company for any loss.
Exam Warning
Questions may present situations testing whether a director has complied with duties, particularly when conflicts of interest are involved. Ensure you understand when board or member approval is required to avoid breaching duties.
Corporate Decision-Making and Shareholder Involvement
The two organs of company decision-making
- The board of directors: Makes day-to-day and strategic decisions.
- The shareholders: Exercise control through general meetings, including appointment and removal of directors, changes to articles, and approving certain transactions.
Key Term: board resolution
A formal decision reached by the directors at a board meeting by majority vote.Key Term: ordinary resolution
A resolution passed by shareholder simple majority (>50%).Key Term: special resolution
A resolution passed by at least 75% of the shareholders.Key Term: written resolution
A resolution of shareholders passed in writing, instead of at a general meeting, permitted for private companies.
Meetings and resolutions
- Board meetings: Used for director decision-making.
- General meetings: Used for shareholder approval of key decisions.
- Written resolutions: Allow shareholder decisions without a meeting (private companies only).
Example of required shareholder approval
Certain transactions—such as substantial property transactions involving directors, directors’ loans, or changing articles—require shareholder approval, usually by ordinary or special resolution.
Worked Example 1.3
A board wishes to enter into a loan agreement with a director for company funds of £30,000. What procedure must be followed?
Answer:
Member approval by ordinary resolution is required before making the loan. The company must circulate details of the loan terms in advance.
Shareholder Rights and Remedies
General rights
Shareholders may:
- Vote at meetings, receive dividends, and inspect statutory registers
- Remove directors or auditors by ordinary resolution
- Demand polls and request meetings
Key Term: minority shareholder
A shareholder holding less than the majority of voting rights, often needing statutory remedies to protect their interests.
Minority shareholder protection
Remedies include:
- Derivative claims: Permit a shareholder to bring a claim on behalf of the company for a breach of duty by a director.
- Unfair prejudice petition: Allows a shareholder to apply to court if the company’s affairs are conducted in a manner unfairly prejudicial to their interests.
Key Term: derivative claim
A claim brought by a shareholder on behalf of the company against directors or others for wrongs done to the company.Key Term: unfair prejudice
Conduct by the company or its controllers that is detrimental and unfair to the interests of one or more shareholders, justifying relief by the court.
Worked Example 1.4
A 10% shareholder complains the directors are paying themselves high salaries but refusing to declare dividends. What can the shareholder do?
Answer:
The shareholder may seek a remedy for unfair prejudice if refusal to pay dividends is unfair and prejudicial. The court may order compensation or the purchase of the shareholder’s shares.
Statutory compliance and record-keeping
Companies must comply with filing annual accounts, a confirmation statement, and other information at Companies House. Failure to comply can result in criminal offences and fines for the company and its officers.
Key Term: confirmation statement
An annual notification to Companies House confirming company information on file is accurate.
Compliance and Professional Obligations
Filing and disclosure requirements
Companies must update Companies House on key changes (e.g., directors, registered office, share capital, and articles). Compliance with filing deadlines is essential to avoid penalties.
Statutory registers
A company must maintain registers of directors, members, and people with significant control (PSCs), among others. Shareholders and the public have certain rights of inspection.
Key Term: person with significant control (PSC)
An individual or entity who owns or controls more than 25% of a company’s shares or voting rights, or otherwise exercises significant influence or control.
Corporate governance principles
Companies must comply with laws and, where applicable, the UK Corporate Governance Code, especially if trading on a public market. The SRA Code of Conduct and professional regulations impose additional standards on companies offering legal services.
Key Point Checklist
This article has covered the following key knowledge points:
- Directors manage the day-to-day business of a company and owe statutory and fiduciary duties under the Companies Act 2006 and general law.
- Breaches of directors’ duties can lead to personal liability and statutory remedies, including derivative claims by shareholders.
- Major company decisions require approval by shareholders via general meetings or written resolutions (private companies).
- Shareholders enjoy voting rights, dividends, and rights to receive company information and seek remedies if their rights are infringed.
- Companies must comply with statutory filing, record-keeping, and disclosure obligations. Non-compliance can result in penalties and director/officer liability.
- Minority shareholder remedies include derivative actions and unfair prejudice petitions.
- Companies must keep statutory registers and update Companies House on changes in directors, shareholding, or key documents.
Key Terms and Concepts
- board of directors
- shareholder (member)
- shadow director
- actual authority
- apparent authority
- fiduciary duty
- duty to further the success of the company
- board resolution
- ordinary resolution
- special resolution
- written resolution
- minority shareholder
- derivative claim
- unfair prejudice
- confirmation statement
- person with significant control (PSC)