Insight 42 - Magazine - Page 8
LEGAL MATTERS
When Must Directors
Consult Shareholders?
John Wiblin, Partner and Head of Dispute Resolution, explains the
exceptions to the assumption that company directors can act without
approval from their shareholders and the consequence of getting it wrong.
the directors but the court later found
that the shareholders had not given fully
informed consent to the transaction. This
was because they had not been given
an adequate explanation of the details
including how the price for all of the
assets transferred had been calculated. It
ordered the directors who had carried out
the transactions to pay back millions of
pounds, resulting in some of the directors
having to declare personal bankruptcy.
As a general rule, directors have complete
control of their companies. They have
the last word and they do not have to
get shareholders’ approval in advance of
their decisions unless there is a written
agreement reserving decisions about
certain things to the shareholders. And
then they only have to seek approval for
those reserved matters.
There are a few significant exceptions,
however, that apply automatically by law
even if there is no agreement about it
with shareholders. Directors must seek
advance shareholder approval about:
• Long-term service contracts
• Substantial property transactions
• Loans, quasi-loans and credit
transactions
• Payments for loss of office
Long-term service contracts and
payments for loss of office are examples
of benefits that one director might give to
another at the company’s expense in the
expectation that they will receive similar
benefits from the other directors then or
at a later date.
A transaction will be a substantial
property transaction if it transfers a "non-
8
cash asset" from or to any of the following:
• A director of the company
• A director of its holding company
• A person connected with a director of
the company
• A person connected with a director of
its holding company
Those directors had also awarded
each other service contracts with
very substantial payments for loss of
office. When the shareholders fired the
directors, they claimed large sums from
the company under their contracts. The
shareholders had not been consulted
about those contracts. The court set those
agreements aside.
The consequences of getting this wrong
can be severe. Any long-term service
contract is void – that is, the company
is not bound by the agreement and,
potentially, any payments made might be
claimed back. And a substantial property
transaction might be set aside with
the directors who approved it without
authority being personally obliged to
indemnify the company for any loss it may
have suffered.
And it is not enough to ask the
shareholders and get their permission
either. They need to have enough
information to make an informed
decision. The case of Stubbins Marketing
Ltd v Stubbins Food Partnerships Ltd
(a case that Longmores were directly
involved in and issued the claim at
court) illustrates the point very well. The
shareholders gave written consent to a
management buyout and other plans by
bIZ4BIZ INSIGHT MAGAZINE | DECEMBER 2024
John Wiblin
Partner and Head of Dispute
Resolution
www.longmores.law
enquiries@longmores.law
01992 300333
