Introduction

The first part of this chapter considers the relationship between

the board of directors and the general meeting. It then goes on
to outline the various categories of director, their appointment
and removal..

Learning outcomes
Having completed this chapter, and the Essential readings and activities, you should
be able to:
1. define the term ‘director’
2. explain the role of the board of directors and its relationship with the general
meeting
3. describe the various categories of director
4. explain the process for awarding remuneration
5. describe how the general meeting can remove a director from the board
6. explain how directors can be disqualified from holding office.

Core text
Dignam and Lowry, Chapter 13: ‘Corporate management’.

Cases
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34
Secretary of State for Trade and Industry v Tjolle [1998] BCC 282
Secretary of State for Trade and Industry v Hollier [2006] EWHC 1804 (Ch)
Re Kaytech International plc [1999] BCC 390
Re Hydrodam (Corby) Ltd [1994] BCC 161
Bushell v Faith [1970] AC 1099
Re Cannonquest, Official Receiver v Hannan [1997] BCC 644
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164
Re Polly Peck International plc (No.2) [1994] 1 BCLC 574
Re Grayan Building Services Ltd [1995] Ch 241
Re Lo-Line Electric Motors Ltd [1988] Ch 477.
 Additional cases

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

Barron v Potter [1914] 1 Ch 895
Unisoft Group Ltd (No.2) [1993] BCLC 532
Re Gemma Ltd (in liquidation) [2008] BCC 812
Re AG (Manchester) Ltd (in liquidation) [2008] EWHC 64 (Ch)
Official Receiver v Watson [2008] 1 BCLC 321
HM Revenue & Customs v Holland [2010] UKSC 51.

Directors

Defining the term ‘director’

As we saw in Chapter 3, companies are artificial legal entities and as such they must
operate through their human organs. The management of the company is vested in
the board of directors, who are expected to act on a collective basis, although the
articles may – and in large companies generally do – provide for delegation of
powers to smaller committees of the board or to individual directors. It should be
borne in mind that in small private companies the same individuals may wear a
number of hats: as directors, workers and shareholders. In large companies,
however, there is generally a clear division between the board and the shareholders
(although it should be borne in mind that even here directors will often receive
shares as part of their remuneration package).
The Companies Act 2015(CA 2015) does not define the term ‘director’ beyond
stating in s.250 that the term ‘includes any person occupying the position of
director, by whatever name called’. Thus, whatever title the articles adopt to
describe the members of the company’s board (for example, ‘governors’), the law
will nevertheless view them as directors. The Act lays down the minimum number of
directors that companies must have: two for public companies and one for private
companies..
The position of the board of directors
The CA 2015 does not attribute specific roles to company directors. The Act is also
silent with respect to the structure and form of corporate management, leaving such
matters to the company’s constitution.
Although it is now accepted that in the modern company the board enjoys a
position of management autonomy this has not always been the case. Until the
end of the 19th century the general meeting of the company had constitutional
supremacy: the board of directors was viewed as its agent and had to act in
accordance with decisions of the general meeting. However, by the early 20th
 century, with shareholding becoming more dispersed and directors beginning
to be appointed on the basis of professional merit rather than social standing,
articles of association were drafted so as to give boardrooms greater
independence. Consequently, the judicial response was that the board should
no longer be viewed as the agent or servant of the general meeting. In
Automatic Self-cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34
the question for the Court of Appeal was whether the directors were bound to
give effect to an ordinary resolution of the general meeting requiring them to
sell the company’s undertaking to a new company incorporated for the
purpose. The company’s articles of association, in terms similar to article 3 of
the model articles of association for private and public companies (see below),
provided that ‘the management of the business and the control of the
company’ was in the hands of its directors. Collins MR, having reviewed the
relevant article, explained that:

it is not competent for the majority of the shareholders at an ordinary meeting

to affect or alter the mandate originally given to the directors by the articles of
association… the mandate which must be obeyed is not that of the majority – it
is that of the whole entity made up of all the shareholders.
See also Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89; and John
Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113.
This ‘balance of power’ between the shareholders and the directors is now
confirmed by article 3 (directors’ general authority) of the model articles of
association for both private and public companies .

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.
However, even though directors are, given the power to manage the company, this
does not mean that shareholders are denied any say within the company. First,
article 4 of the model articles for both private and public companies allows
shareholders to ‘give directions’ to the board. The Article provides that:

Shareholders’ reserve power: ‘The shareholders may, by special resolution, direct

the directors to take, or refrain from taking, specified action.
Thus, shareholders can instruct the board how to act, but crucially, for such an
instruction to be binding on the directors, it must be passed as a special resolution
(which requires a 75 per cent majority). The CA 2015 also empowers the
shareholders to take a number of decisions within the company, for example dealing
with alterations to the articles; share capital; and the allotment of share. If
shareholders disapprove of a director they can remove him from office by ordinary
resolution. Moreover, executive power will revert to the general meeting where the
board of directors is deadlocked so that it is incapable of managing the company
(Barron v Potter [1914] 1 Ch 895).
Summary
Directors are not mere delegates or agents of the general meeting but are under a
duty to act bona fide in the interests of the company as a whole
The Article confers extensive managerial powers on directors, who can thus pursue
a course of action different from that prescribed by a bare majority of shareholders.
However, the general meeting can remove a director by ordinary resolution.
Activity
Read Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89.
To what extent can a controlling shareholder dictate how directors should act?
Appointment of directors
Subject to certain statutory provisions, the appointment of directors is left to the
articles of association. CA 2015 provides that the persons named in the statement of
proposed officers are, on the company’s incorporation, deemed to be its first
directors and secretary. We have seen above that the Act stipulates the minimum
number of directors for companies. The Act goes on to provide that for public
companies the appointment of directors shall be voted on individually. The Act lays
down the minimum age of 16 for appointment as a director. Beyond these particular
statutory provisions the CA 2015 is silent on boardroom appointments, leaving the
issue to the articles of association.
Although first directors are appointed in accordance with CA 2015 their successors
are elected by the shareholders in a general meeting. of the model articles of
association for public companies provides that at the first annual general meeting
(AGM) all the directors shall retire from office and at every subsequent AGM any
directors who have been appointed by the directors since the last AGM or who were
not appointed at one of the preceding two AGMs, must retire from office. It should be
noted that this requirement does not appear in the model articles for private
companies.

Summary
CA 2015 govern the appointment and registration of directors. The principal
requirements for appointment are:
every private company is to have at least one director, and every public company to
have at least two
18 is set as the minimum age for a director to be appointed)
the appointment of a director of a public company is to be voted on individually,
unless there is unanimous consent to a block resolution
the acts of a person acting as a director are valid notwithstanding that it is
afterwards discovered that there was a defect in his appointment, that he was
disqualified from holding office, that he has ceased to hold office, or that he was not
entitled to vote on the matter in question (See the construction given to the
provision in Morris v Kanssen [1946] AC 459, Lord Simonds.)

Directors’ remuneration
As with trustees, directors are not entitled as of right to be paid for their services
unless the articles of association or a service contract between them and the
company provide otherwise (Re George Newman & Co [1895] 1 Ch 674). Article 18
(model articles of association for private companies) and (model articles of
association for public companies) provide that the directors shall be entitled to such
remuneration as they determine.
Given the power of directors to set their own remuneration, issues of transparency
and accountability obviously arise. The temptation for directors to vote themselves
‘fat cat’ awards has generated much debate over the past 20 years or so and this is
considered in the corporate governance section of this chapter. For the present it
should be noted that the BIS (formerly the DTI) published a number of proposals for
reinforcing the accountability of directors to shareholders over boardroom pay
awards (see the DTI consultative documents, Directors’ Remuneration (URN 99/923)
(London, DTI, 1999) and (URN 01/1400) (London DTI, 2001)). A significant
proposal was that there should be a mandatory requirement for the company’s
annual report to contain a statement of remuneration policy and details of the
remuneration of each director. This was first implemented for all quoted companies
for financial years ending on or after 31 December 2002 by statutory instrument
(the Directors’ Remuneration Report Regulations 2002 (SI 2002/1986)), which
came into force on 1 August 2002, and is now incorporated into the CA 2015.
Removal of directors
CA 2015 provides that a company may by ordinary resolution remove a director
before the expiration of his period of office, notwithstanding anything in the articles
or in any agreement between him and the company. Special notice must be given of
the resolution (i.e. at least 28 days’ notice must be given before the meeting at which
the resolution is to be moved. The director concerned is entitled to address the
meeting at which it is proposed to remove him He may also require the company to
circulate to the shareholders his representations in writing providing they are of a
reasonable length
While the power contained the Act cannot be removed by the articles, it is possible
for a director to entrench himself by including in the articles a clause entitling him to
weighted voting in the event of a resolution to remove him. In Bushell v Faith [1970]
AC 1099 the articles provided that on a resolution to remove a particular director,
his shares would carry the right to three votes per share. This meant that he was
able to outvote the other shareholders who held 200 votes between them. In other
words, the ordinary resolution could be blocked by him. The House of Lords
approved the clause. Lord Upjohn reasoned that: ‘Parliament has never sought to
fetter the right of the company to issue a share with such rights or restrictions as it
may think fit.’ He went on to state that in framing s.168 (s.303 CA 1985) all that
Parliament was seeking to do was to make an ordinary resolution sufficient to
remove a director and concluded that: ‘Had Parliament desired to go further and
enact that every share entitled to vote should be deprived of its special rights under
the articles it should have said so in plain terms by making the vote on a poll one
vote one share..

Categories of director

Executive and non-executive directors

Executive directors are full-time officers who generally have a service contract
with the company. The articles will normally provide for the appointment of a
managing director, sometimes called a chief executive, who has overall
responsibility for the running of the company. Non-executive directors are
normally appointed to the boards of larger companies to act as monitors of the
executive management. They are typically part-time appointments. For the role of
non-executive directors
De facto directors
A de facto director is one who has not been formally appointed but has nevertheless
acted as a director (Re Kaytech International plc [1999] BCC 390, CA). The issue of
whether or not an individual is a de facto director generally arises in relation to
disqualification orders The courts have formulated guidelines for determining the
issue. In Re Richborough Furniture Ltd [1996] BCC 155, Lloyd J stated that emphasis
should be given to the functions performed by the individual concerned (see also
Secretary for State for Trade and Industry v Jones [1999] BCC 336). In Secretary of
State for Trade and Industry v Tjolle [1998] BCC 282 Jacob J stated that the essential
test is whether the person in question was ‘part of the corporate governing
structure’. This was approved by the Court of Appeal in Re Kaytech International plc.
In Secretary of State for Trade and Industry v Hollier [2006] EWHC 1804 (Ch),
Etherton J, having made the point that no one can simultaneously be a de facto and a
shadow director, went on to state that although various tests have been laid down
for determining who may be a de facto director there is no single touchstone. The
key test is whether someone is part of the governing structure of a company in that
he participates in, or is entitled to participate in, collective decisions on corporate
policy and strategy and its implementation. In Re Gemma Ltd (in liquidation) [2008]
BCC 812 it was emphasised that what mattered was what the director did (and in
particular whether they were part of the governing structure of the company), not
the label that was attached to them. See also HM Revenue & Customs v Holland
[2010] UKSC 51. Since a de facto director falls within the definition of a ‘director’ in
CA 2015 (see above), then all provisions in CA 2015 which apply to ‘directors’

Shadow directors
In order to evade the duties to which directors are subject a shareholder might
avoid formal appointment as such yet nevertheless direct the board’s decision
making. In this case the shareholder may be classified as a ‘shadow director’.
CA 2015 defines a ‘shadow director’ as a person in accordance with whose
directions or instructions the directors are accustomed to Those who provide
professional advice are expressly excluded. But a professional person may be held to
be a shadow director if his or her conduct amounts to effectively controlling the
company’s affairs (Re Tasbian Ltd (No.3) [1993] BCLC 297). In Re Hydrodam (Corby)
Ltd [1994] BCC 161, Millett J, took the view that in determining whether or not an
individual is a shadow director four factors are relevant, namely that:
 the de jure and de facto directors of the company must be identifiable
 the person in question directed those directors on how to act in relation to the
company’s affairs or that he was one of the persons who did
 the directors did act in accordance with his instructions
 they were accustomed so to act.

Millet J explained that a pattern of behaviour must be shown ‘in which the
board did not exercise any discretion or judgment of its own but acted in
accordance with the directions of others’. However, merely controlling one
director is not sufficient; the shadow director must exercise control over the
whole board or at least a governing majority of it (Re Lo-line Electric Motors
Ltd [1988] Ch 477; Unisoft Group Ltd (No.2) [1993] BCLC 532).