Board meetings, written resolutions, and directors’ duties and liabilities

Best practice for board meetings and written resolutions

Overview

• The constitutional documents of a company include the articles of association. In the case of a joint venture (a “JV”) arrangement, the shareholders’ agreement would supplement the articles. The constitutional documents will set out the governance processes in relation to board approvals and these need to be considered in conjunction with the Companies Act 2006 (the “Act”).
• There are two ways for directors to approve matters: the first is at a board meeting and the other is by way of written resolution. Either method should result in a written document evidencing such decision and this note set outs the key considerations / content for such documents.
• Best practice is for matters to be approved prior to them being implemented. If this is not possible, then matters can be approved by subsequent ratification (meaning to retrospectively authorise) either by board meeting or written resolution.
• The below sets out best practice as well as requirements under the Act but also highlights where there may be additional key considerations in the case of a JV.

Board Meetings

• How to hold a board meeting
  • Typically, any director may call a board meeting by notice to the other directors setting out when and where the meeting will be held.
  • A meeting can be held in-person or electronically (e.g., over the phone or via video conference) if all directors agree and the constitutional documents do not prohibit it.
• Notice
  • The constitutional documents may stipulate a notice period of a number of days prior to the board meeting by which the notice must be given.
  • If the constitutional documents do not set a specific requirement notice period, notice will generally be deemed to have been sufficiently given if it enables all directors to have a reasonable chance to attend the meeting.
  • Note that if a director has waived their entitlement to notice, notice requirements will not apply but this is subject to the terms of the constitutional documents.

Minutes

• The minutes of the board meeting should be recorded in a written document that is signed by the chairperson.
• The minutes record the proceedings of the meeting and should include the following items (each of which are set out in more detail below):
  • appointment of a chairperson;
  • confirmation of quorum;
  • a declaration of interests in accordance with the Act and a confirmation whether
  • directors that are interested are entitled to vote and count in the quorum;
  • a record of the board’s considerations;
  • the purpose of the meeting and background to the matters being approved; and
  • formal resolutions e.g., approvals / ratifications.
• There is no specific legal requirement as to how the purpose of the meeting and background to the matters to be discussed at the meeting are set out, however they should be clear and complete enough for someone looking at the minutes at a later date to gain a sufficient understanding of the matters discussed.
• Actual transaction documents, if any, should be tabled at the meeting.
• In relation to the section dealing with the specific approvals / ratification, we advise that these are drafted broadly to enable directors / authorised signatories to: (i) sign ancillary documents; (ii) carry out ancillary matters such as making payments, filings etc.

Chairperson

• The constitutional documents will usually provide for the appointment of a chairperson or that the directors can appoint a chairperson amongst themselves.
• A chairperson exercises procedural control over the meeting. The constitutional documents could grant special rights, including a casting vote to a chairperson but we consider this to be unusual.

Quorum

• A quorum is the number of directors who must be present at a meeting to allow proceedings to be validly conducted.
• Quorum would typically be set out in the constitutional documents. The default quorum is the majority of the board or the usual practice of the board and will often be two.
• However, in a JV it is usual that a director appointed by each party must be present for a meeting to be quorate.

Directors’ Decisions / Voting

• At a meeting, resolutions will usually be passed by a simple majority of those present and voting, and written resolutions typically require unanimous approval, but this is subject to any special terms contained in the constitutional documents which may set a different threshold. In particular, material decisions – such as bank finance, sales/acquisitions of property etc. – may require unanimous board approval, whether taken at a meeting or by written resolution.
• Typically, each director has one vote unless they are excluded from voting for reasons such as conflicts – see below. If a director is excluded from voting for such reasons, the constitutional documents will also typically exclude them from being counted to meet the quorum requirements.
• In JV arrangements, the authority of the directors may be restricted so that they are required to get the consent of shareholders in relation to certain matters. Directors may go to the shareholders to authorise a transaction where the directors feel they might be in breach of duty under the Act to act in the best interests of the company.

Declaration of Interest

• Directors have a duty to declare the nature and extent of their interest in proposed and existing transactions or arrangements with the company. This duty must always be considered at the start of at a board meeting where a transaction or arrangement is being discussed. A director does not need to disclose their interest if it cannot reasonably regarded as likely to give rise to a conflict of interest.
• A director may be interested in a number of ways. For example, the director may be a counterparty to the transaction or the counterparty may be a company in which the director, or someone connected with the director, is interested.
• The constitutional documents will govern whether or not a director that is interested in a matter to be discussed at the meeting can count in the quorum and vote.

Written resolutions

• If the directors are likely to agree to a proposed resolution or unable to convene a board meeting quickly then it may be easier to pass a written resolution instead of convening a board meeting at a later date.
• Written resolutions are more complex to draft as they are implemented simultaneously rather than board minutes which are sequential.
• A resolution in writing signed by each director member will be effective as long as the constitutional documents do not preclude this approach, however we advise that the articles are drafted to expressly permit this type of decision-making.
• We advise that written resolutions are used as a last resort as overuse may incur rubber-stamping and board meetings enable directors to properly exercise their duties under the Act.

Directors' general duties and liabilities

Directors’ duties are based on the common law but are now codified statutory duties under the Act.

There are also reliefs and protections where applicable.

General duties

Under the Act there are seven general director’s duties:

1. to act within the powers conferred on him or her;
2. to promote the success of the company;
3. to exercise independent judgment;
4. to exercise reasonable care, skill and diligence;
5. to avoid conflicts of interest;
6. not to accept benefits from third parties; and
7. to declare an interest in a proposed transaction or arrangement.

Consequences of breach of general duties

• A breach of the general duties may give rise to an action (including damages for any loss) against the directors by the company or in certain circumstances by the company’s shareholders.

Ratification

• The Act allows the (non-interested) shareholders, in certain circumstances, to ratify conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company.

Insurance

• A company may take out (and pay the premiums for) insurance against liability for negligence, default, breach of duty or breach of trust in relation to his or her company.

Indemnification

• A company is permitted to indemnify a director against certain liabilities incurred to third parties. This indemnity is known as QTPIP (a qualifying third-party indemnity provision) and would normally be set out in a separate deed of indemnity between the director and the company.

Insolvency

Where a company is in financial difficulties, its directors may need to take difficult decisions. One of the key risks for directors is personal liability for wrongful trading. They should therefore seek professional advice without delay. Although the directors have a duty to promote the success of the company for a benefit of the members as a whole, in times where the company is or is threatened with insolvency, the directors must consider the interests of creditors.

Other statutory obligations

The Act and other UK legislation, including tax legislation, impose a number of requirements directly on directors. Failure to comply with these may give rise to fines or constitute a criminal offence, for example the obligation on directors to deliver to the registrar of companies copies of their company's annual accounts.