If one of the directors of a company is appointed as a “managing director”, what special powers does he or she have? This question came up in a recent High Court case where various directors – including a “managing director” – fell out with one another in a big way. As that case shows, much will depend on what the articles of association of the company actually say.
The facts
In this case S owned 68.8% of the shares and was chairman of CH Ltd. The second director was B, who was described as “Group Managing director” in his employment contract, and B held the remaining 31.2% of the shares. The third director, H, the Group Financial Director, held no shares. The articles of CH Ltd incorporated the 1985 Table A Regulations (as is the case for most companies formed before 2009). In addition, special articles required that the quorum at meetings of shareholders was two, one of which had to be S, and further S was entitled to be a director so long as he held any shares in the company.
Between 2002 and 2005 S was allegedly involved in a cheque fraud involving two subsidiaries of the company, as a result of which substantial amounts of cash were allegedly diverted to S. The cheque fraud came to light in 2009, when it was investigated by the company. B took no steps against S at that time. However, by 2011 S was expressing reservations about the way that the company was being run by B and H and declared his intention to appoint another person as CEO. In May 2011 B on behalf of the company instructed solicitors to investigate possible fraud by S. S attended the offices of the company on 1 July 2011 to attend a board meeting, but was handed a letter setting out his immediate suspension. Following his departure B and H signed a resolution of the board authorising the suspension. After this B and H ran the company without reference to S.
On 18 July 2011 S requested that the company hold an EGM to consider the removal of B and H as directors of the company. B made clear that he would not attend such a meeting so that there would not be a quorum. Next day S instituted proceedings against B and the company, seeking a declaration that the decision to suspend him was invalid and that the court should grant an order that in the circumstances a general meeting could take place with a quorum of one.
The Law
Articles will usually provide that the business of a company is to be managed by the directors, who are empowered to exercise all the powers of the company. Those powers must usually be exercised by the board collectively at a properly convened board meeting. The board may not delegate any of their powers unless expressly authorised by the articles or a resolution of shareholders. Articles will therefore often include a provision providing for delegation to a managing director. For example, Regulation 72 of Table A provides:
“The directors may delegate any of their powers …. to any managing director or any director holding any other executive office such of their powers as they consider desirable to be exercised by him. Any such delegation may be made subject to any conditions the directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. …”
As a result the actual power of a managing director will depend on the articles which confer the power on the board to appoint him and upon the terms of the delegation, which will usually be in his employment contract. The office of managing director does not, without more, imbue an officer with powers over and above those enjoyed by any other director.
In this light the court held that there was nothing in B’s service contract whereby any of the powers of the board were delegated to B. The suspension of the Chairman was not a commercial decision, nor was it something occurring within the day to day running of the company’s business.
Further, any powers the Managing Director had depended on the Articles as a whole. The Special Articles were designed to protect S’s position as majority shareholder. They enabled him to ensure that the board could not pass a resolution dismissing him as Chairman. It could not have been intended that that could be sidestepped by an implied delegated authority of the Managing Director. The decision to suspend S was unlawful.
The court noted that B was not powerless as a result of the alleged dishonest conduct by S. He could bring a minority shareholder petition under section 994 of the Companies Act 2006 or he could attempt to bring a derivative action under section 206. What he could not do was to use his position as Managing Director to confer on himself powers which should properly have been exercised by the board.
The court also considered whether it should grant S an order permitting him to hold a shareholders’ meeting on his own (a quorum of one). This was a case where the majority shareholder should be entitled to exercise his ordinary voting rights to appoint and remove directors. The court felt that it was of considerable significance that B chose to take no action in respect of the alleged cheque fraud between December 2009 and May 2011 and only chose to raise it in May 2011 when S was threatening to use his power as majority shareholder to appoint a CEO to the board. It seemed plain that the decision to instruct solicitors to investigate the fraud was part of his attempt to protect his position as Managing Director. The court granted the order in favour of S.
Finally, there was the matter of B instructing solicitors on behalf of the company. In the absence of express delegation, the Managing Director had no authority to authorise the active defence of proceedings against the company by the majority shareholder without a board resolution. As noted above, the Articles were designed to protect S’s position. In those circumstances there was no implied delegated authority to bring proceedings against S. Equally, there was no implied authority to mount an active defence to S’s proceedings. The question of whether there should be an EGM with a reduced quorum was a dispute between shareholders over who should control the company. It followed that company funds should not have been used for the prosecution of an active defence in the application.
The case shows that even where a majority shareholder is alleged to be involved in wrongdoing his power as largest shareholder and, here, his position enshrined by the special articles could not be undermined by a “managing director”. The managing director had authority over day to day commercial matters of the company, but this position did not give him any special rights to act independently in relation to ownership and control issues.
© Taveners 2011