The Law of Meetings
About Andrew A. Martin
Andrew Martin’s practice bridges the international corporate and dispute resolution fields and focuses on commercial litigation and arbitration, insolvency and corporate reconstruction.
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The fundamental principles of the law of meetings are sometimes over-looked in the modern climate of unanimous written shareholder resolutions, comprehensive retrospective ratifications, and the liberal application of the “Duomatic principle”. The decision in East Asia Company Limited -v- PT Satria Tirtatama Energindo in the Bermuda Court of Appeal provides a salutary reminder that the devil is always in the details.
The facts of the case were complex but it is not necessary (or helpful) to give a detailed explanation of those facts in order to distil the essential take-away points contained in the reasoning of the Court of Appeal. Briefly, the case concerned an application to rectify the register following the purported removal of directors in the context of a contested share purchase transaction.
The Court of Appeal’s decision affirmed:
- A proper notice giving 14 days’ advance notice of a special general meeting to remove a director must always be given to the shareholders and the relevant directors. If not, the resolution, albeit passed by the unanimous consent of the shareholders, will remain ineffective [para 43]. Comment: It is always tempting to think that the shareholders are able to ratify any corporate action. This is one that cannot be ratified.
- A director must always declare his or her interest in a material contract or he or she may not be counted in the quorum of the board meeting and may not vote on the relevant resolution. A conflict of interest in this context means that a reasonable man looking at the facts and circumstances would think that there was a real sensible possibility of conflict (and not a theoretical or insubstantial conflict) [para 96]. Comment: The requirement to declare an interest in a material contract is more common that one might imagine, especially in closely held companies. There is a tendency to think that if everyone in the room (or on the phone) knows about the director’s interest, it is not a breach of the Act: au contraire, mes amis. It has the added twist that the failure to declare an interest in a material contract by a director is deemed to be dishonest, and this may impact the director’s indemnity and exoneration from liability (at least in so far as the relevant contract is concerned).
- The interest declared must be declared before the contract is approved [para 90] and may not be ratified afterwards without full disclosure of all relevant facts and circumstances to the board [para 98]. Comment: Again, it is tempting to think that the board can ratify a contract that was entered into without a declaration of interest, but in a case where a declaration has not been made, the transaction cannot be validly ratified without full disclosure to the board.
- Generally, no agenda need be circulated for the convening of a valid board meeting to consider any business that may lawfully or properly be decided by the board in the management of the business of the company. (This is in contrast to the notices convening a meeting of members which must describe the business to be dealt with at the meeting.) Thus, where there is an agenda circulated for a board meeting, there will arise an implied limitation that the only business to be conducted at that meeting is the business described on the agenda [para 82]. Comment: Beware. This may cause unexpected problems where the board members are not working harmoniously. A specific agenda may be a trap for the unwary. Where the chairman circulates a specific agenda (for all the right reasons) it may backfire if there is other business to be discussed which is not identified on the agenda because objection may later be taken to the consideration of business not specified in the notice. But take special note that in some companies, especially where there is shareholders’ agreement that regulates the rights of a minority shareholder, the bye laws may provide specifically that the notice of a board meeting must set out the business to be determined at the board meeting, and require a specific period of notice to be given.
- The expression “any other business” in the context of a board meeting was held to allow the board to determine any other business that could be lawfully be brought forward, (ie anything at all) which saved the day in the East Asia case [para 86]. Comment: By contrast, in the context of a members’ meeting, the expression “any other business” is normally restricted to any other business naturally arising from the business conducted at the meeting and not anything that anyone wants to raise in general.
- The board must ensure that any transfer of shares that it approves is expressly made subject to the receipt of foreign exchange control permission (where necessary). The majority of the Court of Appeal took a narrow view of the resolution that approved a transfer of shares and held that it was ineffective because the transfer required foreign exchange control permission which had not been granted at the date the transfer was approved. The Court of Appeal held that any such resolution must expressly provide that it was subject to the grant of foreign exchange permission being granted [para 154]. Kawaley AJA would have been prepared to differ on this point for practical reasons and would have been prepared to imply such a qualification on the resolution approving a transfer of shares. Comment: Kawaley AJA’s view was in the minority and since it was unnecessary to decide the point, he left it open for another day [para 184]. But practitioners and corporate service providers should take special care.
- Kawaley AJA also expressed the view (alone among the members of the Court of Appeal) that a distinction should be drawn between employee directors and other directors when assessing the extent of a director’s apparent authority. Kawaley AJA held that in a case where there were two employee directors of a company that holds a single asset, the apparent authority of the employee director is far narrower than in other cases. Comment: This is uncharted territory. Although the expression of this view is obiter dictum, it sounds a potential warning to the directors of holding companies (and those that deal with them) that “heightened scrutiny” must be given to their apparent (and actual) authority when dealing with the assets of the company [para 178]. In the writer’s view this is a proposition that is likely to give rise to uncertainty. It suggests that a third party is required to take into account the nature of the company’s business, the type of transaction and the composition of the board when assessing apparent authority. The legal principles relating to apparent authority are already well established, and they are intended to protect third parties from having to make detailed enquiry into the “indoor management” of the company. The Bermuda Companies Act 1981 makes no distinction between directors who are employed by the company (executive directors) and those who are not (non-executive directors). The general position is that where a transaction is within the capacity of the company, the transaction will bind the company if the counterparty was acting in good faith without notice of an irregularity. It is difficult to see why the court should create a new principle to the effect that a counterparty will be put on enquiry (or required to exercise “heightened scrutiny”) as to whether the board’s power is being exercised properly because the company only holds one asset, or that the relevant directors are employees of the company, and not shareholders.