I was recently asked to
advise on some new Articles of Association a client company proposed to
adopt. When I asked about the Special
Resolution of the shareholders to adopt the new Articles, I was told the
Directors intended to agree them at their next Board meeting and they thought
it was just "a paperwork exercise".
Well it usually is, but I do try to get the paperwork right. I advised that the necessary resolution
should be passed by a 75% majority at a General Meeting convened for the
purpose or by circulating a Written Resolution for signature. However, it turned out that there were only a
small number of shareholders, all of whom were on the Board of Directors. As a recent case illustrates, the
"Duomatic principle" would in fact have validated the client’s
informal procedure. So did I really need
to bother with the correct, formal advice?
It is a well-established
principle of company law that where all shareholders who have a right to attend
and vote at a general meeting of the company assent to some matter which a
general meeting of the company could carry into effect, that assent is as
binding as a resolution in general meeting would be (Re Duomatic Ltd [1969] 2 Ch 365).
There are a number of cases where amendments to the Articles of
companies have been held valid in this way, despite a lack of the formalities
prescribed by the Companies Act.
The recent case of Randhawa & Ors v Turpin & Anor [2016] EWHC 2156
(Ch) is a good illustration of just how far the Duomatic principle can
go. 75% of the shares in the company
were held by the sole Director as nominee for his father, who was disqualified
from acting as a director, with the remaining 25% being registered in the name
of an Isle of Man company which had been dissolved in 1996. The sole Director had purported to hold a
Board meeting at which he had appointed Administrators. But the Articles provided that a sole director
only had power to convene a general meeting or appoint an additional director. A creditor (which had taken an assignment of
the debt owed to the company’s solicitors) challenged the validity of the
appointment of the Administrators.
However this was only after they had lost at a previous hearing seeking
to challenge the amount of their fees, when they had not taken this point, so
the judge was unsympathetic, saying that at best this smacked of abuse of
process.
But he decided the case on
the Duomatic principle. From 2009 to the
appointment of the Administrators in 2013 both the disqualified father (who was
the beneficial owner of 75% of the shares and in reality in control of the
company) and the son (who was sole director and registered holder of the 75% shareholding at the time) had acquiesced in the son exercising the full powers of the Board
of Directors. The father had also
acquiesced in the appointment of the Administrators, though not actually
present at the meeting appointing them. This
was held to be an effective variation of the Articles under the Duomatic
principle to allow the sole Director to appoint the Administrators. The 25% shareholder did not count because it
had been dissolved, and so was unable to exercise its voting rights.
The Duomatic principle can be
very useful to cure formal defects in procedure where the reality is that all
the shareholders whose formal consent was needed had agreed to the matter. But to go back to my original question, why
bother with the formalities then?
Update: on 1 August 2017 the Court of Appeal allowed an appeal against the decision of the High Court in Randhawa v Turpin, disagreeing that the dissolved 25% shareholder could be ignored. It remained a member of the company (despite not existing) and could not have given its informal consent when it did not exist. Which supports my original point, that it is best to get the formalities right in the first place.
