Directors manage a company, while shareholders are the owners of the company. The shareholders entrust the oversight of the company to the directors. Subsequently, they have little say in the day to day operation of the business. For this reason, the law imposes duties on directors to ensure that they responsibly manage the company in the interest of the shareholders and other stakeholders. The directors’ decisions impact the shareholders, particularly when the decisions  relate to dividends and the value of shares.

Directors’ make decisions through passing resolutions at board meetings. In board meetings, directors must ensure they comply with their duties provided by the Corporations Act 2001 (CA), company constitution and the shareholders agreement. This article sets out the rules regulating board meetings and the best ways to avoid breaching directors’ duties.

Directors’ Duties

Directors have various duties to shareholders and, in the case of insolvency, to creditors. These include the duty to:

  1. act in good faith;
  2. exercise care and diligence;
  3. avoid and disclose conflicts of interests; and
  4. keep proper accounts and records.

Additionally, directors have the duty not to:

  1. abuse a corporate opportunity;
  2. improperly use their position or information; and
  3. engage in insolvent trading.

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Duties and Decisions in Practice

The board of directors come together to make collective decisions about the company. Broadly speaking, the board is responsible for the direction of the day-to-day business of the company. In contrast, the executive team is responsible for the operation of the business and the implementation of the key decisions made by the board.

In practice, the board’s functions include:

  • directing the company and overseeing the performance of the senior executive team. The board monitors the business through its executive team. The executive team need to report on the company’s performance to the board;
  • deciding on the business’ strategy and direction. Typically, the senior executive team will develop proposals that require board approval. These proposals may include major plans of action, annual budgets and resolving on major expenditures or loans;
  • appointing and removing members of the senior executive team. The board will also decide on the members’ remuneration, or refer this to a sub-committee of directors;
  • giving the shareholders a voice in directing the business. Most of the time, shareholders appoint directors and therefore expect that the directors will represent their interests;
  • avoiding or resolving conflicts of interests between the board of directors and the company; and
  • familiarising themselves with the business’ accounting and financial reporting systems. This involves ensuring that effective methods of control and audit are in place so the company does not trade while it is insolvent.

The CA specifically reserves some decisions for the general meeting of shareholders, including:

  • changing the company’s name;
  • altering the constitution; and
  • approving the buy-back of shares.

Scheduling Directors’ Meetings

Setting a requirement for regular directors’ meetings in the company constitution or shareholders agreement is common. For example, directors may decide to meet two or four times per year. 

An individual director may also request a directors’ meeting by providing notice to the other directors. For example, if a director would like to discuss the executive team’s performance, they may decide to convene a meeting. It is best practice to provide written notice.

The company constitution may specify the notice period. However, if it does not, then reasonable notice is sufficient. What is reasonable depends on the context. Once a director attends the board meeting, they waive the right to notice, even if there was no reasonable notice.

To comply with directors’ duty of due care and skill, it is best to provide an agenda of the items that the meeting will cover. It is common to circulate the notice and agenda to all the directors before the meeting.

Running the Board Meeting

A chairperson must run all board meetings. The chairperson is an existing director who the board appoints. The chair’s role is to run the meeting effectively by:

  • giving all directors a chance to set out their position; and
  • facilitating constructive discussion to achieve resolutions that are in the best interest of the company.

For a board meeting to validly pass resolutions, a quorum must be met. This means that a specified minimum number of directors must attend. Usually, a quorum is 50 per cent of directors, but can be different depending on what is set out in the company constitution or shareholders agreement.

Directors’ attendance can be physical or facilitated through technology, like a video or conference call. It is important to ensure that using technology does not limit directors’ active participation in the meeting.

Passing Resolutions

The directors need to discuss each proposed resolution, then vote on it.  There are three types of resolutions:

  1. ordinary;
  2. special; and
  3. unanimous.

An ordinary resolution is agreed to by over 50 per cent of directors present at the meeting, while a special resolution is agreed to by over 75 per cent of directors present at the meeting. As the name suggests, a unanimous resolution is agreed to by all of the directors present at the meeting.

The constitution and shareholders agreement set out items that need to be resolved by special or unanimous resolution of the board or shareholders. These items will generally be set out in a critical business matters schedule at the end of the shareholders agreement. Critical business matters, which require a special or unanimous resolution of directors, may include:

  • appointing or removing a director;
  • adopting a business plan and budget for the company;
  • capital expenditure over a certain amount;
  • commencing a claim; and
  • issuing securities.

Record Keeping

Directors must keep a record of their meetings as evidence:

  • that a meeting occurred; and
  • of the topics of discussion.

The minutes must be kept at the company’s registered office. Practically, it is often useful for the company secretary to read out the meeting’s resolutions at the end of the meeting to ensure consensus. Minutes are kept and should be signed within a month of the meeting.

While minutes of shareholders meetings must be available to shareholders, this is not the case for the minutes of board meetings. This is so the board of directors can discuss matters openly without fear of repercussions from shareholders.

Other Types of Resolutions

Where there is only one director, a resolution can be passed by recording the resolution and signing the record. In contrast, if a director meeting cannot be convened, a circulating resolution may be prepared and circulated amongst the directors. If all directors sign the resolution, then the resolution is considered ‘passed’ when the last director signs.

Circulating resolutions must be used with caution to avoid breaching the directors’ duties of due care and skill. Where there is a difference of opinion or where the matter is significant, it best practice to create an opportunity for discussion by convening a meeting.

Consequences of Non-Compliance

If a company does not comply with the rules to conduct a meeting or does not obtain the required vote, then the resolution may not be valid. Further, the regulations around holding meetings are there to ensure that the board of directors adheres to its broader director duties. If a company is wound up through a board or voluntarily wind up, the liquidators may consider directors’ actions.

As a general rule, only the assets the company holds are at risk of recovery. However, if directors breach their duties, they may be personally liable for the damage.

In the event of a breach of directors’ duty, it is common to inform the Australian Securities and Investments Commission (ASIC). ASIC may conduct an investigation, resulting in legal action against directors for breaching their duties.

Key Takeaways

If you are a company secretary or director, it is important to be familiar with the law and documents that govern the board of directors. Where directors do not follow these rules, the resolutions they make may be invalid. Subsequently, the directors’ assets could be at risk.

If you have any questions about interpreting your company’s constitution and shareholders agreement or conducting board meetings, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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