Decision-making in a company is subject to certain formal requirements both under the Companies Act 2006 and under the company’s own articles of association.
For many companies, particularly small owner-managed businesses, decisions are often taken informally. Directors and shareholders may be the same people, discussions take place around a meeting table rather than informally convened meetings, and paperwork sometimes follows afterwards, if at all.
In those situations, the principle of unanimous shareholder consent can offer some protection against an allegation that the correct corporate procedures have not been followed.
Although companies continue to rely on informal unanimous consent, recent cases have confirmed that it is not a cure for every procedural defect or corporate failing. It can help where the issue is a missed formality. It cannot make an unlawful act lawful, replace consent from the right people, or fill gaps where the shareholders did not really understand or agree to what was being done.
So it remains useful to go back to the basics: what is needed for the “Duomatic principle” to apply, and when will it not help?
The Duomatic principle
The Duomatic principle is the shorthand used by lawyers to refer to the common law principle of decision-making by shareholders through informal unanimous consent.
The theory behind the principle is straightforward. If all shareholders who are entitled to vote on a matter agree to it, there may be little practical purpose in insisting on the formal procedures that would otherwise have been required.
There are four basic requirements:
- the act must be one which the company could lawfully do and which is not outside the company’s powers;
- all the shareholders who could have voted on the decision must consent;
- that shareholder consent must be fully informed; and
- there must be objective evidence that the shareholders assented to the particular act.
Those requirements sound simple. In practice they can be difficult to prove, especially where the company has been run informally, the shareholders’ roles are blurred, or the decision was never written down.
The act must be lawful and within the company’s powers
The Duomatic principle only applies where the shareholders could formally have authorised the act in question. It cannot be used to validate something which the company itself could not lawfully do.
Recent cases have confirmed this point. If a director causes a company to make payments for an unlawful purpose, such as to defraud HMRC, unanimous shareholder consent will not help. The same caution applies where a transaction may amount to an unlawful return of capital or an unlawful distribution.
This is an important distinction. Shareholders can approve many things, but they cannot authorise the company to act outside the law. Nor can they approve an act which is outside the company’s powers or which is not capable of being approved by them at all.
The decision also needs to be for the company’s benefit. That does not mean that every commercial decision must turn out well. But it does mean that the Duomatic principle should not be treated as a simple answer where directors have moved value out of the company for their own benefit or for a purpose which is not a proper company purpose.
When considering whether the Duomatic principle may assist, the first question should always be whether the underlying act is lawful and capable of approval by the shareholders. If the answer is no, the analysis ends there.
The consent must be unanimous
The Duomatic principle only applies where all shareholders who would have been entitled to vote on the relevant matter consent to it.
The requirement for unanimity can sometimes raise difficult questions where the legal owner of shares and the beneficial owner are different people. Recent cases have confirmed that, in some circumstances, the court may look at the consent of the beneficial owner where that person was in reality exercising the shareholder decision-making power. However, this is a fact-sensitive area and does not mean that beneficial owners can always be treated as standing in the shoes of registered shareholders.
In practice, disputes often arise as to whether all relevant shareholders agreed to the proposal. Companies seeking to rely on the principle should, therefore, be cautious before assuming that a broad consensus is sufficient.
The requirement is unanimity. It is not enough that a majority agreed, nor that one person thought they were entitled to speak for everyone. If the relevant shareholders did not all assent, the principle will not apply.
The consent must be fully informed
Even where all shareholders appear to have agreed, the Duomatic principle will not apply unless that agreement was properly informed. This can be a real issue where a director relies on informal consent after the event, or where the decision involved a conflict of interest or a transaction with the directors themselves.
A court will look closely at what the shareholders were told. A partial or misleading explanation may not be enough. The shareholders must also have a fair opportunity to absorb and understand the information, including why it matters for the decision they are being asked to approve.
This means that the safer course is to record the decision properly and to make sure the relevant information is clearly shared before the decision is made. The more significant the decision, the harder it will be to rely on vague discussions or assumptions.
The courts have consistently emphasised that informed consent is a fundamental part of the Duomatic principle and not just an optional extra.
There must be objective evidence of assent
The final requirement is often overlooked. The court must be able to identify objective evidence showing that the shareholders agreed to the relevant course of action.
Relevant evidence may consist of correspondence, discussions, conduct or a clear course of dealing between the parties. However, it is not enough simply to argue that the shareholders would probably have agreed or that they must have known what was happening.
The fact that consent can be informal does not mean that it can be assumed. Objective verifiability of a decision is necessary to avoid unacceptable uncertainty and potential abuse.
When the Duomatic principle cannot help
There are circumstances in which the Duomatic principle cannot provide a solution, regardless of what shareholders may have agreed.
As noted above, the principle cannot be used to validate acts that are unlawful or otherwise incapable of shareholder approval. It follows that shareholder consent cannot be relied upon to cure conduct that amounts to a fraud on the company, an unlawful return of capital or other conduct that the company itself could not lawfully undertake.
The principle is also unlikely to assist where a company is insolvent or nearing insolvency. In those circumstances, directors may be required to take account of the interests of creditors and the consent of shareholders cannot override duties that are owed to creditors.
Comment
The Duomatic principle remains an important and practical tool when seeking to cure procedural irregularities in a company’s management. This is particularly so for private companies whose affairs are often conducted informally.
However, there are clear limits to its application. It is not a substitute for checking the company’s powers, the Companies Act requirements, directors’ duties and the company’s financial position. The better course of action is still to comply with all required formalities in the first place.
The Duomatic principle may correct some procedural defects, but it is far from a cure for all transgressions.