The importance of properly held board meetings

Board meetings, and minutes documenting these meetings, are often considered a minor part of business transactions, yet failure to properly hold board meetings can have significant implications for a company and its directors. In this article we look at the importance of properly held board meetings.

Quorum

It is vital that a board meeting is held in accordance with the company’s constitutional documents. The articles of a company typically empower its directors to collectively exercise all powers of the company and usually require properly convened board meetings to be held in order to exercise many of these powers.

The articles will specify a procedure for convening and conducting the meeting, including the number of directors that must be present (a quorum). In some circumstances, however, a director may not be entitled to be counted as part of that quorum. If a director has an interest in a proposed transaction with the company, they will have to declare the nature and extent of that interest to the other directors, and, under the articles, may not be permitted to vote on the transaction or to count in the quorum for the meeting to be validly held. If there are not enough remaining directors to form a quorum under the articles, it may be necessary to hold a shareholders meeting.

Minutes

The company is legally required to keep minutes of all board meetings. These minutes should accurately record all resolutions and decisions, and preferably contain some indication of the facts that the directors took into consideration when reaching those decisions.

From a financing perspective, lenders will usually require board minutes to be provided as evidence that directors have held a properly convened board meeting in which they appropriately considered the documents that they are entering into, the obligations that the company will incur as a result of entering into the documents, and the commercial benefit to the company of entering into the documents. These board minutes can be used as evidence that the directors intended to be bound by the documents and acted in accordance with the articles of the company in reaching that decision. If a transaction is challenged at a later date, they can also be useful evidence of the thoughts of the directors at the time. Sometimes benefit can be clear when entering into a transaction but, with hindsight, that benefit can be harder to identify.

The meeting that never was

Of course, for board minutes to accurately reflect the decisions taken at a meeting, that meeting must have actually taken place.

There may be a temptation, particularly when a company’s board consists of a small group of related individuals, to assume that board level decisions can be taken “informally” (without holding a properly constituted board meeting) and subsequently drawing up board minutes to reflect a meeting that never took place. This temptation should always be resisted. As shown by many of the cases on this issue, failing to obtain proper board authorisation for corporate transactions are likely to result in adverse consequences for those involved.

In one particular case, Dickinson v NAL Realisations (Staffordshire) Ltd, the directors of a company were a husband (H) and his wife (W). H and W were also shareholders in the company, along with a pension trust scheme of which they were the beneficiaries. Over several years, H entered into various transactions with the company, including his purchase of a factory from the company for less than market value. This transaction was considered and approved in a set of board minutes signed by H. However, when the company later went into administration, the transaction was questioned and it was found that the board meeting had never actually taken place. Instead, H instructed his solicitors to draft the relevant documentation, including the minutes, and then signed them himself. The court held that the factory sale to H had been made without authority and should, therefore, be unwound. As a result, H held the property on trust for the company and was liable to restore it and to pay compensation.

Even if the meeting had taken place, H should have declared his interest in the transaction, and, in accordance with the company’s articles, would not have been permitted to vote on it. Given that the company’s articles required a quorum of two for any valid meeting to be held, W would not have been able to approve the transaction by herself, even if she had been present.

Can ‘Duomatic’ help to save unauthorised transactions?

Where a company’s board has not formally authorised a transaction, the transaction may still be saved if the shareholders have approved it. Formal shareholder approval will usually be given by resolution in a general meeting or by written resolution. However, informal shareholder approval may be sufficient if all of a company’s shareholders agree (and if other conditions are met). This principle of informal approval is known as the ‘Duomatic principle’.

Relying on the Duomatic principle to authorise a transaction is, again, a very risky prospect, particularly as the principle will not apply in all circumstances. In the Dickinson v NAL Realisations case, H argued that the factory sale was validly authorised as the other shareholders – W and the pension scheme – had unanimously informally approved it. The court disagreed and found that the requirements for Duomatic had not been met. In particular, W could not recall whether the factory sale had ever been mentioned to her. It was irrelevant whether she would have approved the transaction had she known about it. For Duomatic to apply, actual and unqualified approval was required. Also, in relation to the pension scheme (the third shareholder) there was no evidence that the professional trustee or the trustees acting together had approved the factory sale.

Belt and braces?

As stated above, all significant transactions should be approved by a company’s board, either in a duly convened board meeting or (if the company’s constitution allows it) by written resolution. This is particularly important if the transaction is with a director.

Board minutes are not just ancillary documents that can be signed along with other transaction documents but should be a true reflection of the board meeting that has actually been held in accordance with the company’s articles. Lawyers must liaise with their clients to ensure that any issues with quorum requirements and declarations of interest in particular are checked and documented appropriately.

In specified cases, the Companies Act 2006 will require the board to seek shareholder approval before entering into a transaction (e.g. where the company is buying a substantial non-cash asset from a director or is proposing to make a loan to a director). However, even when this is not required, it may sometimes be worth obtaining formal shareholder approval for a transaction in addition to formal board authorisation. It may be particularly useful for shareholders to “bless” a transaction in this way where there is any doubt as to the commercial benefit to the company of entering into the transaction.