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.

Here we look at the importance of properly held board meetings:

Quorum

It is vital that a board meeting is held in accordance with 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 transaction being considered, to the extent that it is likely to give rise to a conflict of interest, they will have to declare the nature and extent of that interest to the other directors[1], and, under the articles, may not be permitted to vote on the transaction in which they have an interest 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 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

A recent case reminded us about this. In the case in question, the two directors of the company were a husband (H) and wife. They were also shareholders in the company, along with a pension trust scheme of which they were the beneficiaries. It was proposed that the company sell the property from which it operated to H, and that he would then lease the property back to the company. This transaction was considered and approved in a set of board minutes signed by H. However, when the company later went into administration, this transaction was called into question, and it was found that in fact the meeting itself was never held. Instead, H instructed his solicitors to draft the relevant documentation, including the minutes, and then signed them himself.  Even if the meeting had taken place, H should have declared his interest in the transaction, and, in accordance with the company’s articles, wouldn’t have been permitted to vote on it. Given that the company’s articles required a quorate of two for any valid meeting to be held, the wife herself would not have been able to approve the transaction, even if she had been present.

Duomatic

To address this, H argued that the other shareholders, his wife and the pension scheme, had unanimously informally either approved or acquiesced both H voting at the meeting, counting in the quorum and executing the board minutes by virtue of the Duomatic principle[2], and therefore the transaction was valid. This argument was dismissed as, even if he could act on behalf of his wife, there was no evidence that he had the authority to speak for the professional trustee of the pension scheme, nor that the trustee was aware of the proposed transaction.

As a result, the transaction was declared void, and H was found to be holding the property on trust for the company, and was liable to restore it to the company and pay compensation equal to the amount of rent credited to him.

Hold the meeting

This case serves as a reminder that board minutes, rather than being merely ancillary documents that can be signed along with other transaction documents, must 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 quorate and declarations of interest in particular are checked and documented appropriately.

It is worth noting that, had the transaction been with a third party in good faith, then they likely would have relied upon protections in the Companies Act.