Shareholder And Director Decision Making: Correcting Defective Decisions

A properly advised company will fulfil its legal obligations when making corporate decisions. However in many companies, decisions are made informally and are often not recorded. Whilst many everyday business decisions taken by directors and/or employees raise no questions of company law, in other cases strict legal formalities have to be observed, for example, giving correct notice of meetings and ensuring the relevant quorum is met, at board and at shareholder level. This article focuses on instances where the validity of company decisions has been challenged because legal formalities have not been complied with. As this article will illustrate, judicial response to such cases has been varied depending on who the legal formalities are considered to be there to protect.

Shareholder Decisions

In some companies, especially in small or family run businesses, decisions tend to be made in an informal manner and are often unrecorded. It was considered by the courts to be unfair that a lack of formality in this context should render decisions invalid so it was for this reason that the courts developed the "Duomatic" principle (deriving from a case involving a company, Duomatic Ltd). Under this principle the unanimous assent of shareholders has overriding authority and therefore is able to validate decisions made where the proper procedures have not been followed. There is no need for the shareholders to have given their agreement at the same time or place, or even in writing. Whilst the principle has not been codified in any legislation, it has been preserved by the Companies Act 2006 (the Act). Under the Act unanimous consent of shareholders can still be used to ratify the acts of directors.

The Duomatic principle has received mixed judicial treatment. The contrasting cases Re RW Peak (Kings Lynn) Ltd and Wright v Atlas Wright, decided within a year of each other, are examples of this.

Re RW Peak (Kings Lynn) Ltd [1998] B.C.C. 596

In Re RW Peak the validity of a buy-back of shares was challenged on the grounds that statutory procedure had not been complied with. The court held that complying with statute was not merely a technical exercise and stated that as the statutory buy-back provisions protect third party interests it would be inappropriate to allow shareholders to waive these third party rights.

Wright v Atlas Wright [1999] B.C.C. 163

In Wright v Atlas Wright the court considered the Duomatic principle in the context of shareholder...