When is a board meeting not one?
A recalcitrant member can frustrate the process, and the Companies Act is no help
MANY board meetings are frustrating, for a wide variety of reasons. However, this article is intended not to give any guidance as to how to cope with the frustrations of your fellow directors’ obtuseness, but rather to deal with the more interesting situation of where a recalcitrant board member is frustrating the holding of board meetings. It will also touch on frustrations created by the obtuseness of provisions such as section 73(1) of the Companies Act, 2008.
Section 73(1) of the act provides that:
“(1) A director authorised by the board of a company
(a) may call a meeting of the board at any time; and
(b) must call such a meeting if required to do so by at least (i) 25% of the directors, in the case of a board that has at least 12 members; or (ii) two directors, in any other case.”
Now posit a situation where a private company has two shareholders. The good and noble holder of the majority of the issued shares — we will call him our client — and the other guy, the degenerate and sly holder of a minority shareholding, whom we will refer to as the “bad guy”. The memorandum of incorporation of this company provides, as many would do in these circumstances, that a valid board meeting requires that a quorum includes a director elected as the nominee of each of our client and the bad guy, but that if that quorum is not present the meeting will stand adjourned for a week and the directors present at the adjourned meeting will constitute a quorum. Assume further that the same quorum is required for a “round robin resolution” contemplated in section 74 to be passed (that is, a resolution of directors acting other than at a meeting).
Now assume that the bad guy and our client have fallen out, and the bad guy has decided to make life difficult for his fellow shareholder and directors. Accordingly, he stops responding to attempts to communicate with him and no longer attends board meetings.
Should our unhappy hypothetical company now require the passing of a board resolution, it finds itself facing a dilemma.
If a board meeting can be called, then the meeting will stand adjourned for a week and our client’s nominated directors will pass the required resolution a week later. Irritating, but a solution at least.
However, can a meeting be called at all? Section 73(1) allows for a director “authorised by the board of a company” to call a meeting, and obliges him to call a meeting in the circumstances contemplated in (1)(b). But what if no director has been authorised by the board to call meetings? Assume, along with our steadily growing legion of assumptions, that our client did not have
it is no good reflection on the act if it requires that level of detailed Machiavellian forethought in drafting a memorandum of incorporation to enable a company to do something as everyday as call a board meeting
the foresight at a previous board meeting to authorise a specific board member to call meetings. In making that assumption, do not judge our client too hastily for his lack of foresight — not many boards would have foreseen the need created by section 73(1).
Logically, it could also be asked whether any board meeting could ever have been held. The board needs to authorise someone to call a board meeting, which can only be called by someone authorised by the board, which cannot have had a meeting without someone having been authorised to call the meeting. And so on.
Perhaps this tiresome loop can be avoided if the memorandum of incorporation of the company authorises a certain director to call a board meeting (on the basis that this is the equivalent of being authorised by the board as all of the directors are bound by the memorandum of incorporation).
However, please remember that our bad guy is, in fact, a bad guy. He is unfriendly and looking for an excuse to have a fight. He is now presented with an opportunity to argue that such a provision in the memorandum of incorporation does not constitute the board authorising a director. The act requires (so this argument runs) that the board authorises a director, having first carefully considered and debated the matter and having placed that authority in the hands of one of their number deemed worthy. Now, this argument is by no means a sure-fire winner, but it is an argument, and enables our “frustrator” to frustrate.
As an aside, it is no good reflection on the act if it requires that level of detailed Machiavellian forethought in drafting a memorandum of incorporation to enable a company to do something as everyday as call a board meeting.
Despite the relatively clear wording of the provision, surely this cannot have been the intention of the legislature?
A solution would perhaps be to take the view that the section is not restrictive, but rather is intended to cover a situation where no other method was provided in the memorandum of incorporation for the calling of board meetings. This argument would hold that while a director authorised by the board may call a meeting, the section would not prevent someone else (the company secretary, a director, someone, anyone) from being able to call a meeting. This of course again leaves the door open for our bad guy to start another long-winded dispute process. While litigators must also eat, this sort of thing gets lawyers disliked.
There are two further options, both of which provide self-evident opportunities for our bad guy.
One is to approach the Companies Tribunal and ask for an administrative order exempting the company from the relevant provision in terms of section 6(2) of the act. The other is to call the meeting and rely on common law principles regarding the authority of directors acting outside of the usually more formal requirements of board proceedings.
The better approach would seem to be to take the view that section 73(1) is not restrictive and to have the company’s memorandum of incorporation provide that any director can call a board meeting, as an empowering provision in addition to what is set out in section 73(1).
And all this just to call a board meeting...