When is a board meet­ing not one?

A re­cal­ci­trant mem­ber can frus­trate the process, and the Com­pa­nies Act is no help

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - DAVID PIN­NOCK

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...



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