As the constitutional make-up of a company, the articles of association are the starting point for determining the procedural formalities of directors’ meetings and shareholders’ meetings alike.
However, what happens if the criteria is not met?
This issue was considered by the High Court in the recent case of Randhawa v Turpin [2016] EWHC 2156 (Ch), in which the appointment of administrators was challenged on the grounds that the company’s sole director was incapable of forming the required quorum of two directors, as set by its articles of association. In determining the appointment was valid, the court applied the principle enshrined in the earlier case of Re Duomatic Ltd [1969] 2 Ch. 365.
In brief, the Duomatic principle is the authority granted by informal, unanimous shareholder consent. In other words, directly from the Duomatic case, if “all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, the assent is as binding as a resolution in general meeting”. Such consent can be regarded “as being tantamount to a resolution of a general meeting of the company.” Importantly, the agreement of non-voting shareholders is not necessary.
In the case of Randhawa v Turpin, the facts showed both a meeting of the directors or the shareholders required at least two persons present to form a quorate meeting. However, there was only a sole director (whose power was, on the face of it, limited to appointing a second director) and he was also held 75% of the company’s share capital (held to be on bare trust for his father as the beneficial owner). In respect of the remaining 25% of the share capital, the court found “there was no-one who could in practice exercise any of the voting rights attached to the shares” because the registered shareholder was, in fact, a dissolved company. This meant the majority shareholder was “the sole registered shareholder at the material time”.
It was agreed the decision to appoint the administrators was not carried out in accordance with the company’s articles of association. The father’s input, acting as a de facto director (e.g. a person who acts as a director, but without having been validly appointed), was disregarded on the basis that he was, in any event, disqualified from acting as such. However, it was argued the conduct of the business “operated as a variation of or departure from the Articles authorising a sole director to do everything which a board of two directors might do.”
The court determined “the acquiescence or consent of the 75% shareholder alone” should be “sufficient to trigger the Duomatic principle.” The actions of the director were, therefore, informally sanctioned by the shareholder, although in the court’s view it was unnecessary to determine whether it was the registered shareholder’s or the beneficial shareholder’s consent that mattered because both acted in agreement. The court nevertheless suggested that, in a bare trust, “there is much to be said for the view that the wishes of the beneficial owner are those that count”. Interestingly, the court also considered that, in the event the registered owner cannot vote due to a disqualifying feature, “the acquiescence or consent of the beneficial owner is still sufficient”.
Despite finding there was only one shareholder, the court considered the quorum requirements of the company’s articles of association could be waived. Beyond that, the court took the view if a shareholders’ meeting is not necessary “then it is difficult to see why that non-meeting should be subject to any formal requirements, whether as to quorum or otherwise”.
This case is a useful reminder of the flexibility offered by the Duomatic principle. Many companies operate, intentionally or not, in such an informal manner from time to time, or even on a regular basis. While your articles of association remain the fundamental pillars of your business, it is worthwhile bearing in mind the common law has developed numerous principles over the years that might also apply.
