Essay: Report on legal issues regarding desired company changes at an AGM

SUBJECT: 2018 Annual General Meeting (the “AGM”)
DATE: 29/11/2018
Dear Joanne,
Please see below for my conclusions regarding the 2018 AGM of Medal plc (the “Company”). The attached report contains both my understanding of the factual situation and my conclusions regarding the arising legal situations.
Review of Research
The re-election of Harjit and Clare at the 2018 AGM is likely to be blocked if the minority shareholders cannot be persuaded to alter their view and vote in Harjit and Clare’s favour. This is due to the dual voting procedure requirement, stipulated in the FCA Listing Rules. The dual voting procedure is the requirement that both a vote of the independent shareholders and a vote of the shareholders as a collective passes by ordinary resolution in favour of Harjit and Clare.
If the dual voting procedure fails, then there is the option of a re-vote.
A re-vote can be taken from 90 but not more than 120 days after the original vote. If the company still wishes for Harjit and Clare to be directors then there is still a rational and justified reason for entering into a re-vote. This is due to the fact that the re-vote has no requirement of a dual voting procedure. This means that the resolution is put to the vote the shareholders as a collective, to be passed by ordinary resolution. What this will mean is that due to the support of SDG Investments (SDG) and CMC Capital (CMC), the ordinary resolutions of the re-election of Harjit and Clare can be passed.
In the intervening 90-120 days between the AGM meeting and the re-vote Harjit and Clare may retain office until the day of the re-vote.
The positive steps the Company must take in order to fulfil any requirements and duties in the re-election of Harjit and Clare are dealt with in detail in the report under heading Legal Issue 1iv.
However, they can be summarised as follows:
Requirement to issue a specific circular regarding the vote for the re-election of Harjit and Clare.
Requirement for Harjit and Clare to be elected via separate resolutions, unless another resolution is passed to counter this requirement.
Any registration requirements as stipulated in the Companies Act 2006.
The prospective changes to the law surrounding corporate directorship can be found in the research report under Legal Issue 2. However, briefly, the change in the law will bring about the requirement that all directors of companies be natural persons.
This change will have an adverse effect on the Company and its relationship with ExCol Ldt as the Company must at some point in the future cease to be a corporate director of ExCol Ldt.
Advice
In light of the above procedure for voting in Harjit and Clare for re-election. The major drawback of the procedure is the waste of resources and time spent having to have a re-election.
It seems from the procedure that given the Company is serious on re-appointing Harjit and Clare, it is simply an inconvenience to have to go through two separate general meetings in order to enable the two of them to be retained as directors.
I suggest that the Company draft a letter to send to the shareholders stating the Company’s intention of appointing the two directors, and with that letter confirm that the Company has the support of both SDG Investments (SDG) and CMC Capital (CMC). It should be explained to the shareholders, in the circular needed under LR13.8.17R, the reasons for the Company’s choice of directors in Harjit and Clare. In addition it should be explained that regardless of the result of this dual voting procedure, it would be the Company’s intention to push for a re-vote, which would then be passed through SDG and CMC’s 52% support.
What this might do is persuade the shareholders to vote for Harjit and Clare in the dual voting procedure, to save themselves both the time and expense of a re-vote where the company is most likely to win. If this has a significant impact then Harjit and Clare could be re-elected in the AGM without the need of a re-vote.
It could be argued that that this might harm positive relationships between the Company and its independent minority shareholders who might believe that their opinions are not being not properly respected. However, it would still be prudent to notify the shareholders of the procedure now, so that positive relationships are not further damaged when their vote gets seemingly overridden in the re-vote.
In regards to the change in law surrounding corporate directorship, the provisions were meant to be introduced in October 2016. However, the BEIS (Department for Business, Energy and Industrial Strategy) has delayed the implementation of the section. And whilst BEIS insists it does intend to implement this prohibition, there is no set date at this time.
The Companies House business plan, published 5 April 2018, confirms that it will work in partnership with BEIS to implement s87.
At this point, any discussion surrounding exemptions has been limited. However, it was proposed in a questionnaire, dated 26 March 2015, that a company may only appoint a corporate director if all of the directors of the corporate director are natural persons and the law under which the corporate director is established requires certain details of the directors of the corporate director to be included in a publicly maintained accessible register.
If this exemption proves to be true, then provided all the directors of the Company are natural persons then the Company’s position, in regards to ExCol Ldt, would be maintained. This is, however, unclear and so the situation should be monitored for any updates regarding exemptions. In the meantime, the Company should consider how best to maintain ties with ExCol Ldt, should be exemption not be confirmed and the corporate directorship be declared void.
If yourself or Medal plc require any further assistance, please do contact me, especially regarding drafting any plans and procedures for the 2018 AGM.
Kind regards,
xxxxxx
RESEARCH REPORT
REF: xxxxx
CLIENT:   Medal plc (“the Company”)
MATTER:   The re-election of directors at the Company’s 2018 AGM, and prospective changes in law regarding corporate directorship.
DATE: 29.11.2018
ANALYSIS
Instructions
The purpose of this report is to research and assess, firstly,  the options available to the Company in retaining Harjit and Clare as directors. And secondly, the impact of the prospective changes to corporate directorship.
The Company wishes to re-appoint Harjit Bhandal (“Harjit”) and Clare Peach (“Clare”) as directors. The Company has the support of two large shareholders who hold a total of 52% of the Company’s shares. However, due to discontent among the minority shareholders the re-election of Harjit and Clare has been put at risk. Due to this, the Company would like advice on how best to further its goal of keeping both Harjit and Clare as directors.
The report will also touch on and assess the changes in the law regarding corporate directorship the likely effects it will have to the Company and its directorship of ExCol Ltd.
The report has not dealt with the following details:
Requirements concerning the details of the Company’s constitution
Rules surrounding nomination committees
Rules surrounding audit committees
Rules surrounding remuneration committees
Legal Issues
The report will deal with the following specific issues; it will:
Assess the possible issues likely to arise from the upcoming general meeting resolution in the vote for the re-election of Harjit and Clare. In particular it will assess whether:
there any way the re-election of Harjit and Clare could be blocked, and if yes;
If there is any possibility of a re-vote and what would its chances of success be?
What would happen to Harjit and Clare prior to any revote?
Regarding the above, should the Company take any positive action or comply with any other requirements concerning the re-election of Harjit and Clare?
Regarding the Company’s corporate directorship of ExCol Ltd, the report will assess whether:
there any proposed or upcoming changes to the law surrounding corporate directorship?
will these changes adversely affect the Company’s position in regards to ExCol Ltd?
CONCLUSIONS
Report into Legal Issue 1:
i. Is there any way Harjit and Clare’s re-election can be blocked.
This issue related to whether the re-election of Harjit and Clare could be blocked by the members, and force a result that adversely affects the Company’s wishes.
Under Model Article 21 all directors who (i) have been appointed by the directors since the last annual general meeting, or (ii) were not appointed or reappoint at one of the preceding two annual general meetings, must retire from office and may offer themselves for reappointment by the members.
Unless the articles, with clear language and unmistakable implication, limit a general meeting’s power to appoint directors members have an inherent power to appoint directors by ordinary resolution. This would seem to point to the fact that with both SDG Investments (SDG) and CMC Capital (CMC) owning over 50% of the voting shares, then the result of the election could be easily predicted.
However, as the Company has a premium listing on the London Stock Exchange it is governed by an additional set of rules. What this entails is that the Company is held by the UK Corporate Governance Code where
there should be a formal, rigorous and transparent procedure for the appointment of new directors.
Appointment should be made on merit, against objective criteria and with due regard for the benefits of diversity on the board (including gender).
In addition to following these principles, the Company must follow the Listing Rules (LR) under the Financial Conduct Authority’s (FCA) Handbook. Under the LRs, a Company with a controlling shareholder must have a dual voting structure for the election or re-election of independent directors so that they are separately approved by both the shareholders as a whole and the independent shareholders. This can be found in LR 9.2.2ER.
The FCA’s definition of a ‘controlling shareholder’ can be found in the Handbook’s glossary and defines it as a shareholder who controls 30% or more of the voting rights of the company.
Here, SDG Investments holds 40% of the shares of the Company and so is treated as a controlling shareholder. Following LR 9.2.2ADR, as the Company has a controlling shareholder it must have a constitution that allows the election and re-election of independent directors to be conducted in accordance with LR 9.2.2ER and LR 9.2.2FR
LR 9.2.2ER, establishes that it must adopt a dual voting structure. This is that the re-election of any independent director, here Harjit and Clare, by shareholders must be approved by both
the shareholders of the listed company; and
the independent shareholders of the listed company
The FCA defines independent shareholders as any person entitled to vote who is not a controlling shareholder. Thus, in order for Harjit and Clare to both be reinstated as directors of the company both votes must be passed. The first is that all the shareholders including SDG Investments must pass the resolution. This is of little concern as we know that SDG in conjunction with CMC’s support will pass this resolution. The second vote will consist of all the shareholders excluding SDG. From our current knowledge of the discontent among the minority shareholders it seems that this resolution is unlikely to pass.
This would mean that, as it seems unlikely that both resolutions will be passed, there is a real possibility that the re-election of Harjit and Clare could be blocked.
ii. Is there any option of a re-vote; and if so, why would the Company wish to call one if members opinions are unlikely to be swayed.
If the resolution to re-elect Harjit and Clare fails under the process details in LR 9.2.2ER, then following LR 9.2.2FR, if the Company still wishes to propose Harjit and Clare as independent directors the Company could propose a further resolution to re-elect the proposed directors. This resolution must be voted on within a period of 90-120 days of the original vote, and be approved by the shareholders of the Company
This means that if the Company should want to keep Harjit and Clare, then 90 days after the AGM a second vote may be carried out where there is no requirement to have a dual voting structure. This means in this secondary vote, it is likely that Harjit and Clare will be re-elected as independent directors, assuming the Company has the continued support of SDG and CMC.
iii. What would happen to Harjit and Clare prior to any revote?
Under LR 9.2.2DG, any director who is being proposed for re-election may be allowed by the Company to remain in office until any resolution required by LR 9.2.2FR has been voted on. This means that in the intervening 90-120 days between the LR 9.2.2ER vote and the LR 9.2.2FR vote, Harjit and Clare may remain in office.
iv. Should the Company take any positive steps in order to comply with any other requirement in the re-election of Harjit and Clare
Yes, these are as follows:
1. A requirement to issue a specific circular regarding the vote for the re-election of Harjit and Clare
As the Company has a controlling shareholder, shareholders must receive a circular relating to the re-election of Harjit and Clare. According the LR 13.8.17R this must include:
Details of any relationship Harjit or Clare has or has had the Company, its directors, SDG or any associate of SDG or a confirmation that there have been no such relationships, transactions or arrangements, and;
A description of
why the the Company considers the proposed independent director will be an effective director
how the the Company has determined that the proposed director is an independent director
the process followed by the Company for the selection of the proposed independent director.
2. A requirement to have separate resolutions dealing with the re-appointment of Harjit and Clare
It should also be noted that two directors cannot be appointed by a single resolution, and so the re-election of Harjit and Clare should be dealt with with separate resolutions being proposed at the general meeting. If the Company wishes to propose both directors in a single resolution it must gain permission to do so through a separate resolution.
3. The Company must ensure it is compliant with any Company Act registration
Lastly, if the re-election of Harjit and Clare is confirmed then the Company must ensure that it’s register of directors is up-to-date and is available for inspection at its registered office, or SAIL. It must also ensure that the particular details of each director is up to date this will include:
name and any former name
service address
country or state in residence
nationality
business occupation
date of birth
And in addition the directors residential address must be checked to be accurate. If any changes are found in the directors details then the Company should submit form CH01, with the change of the directors details within 14 days of the change.
Report into Legal Issue 2:
Are there any proposed or upcoming changes to the law surrounding corporate directorship.
The law surrounding corporate directorship is due to be changed. Under s87 Small Business, Enterprise and Employment Act 2015 (SBEEA), s155 of the Companies Act is revoked and the new s156A-C of the Companies Act 2006 is commenced.  However, the law will change from a day to be appointed under SBEEA s164(1) and as of yet no such date has been appointed.
The Companies Act 2006 (CA) has been prospectively amended in anticipation of this appointment date and as such the change of law can be seen in s156A-C CA.
Under s156A CA there is a prospective requirement for each director of a company to be a natural person. However, under s156A(2) this requirement will not prohibit the office of director being held by either a corporation sole or otherwise by virtue of an office.
If a purported appointment is made in contravention to s156A after the appointment date then the company purporting to make the appointment, the body corporate being purported appointed, and every officer of a person within the aforementioned company and body corporate who is in default will be liable for a fine under s156A(7)
Under s156B the Secretary of State reserves the right to provide for exceptions from requirement that each director be a natural person. However, as none as so far been provided, then there are no operating exceptions.
Lastly, any existing director who is not a natural person who is still a director the day after the end of the period of 12 months beginning with appointment date ceases to be a director. On that date the company must make the necessary consequential alteration in its register of directors and give notice to the registrar of the change.
As can be seen from the above the are considerable changes proposed to the law surrounding corporate directors.
Will the changes adversely affect the Company’s position in relation to ExCol Ldt?
From the above, it appears that the proposed changes will adversely affect the Company’s position in relation to ExCol Ldt. This will be contingent on there being no exemptions provided by the Secretary of State that work to protect the Company’s interests but working on the assumption that there will be no such protection from any exemption, it follows that after 12 months from the appointment date of s164(1) SBEEA the Company will lose this relation with ExCol Ldt.
PRIMARY SOURCES
Companies (Model Articles) Regulations 2008 (S.I. 2008/3229)
Sch 3: Model Articles for Public Companies
Article 21 Retirement of directors by rotation
Commencement of these sections, for purposes relevant to this report, was as follows
1 October 2009           Article 21, sch. 1 para. 1.
Companies Act 2006
s160 Appointment of directors of public company to be voted on individually
s162 Duty to keep a register of directors
s162(3) Register must be available for inspection.
s163 Particulars of directors to be registered
s165 Register of directors residential addresses
s167 Duty to notify registrar of any changes
s156A Prospective requirement that all directors be natural persons
s156B Ability for the Secretary of State to create exemptions to the rule in s156A
s156C All corporate directors who are still corporate directors will cease to be such 12 months after the appointment date of s156A
Commencement of these sections, for purposes relevant to this report, was as follows:
1 October 2007: ss160 SI 2007/2194, art 2(1)(d).
1 October 2009: ss162, 163, 165  SI 2008/2860, art 3(i)
To be appointed ss156A-C, SBEEA 2015 s162
Members power to appoint directors
Worcester Corsetry Ltd v Witting [1936] Ch. 640 sources the inherent power of members to appoint directors. Integrated Medical Technologies Ltd v Macel Nominees Pty Ltd (1988) 13 ACLR 110 qualifies this power with the stipulation that this power continues unless the articles, with ‘clear language and unmistakable implication’ limits this power.
UK Corporate Governance Code (The Financial Reporting Council Limited 2016)
Main Principle B.2 There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
Supporting Principle B.2   The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender
Commencement of these sections, for purposes relevant to this report was as follows
Applicable to accounting periods beginning on or after 17 June 2016
Financial Conduct Authority Handbook, Listing Rules
LR9.2.2ADR Stipulation that where a listed company has a controlling partner it must also have a constitution that allows the election and re-election of independent directors to be conducted in accordance with LR 9.2.2ER and LR 9.2.2FR (election provisions).
LR9.2.2ER Provision for dual voting procedure
LR9.2.2FR Provision for re-voting
LR9.2.2DG Provision that where a company is waiting for a re-vote a director may stay in office during the interim period.
LR13.8.17R Details to be included in any circular relating to the election or re-election of an independent director where the listed company has a controlling shareholder.
Commencement of this section, for the purposes of this report was as follows
1st May 2014 LR9.2.2FR, LR13.8.17R FCA 2014/33: Listing Rules (Listing Regime Enhancements) Instrument 2014
8th June 2018 LR9.2.2ADR, LR9.2.2ER, LR9.2.2DG FCA 2018/27: Listing Rules (Sovereign Controlled Commercial Companies) Instrument 2018
Small Business, Enterprise and Employment Act 2015
s162 Specifies appointment date of s156A-C Companies Act
Commencement of this section, for the purposes of this report was as follows
Specified date: 26 March 2015
COMMENTARY
I used the following commentary to support my research and to ensure that it was up to date:
NOTES
The UK Corporate Governance Code 2016, which sets standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholder is due to be replaced by a new 2018 version which takes effect from 1 January 2019.
TIME TAKEN
Research: 145 minutes
Reporting: 125 minutes
Email: 35 minutes