A usual occurrence for practicing corporate lawyers, as well as persons involved in the day-to-day running of companies and corporations, is an enquiry from shareholders to the effect whether they can propose the appointment of directors which they think best to act as such.
Depending on the facts of each situation, such an enquiry might be easy to resolve, or turn out to be one of the most complex questions to which a reply must be given. This is due to the fact that numerous considerations need to be taken into account, a careful drafting of any Notice and/or proposed resolution needs to be considered.
The question will typical arise once a Notice is received for a Shareholder’s Extraordinary General Meeting and/or Annual Meeting, which shall also concern the election and/or re-election of directors in a Company. Is such a Notice sufficient and general enough to provide for a power to the members of the Company to propose for new directors to be appointed (whether such new persons are replacing current directors, or are additional directors to be appointed).
If the above is being considered, the below issues should be examined:
- Do the Articles of the Company contain any special provisions requiring notice (and/or special notice) to be given with regards to any proposal to appoint a new person as a Director? If the answer is in the affirmative, the proposing shareholder shall need to ensure that any such provisions are complied with.
- In the event that the Articles of the Company distinguish between “ordinary” and “special” business, and the election of directors is within the definition of ordinary business, such business can be considered even if not referred to in the notice of meeting. However, if it is defined as special business, then the notice must set out the general nature of the business. It is note that some Articles provide that the election of directors in place of those retiring is ordinary business while the appointment of additional directors is special business. If that is the case, additional directors could not be appointed unless the notice has specifically referred to such business. If no distinction is made in the Articles between ordinary and special business, the notice must set out the general nature of the business.
- The wording of the Notice of meeting is very crucial, and such wording shall need to to be examined to see whether the appointment of the shareholders’ nominee as a director falls within the scope of the Notice.
- Another provision which is typically included in the Articles of the Company, is the provision fixing the maximum number of directors permitted to sit at the Board. This is highly relevant where there is a proposal to appoint additional directors (not only re-appointments or filling in vacancies), and the Members need to ensure that they do not exceed such maximum number.
In Betts v MacNaghten (1910) 1 Ch 430, the Court indicated that Ordinary Resolutions can be amended whether or not the text of the resolution, or merely the general nature of the business, is set out in the notice. More specifically, the Court upheld that that the notice of meeting, which set out the names of the proposed directors, was sufficient to enable unnamed directors to be elected in place of or in addition to the named directors, since a reasonable shareholder on reading the notice would realise that those nominated might not be elected and therefore others could be put up in their place. However, it is important to note that the notice in that case stated that the meeting was to consider and, if thought fit, pass the resolutions “with such amendments and alterations as shall be determined upon at such meeting“; such wording clearly left room for alterations and amendments and expressly gave the right to the shareholders to proposed for such alterations prior to voting on the resolution.
In Choppington Collieries v Johnson (1944) 1 All ER 762, the Court of Appeal emphasised that the question of the scope of the notice of meeting will turn on the construction of the notice in any given case. In the said case, the Notice contained the general phrase “…to elect directors”, and, given the generality of such wording used, the Court held that such Notice was wide enough to permit the election of new directors (always up to the maximum allowed under the provisions of the Articles). The Court when on further to state that the generality of the phrase “to elect directors” can be construed to mean the appointment of more than one director, irrespective of the fact that the Notice in the said case specified that it related to the re-election of only one director.
It is also worth noting that in neither of the above cases did the articles require notice to be given to a person who was proposed to be a director. If such notice was required, and was not duly given, it is indeed quite likely that a resolution so passed would have been invalidated by the Court.
Given the above case-law, if the wording “to re-elect Mr. …………………. as a director of the company” is included in the notice of meeting, it is probably possible to consider the appointment of another person in substitution for a director retiring by rotation but not as an additional director.
However, the view has been expressed that on such wording it is even possible to allow a separately nominated person to be proposed in addition to a director retiring by rotation. If the proxies clearly support the re-appointment of the existing director, then the narrower approach gains favour that this will be enough to defeat the proposal to appoint the alternatively nominated director.
Can a Shareholder propose an Amendment?
A shareholder can indeed propose an amendment to a proposed resolution for the appointment of directors in a Company. However, it is of the outmost importance to consider the correct approach to any amendment.
It is proposed that the resolutions set out in the Notice of a shareholders’ meeting should not be amended to provide for another person to be elected as a director in place of the named directors contained in the Notice. An amendment of this type would have the effect of negating the substance of the resolution to re-elect the named directors and, therefore, would prevent the meeting from considering their re-election. The Court will not look favourably upon such an action, as it prevents the shareholders from voting on a valid resolution which was duly included on the Notice of the meeting, hence denying them of their rights under the law and the Articles. A Chairman allowing for such an amendment would likely be faced with a resolution which would be invalided by Court.
In light of the above, the Chairman should rule any such amendment out of order and advice the shareholders that if they wish to take this action, the correct course of action is to propose a resolution along the following lines:
“If [named director] is not re-elected as a director of the company [proposed new director] be elected as a director of the company“.
Resolutions in this form would be considered and voted upon by the meeting and polls would be taken at the same time as the resolutions to appoint the directors named in the notice of meeting. Such wording allows both proposed resolutions to be heard and the rights of the shareholders are not limited.