7.2. Corporate Governance

Roles and Constitution

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PART A: CONCEPT & TERMINOLOGY

Please read the text below before starting the exercises.

1 The Two Power Bases: Ownership vs. Management

A company is a separate legal person, but it must be managed by people. There are two main organs of power:

• Shareholders (Members): They are the owners of the company. They provide capital but do not participate in day-to-day management. Their main powers are exercised at General Meetings (voting on resolutions).
• Directors (The Board): They are the managers. They are appointed by shareholders to run the company. Directors owe a fiduciary duty to the company (duty to act in good faith and in the best interest of the company) and a duty of care.

  • Executive Director: A director who works full-time for the company (e.g., Managing Director).
  • Non-Executive Director: A director who is not an employee; they provide independent oversight.
  • Shadow Director: A person who is not officially appointed but whose instructions the directors are accustomed to follow.

2 The Company Constitution

A company is governed by two main documents (often referred to as the constitution):

Memorandum of Association

Historically, this governed the company's external relations (name, objects, capital). Since the Companies Act 2006 (UK), it is a much shorter document simply stating the wish to form a company.

Articles of Association

(Bylaws in US): The internal rulebook. It regulates the relationship between members and the company (e.g., rights of shareholders, conduct of meetings, appointment of directors).

3 Company Meetings & Resolutions

• AGM (Annual General Meeting): A yearly meeting where shareholders approve accounts and elect directors.
• EGM (Extraordinary General Meeting): Any meeting other than the AGM, called to discuss urgent special business.

Resolutions (Decisions):

• Ordinary Resolution: Requires a simple majority (more than 50%).
• Special Resolution: Requires a qualified majority (usually 75%) for major changes like altering the Articles.

PART B: INTERACTIVE EXERCISES

Exercise 1: Match the Roles

Match the person/role on the left with the correct description on the right.

1. Proxy

-- Select Definition -- A. A person appointed by a shareholder to attend and vote at a meeting on their behalf. B. The legal obligation of directors to act honestly and in the best interests of the company. C. Someone who has not been formally appointed but controls the board's actions. D. An officer responsible for administrative duties. E. The minimum number of people required to be present to hold a valid meeting.

2. Fiduciary Duty

-- Select Definition -- A. A person appointed by a shareholder to attend and vote at a meeting on their behalf. B. The legal obligation of directors to act honestly and in the best interests of the company. C. Someone who has not been formally appointed but controls the board's actions. D. An officer responsible for administrative duties. E. The minimum number of people required to be present to hold a valid meeting.

3. Shadow Director

-- Select Definition -- A. A person appointed by a shareholder to attend and vote at a meeting on their behalf. B. The legal obligation of directors to act honestly and in the best interests of the company. C. Someone who has not been formally appointed but controls the board's actions. D. An officer responsible for administrative duties. E. The minimum number of people required to be present to hold a valid meeting.

4. Company Secretary

-- Select Definition -- A. A person appointed by a shareholder to attend and vote at a meeting on their behalf. B. The legal obligation of directors to act honestly and in the best interests of the company. C. Someone who has not been formally appointed but controls the board's actions. D. An officer responsible for administrative duties. E. The minimum number of people required to be present to hold a valid meeting.

5. Quorum

-- Select Definition -- A. A person appointed by a shareholder to attend and vote at a meeting on their behalf. B. The legal obligation of directors to act honestly and in the best interests of the company. C. Someone who has not been formally appointed but controls the board's actions. D. An officer responsible for administrative duties. E. The minimum number of people required to be present to hold a valid meeting.

Exercise 2: Document Analysis

Look at the Certificate below and answer the questions.

CERTIFICATE OF INCORPORATION

OF A PRIVATE LIMITED COMPANY

Company Number: 09876543

The Registrar of Companies for England and Wales, hereby certifies that

OMEGA TRADING SOLUTIONS LTD

is this day incorporated under the Companies Act 2006 as a private company, that the company is limited by shares, and the situation of its registered office is in England and Wales.

Given at Companies House, Cardiff, on 14th May 2024.

1. Full legal name of the company?

2. Is member liability unlimited? Select... Yes No

3. Company Number?

4. Date of incorporation?

Exercise 3: Powers and Duties

Decide if the action belongs to Shareholders or Directors.

1. Manage Daily Business

2. Elect Directors

3. Change Company Name

4. Sign Contracts

5. Amend Articles of Association

Exercise 4: Multiple Choice

1. A company needs to change its constitution. What type of resolution is required?

a) Ordinary Resolution (50%) b) Special Resolution (75%) c) Board Resolution

2. The document that sets out the internal rules for running the company is called:

a) The Memorandum of Association b) The Certificate of Incorporation c) The Articles of Association

3. In the US, "Articles of Incorporation" is used. What is the UK equivalent?

a) The Bylaws b) The Memorandum of Association c) The Trust Deed

Exercise 5: Directors' Duties (Gap Fill)

WORD BANK: conflict of interest | good faith | best interests | disclose | liable

"Directors have a fiduciary duty to the company. This means they must act in (1) and promote the success of the company for the benefit of its members. They must avoid a (2) ; for example, if a director's own private company wants to sell goods to the company he manages, he must (3) this interest to the board. If he fails to do so and makes a secret profit, he will be personally (4) and may have to pay the money back. The director must always act in the (5) of the company, not himself."

Exercise 1: 1-A, 2-B, 3-C, 4-D, 5-E.

Exercise 2: 1. Omega Trading Solutions Ltd, 2. No, 3. 09876543, 4. 14th May 2024.

Exercise 3: 1. Directors, 2. Shareholders, 3. Shareholders, 4. Directors, 5. Shareholders.

Exercise 4: 1-b, 2-c, 3-b.

Exercise 5: 1. good faith, 2. conflict of interest, 3. disclose, 4. liable, 5. best interests.