Business organisations and procedures - Corporate governance...

Learning Outcomes

This article outlines corporate governance and compliance in UK companies for SQE2, including:

• Directors’ statutory and fiduciary duties (ss.171–177 CA 2006), conflicts, disclosure, authorisation, and remedies for breach (ratification and derivative claims)
• Board and shareholder powers under the Model Articles (including members’ reserve power) and agency/authority principles (actual, apparent, s.40, indoor management rule)
• Company decision-making procedures at board and general meeting level, written resolutions, notice, short notice, polls, quorum, minutes, and filing of resolutions
• Transactions requiring member approval: substantial property transactions, directors’ loans, quasi-loans/credit transactions (public/associated companies), long-term service contracts, and payments for loss of office, with thresholds, exceptions, and procedure
• Shareholder rights and minority protection: unfair prejudice, derivative claims, and just and equitable winding up, with typical remedies
• Statutory filing and record-keeping obligations: accounts, confirmation statements, statutory registers, and inspection rights
• Corporate governance frameworks: UK Corporate Governance Code and Wates Principles and their comply/apply-and-explain approaches
• Professional and regulatory overlays relevant to legal practice and regulated entities (e.g., SRA governance and reporting expectations)

SQE2 Syllabus

For SQE2, you are required to understand corporate governance and compliance as they apply to business organisations. This article covers the following aspects of the syllabus:

• the statutory and fiduciary duties of company directors and officers
• corporate decision-making procedures, including the role of the board and shareholders
• statutory filing, record-keeping, and disclosure obligations for companies
• remedies available for breaches of directors' duties
• the protection of minority shareholders and related compliance issues
• the legal and regulatory requirements affecting company operations and management

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the main statutory duties owed by directors under the Companies Act 2006?
2. Who is liable for company debts where a director causes a company to trade while insolvent?
3. What are the two principal decision-making organs in a company, and how do their roles differ?
4. Name two remedies available to minority shareholders if they are unfairly prejudiced by the way a company is run.
5. What are the consequences if a company fails to file its annual accounts with Companies House?

Introduction

This article examines the governance and compliance requirements for companies, covering how companies are managed, how decisions are made, the responsibilities of directors and officers, and how companies comply with statutory obligations in England and Wales. Understanding these rules is essential for the SQE2 exam and for advising clients on best practice in business law.

Separate legal personality and limited liability underpin corporate governance. A company is distinct from its members and directors; it owns assets, enters contracts, and sues in its own name. The board directs the company’s business (typically via Model Article 3), while members exercise strategic control on specified matters at general meetings or by written resolutions. Governance also involves compliance with statutory reporting and internal records, and—particularly for premium listed companies—adherence to the UK Corporate Governance Code’s Principles and Provisions. For large private companies, the Wates Principles guide board purpose, composition, responsibilities, risk, remuneration and stakeholder engagement.

Key Term: board of directors
The group of appointed individuals who collectively manage and control the company’s business on a daily basis.

Key Term: shareholder (member)
A person or entity who owns shares in a company and exercises certain rights, such as voting at general meetings and receiving dividends.

Directors and Corporate Management

Who manages a company?

A company's board of directors is responsible for the day-to-day management and strategic direction. Shareholders (members) are not directly involved in daily management but exercise control through their voting rights at general meetings. Model Article 3 gives directors responsibility for the management of the company’s business and allows them to exercise all the company's powers for that purpose. Members retain a reserve power (Model Article 4) to direct the directors by special resolution to take, or refrain from taking, specified actions, although this does not invalidate acts previously done by the directors.

Key Term: members’ reserve power
A power under Model Article 4 allowing shareholders, by special resolution, to direct directors to take or refrain from specific actions.

Types of directors

• De jure directors: Formally appointed and registered.
• De facto directors: Unregistered but act as directors in practice.
• Shadow directors: Persons whose instructions the board is accustomed to following, even if not officially appointed.

Key Term: shadow director
A person in accordance with whose instructions or directions the company’s directors are accustomed to act, but who has not been formally appointed as a director.

Directors include executive and non-executive directors. Executive directors are commonly employees with specific managerial roles; non-executives (NEDs) sit on the board and monitor executive performance, bringing independent challenge and specialist advice. Under s.250 CA 2006, “director” includes any person occupying the position of director by whatever name called; many duties and restrictions extend to de facto and shadow directors.

Every private company must have at least one director (s.154) and at least one director must be a natural person (s.155), aged at least 16 (s.157).

Director appointment and removal

Company articles usually specify how directors are appointed and removed. A simple majority of shareholders can usually remove a director by ordinary resolution (s.168), subject to strict notice requirements and the director’s procedural rights.

Key Term: special notice
A statutory requirement that certain resolutions (e.g. to remove a director or auditor) must be notified to the company at least 28 clear days before the meeting (ss.168–169, s.312 CA 2006; clear day rule in s.360).

Where members propose removal:

• special notice (28 clear days) must be given to the company (s.312), and the company must send the notice to members (or advertise if not practicable)
• the director has a right to make written representations circulated to members and to be heard at the meeting (s.169)
• removal cannot be effected via written resolution (s.288(2)(a))
• if the board is cooperative, directors will call a board meeting (BM) to convene a general meeting (GM) under s.302.

Removal under s.168 affects office, not contractual rights; any service contract claim is dealt with separately. Articles may also provide for board appointment powers (e.g. Model Article 17) and for director retirement provisions.

Directors’ Powers

Directors are agents of the company. They can bind the company in contract if acting within their actual or apparent (ostensible) authority. Model Articles permit delegation (MA 5) and allow board decisions either at meetings or unanimously without a meeting (MA 7 and MA 8).

Key Term: actual authority
Authority that a director or agent has been expressly or implicitly granted to act on behalf of the company.

Key Term: apparent authority
Authority a third party reasonably believes a director or agent has, based on the company’s conduct or communications.

Statute supports third parties dealing in good faith. Under s.40 CA 2006, a third party is not required to enquire into internal limitations in the company’s constitution; directors’ power to bind the company is treated as free of internal limitations when the third party acts in good faith. The “indoor management rule” similarly protects outsiders (e.g. Royal British Bank v Turquand), though it does not protect insiders who know of irregularities.

Key Term: indoor management rule
The principle that third parties dealing with a company in good faith may assume internal procedures have been properly followed and need not investigate internal compliance.

Key Term: capacity
Under s.39 CA 2006, a registered company’s acts are not invalid simply because they exceed any limitations in the constitution; the old ultra vires doctrine has been curtailed.

Companies may ratify unauthorised acts if appropriate and lawful (e.g. board ratification or member ratification under s.239, subject to restrictions such as votes of the wrongdoer not counting).

Worked Example 1.1

A board with three directors, all properly appointed, holds a board meeting. One director enters into a supply contract without a board resolution, but has routinely signed similar contracts in the past with the company’s knowledge. Is the contract binding on the company?

Answer:
Yes, the director has likely acquired apparent authority from the company’s repeated conduct, so the company will be bound. Statutory protection for good faith counterparties under s.40 and the indoor management rule further support enforceability.

Directors’ Duties

Directors owe statutory and fiduciary duties under the Companies Act 2006 and general law. The main statutory duties include:

• Acting within the company’s powers as set out in the constitution (s.171)
• Furthering the success of the company for the benefit of its members as a whole (s.172)
• Exercising independent judgment (s.173)
• Exercising reasonable care, skill, and diligence (s.174)
• Avoiding conflicts of interest (s.175)
• Not accepting benefits from third parties (s.176)
• Declaring interests in proposed or existing transactions (ss.177 and 182)

Key Term: fiduciary duty
A legal duty requiring a person in a position of trust (such as a director) to act in good faith, for the benefit of the company, and to avoid conflicts of interest.

Conflict situations require careful management. Board authorisation for conflicts is possible if permitted by the articles (s.175(4)(b) for private companies), and disclosure of interests is mandatory in proposed transactions (s.177) and in existing transactions as soon as practicable (s.182). Accepting benefits from third parties (s.176) is prohibited where it gives rise to conflicts.

Key Term: duty to further the success of the company
A statutory duty under s.172 Companies Act 2006 requiring directors to act in good faith for the benefit of the company as a whole, while considering specific factors.

Duty to further the success of the company

This duty is central to director decision-making. Directors must consider the long-term consequences of decisions, the interests of employees, relationships with suppliers and customers, the impact on the community and the environment, and the desirability of maintaining high standards of business conduct. Where a company is insolvent or at real risk of insolvency, s.172(3) requires consideration of creditors’ interests.

Exam Warning

Questions may present situations testing whether a director has complied with duties, particularly when conflicts of interest are involved. Ensure you understand when board or member approval is required to avoid breaching duties, and when disclosure and authorisation can lawfully mitigate conflicts.

Consequences of breach

If directors breach their duties, the company may bring proceedings for remedies including injunctions, compensation for loss, or an account of profits. Acts may be ratified by disinterested members under s.239. In certain cases, shareholders (with court permission) can bring derivative claims on behalf of the company.

Key Term: derivative claim
A claim brought by a shareholder on behalf of the company against directors or others for wrongs done to the company.

Permission for a derivative claim involves a two-stage process (ss.260–264). The court must refuse permission if certain factors apply (e.g. ratification of the act by the company or where a director acting in accordance with s.172 would not continue the claim).

Worked Example 1.2

A director arranges for a company to enter into a large contract with a supplier owned by her partner but fails to declare her interest. The company suffers a loss because the supplier overcharges. What is the likely legal outcome?

Answer:
The director has breached her duty to declare an interest (ss.177/182) and to avoid conflicts (s.175). She may be liable to the company to account for profit and/or compensate for loss. The board should consider whether ratification is available (s.239) and whether to pursue a claim; a shareholder could seek permission to bring a derivative claim if the board declines.

Corporate Decision-Making and Shareholder Involvement

The two organs of company decision-making

• The board of directors: Makes day-to-day and strategic decisions.
• The shareholders: Exercise control through general meetings, including appointment and removal of directors, changes to articles, and approving certain transactions.

Key Term: board resolution
A formal decision reached by the directors at a board meeting by majority vote.

Key Term: ordinary resolution
A resolution passed by shareholder simple majority (>50%).

Key Term: special resolution
A resolution passed by at least 75% of the shareholders.

Key Term: written resolution
A resolution of shareholders passed in writing, instead of at a general meeting, permitted for private companies.

Key Term: quorum
The minimum number of directors or members who must be present for a valid meeting (e.g. Model Article 11 sets a quorum of two for board meetings unless otherwise specified).

Meetings and resolutions

• Board meetings: Directors’ decisions are valid if taken at a duly convened meeting (with notice in accordance with the articles) and a quorum present, or if unanimously agreed without a meeting (MA 7–8). Minutes must be kept for at least 10 years (s.248).
• General meetings: Unless the articles provide otherwise, private companies must give at least 14 clear days’ notice (s.307). Special notice applies to certain resolutions (e.g. removal of directors or auditors). Minutes must be retained for at least 10 years (s.355).
• Short notice: Private companies can hold a GM on short notice with consent of a majority in number of shareholders holding at least 90% of voting rights (s.307(5)–(6)).

Key Term: short notice
Consent-based mechanism allowing a general meeting to be held on less than the statutory minimum notice, subject to 90% (private) or 95% (public) shareholder approval.

Key Term: poll vote
A vote where each member’s voting power corresponds to the number of shares held; may be demanded to replace a show of hands voting outcome.

• Written resolutions: Available to private companies (ss.288–297) for most decisions, but not for removing a director or auditor. The lapse date is typically 28 days from circulation unless the articles specify otherwise (s.297). Special resolutions must include the text specifying that they are special resolutions.

Members and the company must also file certain resolutions at Companies House (e.g. special resolutions, ss.29–30). Companies must keep statutory registers (members, directors, PSCs) and allow inspection rights.

Key Term: confirmation statement
An annual notification to Companies House confirming company information on file is accurate.

Key Term: person with significant control (PSC)
An individual or entity who owns or controls more than 25% of a company’s shares or voting rights, or otherwise exercises significant influence or control.

Example of required shareholder approval

Certain transactions—such as substantial property transactions involving directors, directors’ loans, long-term service contracts (>2 years), payments for loss of office, or changing articles—require shareholder approval, usually by ordinary or special resolution, and sometimes approval by a holding company’s members. The scope and thresholds vary by transaction type.

Key Term: substantial property transaction (SPT)
A non-cash asset transaction between a company and a director (or connected person) requiring member approval where value exceeds statutory thresholds (s.190 CA 2006).

Key approvals include:

• Long-term service contracts (s.188): A director’s service contract with a guaranteed term longer than two years requires member approval by ordinary resolution. Where terminable on notice, measure the guaranteed term by the notice period. A memorandum of terms must be available to members.

• Substantial property transactions (ss.190–196): Member approval by ordinary resolution is required where the company buys/sells a non-cash asset to/from a director or connected person with value:

  • over £100,000, or
  • over £5,000 and exceeding 10% of the company’s net asset value (s.191). Transactions with wholly-owned subsidiaries or in a member’s capacity as member are excluded (s.192). If the director is also a director of the holding company, holding company approval may be needed (s.190(2)). Breach renders the transaction voidable, and parties may have to account for gains and indemnify the company (s.195).

• Loans, guarantees, security to directors (ss.197–214): Member approval by ordinary resolution is generally required. Exceptions include:

  • loans not exceeding £10,000 (minor transactions)
  • loans up to £50,000 to fund expenditure for company purposes or to enable proper performance of duties (s.204)
  • funding defence costs for legal or regulatory proceedings (ss.205–206). If the borrower is a director of the holding company, approval by the holding company’s members may also be required. Breach renders the transaction voidable, with potential accounts of profits and indemnities.

• Quasi-loans and credit transactions (ss.198–201): Member approval applies to public companies and associated companies; private companies are generally outside these requirements.

• Payments for loss of office (ss.215–222): Member approval is required for payments that compensate a director for loss of office (or retirement) not otherwise legally due. Payments over modest thresholds require approval; failure may render payments recoverable.

Worked Example 1.3

A board wishes to enter into a loan agreement with a director for company funds of £30,000. What procedure must be followed?

Answer:
Member approval by ordinary resolution is required before making the loan (s.197). The company must circulate details of the loan terms in advance (memorandum), and if the director is a director of the holding company, holding company member approval may also be required. Consider whether any exception applies (e.g. expenditure up to £50,000 for company purposes).

Worked Example 1.4

The board calls a general meeting on three days’ notice to pass an ordinary resolution authorising a substantial property transaction. Shareholders holding 92% of voting rights and constituting a majority in number consent to short notice. Is the meeting valid?

Answer:
Yes, for a private company, short notice is valid where a majority in number of shareholders holding at least 90% of voting rights consent (s.307(5)–(6)). The meeting can proceed, provided other procedural requirements (e.g. special notice, if applicable) are satisfied.

Shareholder Rights and Remedies

General rights

Shareholders may:

• Vote at meetings, receive dividends, and inspect statutory registers
• Remove directors or auditors by ordinary resolution (with special notice and restrictions on written resolution)
• Demand polls and request meetings or require directors to call a GM (e.g. under ss.303–305)
• Apply to court for relief if their interests are unfairly prejudiced (s.994), or in limited cases seek winding up on just and equitable grounds (IA 1986, s.122(1)(g))

Key Term: minority shareholder
A shareholder holding less than the majority of voting rights, often needing statutory remedies to protect their interests.

Members have rights of inspection of registers and minutes (e.g. s.116 CA 2006) and to receive annual accounts and reports.

Minority shareholder protection

Remedies include:

• Derivative claims: Permit a shareholder to bring a claim on behalf of the company for a breach of duty by a director. Permission is required; the court assesses whether a director acting under s.172 would pursue the claim, whether ratification has occurred, and overall impact on the company.

• Unfair prejudice petition (s.994 CA 2006): Allows a shareholder to apply to court if the company’s affairs are conducted in a manner unfairly prejudicial to their interests. Common examples include exclusion from management in quasi-partnership companies, diversion of business, excessive remuneration without dividends, or breaches of shareholders’ agreements.

Key Term: derivative claim
A claim brought by a shareholder on behalf of the company against directors or others for wrongs done to the company.

Key Term: unfair prejudice
Conduct by the company or its controllers that is detrimental and unfair to the interests of one or more shareholders, justifying relief by the court.

Key Term: just and equitable winding up
A court-ordered liquidation under IA 1986, s.122(1)(g), available where breakdown of trust, deadlock, or quasi-partnership expectations make winding up the only fair remedy.

Typical relief under s.996 includes buy-out orders (often at a valuation that may discount for minority holdings unless circumstances justify otherwise), regulation of future conduct, or injunctions preventing particular acts. Where a reasonable buy-out offer has been made and refused, the court may consider that in determining whether relief is appropriate. In quasi-partnerships, courts are more ready to grant relief for exclusion or breaches of legitimate expectations.

Worked Example 1.5

A 10% shareholder complains the directors are paying themselves high salaries but refusing to declare dividends. What can the shareholder do?

Answer:
The shareholder may seek a remedy for unfair prejudice if refusal to pay dividends is unfair and prejudicial in context (e.g. where profits exist and the directors’ remuneration is excessive). The court may order compensation, regulation of conduct, or the purchase of the shareholder’s shares (with valuation considerations).

Worked Example 1.6

The board declines to pursue a clear conflict-of-interest breach that caused loss to the company. A minority shareholder seeks to bring a derivative claim. What are the main hurdles?

Answer:
The shareholder must satisfy the two-stage permission process (ss.260–264). The court will consider whether there is a prima facie case, whether a director acting under s.172 would continue the claim, whether the conduct has been or could be ratified, and whether the claim would have a disproportionate negative impact. If permission is granted, the claim proceeds on behalf of the company.

Statutory compliance and record-keeping

Companies must comply with filing annual accounts, a confirmation statement, and other information at Companies House. Failure to comply can result in criminal offences and fines for the company and its officers. Private companies must file accounts within nine months of the accounting reference date (s.442); public companies within six months. Companies must prepare accounts giving a true and fair view (ss.393–396), circulate them to members, and file them (s.441). The confirmation statement must be filed annually (s.853A).

Companies must maintain:

• register of members (s.113), directors (s.162), and PSCs (Part 21A CA 2006)
• minute books for board and general meetings (ss.248, 355)
• records at the registered office or SAIL, or elect to keep certain information on the central register at Companies House.

Key Term: statutory registers
Company records required by law, including registers of members, directors, directors’ residential addresses, and PSCs, which must be kept up to date and available for inspection.

Compliance and Professional Obligations

Filing and disclosure requirements

Companies must update Companies House on key changes (e.g., directors, registered office, share capital, and articles), and file relevant resolutions (e.g., special resolutions, ss.29–30). Compliance with filing deadlines is essential to avoid penalties. Internally, companies must ensure adequate accounting records (s.386), maintain statutory registers, and retain minutes.

Where companies offer legal services or are regulated entities, the SRA Codes of Conduct impose additional standards—effective governance systems, supervision, client money safeguards, transparency on referrals and interests, and prompt reporting of serious breaches by COLPs and COFAs.

Corporate governance principles

Premium listed companies are subject to the UK Corporate Governance Code (2018). While not law, the Listing Rules require companies to report how they have applied the Code’s Principles and whether they have complied with its Provisions, or to explain any departures (“comply or explain”). The Code addresses board leadership and purpose, division of responsibilities, composition and succession, audit and risk, and remuneration (including independent remuneration committees and avoidance of directors determining their own pay). Institutional investor stewardship is addressed by the UK Stewardship Code 2020.

Large private companies within statutory thresholds report governance on an “apply and explain” basis against a chosen code; the Wates Corporate Governance Principles emphasise purpose, composition, responsibilities, opportunity and risk, remuneration aligned to long-term success, and stakeholder engagement. Although not directly examinable as statute, familiarity with these frameworks helps contextualise board practice and expectations.

Key Term: UK Corporate Governance Code
Principles and Provisions applicable to premium listed companies, operating on “comply or explain” via the Listing Rules.

Key Term: Wates Corporate Governance Principles
Voluntary principles for large private companies operating on “apply and explain,” focusing on board purpose, composition, responsibilities, risk, remuneration and stakeholders.

Key Point Checklist

This article has covered the following key knowledge points:

• Directors manage the day-to-day business of a company and owe statutory and fiduciary duties under the Companies Act 2006 and general law, including ss.171–177.
• Breaches of directors’ duties can lead to personal liability and statutory remedies, including derivative claims by shareholders and ratification limits under s.239.
• Major company decisions require approval by shareholders via general meetings or written resolutions (private companies), with strict procedural rules on notice, special notice, short notice and filing.
• Specific transactions involving directors—long-term service contracts, substantial property transactions, loans, quasi-loans and credit transactions—often require prior member approval; exceptions and thresholds must be checked.
• Shareholders enjoy voting rights, dividends, and rights to receive company information and seek remedies if their rights are infringed; they can remove directors or auditors by ordinary resolution but must use special notice and cannot do so by written resolution.
• Minority shareholder remedies include derivative actions (permission required) and unfair prejudice petitions (with typical buy-out relief and valuation considerations); in limited cases, just and equitable winding up is available.
• Companies must comply with statutory filing (accounts, confirmation statements), record-keeping (registers; minutes) and disclosure obligations. Non-compliance can result in penalties and officer liability.
• Board meeting formalities (quorum, notice, minutes) and member procedures (notice, short notice, polls) are critical to valid decision-making; Model Articles set default rules.
• Corporate governance frameworks (UK Corporate Governance Code; Wates Principles) shape board practice for listed and large private companies, requiring reporting on application or compliance.

Key Terms and Concepts

• board of directors
• shareholder (member)
• members’ reserve power
• shadow director
• actual authority
• apparent authority
• indoor management rule
• capacity
• fiduciary duty
• duty to further the success of the company
• board resolution
• ordinary resolution
• special resolution
• written resolution
• quorum
• short notice
• poll vote
• special notice
• minority shareholder
• derivative claim
• unfair prejudice
• just and equitable winding up
• substantial property transaction (SPT)
• confirmation statement
• statutory registers
• person with significant control (PSC)
• UK Corporate Governance Code
• Wates Corporate Governance Principles