Company administration

The headache of administration

Thomas Taylor Adviser, Net Lawman explores how to take away the pain from company meetings by reducing company administration.

In legal and accounting textbooks, the requirements of company administration are often cited as one of the principal disadvantages of incorporating a business. Administrative tasks take management time away from revenue generating operations.

Arranging and carrying out a meeting of shareholders or directors is a good example of an administrative task that can take a lot of time: finding a date when and place where all the parties can attend; issuing a formal notice of an agenda; and recording and circulating minutes, motions and votes.

Particularly in small companies, directors don’t follow the process fully, or at all. But that’s understandable if the process does not help nimble decision making.

It is relatively straightforward, however, to take away much of the pain that meetings can bring. You can reduce the number of meetings that need to be held by delegating decision making power; and when they are required, you can change the legal process to make them easier to manage.

While this article has been written from a UK perspective, many of the changes are possible if the company is incorporated in other countries as well.

The risks in not following the rules

Directors of small companies tend to be in their position because they are the owners or day-to-day decision makers, not because they are experienced administrators. Many are not aware of the breadth of their legal obligations, including to follow the correct procedure when making certain decisions. Others simply prioritise running the business over dealing with red tape.

In a small company, not following the legal process precisely may not seem too important if the directors are also the shareholders and the management structure is small enough so that everyone is aware of what is happening in the business.

However, the risk is that if the company becomes insolvent or some owners later sell, the directors leave themselves open to claims by a liquidator or new owners that they are in breach of their duties and therefore personally financially liable for the consequences of any decisions made outside of the correct process.

Rules are beneficial

The default procedures are in place to protect stakeholders, ensuring that they are kept informed of company performance and that they have ample opportunity to exercise legal rights in respect of significant decisions. They also give protection to directors from claims of mismanagement of the company.

So if the safeguards that the law provides by default seem excessive, the solution is not to turn a blind eye to them, but rather amend them so that they suit how the company is run.

Additionally, the work involved in changing brings benefits. It strengthens the perception of common interest between shareholders, between board members themselves and between owners and directors. The inevitable agreement to be committed to a new set of processes brings with it a feeling of community and comfort with the views of each other.

Where the rules can be found

Generally, the rules as to how a company should be run are contained in three documents, which are:

● the articles of association (sometimes known as the company’s constitution);

● the shareholders’ agreement; and

● the service agreements of the directors.

Articles of association tend to cover procedures for calling meetings of directors and shareholders and for voting at those meetings. The company should keep a copy of its articles. In case these are hard to pin down, they are also registered with the Registrar of Companies.

A shareholders agreement sets out how the owners have agreed to vary their rights against each other in so far as possible under company law. It is likely to cover which decisions are to be made only between themselves (particularly those of importance to one or more of them) and which are to be delegated to the board of directors or individuals. In short, the agreement regulates who decides what.

There may or may not be a shareholders’ agreement. There is no legal requirement to have one, so they tend to be put in place only at times when the risks of not having a shareholder’s agreement are particularly apparent (usually at times when the ownership or management structure becomes likely to change, or before some of the owners make a large debt investment). It is a private document, so only shareholders will have a copy.

A director’s service agreement should set the boundaries of individual director power, although it may do so by reference to another document that can be updated regularly. It is likely to describe job responsibilities and limitations that require agreement by other directors or by the shareholders. The company should keep a copy of each one.

First, simplify how meetings are held

Both the meetings of the board of directors and of the shareholders can be made easier to carry out.

1.Regardless of the attendees, and without changing any legal text:

The aim should be to reduce the business of the meeting to voting only. While a meeting can be a forum for debate before voting, in practice long discussions may cut into the time needed to vote on all motions. Or the debate may be sidetracked with the vote being deferred pending something else.

Proposals should be circulated well in advance of the meeting so as to allow attendees the opportunity to satisfy themselves as how to vote beforehand. Decision makers should be given enough information to feel comfortable with how to vote, but the volume should be as concise as possible.

2. By changing the company’s articles:

The chairperson of the meeting can be given powers to keep speakers on-topic. Shareholders with a holding over a certain percentage may have a right to be heard, but only if the subject matter is relevant.

Meetings can take place via video-conference. If a meeting location is required to be recorded, the location of one of the attendees can be used. Holding a meeting via video-conference has the obvious advantage that it is easier to find a time to meet sooner.

Directors can be allowed to use written resolutions to vote, and the delivery of those resolutions can include by email (although we would advise only from authorised accounts such as their company email address). Voting by written resolution sounds formal, but it doesn’t need to be more than a simple message stating how the director’s choice.

Proxy voting is also possible (where a director or shareholder nominates someone else to vote in their place). This requires written notice conferring power, but the notice could be acceptable as an email message.

If the meeting is one of shareholders and some shares are owned by more than one person, a vote of just one of them can be allowed.

3. In the shareholders’ agreement:

The basis of voting can be simplified where the shareholders agree it should be. Instead of one share carrying one vote, a motion could be passed on the agreement of a certain proportion of attendees, regardless of their shareholdings. Or one person might have twice the number of votes of another, or none at all.

Then delegate decision making so as to reduce the need for meetings

Some meetings are necessary because some company business must be carried out at one.

However, if a meeting is called because of the need for a group to make decisions, it may be possible to reduce the number of them by delegating decision making power away from the group. The key is to define exactly what decisions can be made, and which can’t.

In small companies where owners tend to be managers, it is also important to consider whether a decision is made by someone in their role as shareholder or in their role as director. In either case, you would record the delegation of power to make that decision in a shareholders’ agreement, and if the decision maker is also a director, in their service agreement (or an appendix to it) as well. The better defined the limits of the power are, the less likely they are to be overstepped accidentally.

If giving power to one person seems to be a step too far, you can also delegate to a committee. A smaller number of people with subject area expertise may be more able to make good decisions faster. Typically, the shareholders’ agreement would set out how committees are formed and run, although the articles may describe the rules for committees of directors.

In summary

By removing the need for all owners or all directors to come together to decide on every aspect of managing the business, the need to call meetings frequently can be reduced. Managers can concentrate on running the business. When meetings are required, how they need to be held can be changed.