UK: Shareholder And Director Decision Making: Correcting Defective Decisions

A properly advised company will fulfil its legal obligations when making corporate decisions. However in many companies, decisions are made informally and are often not recorded. Whilst many everyday business decisions taken by directors and/or employees raise no questions of company law, in other cases strict legal formalities have to be observed, for example, giving correct notice of meetings and ensuring the relevant quorum is met, at board and at shareholder level. This article focuses on instances where the validity of company decisions has been challenged because legal formalities have not been complied with. As this article will illustrate, judicial response to such cases has been varied depending on who the legal formalities are considered to be there to protect.

Shareholder Decisions

In some companies, especially in small or family run businesses, decisions tend to be made in an informal manner and are often unrecorded. It was considered by the courts to be unfair that a lack of formality in this context should render decisions invalid so it was for this reason that the courts developed the "Duomatic" principle (deriving from a case involving a company, Duomatic Ltd). Under this principle the unanimous assent of shareholders has overriding authority and therefore is able to validate decisions made where the proper procedures have not been followed. There is no need for the shareholders to have given their agreement at the same time or place, or even in writing. Whilst the principle has not been codified in any legislation, it has been preserved by the Companies Act 2006 (the Act). Under the Act unanimous consent of shareholders can still be used to ratify the acts of directors.

The Duomatic principle has received mixed judicial treatment. The contrasting cases Re RW Peak (Kings Lynn) Ltd and Wright v Atlas Wright, decided within a year of each other, are examples of this.

Re RW Peak (Kings Lynn) Ltd [1998] B.C.C. 596

In Re RW Peak the validity of a buy-back of shares was challenged on the grounds that statutory procedure had not been complied with. The court held that complying with statute was not merely a technical exercise and stated that as the statutory buy-back provisions protect third party interests it would be inappropriate to allow shareholders to waive these third party rights.

Wright v Atlas Wright [1999] B.C.C. 163

In Wright v Atlas Wright the court considered the Duomatic principle in the context of shareholder approval for directors' long-term service contracts. As in Re RW Peak, the court looked at the purpose of the statutory provision in question in determining whether the principle should apply. In this case the court found that the purpose of the relevant provision was to protect the interests of the shareholders only. As such the principle rescued the transaction.

The approach in Wright v Atlas Wright was subsequently adopted in BDG Roof-Bond Ltd v Douglas [2000] B.C.C. 770 in which it was held that the statutory requirement for a special resolution in these circumstances was "designed solely for the benefit of shareholders" and so the Duomatic principle applied to validate the share buy-back, despite not all the statutory procedures being complied with. Indeed the judge in this case deemed the lack of availability of the buy-back contract at the registered office in advance of its approval, which was required by statute, a "pointless formality in the circumstances".

There is a clear distinction in the courts' reasoning in these cases. In Wright v Atlas Wright and BDG Roof- Bond Ltd v Douglas the procedure in question was designed to protect the interests of shareholders only and so the courts ruled that a unanimous decision by those persons could override procedure. This contrasts with the decision in Re RW Peak where the procedure protected third party interests and so it would have been unfair to allow the shareholders to override this third party protection by using the Duomatic principle.

Director Decisions

Although the Duomatic principle is normally cited in the context of members' decisions, it is generally accepted that a similar rule applies to director decisions. Anything the directors can do at a formal board meeting they can do informally if they all agree to it. This principle in practice is often watered down, with some directors believing that a majority rather than unanimity is enough to override procedure. A recent case however has demonstrated the impact that side stepping formalities can have on the enforceability of directors' decisions.

In Minmar (929) Ltd v Khalatschi [2011] B.C.C. 485, a company director successfully argued for an order to set aside the appointment of an administrator on the grounds that the formalities set out in the company's articles had not been complied with.

The dissenting director applied for the order on the grounds that there had not been a properly convened meeting of the directors to appoint the administrator, as required by the company's articles of association. He also argued that no notice had been served on the company in accordance with the Insolvency Rules.

The other directors argued that the need for a formal meeting had been dispensed with because they represented a majority of the board.

The court held that this did not validate an act made in breach of a company's articles of association. The appointing directors had not held a valid meeting of the board in accordance with the articles and the appointment was therefore invalid and should be set aside.

This judgment makes it clear that adherence to the formalities prescribed in the company's articles of association is required, otherwise the decision in question could be declared invalid.


It is important to ensure that companies follow the correct formalities when making certain corporate decisions. Case law clearly shows that relying on shareholder unanimity to correct a defect in procedure is not always a safe bet, particularly when third party interests are involved. In light of the Minmar case directors also need to be mindful of formalities as a majority vote will not validate every procedural deficiency. After all, the fact that many of the procedural formalities which existed under the previous Companies Act still remain under the Act indicates that formal procedures are still considered to have significant worth. The most effective way to ensure a corporate decision is free from challenge is to follow all procedures and seek legal advice when in doubt.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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