28 April 2020

How can private companies continue to function in a pandemic?

With a little thought and willingness to try new processes, private companies can continue to function in a lockdown situation.

At the time of writing, the UK is essentially in lockdown. While there is no denying that the protection of health and lives is paramount, these restrictions are having a huge impact on our daily lives and we are all finding new ways to keep life as ‘normal’ as possible. Businesses are no exception to this, but how can companies function on a day-to-day basis while these regulations are in force? If directors and shareholders are unable to attend meetings in person, how can decisions be made? And how can they be properly taken in accordance with company law? Fortunately, for private companies at least, company law allows some flexibility – and directors may even find that the current situation provides a chance for existing processes to be streamlined for the future.

Directors' decision making

The directors of a company are collectively responsible for running the company, in accordance with its articles of association.

Although most articles will leave the directors free to arrange their proceedings as they see fit, it is crucial that directors check the articles carefully in case they include any specific limitations or procedures. It may be necessary to amend any specific article provisions which prevent the directors from operating safely and efficiently, for example, provisions that expressly require meetings to be held physically or in a particular place. Amendments can be made by a written special resolution of the shareholders.

Assuming no express restriction is present in the articles:

  • board meetings should be held remotely, by telephone or video call, while social distancing restrictions are in place;
  • every director must be able to properly participate in the meeting, i.e. they can speak and hear their fellow directors;
  • directors must have been given proper notice of the board meeting: in the absence of a provision in the articles, this will be 'reasonable notice' – what is reasonable will depend on the circumstances, so in an emergency a short time may suffice;
  • directors must have been provided with all the information they need to consider the issues and make any decision; and
  • minutes of the meeting must be made and kept for 10 years as with any other proceedings of the board.

Alternatively, many companies' articles permit the directors to make decisions by informal means, including by written resolution, although this will usually require unanimity. An exchange of emails confirming agreement of all the directors would be valid for these purposes.

Should directors become unwell, or if it becomes impractical for them to discharge their duties, for example because they are self-isolating in a remote area with poor communications, they should check the articles to see if they are permitted to appoint alternate directors to attend in their absence. They could also delegate functions to a committee of the board, or to a managing director, to ensure the company can continue to operate effectively.

If it is impossible for the available and contactable directors to form a quorum and a crucial decision needs to be made, the remaining directors could consider acting anyway and having their actions ratified by the full board (and potentially the shareholders) when ‘normality’ returns. There is some risk in doing so, as of course the decisions may not be ratified and the directors involved could be made to carry the blame (and potential personal liability) for any negative consequences, but in an emergency it may be the only viable option.

Directors' duties

Despite the huge effects that COVID-19 is having on the world, directors’ statutory duties remain in place. In particular, directors should consider the factors set out in section 172(1) of the Companies Act 2006, which are:

  1. the likely consequences of any decision in the long term,
  2. the interests of the company's employees,
  3. the need to foster the company's business relationships with suppliers, customers and others,
  4. the impact of the company's operations on the community and the environment,
  5. the desirability of the company maintaining a reputation for high standards of business conduct, and
  6. the need to act fairly as between members of the company.

Although relevant to all aspects of the company’s operations, these are particularly important at the current time to matters such as:

  • whether to require employees to work;
  • how a workplace will be physically organised when restrictions are loosened;
  • non-participation by members in important decisions because they are unwell or isolated;
  • whether customers and suppliers can be dealt with safely; and
  • whether continuing operations creates a risk to the community (if the business has not been required to cease operating by law).

Although these duties are owed to the company itself, rather than to its employees, customers or others, if the directors do not consider these factors where they should have done, and the company suffers a loss as a result, they may be held personally liable for the loss. It is therefore crucial that the directors document that they have turned their minds to all relevant factors.

Shareholder decision making

It is not currently safe for physical general meetings to be held. Most private companies are not obliged to hold annual general meetings, and with shareholder decisions usually being reserved for specific, major issues, there will be relatively few instances where the shareholders are required to make any decision during the lockdown period.

While the current restrictions are in place, companies should avoid calling a general meeting, and if one has already been called it should be cancelled or adjourned, provided that there is power in the articles to do so.

If any shareholder resolution is required by the articles or by company law (for example, to approve the allotment of shares or to waive statutory pre-emption rights), this should be circulated using the written resolution procedure under Chapter 2 of Part 13 of the Companies Act 2006. Only resolutions to remove directors or auditors from office cannot be passed using written resolutions. In these circumstances, other options should be considered, such as persuading the person to resign when shown that the vote will go against them, or by appointing additional directors.

If for any reason a general meeting must be held, the board should ensure that:

  • only the minimum number of people required to form a quorum attend (usually two persons);
  • shareholders and directors are told not to attend and to vote by proxy;
  • a suitable venue is chosen that has sufficient space and facilities;
  • attendees can maintain distance from each other at all times; and
  • the chairman should ensure the meeting is concluded as quickly as possible.

Practical points for meetings

Where meetings are being held remotely there will be many new logistical challenges. Companies should consider, for example:

  • making clear to all participants how the meeting will be conducted and explaining the technology to be used;
  • running tests of the process for all participants well in advance of the meeting;
  • sending clear guidance on using remote conferencing apps, including how to download them and set up accounts;
  • allowing plenty of time for people to join the meeting before it starts; and
  • ensuring that there are IT staff available to deal with any technical issues that arise and guidance is in place on what to do if someone's connection to the meeting fails.

Although these are unusual times and we are all having to get used to new ways of socialising and doing business, the day-to-day administration of private companies need not cause too much of a headache. Written resolutions are commonly used and if required, private companies have the flexibility to amend their procedures fairly easily.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

Andrew is a Legal Assistant in our Corporate team.

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