When disposing of company assets, there are specific statutory provisions in place which mean that shareholder approval must first be obtained in certain circumstances. The following article provides a detailed response to the commonly asked question: ‘Can directors sell company assets without shareholder approval?’.
Can directors sell company assets without shareholder approval?
There are many reasons why company directors may want to sell, or dispose of, some or all of the assets of a company. It could be that the assets in question are simply no longer required, or the directors are looking to generate additional capital to either grow or even salvage the business. In many of these cases, it will be for the board of directors to make these types of decisions, provided they act in accordance with their general directors’ duties. These include a duty to promote the success of their company, a duty to exercise independent judgment, and a duty to exercise all reasonable care, skill and diligence.
However, in certain circumstances, there are special procedures that must be followed. Under the Companies Act 2006, directors are under a specific duty to declare to the other directors any direct or indirect interest that they may have in relation to a proposed transaction or arrangement with the company, including the nature and extent of that interest.
In addition, the 2006 Act also requires shareholder approval in connection with various transactions involving a director of the company, or any person connected with a director, including the sale of company assets. This is because the law in the UK seeks to protect the interests of shareholders where a transaction may benefit the director(s) at the expense of the company, or where the company essentially does business with its own directors.
In these cases, company law provides that the shareholders of the company will have the final say, where relevant transactions must be authorised by them, otherwise risk the transaction being treated by the company as void. While there are a number of exceptions to the general rules, a failure to obtain the necessary approval can prove to be a costly mistake for directors.
What are company assets?
When providing an answer to the question — ‘Can directors sell company assets without shareholder approval?’ — one must first consider what is classed as a ‘company asset’. In broad terms, there are two types of business assets: tangible, such as property or equipment, and intangible, such as any form of intellectual property, brand reputation and goodwill.
However, for something to be considered a company asset, it must have been acquired exclusively or principally for business purposes. Business assets can be classified as either current or non-current; current assets are expected to be converted to cash within one year, such as inventory, whereas non-current assets are those that are expected to deliver value for more than one year, such as property and equipment.
What types of sales transactions require shareholder approval?
Under the 2006 Act, Part 10, Chapter 4 (Transactions with directors requiring approval of members), sets out circumstances when the directors of a company are required to seek the approval of the company’s shareholders before entering into a sales transaction. These circumstances include where a company is selling a substantial asset to a director or any person or entity connected with a director. Equally, it applies when a company is buying a similar asset from a company director or person/entity connected with a director. These are described under the relevant provisions as ‘substantial property transactions’.
Section 190(1)(a) of the Companies Act provides that: a company may not enter into an arrangement under which a company director acquires or is to acquire from the company — either directly or indirectly — a substantial non-cash asset, unless this arrangement has been approved by the shareholders or is conditional upon such approval being obtained. Of note, although the requirement for shareholder approval is often referred to as applying to ‘substantial property transactions’, this does not relate exclusively to land and buildings. Any non-cash asset, including intangible assets, for example, selling a trademark, can be included.
Subsection (1)(b) goes on to make provision for where a company is buying, rather than selling, a non-cash asset from a director. The provisions relating to substantial property transactions also extend to a director of the parent company, and any person connected with a director of the company or director of its parent company, including family members.
The meaning of ‘substantial non-cash asset’ is set out under section 191 of the Act, where an asset is substantial if its’ value either exceeds £100,000 or, alternatively, its value exceeds 10% of the company’s net asset value — to be determined with reference to its most recent statutory accounts or called-up share capital if no accounts have been produced — and is more than £5,000. No approval is required if the asset value is less than £5,000, where section 190 only applies if the transaction will substantially reduce the asset value of the company.
Where shareholder approval is required, this can be given before the transaction is entered into or after the transaction has been agreed, provided the transaction is conditional upon members’ approval being granted. Such a resolution can be passed as an ordinary resolution — a simple majority of the total voting rights of all eligible shareholders — unless the company’s articles require a higher approval level, known as a special resolution.
If the director is a director of the company’s parent company, or any person connected with such a director, the transaction must also have been approved by a resolution of the members of that company or be conditional upon such approval being obtained.
Exceptions to the requirements under section 190 of the 2006 Act are allowed for:
- transactions between a holding company and its subsidiaries, or between subsidiaries
- transactions carried out when a company is being wound up, and
- transactions on a recognised investment exchange.
What other types of transaction require shareholder approval?
Under the 2006 Act, there are other types of transaction that require shareholder approval. These include where a company is making a loan to a director, or providing a guarantee or other form of security for the benefit of a director, or where a company is looking to enter into a service contract with a director which is for a fixed term of more than 2 years.
Loans, quasi-loans and credit transactions
Shareholder approval is required for loans by either a company or parent company to a director, or for the company to give a guarantee or provide security to any person in connection with a loan made by any person to such a director.
As with substantial property transactions, a majority of the voting shareholders will generally be required to provide the necessary approval, and if the director is a director of the parent company, the transaction must also have been approved by those shareholders.
A memorandum setting out certain information about the loan — including its purpose, the amount and the extent of the company’s liability — needs to be made available to the shareholders. Where shareholder approval is to be given at a general meeting, the memorandum needs to have been made available for 15 clear days.
In the case of public limited companies, or a company associated with a public company, the rules around directors’ loans extend to quasi-loans, (agreements to pay or reimburse) and to credit transactions (providing credit terms for goods or land), as well as to persons connected to a director or director of the parent company, such as a family member.
There are, however, some exceptions to requiring shareholder consent, including:
- where the loan is for company business, provided it does not exceed £50,000
- where the loan is for the purpose of defending certain proceedings against the person as a director of the company, or
- where the loan is no more than £10,000, or £15,000 in the case of credit transactions.
Long term service agreements
Long term service agreements relate to giving a director of a company or parent company guaranteed employment of more than 2 years. This includes fixed term employment contracts over 2 years, as well as contracts where the company cannot terminate with notice within such a period. The voting shareholders must be provided with the contract in question — to be made available for 15 days where shareholder approval is to be given at a general meeting — and, generally, a majority need to provide the necessary approval.
What are the implications of failing to obtain shareholder approval?
Failing to obtain shareholder approval, where required under the rules, or obtaining the correct member approval, can have significant consequences for company directors.
In relation to substantial property transactions and company loans, if the requirements for approval are not met, it may be possible for the transaction or arrangement to be voided by the company. This means that the sale or loan can be set aside, in this way obligating the director to return the property or money in question. The directors could also be liable to account to the company for any gain made, either directly or indirectly, and to indemnify the company for any loss or damage suffered because of the arrangement or transaction.
An arrangement or transaction will be capable of being rescinded, unless:
- restitution of the asset or money involved is no longer possible
- the company has been indemnified for any resulting loss or damage suffered, or
- if rights acquired in good faith by a third party who was not aware of the failure to get shareholder approval would be affected by this.
Where approval has not been obtained, but there are no objections, it may be open for the transaction or arrangement to be ratified by the shareholders. However, the directors would still be liable to account for any gain made and to indemnify the company for any loss suffered.
In relation to directors’ long term service agreements, where shareholder approval has not been sought in advance where required, the contract will be deemed to include a term by which the company can terminate such agreement on reasonable notice.
What other factors should be considered when selling company assets?
Even where shareholder approval has been secured by directors, there are various factors that must be taken into account before disposing of valuable company assets. This is because directors must, at all times, be acting in the best interests of the company.
One important consideration when selling off company assets is asset depreciation. While some assets may increase in value over the time that the business has owned them, in most cases the value of an asset will be subject to value depreciation from its original purchase price. Put simply – the assets of a business are only worth what someone else is willing to pay for them which, taken together with the effect of natural depreciation, this can significantly affect their price. In some cases, this means that selling off company assets may not be financially beneficial. It could even be to the company’s detriment, if the assets are still useful to the company.
When it comes to the sale of intangible assets, there are a number of additional issues that can make their disposal less straight forward. Generally speaking, intangible assets are more difficult to value than tangible assets, where it is often advisable to have any intangible asset valued by a business expert before seeking to dispose of this type of property.
Secondly, special tax rules apply to any chargeable gains made from the sale of intangible business assets, depending on when the asset was first acquired. For example, if a limited company first owned an intangible business asset after 31 March 2002, any chargeable gains from the sale of that asset should be included in the company’s trading profits, with corporation tax paid on these. In contrast, if the intangible asset was first owned before 1 April 2002, a much more complex procedure must be used to calculate any chargeable gains.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.