Board Meeting Called on Short Notice
Titas Engineering Ltd has seven directors. The articles require seven days' notice of board meetings, but permit shorter notice if all directors agree. On 3 March, the chairman's office emails a notice at 4 p.m. for a meeting on 4 March at 10 a.m. to consider a BDT 200 million bank guarantee and a rights issue. Two directors, Ms. Rahman and Mr. Chowdhury, are overseas and do not see the email until after the meeting. Five directors attend and pass both resolutions. Ms. Rahman later discovers that the bank guarantee was given to a company owned by the chairman's son and that the rights issue was priced at a 40% discount to market. She challenges both resolutions. The company secretary must advise the board on whether the meeting was validly convened and what should be done.
1. Determine whether the board meeting was validly convened and whether the resolutions are valid.
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The meeting was not validly convened. The articles require seven days' notice. The notice given was less than one day. Short notice is permitted only if all directors agree. Ms. Rahman and Mr. Chowdhury did not agree; indeed they did not see the notice until after the meeting. The condition for short notice was therefore not satisfied.
A resolution passed at a meeting that was not properly convened is invalid, even if a quorum was present. The five directors who attended cannot cure the defect by their presence, because the defect goes to the calling of the meeting, not to the quorum.
Both resolutions are therefore liable to be set aside. The bank guarantee resolution is additionally tainted because the chairman had an undisclosed interest: the guarantee was for a company owned by his son. He should have disclosed and abstained. The rights issue resolution is also vulnerable because the 40% discount may not have been properly considered.
The board should be advised to treat both resolutions as invalid and to reconvene with proper notice.
2. Advise on the chairman's conflict in relation to the bank guarantee.
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The chairman has an indirect interest in the bank guarantee. The beneficiary is a company owned by his son, which is a connected person. He was required to disclose the nature of his interest at the meeting and to abstain from voting.
Because the meeting was invalidly convened, the point is academic for the validity of the resolution, but it matters for the chairman's personal position. If the guarantee is called upon, the company may suffer a loss, and the chairman may be liable to indemnify the company for any loss caused by his breach of duty.
The board should:
- Require the chairman to disclose his interest in writing.
- Refer the guarantee to the audit committee for review.
- Consider whether the guarantee can be cancelled or whether the bank can be asked to release it.
- Record the conflict in the register of directors' interests.
- If the guarantee is to proceed, obtain shareholder approval with the chairman abstaining.
3. Set out the procedure the company secretary should follow to regularise the rights issue.
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The company secretary should:
Treat the earlier resolution as invalid and withdraw the rights issue timetable.
Convene a properly noticed board meeting with at least seven days' notice, or obtain written agreement from all directors to short notice.
Prepare a board paper explaining the purpose of the issue, the amount, the price and the discount, and the reasons for the 40% discount. The board should consider whether the discount is fair and whether a smaller discount would suffice.
Check the articles and any shareholder agreement for pre-emption rights and any required approvals.
Obtain shareholder approval if required, with a proper explanatory statement.
Issue the rights issue documents to all shareholders on the same terms, with a timetable that complies with the applicable rules.
Record all decisions in the minutes, including the votes and any dissent.
The company secretary should also consider whether the earlier defective process requires disclosure to the regulator or to the bank.