HM Insights

Coronavirus: how should companies deal with corporate governance, compliance and decision making?

Companies across Scotland are having to adapt, along with the rest of us, to new ways of working in light of the COVID-19 pandemic and the impact of Scottish and UK Government measures relating to social (for social, read physical) distancing.

That being said companies, in addition to having to deal with all of the other challenges that are being thrown up by this pandemic, have a raft of other compliance obligations to deal with, be that in the company's constitution, under the Companies Act 2006, insolvency legislation or other contracts such as shareholders' agreements.

This means that companies need to come up with innovative or "make do" solutions to ensure business continuity as much as practicably possible. Here we look at what steps companies might have to take in relation to the following key areas:

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Board meetings

You may have already engaged in meetings during this period of physical distancing using one of a multitude of video conferencing platform such as FaceTime, Zoom, Microsoft Teams and so on. Indeed you may have also noticed in the press that event the Cabinet of the UK Government is using Zoom to facilitate Cabinet and COBRA meetings.

As a result, there may be a temptation to simply follow suit and hold board meetings virtually to ensure business continuity.

However, before doing so, all companies should ensure that their Articles of Association (or any associated members'/shareholders' agreements) permit board meetings to take place using facilities such as conference calls or video conferencing facilities.

Regulation 10 of the Model Articles (participation in directors' meetings) provides the framework for this so if this is incorporated into the company's Articles of Association then this would be a starting point. We would suggest going further and explicitly providing for participation in board meetings by way of conference call or video conference facilities where all participants can speak to and hear each other.

Companies which still have Tables A or C (the predecessors to the Model Articles) as the underlying default provisions for their Articles of Association are (unless they have had bespoke participation provisions included as part of an update to their Articles of Association) unlikely to have such provisions and should take action so as to ensure virtual board meetings can take place by way of amending their Articles of Association.

Failure to do so could lead to the validity of decision making at board meetings being challenged both now and when the dust settles on this pandemic, everything gets back to "normal" and all parties take stock of the position they then find themselves in.

Director resolutions

As an alternative to virtual board meetings, companies may want to elect to have their directors make decisions by way of resolutions in writing. With the counterparts legislation we have had in place in Scotland since 2015, it is also much easier for the board to execute such resolutions in writing as they do not all need to execute the same copy. This is particularly helpful given the current guidelines on physical distancing and the uncertainty around mail collections and deliveries.

Regulation 8 of the Model Articles (unanimous) provides the framework for this so if this is incorporated into the company's Articles of Association then this will allow decisions to be taken by the Board by way of resolution in writing. It is also applicable pursuant to Regulation 93 of Table A if that is incorporated into older sets of Articles of Association. If neither provision forms part of the Articles of Association of your company, you should have them amended to incorporate such provisions.

It is worth noting, however, that resolutions in writing require to be signed by all eligible directors (i.e. all those who are not rendered ineligible as a result of a conflict of interest or an interest in a proposed or existing transaction or arrangement with the company) so you need to ensure that all eligible directors are available to sign resolutions in writing in order for this to be effective.

AGMs / general meetings

Many companies will have an annual general meeting scheduled to take place, whether by way of convention or pursuant to an obligation set out in the company's Articles of Association or elsewhere (e.g. as a condition of continued funding for certain companies that perform public functions).

Typically, the Model Articles, Tables A and C and most sets of bespoke Articles of Association do not envisage the need for a member/shareholder meeting to take place remotely or virtually as a consequence of the current emergency measures.

We would recommend that all companies amend their Articles of Association to allow for AGMs/general meetings to take place remotely or virtually by providing for attendance and voting in such general meetings by way of conference call or video conference facilities where all participants can speak to and hear each other.

It is appreciated, however, that for some companies with large member / shareholder bases that there would need to be a general meeting to amend the Articles of Association to facilitate this. This could be done by calling a general meeting and arranging for a number of members/shareholders to vote by way of proxy to amend the Articles of Association, thus allowing such changes to be implemented and for a virtual AGM/general meeting to be subsequently called.

There is some case law which suggests that this would not be a valid meeting if there is only one person physically located at the place designated for the meeting to take place. In order to get the amendments to the Articles of Association through to facilitate virtual meetings going forward, if it is possible there should be two members/shareholders (observing physical distancing) at the designated location so that such case law could not apply.

For companies with fewer participators in member/shareholder meetings (such as owner-managed and family-owned businesses), then it is still possible to amend the Articles of Association by way of written resolution. Indeed, for all companies, the written resolution procedure will still allow member/shareholder decisions to be made so long as all members/shareholders are proactive in participating in the process (given the need for the threshold of decisions to be taken by reference to the entire membership/shareholder group rather than simply based on the participants in general meetings either in person or by way of proxy).

Electronic communications

Given the uncertainty of the current circumstances in respect of the usage of mail / courier services, all companies should be encouraged to facilitate the use of electronic communications with their members/shareholders.

Regulation 48 or 34 (depending upon whether is it a company limited by shares or by guarantee) of the Model Articles and Regulations 111-115 of Table A facilitate this. Even so, companies may want to amend their Articles of Association further so as to explicitly provide for communications by way of email or via a website. Any companies whose Articles of Association do not provide at all for electronic communications should certainly update their Articles of Association to provide for this.

Even with the framework established in the Articles of Association, all companies should ensure that they have the explicit consent of their members/shareholders to communicate with them electronically either by way of email or by way of posting documentation on a website. This will avoid any debate as to whether or not notices of general meetings etc. have been properly communicated to members/shareholders.

Accounts filing deadlines

A positive measure announced by the UK Government on 25 March 2020 is the relaxation of deadlines for companies to file annual accounts with Companies House. With effect from that date, companies are able to apply for a three-month extension to the deadline for filing their accounts.

While there is an application process, any company citing issues associated with COVID-19 will be granted an automatic and immediate extension. The extension can be applied for online and we are told it should take no more than 15 minutes.

This will come as a welcome relief for companies who are within the nine-month period between their financial year end and the deadline for filing their accounts and are unable to have their accountants / auditors carry out the necessary work associated with the preparation and sign off of their accounts.

Relaxation of insolvency rules

On 28 March, the UK Government announced a temporary relaxation of insolvency rules relating to wrongful trading and the potential personal liability for company directors associated with wrongful trading. This is to have retrospective effect from 1 March 2020 onwards.

This will assist company directors who are reluctant to incur further financial liability for the company (including under the Government-backed financial assistance schemes previously announced) while still operating under a cloud of uncertainty, and possible insolvency, as a result of the COVID-19 pandemic.

It is not intended to be abused by directors of companies that were already in financial difficulty prior to the pandemic, and all other statutory duties on directors (including the duty to have regard to the interests of creditors where insolvency is likely) remain in place.

If you are a company, or a director and/or member of a company, and require advice on insolvency issues, please get in touch with our Corporate Insolvency team on 0141 227 9586.

Review of commercial contracts / force majeure clauses

At this time, a number of contractual disputes will arise for clients, particularly with regards to whether or not the COVID-19 pandemic is an event which frustrates the contract and constitutes a "force majeure" event.

We have sought Counsel's advice in relation to a particular instance and in those particular circumstances the opinion of Counsel was that the COVID-19 pandemic did frustrate the contract, which supported the position of our client in the circumstances.

Obviously each particular case and each particular contract will have its own merits, but this is something that all companies should be reviewing with their commercial contracts so as to ensure that they can take appropriate steps, which financially may be critical to their company at this time.

Get in touch

If you are a company, or a director and/or member of a company, and require advice on how the Coronavirus emergency restrictions affect the company's corporate governance, compliance and decision making, please get in touch with our Corporate team on 0141 227 9540.

Useful links

CORONAVIRUS LEGAL ADVICE HUB

BUSINESS LAW AND CONTRACTS

CORPORATE