The line can often be blurred in owner-managed businesses where the directors of a company are also the shareholders. It can be difficult for individuals to identify which role they are fulfilling and when, and which procedural requirements they are obliged to comply with as part of that role. As a result, procedural irregularities may arise.
However in some cases the Duomatic principle can be used to ease procedural irregularities. It provides that in certain circumstances, the unanimous informal consent of shareholders can be as effective and binding as the formal procedural requirement of a resolution passed at a general meeting. Whilst this principle is in itself not new, new cases have carved out certain rules in relation to its application.
In the recent case of Randhawa and another v Turpin the Court of Appeal emphasised that the Duomatic principle could not be relied on in every case and that fundamentally, the principle requires that all of the registered shareholders consent.
Essentially, to be able to rely on the Duomatic principle all of the shareholders must have full knowledge of the transaction, have the right to vote and have also consented to the transaction. The principle can only be relied on to rectify matters that are procedural in nature. However, it should be noted that the Duomatic principle is a common law principle which is therefore subject to the court’s interpretation. Furthermore, it is important to note that there are certain statutory procedures in place for the protection of parties interested in particular transactions, which could also prevent the principle from being relied on.
As a result of the above it is advisable that companies:
- For certainty, check what the procedural requirements are for entering into particular transactions and comply with these to the fullest extent possible – this is far safer than simply seeking to rely on the Duomatic principle
- Update the register of shareholders as soon as possible if any change occurs (due to the fact that deceased or dissolved shareholders can remain members of the company which may impact the ability for certain decisions to be made)
- Ensure that any records of board and shareholder decisions are retained to help prevent challenges by parties who may be negatively impacted by those particular decisions
- Regularly review the company’s articles to ensure they always reflect the specific requirements of the company at the time