A recent case confirmed that, in certain circumstances, the unanimous informal consent of the shareholders of a company can be as binding as a resolution passed at a general meeting. This concept is known as the Duomatic Principle (unimaginatively named after the case in which it was formulated).
The advantages – and some disadvantages
This will be of interest to owner-managed businesses as the Duomatic Principle may be relied upon to rectify certain procedural irregularities. An example of this would be where a substantial property transaction between a company and one of its directors has been completed but without the required shareholder approval. Provided all of the shareholders are aware of the transaction and it is clear they consented (more on consent below), the principle could be applied to ‘cure’ this lack of formal shareholder approval. Essentially the principle is viewed as a waiver of procedures which are designed to protect shareholders.
In an owner-managed business the same individuals may be both directors and shareholders and they may not always be aware of which role they are fulfilling when they make a decision. This can lead to procedural irregularities and the Duomatic Principle may be available to help overcome these.
But the Duomatic Principle is based on common law which means it is open to interpretation by the courts and should only be relied upon as a matter of last resort – there is no substitute for obtaining the correct consents in the first place. As well as this, the Duomatic Principle cannot be used to avoid statutory procedures which are in place to protect other interested parties, not just shareholders. For example, the principle cannot be used to remove a director from office and avoid the protections given to that director by statute, in particular the right to put their case to the shareholders when they are considering a resolution to remove the director.
To be able to rely on the Duomatic Principle:
- there must be unanimous consent of all the shareholders with a right to vote;
- the shareholders must have full knowledge of the matters they are deemed to be consenting to;
- the matters to be rectified must be procedural in nature;
- the principle cannot be used to validate a resolution which ordinarily would be invalid; and
- the principle cannot be used to avoid set statutory procedures which protect parties other than the shareholders.
How to show consent
If all the shareholders must consent to the relevant matter but there’s no formal resolution, how can you tell if they have consented? Fundamentally, this is a matter of fact – so, for example, all of the shareholders entitled to vote on a matter may be present at a board meeting approving a transaction requiring shareholder approval. Also, acquiescence can equate to consent – so failing to vote against a motion would be deemed consent. Finally, the consent must be verifiable in some way, for example a resolution is approved at a meeting, a transaction is completed or a memorandum is produced.
The Duomatic Principle is not a panacea to cure all ills but it can be useful to prevent something failing due to a minor procedural irregularity. Remember:
- the principle is based on common law and is therefore subject to interpretation;
- it can be used to rectify procedural irregularities which ordinarily are in place to protect shareholders;
- all shareholders with a right to vote must consent; and
- consent can take a number of forms but must be verifiable.