The Duomatic Principle

The Companies Act 2006 (Companies Act) sets out certain formalities required for shareholder approval and a company's articles of association and other constitutional documents may contain further formalities.

The Duomatic Principle

The Duomatic principle was established by case law and overrides the need for the formalities as set out in the company's constitution. Depending on the decision to be made, the Companies Act specifies that a decision may be lawfully passed by directors if agreed to by a simple majority of shareholders (over 50%) or, where a special resolution is needed, at least 75% . For the Duomatic principle to apply, however, the shareholders have to unanimously agree to the proposal.

Qualifying Shareholders

A recent case considered the Duomatic principle where one of the shareholders in the relevant company was a company that had been dissolved. The High Court interpreted the Duomatic principle widely, holding that the dissolved shareholder's incapability to exercise its voting rights had informally altered the company's articles, disqualifying that shareholder from the company's register of members. The High Court held that the company therefore no longer needed the consent of that shareholder.

The Court of Appeal, taking a more narrow approach, held that the Duomatic principle did not apply here because the shareholders of a company are those who are named in its register of members. Since the dissolved shareholder was still named in the register, it was, in fact, a shareholder, and its consent would be needed.

Evidence

Directors may make a decision under the impression that all shareholders agree. If shareholders subsequently claim that proper procedure was not followed, it is important for the directors to be able to demonstrate that the shareholders actually agreed to the decision. It is not enough to claim that all shareholders would have agreed to a decision; there must be evidence that they actually agreed.

Best Practice

While the Duomatic principle is useful, it is important that directors fully disclose all information regarding a proposal to all shareholders. There should also be evidence of shareholder consent and therefore in many cases, it will be better to use the traditional written resolution or general meeting methods to obtain shareholder consent. This recent case is also a strong reminder to companies to keep their registers of members up to date.

For further information, please contact Emma Cameron in our Corporate Law team on 01923 919 305.