Section 110 of the Companies Act 1997 takes the biggest decisions out of the board’s hands and puts them to the shareholders.
Section 110(1) — the requirement
A company shall not enter into a major transaction unless the transaction is —
(a) approved by special resolution; or
(b) contingent on approval by special resolution.
Paragraph (b) is the practical route. A board can negotiate and sign, provided the agreement is expressly conditional on shareholder approval — which avoids the awkwardness of asking shareholders to approve a deal whose terms are not yet settled.
Section 110(2) — the three limbs
(a) the acquisition of, or an agreement to acquire, whether contingent or not, assets the value of which is more than half the value of the assets of the company before the acquisition; or
(b) the disposition of, or an agreement to dispose of, whether contingent or not, assets of the company the value of which is more than half the value of the assets of the company before the disposition; or
(c) a transaction which has or is likely to have the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the assets of the company before the transaction.
“Assets” is defined in the same subsection to include property of any kind, whether tangible or intangible.
Each limb measures the transaction against the value of the assets of the company before it — gross assets, not shareholders’ funds. A highly geared company can therefore enter substantial transactions without crossing the threshold, while a debt-free company crosses it sooner.
Note also that all three limbs catch agreements and contingent arrangements. An option, a conditional contract or a guarantee can be a major transaction before anything is actually acquired or disposed of.
It reaches a transaction that has or is likely to have the effect of the company incurring obligations or liabilities, including contingent liabilities, above the threshold. A large guarantee, a long-term lease, a take-or-pay supply contract, or an indemnity can all fall within it even though no asset changes hands.
Section 110(2A) — valuing a contingent liability
(a) shall have regard to all circumstances that the directors know, or ought to know, affect, or may affect, the value of the contingent liability; and
(b) may rely on estimates of the contingent liability that are reasonable in the circumstances; and
(c) may take account of — (i) the likelihood of the contingency occurring; and (ii) any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the liability.
This mirrors section 4(4), which applies the same approach to contingent liabilities under the solvency test. The board must look at everything it knows or ought to know, may use reasonable estimates, and may net off a recovery it is entitled to claim and can reasonably expect to be met.
Sections 110(3) and (4) — the exceptions
Nothing in limb (c) applies by reason only of the company giving, or agreeing to give, a floating charge over its assets the value of which is more than half the value of the company’s assets, for the purpose of securing the repayment of money or the performance of an obligation.
Nothing in this section applies to a major transaction entered into by a receiver appointed pursuant to an instrument creating a charge over all or substantially all of the property of a company.
Without subsection (3), every general debenture would require a special resolution — because a floating charge over the whole undertaking necessarily exceeds the threshold. The exception is confined to giving security; the underlying borrowing may still be a major transaction under limb (c).
Subsection (4) reflects the reality that a receiver appointed over all or substantially all of the property acts for the secured creditor, not the shareholders. Requiring shareholder approval for the receiver’s sales would defeat the security. The receiver’s controls are elsewhere — the duties in sections 268 to 271, including the duty on a sale of property in section 269.
What happens without approval
Section 110(1) says the company shall not enter into a major transaction without approval — but it does not say the transaction is void. Consistently with the rest of the Act:
- Section 18(1) — no act is invalid merely because the company lacked the capacity, right or power;
- Section 19(1)(a) — the company cannot assert against an outsider that the Act was not complied with, unless that person has, or ought to have by virtue of their position or relationship, knowledge of the matter;
- Section 114 — the directors breach their duty not to act, or agree to the company acting, in contravention of the Act; and
- shareholders may seek an injunction under section 142, leave for a derivative action under section 143, or relief under section 152.
The section 19 protection turns on knowledge. A buyer acquiring what is obviously the whole of a company’s business, or a bank lending against substantially all its assets, will find it hard to say it did not know the transaction was a major one. In practice such counterparties ask for the special resolution — or make completion conditional on it under section 110(1)(b) — and take a directors’ certificate under section 438.
And the cost of approval: minority buy-outs
Approving a major transaction triggers section 91. A shareholder who casts all their votes against the resolution — or who does not sign a written resolution — may require the company to purchase their shares at a fair and reasonable price under sections 92 and 93.
A board proposing a major transaction should therefore model the potential buy-out cost before putting the resolution, and remember that under section 92(2) it has four options within one month — including applying to the Court or abandoning the transaction altogether.
Sources
- Companies Act 1997 — ss 4, 18, 19, 88, 91–96, 109, 110, 114, 142, 143, 152, 268–271, 438
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.