Logo

Insights -

Duomatic isn’t Automatic – Taking Care with Informal Shareholder Approvals

Whilst most day-to-day decisions required to operate a company will be made by directors and members of senior management, some actions do require the approval of the company’s shareholders.

When this applies, the Companies Act 2006 includes formal processes for obtaining consent (usually via a properly called meeting or, more commonly, a validly served written resolution).

A more informal alternative

Notwithstanding this, there is a handy common law principle that companies often seek to rely on to speed up decision making.

This is known as the Duomatic principle and, in short, it applies if shareholders have given unanimous, unconditional consent, notwithstanding that such consent is informal and does not comply with strict procedures.

The principle can also be relied on if a decision, which had approval of the shareholders, is (later) challenged and the board cannot provide evidence that formal processes were adopted to obtain that approval.

The Duomatic principle is a handy tool but there are limits to its flexibility and application. Last month’s decision in Chohan v Ved and others [2024] EWHC 739 (Ch) serves as a reminder that it may not always be available.

The Chohan v Ved Case

Chohan v Ved involved a company that owned a commercial property, 5 Theobald Court (5TBC). Mr Ved and his wife each held 50% of the shares in the company but half of these shares were held on trust for Mrs Choban.

Mr Ved also operated an accountancy practice from 5TBC as a sole trader. The lease between the company and Mr Ved had no security of tenure (meaning that Mr Ved had no right to extend his lease at the end of the term).

The company and Mr Ved had discussed an intention to grant a sub-lease in relation to Mr Ved’s office space and that Mr Ved’s lease term would need to be extended to accommodate the new sub-lease.

Before the lease extension could be finalised by the parties, the relationship between the Veds and the Chohans broke down. Notwithstanding this, Mr Ved, being the company’s sole director, continued with the extension and included two further changes to his advantage (giving him security of tenure at 5TBC and a rolling break clause if he chose to end the lease).

The Chohans argued that Mr Ved had acted inappropriately and outside his authority. By approving these matters (in his capacity as a director of the company) he had breached his duties to the company.

Mr Ved’s defence was that shareholders of a company can approve actions of a director which might otherwise comprise a breach of duty and that, whilst no meetings had been called or resolutions approved, his actions had been authorised by the shareholders under the Duomatic principle.

In short, Mr Ved and his wife were the sole legal shareholders and had unanimously and informally assented to the actions that he undertook as a director.

The court disagreed. It said that whilst the Duomatic principle operates informally, there does need to be some “outward demonstration” of assent. In this case, there was no evidence that Mr Ved (or his wife) had considered or assented to his potential breaches.

Furthermore, case law had established that, if shares are held on trust on the understanding that the beneficial owner makes decisions in relation to them, the beneficial owner’s assent may be required for the Duomatic principle to apply.

What can we learn from this?

In light of the court’s judgment, shareholders do need to exercise some caution when taking a relaxed approach to decision making (which is often not recommended) or find themselves needing to invoke the Duomatic principle in relation to a past action.

They should consider the following.

  • Can the shareholders demonstrate intention to assent? For example, do they have any contemporaneous records, such as email exchanges approving the decision?
  • Is the Duomatic principle capable of applying? It cannot be deployed to bless actions that are legally invalid (e.g., an unlawful dividend) or avoid procedures that protect third parties (e.g., the formal process to remove of a director under the Companies Act 2006).
  • Is the company solvent? Case law has cast doubt on whether Duomatic principles can apply if the company is (or is at risk of becoming) insolvent.

The case also underlines that courts will be reluctant to extend the Duomatic principle if (motivated by self-interest) a director later seeks to rely on it to ratify his own conflict.

How can Morr & Co help?

Morr & Co can help you navigate the complexities of company decision-making by providing expert guidance on formal shareholder consent and the Duomatic principle. Our team ensures compliance with the Companies Act 2006 and helps protect your company’s interests in legal matters.

If you would like to get in touch with us about informal shareholder approvals and the Duomatic principle, please call 01737 907492 or email [email protected] and a member of our expert team will get back to you.

Disclaimer

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.


Back to listing
Print Share