A recent Privy Council decision examines the extent to which formal shareholder resolutions may be bypassed by relying on the Duomatic principle.

The ability for shareholders to pass resolutions — or assent to a course of action — quickly and informally is a potentially useful tool at any time, and even more so in times of financial and business uncertainty. Shareholders may wish to ensure time-pressured deals or restructurings are completed at speed. Companies may face liquidity challenges or expiring business opportunities, which require shareholder resolution. For creditors or bondholders, there may be an incentive to move swiftly, for example, if a receiver (who is appointed pursuant to the terms of a debenture and empowered to exercise the company’s voting rights) wishes to amend Articles of Association in order to effect a contentious restructuring.

In each case, the solution may be the Duomatic principle,[1] which permits shareholders to pass resolutions informally (instead of convening a general meeting or signing written resolutions), or to assent to a particular matter that could have been dealt with by way of shareholder resolution, provided the decision is unanimous. The Duomatic principle is recognised by English law as applying to English companies, and has some application in other common-law jurisdictions, including the British Virgin Islands, Australia,[2] and Bermuda.[3] However, it is not without limitations, and can give rise to considerable uncertainty, as demonstrated in the recent Privy Council decision Ciban Management Corp v. Citco (BVI) Ltd[4] (Ciban).

What is the Duomatic principle?

The Duomatic principle, as summarised by Mr Justice Buckley in Duomatic, operates so that “where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be”.

In EIC Services Ltd v. Phipps,[5] Mr Justice Neuberger (as he then was) summarised the Duomatic principle as being that “where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval”.

Put simply: if every shareholder with voting power agrees, they can pass, or bypass, resolutions without further formality.

Why use the Duomatic principle?

The primary advantages of passing resolutions using the Duomatic principle are speed and informality. The Duomatic principle can be used to abridge periods required by statute or in the relevant company’s Articles of Association for giving notice of a meeting, or for seeking agreement to written resolutions.

The informality of Duomatic may avoid inefficiency and uncertainty caused by procedural requirements, particularly for sole shareholder companies, close companies, family companies, and wholly owned subsidiaries. Generally, the principle can be relied on when making decisions that do not require discussion or debate and on which all those with voting power are agreed.

However, the principle is also applicable in the absence of unanimity, or even if there is no shareholder intent at all. In Ciban, the Privy Council considered the position of a sole shareholder who informally consented to his business associate giving instructions to the company over a substantial period of time (as a sole shareholder, his consent was inherently unanimous). By so doing, the associate had actual authority, on which the company was entitled to rely. However, on one occasion the associate gave instructions to corporate directors of the company without the actual consent (and arguably against the interests) of the shareholder. Without knowing of the absence of consent, the corporate directors complied with the instructions and issued a power of attorney on behalf of the company enabling the transfer of the company’s assets (five parcels of real estate).

The Privy Council held that the associate had ostensible authority to act on behalf of the shareholder and that the company’s directors were entitled to rely on that. This position was found to arise due to a course of dealing with the shareholder, despite the fact that the relationship was never formalised. The Privy Council further held that the Duomatic principle applied, and the power of attorney was validly issued.

Ciban illustrates that the Duomatic principle exists not merely for the benefit of shareholders or those exercising voting power, but also for other stakeholders who may need to rely on the validity of such resolutions. It also illustrates that it can apply to informal instructions as well as resolutions. In this case, the shareholder ultimately lost out as a result of the principle, but the company, its registered agent, and director were also engaged in several years of litigation to clarify the position.

Limitations of the Duomatic principle

The Duomatic principle is not automatically applicable in all situations. Attempts to bypass procedural rules can give rise to uncertainty, challenges, and litigation from those whose interests may have been, or may be, harmed by the resolution in question.

Even if the shareholders (rather than their ostensible agents) made the unanimous informal decision, a resolution may still be subject to challenge if it can be shown that the decision was outside the scope of the Duomatic principle. Such decisions may include a transaction that:

• Jeopardises the company’s solvency or causes loss to its creditors[6] (not relevant in Ciban)
• Is not consented to by all of the shareholders that are technically entitled to vote (even dissolved companies[7]) (considered briefly in Ciban, in which Lord Burrows ultimately concluded that the nature of ostensible authority precluded the shareholder from denying that he had given consent)
• Is dishonest or fraudulent[8] (there are complicated rules here, as explored in Ciban)
• Could not have been passed by the formal resolution procedure[9] (e.g., because a director has a right to address the shareholder group on a topic before the resolution was passed)

Practical recommendations

The Duomatic principle can be a powerful tool in the right circumstances. Given the uncertainty of decisions made via the principle, companies should:

• Carefully review the shareholder register, and ensure it is up to date; an error in identifying all shareholders may prevent the use of the Duomatic principle
• Consider the rationale for the decision, and whether the decision requires consideration of the interests of stakeholders other than the shareholders
• Regularly check that the Articles of Association accurately reflect the company’s practice, to limit the need to rely on the Duomatic principle (and avoid the attendant uncertainty)
• Make any required filings to Companies House, even when relying on the Duomatic principle (case law has indicated that in certain circumstances a company’s Articles can be amended by the principle without making the required filings,[10] but informality can lead to uncertainty)

Similarly, stakeholders who consider that a resolution passed — or other instruction given — pursuant to the Duomatic principle is contrary to their interests (especially if the company’s solvency is in question) may benefit from examining the rationale for the decision and considering whether to challenge its validity.

This post was prepared with the assistance of Leanne Chen in the London office of Latham & Watkins.

Endnotes

[1] Re Duomatic Ltd [1969] 2 Ch 365.

[2] Akierman Holdings Pty Ltd v. Akerman [2019] NSWSC 1486.

[3] SJTC v. James Watlington et al [2020] SC (Bda) 19 Civ.

[4] [2020] UKPC 21.

[5] [2003] EWHC 1507.

[6] Re Finch (UK) Plc [2015] EWHC 2430 (Ch).

[7] Randhawa and another v. Turpin and another [2017] EWCA Civ 1201.

[8] Bowthorpe Holdings Ltd v. Hills [2002] EWHC 2331 (Ch).

[9] Dickinson v. NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146.

[10] The Sherlock Holmes International Society Ltd v. Aidiniantz [2016] EWHC 1076 (Ch).