Duomatically Invalidated

22 January 2020

The Court confirms its preference for a narrow and strict interpretation of the “Duomatic principle” relating to the informal approval of actions by a company’s shareholders.

The principle provides that if shareholders do not pass a formal resolution approving a matter but: (i) all shareholders who have a right to attend and vote at a general meeting of a company assent to a matter in some other way, and (ii) the matter is one that could be effected at a general meeting of the company, then the shareholders’ informal agreement is as binding as a resolution of the company at a general meeting.

Broadly, this means that once an agreement has been finalised between all shareholders who have a right to attend and vote at a general meeting, if one or more of those shareholders then argues that they are not bound by the agreement because a formal resolution of the company was not made, that argument will fail.  The principle also means that all such shareholders must have been party to the agreement for it to be binding as if it were a resolution of the company.

In Dickinson v NAL Realisations (Staffordshire) Limited (NAL), the Court at first instance found (amongst other things) that the transfer in 2005 by NAL of its own factory premises without any formal board approval to its majority shareholder at the time, Henry Dickinson, was invalid.

Mr Dickinson and his wife appealed this decision[1], seeking to apply the Duomatic principle.

At the relevant time, Mr Dickinson owned 50.6% of NAL, 39.2% was owned by trustees of a settlement in Mr Dickinson’s name (the Settlement), and the remaining 10.2% was owned by a pension scheme (the Scheme).  It was accepted at trial that Mr Dickinson was able to act in respect of the Settlement as though he had the authority of any other trustee and it was also established that Mr and Mrs Dickinson were the sole members of the Scheme.

Mr and Mrs Dickinson argued that the property transfer was valid even without board approval because, since Mr and Mrs Dickinson were the only members of the Scheme and Mr Dickinson controlled the Settlement, the sale had been authorised by the unanimous approval of all of the shareholders.

The difficulty with this argument was that Mr and Mrs Dickinson were not the sole trustees of the Scheme, the rules of which required there to be a “pensioner trustee” with no connection to any scheme member.  Further, Mr and Mrs Dickinson were not the only potential beneficiaries of the Scheme, which also provided for sums to be paid to dependants.  Mr Dickinson argued that he was authorised to act on behalf of all trustees and beneficiaries; however this was not established on the facts.

As neither (i) all the trustees nor (ii) all the beneficiaries of the Scheme had given their authority to Mr Dickinson (or anyone else) to act on their behalf, the transfer had not been approved by all the trustees, nor had it been approved by all the beneficiaries, therefore the Duomatic principle did not apply, reaffirming the strict requirement for all shareholders to agree if that principle is to be relied upon to retrospectively validate corporate actions.

[1] [2019] EWCA Civ 2146

Harry Stewart Author
Harry Stewart
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