We undertook some staff training recently on substantial property transactions, essentially where a company disposes of, acquires, or enters into an arrangement involving, “a substantial non-cash asset”, where the other party to such transaction is a director of the Company, or a person connected to that director and we thought we would share with you the main points discussed in this article.

The purpose of section 190 of the Companies Act 2006, which obliges shareholder approval of such transactions, is to safeguard the interests of the shareholders and prevent directors from abusing their position for their own gains or benefits to the detriment of the company.

A transaction or arrangement falls within section 190, if:

1. It is entered into between the company and a director, or a person connected with a director, of the company or its holding company.

2. It involves a non-cash asset (typically land, buildings, and other tangible properties, but can be anything other than cash).

3. The value of the non-cash asset (i.e. this could be the value of property, machinery or the aggregated the value of a fixed term contract (such as the total annual rents of a five year lease) which in any case must exceed:

· 10% of the company’s asset value (provided this is in excess of £5,000); or

· £100,000, unless the transaction falls within the limited exceptions outlined in the Companies Act 2006.

A person is “connected” with a director if:

(i) they are a family member of that director (see section 253 of the companies Act but essentially this includes

(a) the director's spouse or civil partner;

(b) any other person (whether of a different sex or the same sex) with whom the director lives as partner in an enduring family relationship;

(c) the director's children or step-children;

(d) any children or step-children of a person within paragraph (b) (and who are not children or step-children of the director) who live with the director and have not attained the age of 18; and

(e) the director's parents,

(but does not include the director’s grandparent or grandchild, sister, brother, aunt or uncle, or nephew or niece), or

(ii) a company with which the director is associated (either because the director is:

1. interested in shares comprised in the equity share capital of that body corporate of a nominal value equal to at least 20% of that share capital; or

2. entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of that body);

(iii) a trustee of a trust and the director (or a person he is “connected” to is a beneficiary under that trust) or

(iv) a partner of the director; or

(v) a firm with which the director is connected.

Section 190 requires the board of directors to seek approval of the company’s members, typically by way of a majority resolution (ordinary resolution). This ensures that shareholders, as the ultimate owners of the company, have notice and a majority say in transactions that could significantly impact the company’s assets.

Companies involved in substantial property transactions must provide information about the transaction to their members when seeking approval. This includes disclosing the identity and value of the property and the consideration involved, together with any other relevant information. This is aimed at enabling shareholders to make informed decisions about the transaction.

The Companies Act 2006, and often the articles of association of the company also obliges any directors of the company who have a direct or indirect interest in the transaction or arrangement, must disclose this interest to the board. Interested directors are generally prohibited from voting on any matters in which they have an interest unless their participation is authorised by the company’s articles, or by a resolution of the non-interested members.

Failure to comply with the provisions of section 190 of the Companies Act can make the transaction voidable by the company or any affected party. In addition, directors and their connected persons may be liable to:

· account to the company for any gains made or benefits received by them; and/or

· indemnify the company lor any losses or damaged suffered by the company, as a result of the transaction or arrangement.