In light of the requirements contained in section 1 of the Powers of Attorney Act 1971 ("PA 1971") pursuant to which a power of attorney needs to be executed as a deed, it is arguable whether a provision in the articles can be seen as granting a formal and valid power of attorney to the directors of a company pursuant to which the directors may execute documents on behalf of shareholders. It is more likely that such a provision can be seen as creating a simple agency appointment pursuant to which the directors can validly execute simple contracts and agreements (i.e. not deeds) on behalf of shareholders.
When it comes to the directors of a company executing a document in the form of a deed – it is strongly advised that a separate document granting a power of attorney is prepared and executed as a deed in accordance with the formalities in section 1 PA 1971. The alternative to having a separate power of attorney is to include the provision granting a power of attorney in a shareholders agreement which, due to the nature of the restrictions and intellectual property assignments usually found within it, will be executed as a deed.
One of the reasons for this issue stems from the fact that section 33 of the Companies Act 2006 ("CA 2006") does not replicate the same language that was used in section 14 of the old Companies Act 1985 ("CA 1985").
In a nutshell - section 14 CA 1985 states that the shareholders of a company are bound to the provisions contained in the articles as if they were "signed and sealed by each member" - in other words, as if the articles were executed as a deed. Whereas section 33 CA 2006 avoids the use of the "signed and sealed" language, although it does state that the effect of the articles is that the shareholders of a company are bound to the articles as if "there were covenants" on the part of each shareholder to observe the provisions contained in the articles.
This ambiguity results in the route of having to avoid relying on a provision in the articles granting a power of attorney to the directors of a company where it comes to documents that need to be executed in the form of a deed. This is because the validity of the executed document as a deed may be challenged on the grounds that the directors did not have the requisite authority to sign the document as a deed on behalf of a shareholder as the articles are not capable of granting a power of attorney due to the articles not being executed as a deed by the shareholders of a company.
So, what do I need to do?
Where a director is going to be signing a document under a power of attorney provision in the articles check whether the document needs to be executed as a simple agreement or in the form of a deed – in case of the simple agreement, the directors can usually rely on the provision in the articles granting the power of attorney to execute the document on behalf of shareholders.
In the event the document that the director is going to sign is to be executed in the form of a deed, check to see if there is a shareholders agreement validly executed as a deed which has a power of attorney provision within it the directors may rely on this provision as a valid grant of power of attorney and execute documents on behalf of shareholders in the form of a deed. If not, or if there is any doubt, it is strongly advised that the directors draw up a separate power of attorney which is validly executed as a deed.
Where do you see this the most?
We often see this arise in the context of an M&A transaction where the drag along provisions are being utilised by management. There may be disgruntled shareholders not wanting to be dragged along in the sale but the directors might rely on the provisions of the articles to drag them - including the power of attorney. If the share purchase agreement or any other document that needs to be entered into as part of the transaction is to be executed as a deed this can create problems.
We have worked on many transactions where this occurs - do get in touch with us and take advice.