The Duomatic Principle

When can directors’ decisions be ratified by the company’s shareholders when not taken in the usual formal manner? The Duomatic principle has been considered in two important rulings in recent times and can prove valuable to company directors and shareholders. The award-winning corporate lawyers at ParrisWhittaker in the Bahamas, Jamaica and across the Caribbean, are highly experienced in advising on corporate decision-making.

In the normal course of business, company decisions are made by way of shareholder resolutions – whether by a written resolution or a shareholder meeting convened and held under company law or the articles of association.  In some circumstances, the shareholders can instead approve a course of action informally without the usual formalities ,under the Duomatic principle.

What is the Duomatic principle?

The Duomatic principle is sometimes referred to as the ‘ratification principle’: anything the members of the company can do by formal resolution in a general meeting, they can also do informally if all of them assent to it.

All members (the company being solvent) must agree to the action; positively manifest that agreement; and there must be no dishonesty or bad faith towards the company. It allows the shareholders to ratify a decision made by the directors in breach of duty in order to preclude a claim by the company against the directors.

There are limits: the principle cannot be used to relieve directors from breaches in relation to transactions the company had no power to carry out.

Two cases from the UK courts illustrate the importance of this principle to companies today. First, a key ruling from the Privy Council in 2020¹ followed a long-running case involving a complex corporate structure created by an individual (the ultimate beneficial owner) for the purpose of holding land – but masking its true ownership. (You can read our article on the Ciban ruling here).

The courts ruled that by setting up the company structure in the form that he had, the ultimate beneficial owner’s agent – acting under ostensible (ie apparent) authority – bound the company under the Duomatic principle.  The Privy Council said: “If actual authority can be conferred informally by unanimous shareholder consent, the same should apply to ostensible authority”.

The case in Satyam² followed that decision. At issue was whether the sole director (John Burton) of one company had authorised the sale of 12 London flats at an undervalue to another company, of which he was also the sole director/shareholder. It was alleged he had done so in breach of his fiduciary duties.  The court ruled that the transaction was genuinely intended to be a market value transaction.

It also accepted Burton’s argument that the Duomatic principle applied as the transfer was expressly authorised by him as the company’s sole beneficial owner. The sale was not at an undervalue, no dishonesty was involved, so it could be ratified by him as the shareholder. And while there was no breach of duty on Burton’s part – even if there had been, such breach was authorised by him and he had no liability under the Duomatic principle.

How can we help?

Strict formalities for the purpose of corporate decision-making is not the only way in which decisions can be made by the company. The Duomatic principle clearly has an important role to play in the general running of a business, as these rulings illustrate.  However, the principle cannot be relied on where there is dishonesty or decisions purportedly made that are not permitted.

We advise and represent companies and directors on their decision-making processes and on who has authority to make bind decisions. For specialist advice from expert corporate and commercial lawyers at ParrisWhittaker contact us on +1.242.352.6112

¹Ciban Management Corporation (Appellant) v Citco (BVI) Ltd and another (Respondents) (British Virgin Islands) Case ID: JCPC 2019/009

² Satyam Enterprises Ltd v Burton & anor [2022] EWHC 1987