5 - Directors' duties and powers

Question 1

Article 3 of plc model articles

Answer 1

‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose the may exercise all the powers of the company’

Question 2

5 restrictions to general management powers which CoSec should be aware of

Answer 2

• Objects clause
• Article imposing specific limit on powers, such as borrowing limit
• Article allowing members to give directions to directors
• Shareholders’ agreement
• Companies Acts, other rules or regulations

Question 3

What other powers may Articles give directors other than ‘general management’ powers? (2)

Answer 3

• Special powers, such as rejecting share transfers
• Power to delegate their powers

Question 4

Article 4 of model articles for PLCs

Answer 4

Shareholders can instruct director by special resolution to take, or refrain from taking, specified action.

Cannot be used to effect validity of anything which the directors had already done prior to the resolutions passing

Question 5

Why is article 4 of model articles for PLCs rarely used?

Answer 5

It is easier to seek removal of existing director and appoint new director, as this can be done by ordinary resolution

Question 6

What is a fiduciary duty?

Answer 6

A duty owed by a person in a position of trust
Directors are in positions of trust as they are agents of the company

Question 7

Which directors owe directors’ duties to company?

Answer 7

Exec directors
NEDs
Shadow directors

Question 8

Two duties imposed by S.171

Answer 8

• Act in accordance with company’s constitution
• Only exercise powers for purposes for which they are conferred

Question 9

Consequence of director breaching constitution

Answer 9

They are required to account for any gains made, or compensate company for losses sustained, as a result of breach

Question 10

3 ways CoSec should supports directors in fulfilling S.171 duty

Answer 10

• All powers and delegation of authority are properly documented
• It is clear when powers are being exercised, if they are being exercised by company or individual
• Directors are aware of what powers they have under Articles

Question 11

S.172 duty

Answer 11

‘[a] director of a company must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and that, in so doing, the director must have regard (among other matters) to:…..’

Question 12

6 matters to which directors must ‘have regard to’ when promoting success of company - S172(1) factors

Answer 12

• Likely long-term consequences of decision
• Interests of employees
• Need to foster relationships with suppliers, customers, etc.
• Impact on community and environment
• Desirability to maintain a reputation for high standards of business conduct
• Need to act fairly as between members

Question 13

Key couple of sentences that should be added after stating s172 - what s172 actually means

Answer 13

Section 172 does not require the directors to act for the benefit of the stakeholders listed in that section. It requires them to determine, having taken into account those stakeholder interests, what action would best promote the success of the company for the benefit of its members as a whole.

Question 14

Which director duty is generally considered the primary duty?

Answer 14

Duty to promote the success of the company

Question 15

CA2006 - purpose of strategic report

Answer 15

Inform members of the company and help them assess how directors have performed S.172 duty

Question 16

What does the Act mean by ‘success of the company’?

Answer 16

It doesn’t really given any guidance. Companies are free to define this themselves in the articles but few do. Could be financial but a wide array of factors are at play.

Question 17

S.173 duty

Answer 17

A director must exercise independent judgement

Question 18

What does s173 duty mean? (3)

Answer 18

• Director must not fetter their discretion
• Director must not allow personal interests to affect their independent judgement
• Directors representing major shareholder can protect interests of shareholder but must not allow that to override the interests of the company

Question 19

2 exceptions to duty to exercise independent judgement

Answer 19

• Where director is acting in accordance with agreement which restricts future exercise of discretion
• Where director acts in a way that is authorised/required by company’s constitution

Question 20

S.174 duty

Answer 20

A director of a company must exercise reasonable care, skill and diligence

Question 21

S.174 - What standard of care, skill and diligence are directors required to meet? (two thresholds)

Answer 21

That which would be exercised by a reasonably diligent person with:

• knowledge, skill and experience that would be expected of director of that company (objective/minimum)
• knowledge, skill and experience of that particular director (subjective)

Question 22

How does S.174 duty apply when delegating powers?

Answer 22

Director can be found in breach if they have not exercised adequate supervision over those performing delegated functions

Question 23

How does s.174 apply to NEDs?

Answer 23

In the same way, but they are entitled to rely on information provided by executive management unless they have grounds to suspect dishonesty

Question 24

S.175 duty

Answer 24

Duty to avoid conflicts of interest

Question 25

Re. S.175, what accounts to a conflict?

Answer 25

Must arise from a transaction or arrangement with a third party

Question 26

When will a director be found to have breached S.175 duty?

Answer 26

Exploit property, information or opportunity that belongs to company to make a profit

Question 27

2 ways by which conflicts may be authorised

Answer 27

• By shareholders through ordinary resolution
• Other directors can authorise through majority vote

Question 28

S.175 conflict authorisation - what do private model arts say?

Answer 28

They do not invalidate directors’ ability to authorise conflicts

Question 29

S.175 conflict authorisation - what do public model arts say?

Answer 29

They do NOT contain provision enabling directors to authorise conflict

Question 30

Remedies to breaches in S.175 duty

Answer 30

• Agreement is voidable at company’s instance
• Director in breach may be required to account for any gains made

Question 31

S.176 duty

Answer 31

Director must not accept benefit from third party conferred by reason of being a director or doing anything as a director

Question 32

What constitutes a benefit from a third party?

Answer 32

Only a benefit that can reasonably be regarded as likely to give rise to a conflict of interest

Question 33

2 exceptions to breach of S.176 duty

Answer 33

• Benefit has been approved by the members
• Director has acted in accordance with provisions of articles

Question 34

Another area of compliance (Act) linked to S.176 duty

Answer 34

Bribery Act 2010 - criminal offence to accept a bribe, and companies are required to put adequate procedures in place to prevent bribery

Question 35

S.177 & S.182 rules (duty)

Answer 35

Regarding disclosing their interest in certain transactions or arrangements

Question 36

Which sort of transactions and arrangements are covered by S.177 rules

Answer 36

Where the director has entered into an agreement with the company, or is the shareholder of another company which has done so

Question 37

7 duties of directors

Answer 37

• Act within powers in accordance with constitution
• Act in a way they consider most likely to promote success of company for its members as a whole
• Exercise independent judgement
• Exercise reasonable care, skill and diligence
• Avoid CoIs
• Must not accept benefits from third parties
• Declare nature and extent of interest in transactions and arrangements (and disclose interests if they arise following approval of transaction/arrangement)

Question 38

What is a derivative action claim?

Answer 38

A claim brought by a member of a company in respect of a cause of action vested in the company, which seeks relief on behalf of the company

Question 39

What must a claimant member do before derivative action claim can continue?

Answer 39

Apply to court for permission

Question 40

2 stages following application to make derivative action claim

Answer 40

• Stage 1 - establishing a prima facie case
• Stage 2 - determining whether to grant permission

Question 41

Key reason why possibility for derivative action is important

Answer 41

In instances where directors are wrongdoers, and they are also majority shareholders
Act constitutes a ‘fraud on the minority’

Question 42

Which actions provide grounds for a derivative claim?

Answer 42

An actual or proposed act or omission involving negligence, default, breach of duty or breach of trust

Question 43

What do companies usually do for directors in light of the heavy potential liabilities that they and other officers face?

Answer 43

Effect and pay the premiums on an insurance policy - D & O insurance

Question 44

What does CA 2006 say on exemption/indemnification of director from any liability for negligence, default, breach of duty or trust in articles or any contract?

Answer 44

It is void, with certain exceptions

Question 45

When is a company allowed to indemnify its directors?

Answer 45

Against liabilities to third parties (known as qualifying third party indemnity provisions)

Question 46

Where can entirety of S.172 be found?

Answer 46

Wates Principles - FRC website

Question 47

CA 2006 - 2 of the instances where company cannot indemnify director

Answer 47

• Against payment of a criminal or regulatory penalty
• Against any liability incurred y director in defending criminal proceedings of which they are convicted