Chapter 5 - Directors duties and powers

Question 1

1. Where might you find limitations on the directors’ management powers?

Answer 1

Limitations on the directors’ general management powers can be found in:

• an objects clause;
• other article provisions, which may impose a borrowing limit or a require shareholder approval;
• article provisions allowing the members to give directions to the directors;
• a shareholders’ agreement – which could require shareholder approval for certain types of decisions; and
• the Companies Act 2006 and the Listing Rules – which both impose requirements for shareholder approval

Question 2

2. Identify at least two special powers that are usually conferred by articles on the directors?

Answer 2

Examples of special powers given to directors include:

• the power to delegate;
• the power to reject transfers;
• the power to pay and fix directors’ remuneration and fees;
• the power to forfeit shares;
• the chair’s right to a casting vote

Question 3

3. Is setting the company’s strategy is a management decision?

Answer 3

Setting the company’s strategy is a management decision.

It is one of several management decisions that, under the UK Code, must be performed by the board. Accordingly, it is wrong to suggest that the board delegates all management responsibility to the executive directors.

Question 4

4. Can shareholders interfere in the management of a company?

Answer 4

Most articles of association provide a method by which shareholders can give directions to the board (typically by
passing a special resolution).

Those directions could cover matters regarding the management of the company. However, shareholders do not normally interfere in this way on management issues as it easier for them to secure their objectives by appointing and removing directors.

Question 5

5. Directors General Duties?

Answer 5

Directors General Duties?

1. Duty to act within powers in accordance with the company’s constitution (and to use those powers for proper purposes). general duties. (S171)

2.Duty to promote the success of the company. (s172)

3. Duty to exercise independent judgement. (s173)
4. Duty to exercise reasonable care, skill and diligence (s. 174).
5. Duty to avoid conflicts of interest (s. 175).
6. Duty not to accept benefits f om third parties.
7. Duty to declare any interest in proposed transactions or
   arrangements

Question 6

6. Fiduciary duties of trustees?

Answer 6

Fiduciary duties of trustees:

1. Duty to act in accordance with the trust deed
2. Duty to act in good faith in the interests of the beneficiaries
3. A combination of the duty to avoid conflicts of interest and the duty to act in good faith in the interests of the beneficiaries
4. A combination of the duty not to place themselves in a position where their own interest conflicts with their fiducia duties and the duty not to make a profit from their position.
5. A combination of the duty not to place themselves in a position where their own interest conflicts with their fiducia duties and the duty not to make a profit f om their position

Question 7

7. What is a fiduciary?

Answer 7

A ‘fiduciary’ is a person in a position of trust, like a trustee.

Question 8

8. Why are directors rarely sued for exceeding their powers?

Answer 8

Directors are rarely sued for exceeding their powers because:

• recent practice has been to draft any objects clause very widely so as not to constrain what the directors can do;
• companies are no longer required to have an objects clause and if they do not have one, their objects are deemed to be unrestricted;
• even if a company has a restricted objects clause, the company must have suffered a loss for it to be worth suing the directors

Question 9

9. Why do you think there are a lot more cases about directors using their powers for improper purposes?

Answer 9

There are probably more cases about directors using their powers for improper purposes:

• because this happens more often;
• directors are not aware of the underlying rule and believe, from a reading of the articles, that their powers are unrestricted in this regard;
• the remedies that the courts are willing to apply include declaring the improper transaction void

Question 10

10. What are the consequences of the directors exceeding their powers and how do these compare with cases
    where they have used their powers for improper purposes?

Answer 10

Where the directors exceed their powers, the transaction is still enforceable by third parties dealing with the company in good faith. However the directors can be sued for any losses that the company suffered as a result of the breach.

Where the directors have used their powers for improper purposes, the transaction can be declared void.

Question 11

11. According to the CA2006, what is the purpose of the strategic report?

Answer 11

According to the Act, the purpose of the strategic report is to inform members of the company and help them assess how
the directors have performed their duty under s. 172, to promote the success of the company.

Question 12

12. What does ‘promoting the success of the company’ mean?

Answer 12

The Act provides that directors have a duty to exercise their powers to promote the success of the company for the
benefit of the members.

In doing so, they must regard the likely consequences of any decision in the long term and various other matters. It would appear therefore that success can be equated with what is in the best interests the company’s members/shareholders.

Directors are allowed to take other interests into account. However, the interests of shareholders are paramount. The benefit to shareholders does not need to be immediate.

A company may, for example,
sustain a period of losses before it becomes profitable, as has been the case with most of today’s big technology companies. The directors may not even be in breach of this duty if the company fails as long as they believed at the time that their actions would promote the success of the company.

Section 172 also recognises that a successful company needs a contented and committed workforce, good relationships with its customers and suppliers, and a reputation for high standards of business conduct. It also recognises that a company’s reputation may suffer if it has an adverse effect on the environment.

Question 13

13. Do the directors need to consider stakeholder interests whenever they make a decision?

Answer 13

Where a decision may impact on the interests of stakeholders, directors must take those interests into account. Not all
decisions will have an impact on stakeholders.

Some may only have a very minor (or theoretical) impact. There is no need to record the fact that the board has taken into account the interests of stakeholders in these circumstances.

It is much more important to do so in circumstances where the decision may have a major impact on stakeholders (e.g.
shutting down a factory). The fact that such a decision might not be in the interests of factory workers does not prevent the company from making that decision.

Question 14

14. What tests should be applied in judging whether a director has breached the duty of skill and care?

Under s. 174(2) the standard against which the duty of directors to exercise due diligence, skill and care is judged
directors is that of:

Answer 14

A reasonably diligent person with:

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b) the general knowledge, skill and experience that the director has.

Question 15

To what extent can directors rely on other company officials?

Answer 15

Directors are entitled to trust people in positions of responsibility until there is reason to distrust them (Norman v
Theodore Goddard [1991]).

However, delegation by the directors does not absolve them completely from the duty to exercise due skill and care.

They can be found to be in breach of that duty if they fail to exercise adequate supervision over those performing those delegated functions

Question 16

16. What sort of conflicts does s. 175 relate to?

Answer 16

The duty to avoid conflicts in s. 175 applies in particular to the exploitation of any property, information or opportunity.

Section 175(3) clarifies that it does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company in which a director has an interest.

This type of conflict is dealt with separately by ss. 177 and 182 ofthe Act.

Question 17

17. What are the consequences of a breach of this duty?

Answer 17

A director who wrongly makes a profit by exploiting a business opportunity that belongs to the company can be made
to repay that profit.

The courts may also rule that a third party acquiring company property through a breach of duty by directors holds that property on behalf of the company as a constructive trustee and, as a result, can be forced to return it.

Question 18

18. Who can authorise conflicts of interest and what is the effect of authorisation?

Answer 18

Under s. 175 of the 2006 Act, the non-conflicted directors may now authorise conflicts such as the exploitation of business opportunities. This is the case for a private company unless the articles provide otherwise.

In the case of a public company, the articles must specifically allow the board to authorise such conflicts. If a conflict has been properly authorised, the duty is not infringed, which means that the director cannot be sued on these grounds.

Question 19

19. Do directors’ interest in transactions and arrangement need to be authorised?

Answer 19

A conflict of interest that arises out of a director’s interest in a transaction or arrangement with the company does not
need to be authorised.

The transaction itself may need to be authorised by the board if it is one of the matters reserved for its decision.

However, the fact that the director has an interest in the transaction does not need to be authorised either
by the board or the shareholders

Question 20

20. Why are directors required to disclose their interests in proposed transactions?

Answer 20

Directors are required to disclose any interest they may have in a proposed transaction or arrangement with the
company to:

• ensure that the other directors are aware of that interest before entering into that transaction or arrangement; and
• ensure that the chair is able to rule on whether the director can participate in the decision on that matter.

Question 21

21. Why are they required to disclose their interests in existing transactions?

Answer 21

Directors are required to disclose their interests in existing transactions because:

• they might otherwise be able to exert covert influence on the continuation or management of that contract or arrangement; and
• a failure to disclose an interest in a proposed transaction becomes a criminal offence under s. 182 as soon as it becomes an existing transaction, i.e. when the company enters into that transaction and the director’s interest has still not been disclosed

Question 22

22. List the general duties of directors under Part 10, Chapter 2 of Companies Act 2006.

Answer 22

The general duties of directors under Part 10, Chapter 2 of Companies Act 2006 are:

• to act within their powers in accordance with the company’s constitution (and to use those powers for proper purposes) (s. 171);
• to promote the success of the company (s. 172);
• to exercise independent judgement (s. 173);
• to exercise reasonable care, skill and diligence (s. 174);
• to avoid conflicts of interest (s. 175);
• not to accept benefits from third parties (s. 176); and
• to declare any interest in proposed transactions or arrangements (s. 177).

Question 23

23. What is a derivative action?

Answer 23

A derivative action is a special court procedure which enables shareholders to bring a legal action in the name of the
company against a director(s) for breach of duty.

If the action succeeds, any compensation is awarded to the company rather than to the shareholders who initiated it.

Question 24

Q1. List the 7 directors’ duties under the CA2006 (7 marks)

Answer 24

The 7 directors duties under the companies act 2026 are as follows:

1. S171 - Duty to act with their powers – this will be in line with their articles of association
2. S172 - Duty to promote the long term success of the company
3. S173 - Duty to exercise independent judgement
4. S174 - Duty to exercise, care and skill
5. S175 - Duty to avoid conflict of interest
6. S176 – Duy to not except benfits from 3rd parties
7. S177 - Duty to declare a conflict of interest.

Question 25

Q2. List 3 factors likely to be considered when adhering to s172 of the Act (3 marks)

Answer 25

1. When adhering to s172 of the companies act directors must look at the like long term consequences of their decision and the impact on the company
2. Have regard to the interest of their employees
3. The needs to foster business
   relationships with suppliers, customers and others
4. The impact of the environment and community
5. The desirability to maintain a reputation for high standards of business conduct.
6. To treat all members fairly

Question 26

Q3. What is the purpose of Directors’ and Officers’ insurance? (2 marks)

Answer 26

• The core purpose of a D&O policy is to provide financial protection for directors against the consequences of actual or alleged “wrongful acts” when acting in the scope of their duties. These include:

– breach of trust
– breach of duty
– neglect
– error
– misleading statement
– wrongful trading

• The D&O policy will pay for defence costs and financial losses.