Chapter 5 - Directors Duties & Powers Flashcards
Why do companies need directors?
- The company is an independent legal personality and cannot operate itself
- Company cannot be solely operated from the AGM of shareholders. The board is chosen by the shareholders to run the company, it decides the strategy and appoints the management to achieve the strategy.
What does CA2006 require regarding directors?
s.154(1)- private company to have at least 1director (does not confer any management powers on them.)
s.154(2) public company to have at least 2 directors.
s.250 a director is any “person occupying the position of director, by whatever name called” (so can include shadow directors)
What is the main source from which directors derive their powers?
Articles of Association
Where might one find limitiations on directors’ management powers?
- Article giving a specific restriction (ex. borrowing powers)
- Shareholder agreements
- Objects clause, if it has one (not required post- CA2006)
- Article allowing members to give instruction to directors
- CA2006 / other rules and regulations such as the Listing Rules (often procedural conditions)
What are some special powers that are commonly conferred on directors’ by articles?
- Reject share transfers
- Delegation
- Forfeiture of shares
- Chair’s right to casting vote
- Power to set and pay directors remunerations/fees
Is setting the company’s strategy a management decision?
Yes.
One of several management decisions per UKCGC which must be performed by board.
It would be wrong to suggest that the board delegates all management responsibility to the executive directors
What is a de facto director?
Someone carrying out function / role of a director but without being formally appointed.
Per s.250 - Courts will treat them as directors
What tests can be applied to establish if someone is a de facto director?
DTI v Chacra & Sapay [1998] the court provided the test for establishing a de facto director:
- Had he held himself out as a director?
- Did he use the title director?
- Did he have access to all relevant information to make decisions?
- Did he make major decisions for the company
What is a shadow director?
s.251 CA20065- “person in accordance with whose directors and instructions the directors of the company are accustomed to act”
s.251(2) - giving professional advice will not count, nor is a holding company to be treated as a shadow director of any subsidiaries
Can shareholders interfere in the management of a company?
- Articles must provide an express mechanism for them to do.
- Article 4 of the Model Articles for PLCs provide that shareholders can deliver instructions via Special Resolution for directors to take / refrain from taking specified action.
- Will not use often in practice (activists might for publicity but rarely expect success) - as it is easier to seek removal of a director or appoint new ones - both of which can be done by ordinary resolution (albeit special note required).
What are the 7 general duties of directors per CA2006?
- S.171 - within powers/for reason conferred
- S.172 - promote success of company
- S.173 - independent judgement
- S.174 - reasonable care, skill, diligence
- S.175 - avoid conflicts of interest
- S.176 - not accept benefits from third parties
- S.177/S.187 - relate to transactions (before/after) but are not general duties
To whom do the directors owe general duties?
The company as a whole - not directly to the shareholders. Represents directors carrying out their function as agents of the company (principal).
What are the two primary duties owed to a company?
- Common law (relatively light)
- Equitable fiduciary (more onerous)
What the main fiduciary duties trustees owe to beneficiaries?
- Act in good faith and in interests of the beneficiaries
- Act In accordance with trust deed
- Not to make profit from position (ex. bribes…)
- Not place selves in position own interest(s) conflict with fiduciary duties
- Not act own advantage/benefit of 3rd person without benficiariary’s informed consent
- Proper investment of trust property
What are the reminders for a breach of the general duties?
Will depend on the nature of the breach
<br></br>Generally - made to repay any illegal payments received or repay any secret profits they have made
<br></br>Where a breach of duty of skill and care or have acted beyond powers company can be awarded compensation for any losses it has suffered
<br></br>Where directors act outside powers, the courts cannot normally declare the transaction void. Where they have used their powers for improper purposes, the transaction can be declared void.
<br></br>Where a director has failed to disclose interest in a transaction, the company can choose whether or not to treat that transaction as void.
Where might a breach of s.171 arise?
- Individual/board do something beyond company’s powers
- Individual/board do something within powers of the company, but not within their own powers
What conditions are set out in respect of s.171 by s.39 and s.40 ?
- CA 2006 s.39 – the validity of an act done by company shall not be called into question on grounds of lack of capacity by reason of the company’s constitution
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- CA2006 s.40 – in favour of person dealing with a company company in good faith, the power of the board to bind the company be deemed free of any limitation in the company’s articles
Both mean third parties can generally enforce contracts against a company even if the directors entered into it illegally
<br></br>Will not affect personal liability of directors to compensate the company for any losses arising from a breach of duty
<br></br>If contract was entered into with a director - s.39/40 would not help as director concerned could not be considered as someone dealing with the company in good faith
Can transactions be declared void on the basis that the directors have exceded their powers/used their powers for improper purpose?
Exceed powers - transaction still enforceable by third parties ‘dealing with the company in good faith’
<br></br>Directors can still be sued for any losses suffered by the company as a result of the breach. <br></br>
Where directors have used their powers for improper purpose, the transaction can be declared void.
Why are directors rarely sued for exceeding powers?
- No more or very wide objects clause
- Where company has a restrictive objects clause - company must have suffered a loss to make it worth suing directors.
Why might shareholders prefer a company has a restrictive objects clause?
Stop board unilaterally expanding the business into areas the shareholders and/or directors do not have any experience in.
Why are cases regarding ‘improper purpose’ part of s.171 more common than the other part?
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- Happens more often<br></br>
- Directors do not understand underlying rule - from AoA alone they genuinely believe their power is unrestricted
- Remedies the courts arewilling to apply include declaring the improper transaction void
What can the Company Secretary ensure so directors are less likely to breach s.171 duty?
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Powers and delegation of authority are properly documented, for example:
o Schedule of matters reserved for the board
o Committee terms of reference
o Authority matrix for management - It’s clear that when powers being exercised that they are exercised by proper body/individual – whether the board, a committee or an individual such as the CEO.
- Directors are aware of what powers they have under the Articles and which are granted by shareholder resolution. Should be aware if/when those granted by shareholder approval should be renewed (for example. Authority to allot will expire after max of 5 yrs)
What are the key factors directors should have regard to re S.172?
- Consequence in long-term
- Interests of employees
- Need to foster business relationships (customers, suppliers, etc)
- Impact on society and environment
- Desirability to maintain reputation for high standards of business conduct
- Need to act fairly between members of the company
Who can enforce s.172?
The company - not stakeholders
What is the purpose of the strategic report according to CA2006?
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 - CA2006 s.414C
What is meant by ‘promoting the success of the company”?
- Should promote success in best interests of the members as a whole.
- Must have regard to consequences of decision(s) in long-term and various other matters (ss.B-F)
- Success can be equated as whatever is in the best interests of company and its members. Other interests can/should be taken into account but primarily is shareholders is paramount. Benefit to members does not need to be immediate (ex. longer term ROI)
- Ex. as company main sustain a loss before becoming profitable (tech companies).- this won’t be considered a breach of duty as long as the directors truly believed it to be in best interests overall/at the time. Recognises the need for an happy workforce, good business rships and a reputation for high business standards. Also may hurt company if bad society/environmental impact due to its decisions/activities.
