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Corporate Governance and Directors Duties Flashcards

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1
Q

How can you constraint company activities?

A

Through Corporate Governance

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2
Q

Definitions of Corporate Governance

Cadbury Committee 1992

A

“…the system by which companies are directed and controlled” (Cadbury Committee, 1992)

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3
Q

Definitions of Corporate Governance

OECD 1999

A

“…a set of relationships between a company’s board, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of attaining those objectives, and monitoring performance, are determined” (OECD, 1999)

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4
Q

OCED (2004) Principles of Corporate Governance

International Benchmark for Corporate Governance

A

1 ) Rights of shareholders: protect shareholders and facilitate their rights in the company

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5
Q

OCED (2004) Principles of Corporate Governance

A

2) Equitable treatment of shareholders: all shareholders should be treated equitably (fairly), including those who constitute a minority, individuals and foreign shareholders

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6
Q

OCED (2004) Principles of Corporate Governance

A

3) Stakeholders: recognise the legal rights of stakeholders and facilitate cooperation with them

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7
Q

OCED (2004) Principles of Corporate Governance

A

4) Disclosure and transparency: companies should make relevant, timely disclosures on matters affecting financial performance, management and ownership of the business

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8
Q

OCED (2004) Principles of Corporate Governance

A

5) Board of directors: should set the direction of the company and monitor management; the CG framework should underpin the board’s accountability to the company and its members

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9
Q

Who is Corporate Governance relevant to?

A

It is important to almost all organisations.

Most of CG attention is given to Public limited companies (PLC) who are being treated and recognised in capital markets.

These types of organisations are involved with a large amount of shareholders which is referred to as an agency problem.

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10
Q

Corporations and the Separation of Ownership and Control

A

Shareholders (ownership)

Can either participate (or not) in Annual Meeting

Can hire and fire Board of Directors

These board of directors can be internal/external members and they have (executive/control/consulting functions)

They will then vote on Executive Directors who are in control.

In an agency relationship the principal will be the shareholders and the agents will be the directors.

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11
Q

The Development of Codes of Best Practice for Corporate Governance in the UK

A

The UK system of corporate governance has developed both formal and informal corporate governance mechanisms which are a mixture of:

  • law
  • self-regulation
  • best practice and market-based sanctions.
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12
Q

Formal Forms of Corporate Governance

A

Company’s Act 1985/1989/2006
Includes
-duties and responsibilities of company officers and
-financial reporting requirements

Corporate Governance Code (Financial Reporting Council) – the board (latest one 2018)

The Registrar of Companies

Audit

Articles and Memorandum

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13
Q

Informal Forms of Corporate Governance

A
  • managerial incentive plans
  • shareholder and debt-holder board monitoring (exit v voice)
  • takeovers (market reactions)
  • and the internal and external labour market
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14
Q

Formal Forms of Corporate Governance

Corporate Governance Code

A

The latest one was published in 2018.

The financial reporting council issues the CG code.

The UK’s CG code sets out the principles for the board of directors that they should apply for the success of the company. Sets out expected standards of good practices.

Also talks about board issues, company purpose, division of responsibilities, audit, risk, control.

Listed companies must comply or explain the provisions of the CG code. In the case where they don’t comply they must explain the why and include this in the annual reports.

Must apply the principles and provisions and report their activities to the shareholders.

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15
Q

Formal Forms of Corporate Governance

The Registrar of Companies (Companies house)

A
  • Allows companies to file information about themselves that is required by the Company Act 2006
  • Enables individuals or companies to search for information on other registered companies
  • Maintains ‘other’ information data bases such as the disqualified directors register
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16
Q

Personalities The Board Of Directors

Structure of the board

Executive Directors

A

Executive Directors (full-time employees)

They will have two types of relationships and duties. One is based on an agency relationship and the other is the employment contract.

They have senior capacity eg CEO and Finance Directors

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17
Q

Personalities The Board Of Directors

Structure of the board

Non-Executive Directors (NEDs)

A

Non-Executive Directors (NEDs)

They are not employees of the company and are not involved in the day to day running. Usually receive a flat fee for their services and a contract for services.

Their main responsibility is to provide a balancing influence and try to minimise conflict of interest between directors and shareholders.

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18
Q

Personalities

The Board Of Directors

Unitary boards

A

Unitary board system is what is used in the UK. The company directors will be serving on the same board.

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19
Q

The Board of Directors

Two-tier boards

A

Two-tier boards. This is used in continental Europe. There are two types of boards

1) Supervisory board (responsible for supervision of the business)
2) Operating board (responsible for day to day running of the business)

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20
Q

The Board of Directors

Key Positions

A

Chairman/person (leader of the board)
Their responsibility is to ensure the board operates efficiently and effectively. Usually a NED

Chief Executive Officer (CEO)
Leader of executive team. Responsible for day to day management of the organisation. Executive Director

Secretary
Responsible for administrative duties. Chief admin officer of the company. Provides agendas and papers for the board meetings. Responsible for communication between the shareholders, government and the company.

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21
Q

The Board of Directors

Segregation of Responsibilities

A

For example the CEO shouldn’t hold the position of the chairman.

As this can compromise the flow of information between the different parties.

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22
Q

The Board of Directors

Standing Committees

A

Standing Committees (most often: Audit, Remuneration, Risk, Nomination Committee)

These have a permanent nature and are within the management structure of the company.

These committees are made up of members of the board and have specific sets of duties.

23
Q

What is required for a successful board?

A
  • frequent meetings & good communication
  • balance of power
  • open to suggestions & NEDs
  • trust, diversity, dynamism & integrity required
  • responsibility for financial a/c
  • embrace change & calculated risks
  • in-depth understanding of core business & risks
  • active engagement with stakeholders
  • training
24
Q

Directors’ authority & managing directors

A

The powers of the directors are defined by the company’s articles.

The directors’ powers are vested in them as a collective body (BOD) & exercised by the directors in board meetings.

Normally directors are authorised to manage the business of the company and to exercise all the powers of the company.

25
Q

Directors are agents of the company and act on its behalf

A
26
Q

Restriction on the directors power

Statutory (general)

A

Statutory (general) → exercise powers only “for the purpose for which they are conferred (s.171)

They will have to act in accordance with the companies constitution.

27
Q

Restriction on the directors power

Statutory (specific)

A

Statutory (specific) → e.g. alteration of the articles / reduction of capital need a special resolution, which the directors must secure from the shareholders in general meeting before they can act

Need a special resolution before the directors can act on behalf of the shareholders.

Special resolutions will have to be passed by shareholders in General Meetings and require 75% approval.

28
Q

Restriction on the directors power

Articles (of association)

A

Articles → e.g. the articles may set a maximum amount that the directors are entitled to borrow, any greater amount needing approval of the company in general meeting

Articles can contain additional restrictions. Can contain provisions related to the directors powers/authority.

29
Q

Restriction on the directors power

Members

A

Members → re-allocating the powers between the board and the general meeting by passing a special resolution to alter the articles / removing directors from office

These powers are included in the articles of association and can be changed by a special resolution.

30
Q

Directors’ authority & managing directors

Company contracts through agents

A

The power of the board of directors can be extended / delegated to individual directors, other officers, senior employees → company is bound by the contract entered into by the person within his authority.

31
Q

Actual authorities of Directors

A
  • Express

- Implied

32
Q

Actual authorities of Directors

Implied authority

Case Law: Hely-Hutchinson v Brayhead Ltd (1968)

A

The person’s authority flows from his position; e.g. the board delegated powers to any managing director

The managing director has implied usual authority to make general business contracts on behalf of the company

Third party assumes that a person appointed as managing director has all the power usually exercised by a person acting as a managing director.

33
Q

Directors Authority

Ostensible (Apparent) Authority

Case Law: Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964)

A

The board permits a director to behave as if he was a managing director or give the impression that he is one → the director will have the apparent authority to enter into contracts relating to the business as a managing director would have and to bind the company in respect of them.

Only exists in the mind of the third party.

34
Q

Directors Duties to the Company

General Duties (code of conduct)

Statutory/Codified in CA 2006

A

To act within powers (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 conflict of interest (s.175)
Not to accept benefits from third parties (s.176)
To declare interest in proposed transaction or arrangement (s.177)

35
Q

Directors Duties to the Company

Specific Duties

Statutory/Codified in CA 2006

A 
e.g. Obligation to prepare 
the directors’ report (s.415)
accounting records (s.386)
annual accounts (s.393)
directors’ remuneration report (s.420)
annual return (s.855)
36
Q

Directors Duties to the Company

Specific Duties

Not codified (Case Law)

A

Common law duties e.g. duty to consider creditors’ interest when insolvency is inevitable.

37
Q

Directors General Duties

S.171 Duty to Act within Powers

(Codification of the Proper Purpose Rule)

A

The director has the duty to exercise the company’s powers for the purpose of which they were allocated to do. Must act within powers.

A director must

  • act in accordance with the company’s constitution
  • exercise powers only for the purpose for which they were conferred

If the directors exercise powers for a collateral purpose, the transaction will be invalid unless it is approved or ratified by the company in general meeting.

38
Q

Directors General Duties

S.172 Duty to promote the success of the company

A

A director must act in the 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.

39
Q

Directors General Duties

S.172 Duty to promote the success of the company

What 6 factors must the director have regard to (as well as the company and the shareholders) ?

A
  • the likely long term consequences of any decision
  • the interests of the company’s employees
  • the need to foster the company’s business relationships with suppliers, customers and others
  • the impact of the company’s operations on the community and the environment
  • the desirability of the company maintaining a reputation for high standards of business conduct
  • the need to act fairly as between members of the company
40
Q

Directors General Duties

S.172 Duty to promote the success of the company

Interest of the company’s creditors insolvency

A

Where a company is insolvent the interest of creditors intrude.

They have power (through insolvency procedures) to control the company’s assets which are (in practical sense) their assets (not the shareholders’ assets).

The directors will have to serve the interest of the creditors in insolvency cases.

s.172(3) the focus of a director’s duties will shift away from the “members as a whole” to that of the creditors.

41
Q

Directors General Duties

S.173 Duty to exercise independent judgement

A

The constitution of a company may allow a director to delegate some of its duties.

An agreement with the company may prevent the directors from acting in a certain way.

Apart from this directors will be expected to exercise independent judgment.

Directors should not obey instructions or be influenced from certain people

42
Q

Directors General Duties

S.174 Duty to exercise reasonable care, skill and diligence (duties of an agent)

A

The care, skill and diligence that would be exercised by a reasonably diligent person with

-the general knowledge, skill and experience that may reasonably be expected of a person performing his functions as director.

There is no excuse for a director to lack expertise

-his actual general knowledge, skill and experience

43
Q

Directors General Duties

S. 175 Duty to Avoid Conflict of Interests

A

A director must avoid a situation in which he has or can have a direct or indirect interest that conflicts or possibly may conflict with the interest of the company or another duty.

The duty is not infringed if the matter has been authorised by the directors.

44
Q

Directors General Duties

S. 176 Duty not to accept benefits from third parties

A

A director must not accept a benefit from a third party by reason

  • being a director or
  • doing (or not doing) anything as a director.

Unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. For example a dinner invitation.

45
Q

Directors General Duties

S. 177 Duty to declare interest in proposed transactions or arrangement

A

Provided the director is, or ought reasonably to be, aware of the situation, he must declare the nature and extent of any such interest (direct or indirect) to the other directors, unless it cannot reasonably be regarded as likely to give rise to a conflict of interest.

The declaration may be made

  • at a board meeting
  • by notice in writing or
  • by a general notice
46
Q

Directors General Duties

Overlapping Duties Example

A

one or more of the general duties may overlap, in which case each will apply
e.g. taking a bribe from third party

  • would contravene the duty not to accept benefits from third parties (s.176)
  • failure to promote the success of the company for the benefit of its members (s.172)
  • a failure to exercise independent judgements (s.173)
47
Q

Directors’ duties to the company

Breach of duty

Civil Liability

A

Civil liability is enforced by
- The board or Members in GM

A person may continue to be subject to the duties in s.175 (avoid conflict of interest) and s.176 (not to accept benefits from 3rd parties) even after he ceases to be a director.

48
Q

Directors’ duties to the company

Breach of duty

Consequences

A
  • he / she may be required to make good any loss suffered by the company (including accounting for any secret profits)
  • any contract entered into between the company and a director may be rendered voidable
  • any property taken by the director from the company can be recovered if it is still in his possession (it may be recovered from 3rd party unless that 3rd party required it for value and in good faith)
49
Q

Directors’ duties to the company

Breach of duty

How directors can be protected from liability (4 ways)

A
  • constitution (may contain provisions which can protect directors from liability)
  • ratification (s.239) (members can ratify wrongful acts through for eg ordinary/special resolutions) (fraudulent acts cant be ratified)
  • company indemnify (s.232-234)
  • relief from the court (s.1157)
50
Q

Disqualification of directors

The Company Directors Disqualification Act (1986)

The courts can disqualify a person from being a …

A
  • director
  • insolvency practitioner or receiver
  • manager of a company
  • being concerned in the promotion, formation or management of any company
51
Q

Disqualification of directors

The Company Directors Disqualification Act (1986)

Reasons for disqualification

A
  • a person is convicted of a serious offence
  • fraudulent trading / wrongful trading
  • public interest
  • breaches of competition law
  • where a person has been persistently in default in relation to provisions of company legislations
52
Q

Disqualification of directors

The Company Directors Disqualification Act (1986)

What happens if there is a breach of a disqualification order?

A
  • fine and / or

- imprisonment

53
Q

Majority rule & Minority protection

Majority shareholders

A

The directors manage the company but it’s the members who ultimately control the company.

The company is controlled by the will of the company which is most likely to be the shareholders.

Majority shareholders are not required to act in the benefit of the company. The can exercise their votes and powers in their own interests.

54
Q

Majority rule & Minority protection

Minority shareholders

A

If the minority shareholders are unhappy with the majority shareholders then there are someways they can protect their own interests.

For example the minority shareholders with 5% or more shareholding can call a meeting.

The minority is given statutory rights to object in certain circumstances. Members may

  • bring an action against the directors (on behalf of the company) for breach of duty or negligence
  • apply to the court for relief where the affairs of the company have been conducted in an unfairly prejudicial manner
  • (as a last resort) petition the court to wind up the company on the ground that it is just and equitable to do so.

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