Director’s Duties Flashcards
Directors’ Duties and Company
Trustee-like ‘fiduciary’
a trustee is someone in whom property is legally vested
for the benefit of others
a fiduciary is a person who acts for or on behalf of
another person in a relationship of trust and confidence
directors are not trustees but they occupy a fiduciary
position towards the company whose board they form
Fiduciary duties are owed to the
company
a director owes his/her fiduciary duty to the
company
directors do not, by virtue only of being a
director, owe fiduciary duties to members of
the company, creditors or fellow directors
Directors’ duties - general principles
law must strike balance between necessary regulation and
freedom for directors to make business decisions
care must be taken to ensure that the costs of disclosure
do not outweigh its utility
rules must be clear and certain so that directors can be
advise or decide for themselves without difficulty whether
a particular transaction falls within their ambit or not
6
Sources of Directors’ Duties
Until CA 2006, set out in case-law
Codification = opportunity to modernise the law…
Or at least to restate the law
Law Commission’s aims of codification include:
Different rules for different types of company
Consideration to the extent to which the law allows directors to
consider other interests
Law must be accessible, comprehensive, clear
Law must strike balance between regulation and freedom to take
business decisions
To whom are the duties owed?
s 170 of Companies Act: directors duties are owed to the
company and not the shareholders individually
Based on common law and have effect in place of those
rules and principles (s 170(3))
Interpreted and applied in the same way as common law
rules or equitable principles (and regard shall be had to
those rules) (s 170(4))
Directors’ General Duties
CA 2006, ss 170-177
Duty to
act within powers
promote the success of the company
exercise independent judgment
exercise reasonable care, skill & diligence
avoid conflicts of interest
not to accept benefits from 3rd parties
declare interest in proposed transaction/arrangement
Who owes the duties?
Directors!
De facto directors
Shadow directors “where, and to the extent
that, the corresponding common law rules or
equitable principles apply” s 170(5)
Ultraframe (UK) Ltd v Fielding [2005]
Sections 170 - 177
S. 170 Scope and nature of general duties
S. 171 to act with powers
S. 172 to promote the success of the company
S. 173 to exercise independent judgement
S. 174 to exercise reasonable care, skill and
diligence
S. 175 to avoid conflict of interest
S. 176 not to accept benefits from 3rd pties
S. 177 to declare interests in transactions
Duty to act within powers - s 171
Using powers for proper purposes
A director may be acting in good faith but still use
his powers for an improper purpose
What is the primary purpose?
2 contexts: use of power to
◦ Prevent takeover bids
◦ Undermine effectiveness of shareholders’ vote
2 primary cases:
◦ Hogg v Cramphorn [1967]
◦ Howard Smith v Ampol Petroleum [1974]
What are the facts of Hogg v Cramphorn [1967]
Facts: Mr Baxter approached the board of directors of
Cramphorn Ltd. to make a takeover offer for the company. The
directors (including Colonel Cramphorn who was managing
director and chairman) believed that the takeover would be
bad for the company. So they issued 5707 shares with ten
votes each to the trustees of the employee’s welfare scheme
(Cramphorn, an employee and the auditor). This meant they
could outvote Baxter’s bid for majority control. A shareholder,
Mr Hogg, sued, alleging the issue of the shares was ultra vires.
Cramphorn argued that the directors’ actions were all in good
faith. It was feared that Mr Baxter would sack many of the
workers.
Duty to act within powers - s 171
What are the decisions of Hogg v Cramphorn [1967]
Decision: the new shares issued by the directors are invalid.
The directors violated their duties as directors by issuing shares
for the purpose of preventing the takeover. The power to issue
shares creates a fiduciary duty and must only be exercised in
order to raise capital and not for any other purposes such as to
prevent a takeover. The act could not be justified on the basis
that the directors honestly believed that it would be in the best
interest of the company. The improper issuance of shares can
only be made valid if the decision is ratified by the
shareholders at a general meeting, with no votes allowed to
the newly issued shares.
