Directors and their Duties Flashcards
Give an overview of what directors do and how many are required
- Directors run the company day-to-day, but directors may also be shareholders
- Private companies need minimum 1 director and public companies need a minimum of 2
- At least 1 director must be a natural person 16 or over and the others could be corporate directors (a company)
- Directors can pass board resolutions at board meetings, or they can exercise powers unanimously without meeting, by indicating to one another that they share a common view (can be done informally via text even)
- Directors can delegate powers as they see fit
- Shareholders do have prior veto over some decisions (like SPTs), but they cannot override a decision after it is made by directors
- Where directors and shareholders are the same people, they must promote the success of the company at board meetings and ignore personal interests. At GMs, they can then vote to promote their own interests – cannot merge the roles as such
What is the difference between an executive and non-executive director?
Board can decide what services the directors undertake + each director’s level of pay and benefits
Executive – appointed to board and have a service contract setting out their job title and duties
Non-executive – registered as directors with CH, but don’t have service contracts, so don’t get a salary + only get director’s fees for attending board meetings – they have the same directors’ duties
What is the role of a chairperson?
Directors can appoint a director chair board meetings by passing a board resolution
Their only additional power is a casting vote, allowing them to pass a resolution if there is a tie – negative view prevails ordinarily
Give details of de facto and shadow directors
De facto – person who carries out job of director without being validly appointed
- According to case law, can fall within the definition of director under CA 2006
Shadow – a governing majority of the directors act in accordance with their directions or instructions, but they aren’t formally appointed
- The whole board doesn’t have to follow what they say and not on every matter for them to be a shadow director
- They are in the background, with influence and control, whereas a de facto director acts directly
- The general duties of directors apply to them too
Give details of sole and alternative directors
Sole – in companies with one director, director can validly make company decisions without calling a board meeting
Alternative – where a director cannot attend a board meeting, an alternative might be appointed to attend and vote as they would
- Not included in Model Articles, so must add an article for this
What is the process of appointment for directors?
First directors will take office on issue of certificate of incorporation
Thereafter, they are appointed in accordance with the articles
- Under MAs, they can be appointed by board resolution or ordinary resolution of shareholders
When appointed, CH must be notified within 14 days by a form for appointment of individual or corporate director. The company adds it on their register of directors and register of directors’ residential addresses
A person cannot become a director if they are disqualified - see controls on directors flashcard set for details
A person will cease to be a director if a bankruptcy order is made against them or if a doctor gives a written opinion to the company that they will be physically or mentally incapable for more than 3 months
When can directors bind the company to contracts with 3rd parties?
Directors have actual and apparent authority to bind the company into contracts with third parties, as they are agents, with company as principal
1) Actual – director has consent to act in a certain way
- Can arise expressly from the service contract or from a discussion with the board
- Can arise impliedly where the director has acted in a certain way before and the other directors haven’t stopped them or told them they aren’t authorised
2) Apparent – representation from company to third party that the director is acting with company’s authority – focus on whether there is an absence of information from the company to correct this impression to decide
3) If a director doesn’t have actual or apparent authority, they are personally liable to the 3rd party and the company is not liable to 3rd party
What involvement do the shareholders have in relation to directors’ service contracts?
1) Board can generally decide on terms of a director’s service contract. Where the board is proposing to enter a service contract with a guaranteed term of more than 2 years, they must be approved by ordinary resolution
- No ordinary resolution needed if the company can terminate it with 2 years notice or less
- It is the guaranteed element that needs authorisation by shareholders - A ten-year contract with one year notice period needs no authorisation, but a three year one with no provision for early termination does
- Helps to protect financial stability of company, if director might be a poor fit and highly paid
2) Companies can disapply MA 14 which prevents directors from voting on personal interest matters (like service contracts) + it can be temporarily suspended by ordinary resolution
3) If the guaranteed service contract was entered into without shareholder approval, the guaranteed element is void + remainder is enforceable, but capable of being terminated on reasonable notice
4) Shareholders can inspect the service contracts of directors anytime up to a year after termination, without charge + within 7 days of requesting to see them
What is an administrative requirement around the shareholders + guaranteed service contracts before the general meeting?
The proposed contract terms must be available for inspection by shareholders at the company’s registered office for not less than 15 days ending with the date of the General Meeting
How do directors resign?
Directors can resign + complete form TM01 (individual) or form TM02 (corporate director) within 14 days of resignation
Ending the service contract is not the same as ending the directorship; service contract must be terminated in accordance with its terms
How can directors be removed from their position?
Directors can be removed by ordinary resolution at GM, after a ‘special notice’ is given – not effective removal without this special notice
(i) This means the notice of intention to remove the director must be received by the company 28 days before the GM where the resolution to remove them is passed
(ii) Once special notice received, the director in question is informed along with the shareholders
- Shareholders must be informed at least 14 days before GM, by advertisement in a newspaper having ‘an appropriate circulation’, or any other manner allowed by the company’s articles
- Director should be informed immediately
(iii) Director can speak at GM to argue why they should not be removed + give written representations
(iv) If the GM is then called for 28 days or less after the notice has been given, then notice is deemed to have been properly given – meeting must happen after the 28-day special notice has expired
What two other things might affect the ability to remove a director?
1) Bushell v Faith clauses allow a shareholder/director (as one person) greater voting rights as shareholder when the resolution being considered is to remove them as a director
2) Some shareholder agreements might have a provision where they must vote against the removal of a fellow shareholder/director or risk being in breach of shareholder’s agreement
Can directors and auditors be removed by written resolution?
No
What administrative requirements are there in relation to details of directors?
1) Register of directors must be kept by company, including directors’ DOB, addresses and company’s registered office
- Must be available to inspect without charge by shareholders
- Criminal offence to not have one or to not keep it open for inspection
- Can be kept on central register at CH
2) Register of directors’ residential addresses, for individual directors only – not open for inspection
- Can be kept on central register at CH
To whom are directors duties owed and who can take action if they are breached?
Their fiduciary duties are owed to the company itself, not to shareholders or creditors, so claimant in a breach of duty case will be the company. The board of directors will decide to take legal action for breach of duty on company’s behalf.
What is the ‘duty to act within powers?’
Two parts:
1) D must act in accordance with company’s constitution (articles and special resolutions mainly)
- Articles state you can only enter contracts up to £5k without board approval; if D enters one for £10k without approval, they are in breach of duty
2) D must only exercise powers for the purpose of promoting the company’s success
- Promoting their own interests would not be using them for this purpose
- Entering a contract to favour a company your spouse owns, rather than a cheaper, better option would be a breach of duty
What is the ‘duty to promote the success of the company?’
Directors must have regard to 6 factors:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company
How is the ‘duty to promote success of the company’ examined by the court?
The court applies a subjective test, so if the director considered, in good faith, that their actions were most likely to promote the company’s success, they won’t be in breach of duty – difficult to establish a breach under this section
Success equates to an increase in share value
Even a decision which harms the environment, loses jobs and negatively impacts the local community would not be a breach if the company had regard to the 6 factors and felt it would promote success overall
Where a director’s viewpoint is so far removed from normal and accepted business practice, such an unusual viewpoint may help to show that they did not/could not have believed it was in the best interests of the company
What is the ‘duty to exercise independent judgment?’
This duty is breached where a director through words or deeds removes for himself
the opportunity to act in an unfettered manner
It is unusual for this duty to be breached
- One theoretical example may be if someone had been told to vote in a particular way and they had agreed (maybe in return for money or because someone had influence over them in some way).
This is not infringed by the director acting:
- (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
- (b) in a way authorised by the company’s constitution
What is the ‘duty to exercise reasonable care, skill and diligence?’
This means the care, skill and diligence that would be exercised by 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
Part 1 of the test is the minimum expected standard and Part 2 imposes a higher standard if their knowledge, skill and expertise is greater than the Part 1 minimum standard
The standard cannot be lowered by the second Part of the test
What is the ‘duty to avoid conflicts of interest?’
Must avoid situations where they have or could have a direct/indirect interest that conflicts or may conflict
Relates to property, information or opportunities where the company is not involved, so transactions with the company are not covered here
- It is immaterial if the company could have taken advantage of the above or if they could have but declined to
No breach if the situation cannot reasonably be regarded as likely to give rise to a conflict or if the matter was authorised by the directors
- Although MA14 can be excluded to allow directors to vote when they have a personal interest, they still cannot vote to authorise their own infringement and if they do, the vote won’t count
What is the ‘duty to not accept benefits from 3rd parties?’
Must not accept a benefit if it was given because they are a director or for them to do, or not do something as director
No breach if acceptance of benefit cannot reasonably be regarded as likely to give rise to a conflict of interest
Normal corporate hospitality is OK, but something unusually lavish like a holiday would be a breach of duty, if accepted
What is the ‘duty to declare interest in a proposed transaction or arrangement?’
- If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors
- The declaration must be made before the company enters into the transaction or arrangement in question
- The same facts cannot result in a breach of duty under avoiding conflicts of interest, as that requires the director acting personally, so there is no company transaction
- Must declare the interest, even if MA14 disapplied, allowing them to vote on it - the need to declare nature + extent cannot be disapplied
When will there be no requirement to declare an interest in a proposed transaction?
- The discussion relates to the director’s service contract
- The other directors are, or ought reasonably to be, aware of it
- Director is not aware of the interest (includes if they ought reasonably to have known about the interest)
- Interest cannot reasonably be regarded as likely to give rise to a conflict of interest
