Directors' Duties and Powers Flashcards
What is the s.171 CA2006 duty?
What does S.171(a) CA2006 say?
What 2 circumstances may a breach arise in?
What in the memorandum could limit the company’s powers and why might shareholders want this?
Duty to act within powers and for proper purposes
S.171(a) = duty to act within powers and in accordance with the company’s constitution
Breach of duty may arise where:
1. Individual director or the board does something that is beyond the company’s powers
2. Individual director or the board does something that is within the company’s powers but not within their own powers
Objects clause = if don’t have one objects are deemed unrestricted, otherwise limit company’s powers
* Shareholders may wish to have one to prevent directors expanding into new business areas in which they and the company have no experience
How can a cosec support directors in fulfilling the S.171(a) duty? (3)
Which recent case links to s.171(a)?
Cosec should ensure that:
1. All powers and delegation of authority are properly documents = e.g. in a schedule of matters reserves for the board, terms of reference for committees, and a delegation of authority matrix for management
- It is clear when powers are being exercised that they are being exercised by the proper body or Individual
- Directors are aware of what powers they have under the articles of association, and which are granted by shareholder resolution
Hashmi v Lorimer-wing 2022
What does S.171(b) CA2006 say?
Many cases concern abuses by directors of their powers to do what?
Describe the case of Hogg v Cramphorn Ltd.
What are the consequences/remedies for a breach? (2)
= directors must only exercise powers for the proper purposes for which they are conferred
Many cases concern abuses by directors of their power to allot and issue new shares
Hogg v. Cramphorn Ltd = directors feared a takeover bid so allotted shares to parties likely to support them and enable them to continue in office = court declared allotment void = primary purpose of any power to allot new shares is to raise capital as and when required = directors had an improper collateral purpose
- Transaction can be declared void - unless director had authority to enter it
- Director account for any gains or compensate for losses
What does s.172 CA2006 say?
Is this the primary duty?
What are the consequences/remedies for a breach? (2)
= directors must act in a way they consider, in good faith, would be most likely to the promote the success of the company for the benefit of its members as a whole, and in doing so have regard to:
1. The likely long-term consequences of a decision
2. The interests of the company’s employees
3. The need to foster business relationships with suppliers, customers, and others
4. The impact of the company’s operations on the community and the environment
5. The desirability for the company to maintain a reputation for high standards of business conduct
6. The need to act fairly as between members of the company
Yes - as reflected in the UK CG Code
- agreement voidable
- account for gains or compensate company for losses.
According to the CA2006, what is the purpose of the strategic report?
Which companies must produce a s.172 statement?
What does the s.172 statement describe?
= to inform members of the company and help them assess how the directors have performed their duty under s. 172
S.414 CA2006 = requires all large companies (whether quoted, unquoted, public or private) to include a s.172 statement in the strategic report
= describes how the directors have had regard to the matters set out in s. 172(1)(a) to (f) when performing their duty under s. 172
What does s.173 CA2006 say?
What does it not prevent a director from doing? (2)
Describe the case of Englefield Colliery Co and when a director will be in breach.
What are the consequences/remedies for a breach? (2)
= directors must exercise independent judgment = must not fetter their discretion
Does not prevent a director from:
1. acting in accordance with an agreement entered into by the company or from
2. acting in a way authorised by the company’s constitution
Englefield Colliery Co = will breach duty if they make an arrangement with an outsider to vote in the outsider’s interests on a particular transaction
- agreement voidable
- account for gains or compensate company for losses.
What are 3 guidance examples on the s.173 duty contained in the ICSA ‘Directors’ general duties under the Companies Act 2006’ guidance note?
- Directors should ensure they don’t allow personal interests to affect the exercise of their independent judgment = excuse themselves if needed
- Directors can delegate but must do so appropriately and still exercise independent judgment to decide whether to follow the action suggested
- A director associated with a major shareholder should set any ‘representative’ function aside and make decisions on their own merits (can
consult the shareholder but must make the final decision themselves)
What does s.174 CA2006 say?
What is the standard?
What was the standard before (Case)?
What does the subjective element mean?
How does this relate to NEDs and EDs?
= directors must exercise reasonable skill care and diligence
= that of a reasonably diligent person with:
* the general knowledge, skill, and experience reasonably expected by a director of the company (objective), and
* the general knowledge, skill, and experience that the director has (subjective)
Re City Equitable Fire Insurance Co [1925] = subjective only = the skill, care and diligence they have
High skill = higher standard of care
EDs know more about the business and usually owe position on board to area of speciality (e.g., FD) so will likely have higher standard of care than NEDs
In relation to s.174 CA2006, to what extent can directors rely on other company officials?
What must the company prove for legal action against a director to succeed?
What did the case of Re Barings Plc show in relation to breaching this duty?
Describe this case.
If management appears honest = directors may rely on the information they provide
Not their duty of skill and care to question whether the information is reliable or complete.
For legal action against a director to succeed a company will have to prove that serious negligence has occurred
Breach of S.174 if fail to exercise adequate supervision over those performing delegated functions
Re Barings Plc = Chairman Tuckey was responsible for supervision over Leeson but failed to exercise this adequately = he did not have sufficient knowledge of the nature of the markets and risks involved so was unable to properly consider matters
What does s.175 CA2006 say?
What does it particularly apply to?
Which transactions does it apply to?
When does it not apply? (2)
What is the consequence/remedy for a breach?
= directors must avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company
Applies particularly to the exploitation of any property, information, or opportunity irrespective of whether the company could take advantage or not
Only applies to transactions with 3rd parties.
Does not apply:
1. if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest
2. to a conflict of interest arising in relation to a transaction or arrangement with the company in which a director has an interest
Consequence = account for gains
Under s.175 CA2006, when would an irreconcilable conflict of interest arise? Why?
What can’t conflicted directors do?
What happens if there are not enough non-conflicting directors to make a decision?
Irreconcilable conflicts of interest would arise if a director of a competitor joined the board = business opportunities could be viewed as a diversion of an opportunity from the other company
Directors who are conflicted in this regard cannot count towards the quorum at the meeting on the matter and cannot vote at it = if do vote, must be ignored
If not enough non-conflicting directors to make a decision = only members will be able to authorise conflict
How can an actual or potential conflict of interest under s.175 CA2006 be managed? (2)
How long will authorisation last?
What is the effect of authorisation?
- Shareholders authorise it via ordinary resolution
- Directors authorise it via a majority vote, so long as they are not themselves interested in the matter
a. Can only do this in a Plc if articles allow
b. Can do this in a Ltd unless articles prevent
Authorisation will last indefinitely if the facts and circumstances surrounding the conflict stay the same
If facts change, = new authorisation is needed
Effect = director can’t be sued
What should Boards do to manage conflicts of interest under s.175 CA2006?
Give 3 examples.
Board should consider introducing a procedure for dealing with conflicts of interest:
- During induction cosec provide new directors with a briefing on s.175 and requirements prior to authorisation
- Advise directors they may need to take independent legal advice if a direct conflict arises
- Consider appointing a committee to review conflict authorisations
What does s.176 CA2006 say?
Which other duties may it link to? (3)
Describe the case of Boston Deep Sea Fishing and Ice Co Ltd v Ansel.
= directors must not accept any benefit from 3rd parties, whether conferred by a reason of them being a director or them doing (or not doing) anything as director
S.175 = accepting benefits may create a conflict of interest
S.173 = accepting may compromise their independent judgement
S.172 = accepting may mean not acting in best interests of the company
Boston Deep Sea Fishing and Ice Co Ltd v Ansell = accepted a bribe in return for awarding a contract to a supplier
When will the S.176 CA2006 not be infringed?
What is this influenced by?
What did the Bribery Act 2010 introduce?
How can a company avoid prosecutions under Bribery Act 2010?
Name 2 examples.
Duty will not be infringed if the acceptance of a benefit cannot reasonably be regarded as likely to give rise to a conflict of interest
Influenced by the policies which the company adopts for the purposes of compliance with the Bribery Act 2010 (director’s responsible for this)
Bribery Act 2010 = giving or accepting bribes is illegal and introduced a corporate offence of failing to prevent bribery
If it can show that it had ‘adequate procedures’ in place to combat bribery
e.g. (1) require directors to obtain clearance before accepting any benefits (2) require all instances of gifts to be recorded in a register
