Directors' duties and responsibilities Flashcards
Who are the directors accountable to?
Directors are accountable to the company itself rather than to the shareholders directly.
Directors versus shareholders
Directors:
- manage the company on a day to day basis (on an agency basis)
- Certain actions can only be taken by directors if the shareholders have given authority
- owe duties to the company
Shareholders:
- own the company
- are able to control key decisions through shareholder resolutions eg to give directors authority to change the name of the company
Directors’ authority to manage the company
- some decisions are reserved for shareholder approval
- board is usually free under a company’s articles to make decisions on behalf of the company on all other matters (e.g. employ people, determine their salary, enter into contracts, borrow from banks etc)
- Board is also able to delegate some decisions to one of the directors or a committee
Directors’ accountability
Directors’ actions and powers are restricted and regulated by statute.
Helps to ensure companies are run for benefit of shareholders and to protect creditors.
May also be made to account for wrongs through civil and criminal actions.
Crime:
- fraud act
- theft act
Civil:
- Criminal Justice Act 1993 (insider dealing)
- PCA 2002 (money laundering)
Categories of directors
- At law:
- de jure
- de facto
- shadow - In practice:
- executive
- non-executive
What is a de jure director
One who has been validly appointed under law:
- private company: at least one
- public company: at least two
Note: every company must have at least one director who is a natural person
Must be at least 16 years old.
Cannot be a director if prohibited under director disqualification legislation.
What is a de facto director?
Someone who assumes to act as a director but has in fact not been validly appointed.
Fiduciary duties and liabilities apply to de factor directors as they do de jure directors
What is a shadow director?
A person who exerts influence on the board without being appointed as a director.
Designed to ensure that anyone who acts as a director even if not technically appointed as one is subject to the same duties and restrictions which apply to all directors.
Executive director
A director who as been appointed to an executive office. Such a director will generally spend the majority if not all the working time on the business of the company and will be both an officer and employee.
e.g. marketing director, finance director, managing director
Non-executive director
Officer of the company but not an employee of the company.
Does not take part in the day-to-day running of the company. Role is generally to provide independent advice and guidance to the board and to protect the interests of the shareholders.
What is an alternate director
Some companies provide for an alternate director in their articles to take the place of a director where one or more directors are absent
Less common now.
Company secretary
Main duties:
- keep the company books up to date
- produce minutes of board and general meetings
- make sure all necessary filings are made at Companies House
Public companies are required to have a one (with requisite knowledge and experience).
Private companies are not required to have a company secretary.
How are directors appointed?
Either:
- ordinary resolution
- decision of the directors
Usually will be done by the directors
BUT: make sure to check the articles in case they are different from MA
Service contracts
Directors should enter into service contracts (note, no automatic entitlement for directors to be paid for their services)
Company has an obligation to keep directors’ service contracts at registered office for inspection by members
Generally, service agreement only required board approval.
However, if a long-term contract, shareholder approval will be required.
Disclosure of identity of directors and secretary
- Every company must maintain a register of its directors
- Each company must also notify the Registrar of Companies of changes relating to its directors (AP01 for appointment of director, AP03 for secretary)
This information is available for inspection at Companies House by the public.
Register at company’s register office must be open for inspection for any member without charge and any other person on payment of a fee.
Privacy for officers of the company
Company’s register of directors must contain following for an individual:
- name and any former name
- a service address
- country or state in which usually resident
- nationality
- business occupation
- date of birth
Service address need not be residential address.
Individual directors still provide residential address but this is not open to public inspection.
Annual accounts: disclosure requirements
Includes info relating to:
S412 CA 2006:
- directors’ salaries, bonus payments, pension entitlements
- compensation paid to directors and past directors for loss of office
Also: details must be disclosed of any payments made to or receivable by a person connect to a director or a body corporate controlled by a director
S413 CA 2006:
- info on advances and credits given by a company to its directors and guarantees entered into by a company on behalf of its directors.
Ways in which an individual may cease to be a director
- Resignation by notice
- tender letter of resignation
- usually board will pass a resolution accepting letter (but not necessary) - Automatic termination: as soon as:
- director becomes disqualified from being a director
- subject of an individual voluntary arrangement
- director becomes bankrupt
- doctor states in writing that director has become physically or mentally incapable of acting as a director and will remain so for more than three months - Disqualification
- court order
- max 15 years
- criminal offence to participate - retirement by rotation
- Public companies: require retirement and reappointment of directors by the members every three years
- Listed companies: subject to annual re-election
Companies House updated by filing form TM01.
Directors’ duties
Any breach of duty by a director is a wrong done to the company and is therefore the claimant in proceedings in respect of a breach of duty by a director.
Statutory duties are owed by all directors (171-177 CA2006)
- Duty to act within powers
- Duty to promote the success of the company for the benefit of the members as a whole
- Duty to exercise independent judgment
- Duty to exercise reasonable care skill and diligence
- Duty to avoid conflicts of interest
- Duty not to accept benefits form third parties
- Duty to declare an interest in a proposed transaction
S171: Duty to act within powers
Two duties:
- Duty to act within the company’s constitution
- includes everything in the articles
- in breach if act without authority - Duty to exercise powers for the purposes for which they are conferred
- must not use powers for improper purposes
S172: Duty to promote the success of the company
- for the benefit of the members as a whole
- success: long-term increase in value
Have regard to (not exhaustive):
- likely long-term consequences of any decision
- employees’ interests
- need to foster relationships with suppliers, customers
- impact of the company’s operations on the community and the environment
- desirability of the company’s maintaining a reputation for high standards of business conduct
- the need to act fairly as between the members of a company
Part of the concept of ‘enlightened shareholder value’: middle ground between max profits and acting in the interests of a wider group of stakeholders
Compliance with s 172
Most companies take a common-sense approach of ensuring that board minutes clearly note that consideration has been given to the s172 CA 2006 duty when taking board decisions.
s173; Duty to exercise independent judgment
Based on the principle that directors must exercise their powers independently and not fetter their discretion.
Can rely on advice from other but must make their own judgments.
Cannot blindly follow other’s views without considering the interests of the company.
S174: Duty to exercise reasonable care, skill and diligence
Level of skill, care and diligence which would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of someone in their role; and
- the general knowledge, skill and experience of that director
Whichever standard is higher is the one used to assess.
S175: Duty to avoid conflicts of interest
Requires director to avoid a situation 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 in particular to the exploitation of any property, information or opportunity
Not infringed if situation cannot reasonably be regarded as likely to give rise to a conflict or if conflict arises:
- in relation to a transaction with a company (subject to duty of disclosure under 177 but not prohibited)
- in relation to a matter which has been authorised by the directors
e.g. being on the board of two competing companies (need approval from board of both boards)
S176: Duty not to accept benefits from third parties
A director must not accept a benefit from a third party which is conferred by reason of them being a director or by reason of them doing (or not doing) anything as a director.
Not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Note: no way for other directors to authorise an arrangement under this section but shareholders may be able to ratify or authorise in advance.
S177: Duty to declare an interest in a proposed transaction
Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors.
Note: directors are also required to disclose interests in existing transactions or arrangements entered into by the company.
s177: procedural matters
- applies equally to indirect interests (e.g. through a spouse or company in which they are a member) and the director does not have to be party to the transaction for 177 to apply
- Must declare interest BEFORE transaction is entered into
- declaration can be at board meeting or in advance of BM in writing (must be sent to all directors in paper or electronically (if agreed)
- can give a one-off general notice of their interest: this can give notice to the effe t they are always to be considered interested in any transaction with a specified party
When does a director not need to make a declaration pursuant to s177?
- director is not aware of the interest or transaction/arrangement in question
- the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know about or ought to have known about the conflict of interest
- if the conflict arises because it concerns their service contract and their service contract has been or will be considered by the board or committee of the board
In practice: directors are likely to continue to declare their interests even if other directors are aware of it as it can easily be documented in board minutes and is safer than relying on an exception later down the line.
s177 and MA14
MA14: a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for board resolutions in respect of that transaction or arrangement
MA14(2) and (3) allow the conflicted director to vote if:
- the company disapplies MA14(1) each time by ordinary resolution
- director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest
- director’s conflict arises from a permitted cause
Can also remove MA14 and replace it with an article permitting director interests to vote and count in quorum
Remedies for breaches of director’s duties
s171-173 and 175-177:
- injunction
- setting aside the transaction
- restitution and account of profits
- restoration of company property
- damages
s174 (care, skill, diligence):
- only remedy is damages
Shareholder approval in advance
Shareholders may support a director’s proposed action and be prepared to approve it in advance even though it would otherwise represent a breach of the general duties. (but cannot approve unlawful acts)
Authorisation is only effective if there has been full disclosure by the directors so that the shareholders are properly aware of the details of the action and can make an informed decision.
Ratification for breach of duty
Shareholders can ratify by ordinary resolution the following conduct of directors:
- negligence
- default
- breach of duty
- breach of trust
Note: if a director is also a shareholder they cannot ratify their own breach
Note: unlawful acts can never be ratified
Transactions with directors
Three types which require the approval of the company’s shareholders.
- Directors’ long-term service contract
- Substantial property transactions
- Loans, quasi-loans and credit transactions
Who is the best boyfriend?
Cameron Alexander Drummond
Long-term service contracts
Need shareholder approval by ordinary resolution
if the contract is for a guaranteed period in excess of two years
Service contracts: guaranteed term
Applies to:
- period during which the contract is to continue other than at the instance of the company; and
- during this time the company either cannot terminate the contract or can only terminate in specific circumstances
OR - the period of notice to be given by the company
e.g. unable to terminate for first 18 months and then has to give nine months notice to terminate - this is an excess of two years and will need to be approved by an ordinary resolution
Consequences of non-compliance
- provision will be void to extent of non-compliance
- contract will be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonably notice
Wholly owned subsidiary exception
Approval is not required by members of a company which is a wholly owned subsidiary of another company.
s177 disclosure - service contract
A director is not required to disclose their interest in the service contract. However, it is likely to remain the practice that directors will continue to disclose so it is documented in the board minutes.
Director will not be permitted to vote or count in the quorum on any board resolution relating to the contract.
Members’ inspection rights of service contracts
- must keep copy for inspection at registered office for at least one year from date of termination or expiry
Service contract: procedure
- Where OR to be passed at a GM, memorandum setting out the proposed contract must be made available for inspection by members of the company, bothL
- at company’s registered office for not less than 15 days ending with date of meeting
- at the meeting itself
Therefore must be minimum of 15 days notice of the GM held to approve the contract
- Where written procedure is being followed:
- memorandum setting out the proposed contract must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted
Substantial property transactions
Governs acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.
Permitted but again require shareholder approval but ordinary resolution
Substantial property
Non-cash asset: any property other than cash
Substantial:
- asset worth £5000 or less is not substantial
- worth more than £100,000 is a substantial asset
- asset worth more than £5000 but not more than £100,000 is a substantial asset only if it is worth more than 10% of the company’s net asset value
Connection persons
- Members of the directors’ family: spouse or civil partner, parents, children or step-children
(NOT brothers, sisters, grandparents, uncles and aunts) - Companies in which the director holds 20% or more of the shares
- A business partner of the director or those connected with them
- Trustees of a trust the beneficiaries of which include the director or those connected with them
Director (or connected person) of holding company
Where the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR.
Wholly owned subsidiary
Approval is not required by members of any company which is a wholly-owned subsidiary of another company.
Remedies where transaction entered into without shareholder approval
Transaction is voidable at the instance unless:
- restitution is no longer possible
- company has been indemnified for the loss or damage suffered
- rights acquired in good faith by third party would be affected by the avoidance
Directors involved (and those connected) are liable to account to the company for any profits made and to indemnify the company for any loss incurred.
Arrangement can always be affirmed by shareholders of company and holding company (where relevant) by OR within a reasonable period.
If affirmed - can no longer be avoided.
Defences for substantial property transactions
- if between company and connected person and the director shows they took all reasonable steps to ensure the company’s compliance with s190 the director will not be liable.
Also a defence for a director or connected person who authorised the transaction to show they had no knowledge of the circumstances constituting the contravention.
S190 and 177
Under s177 the director would need to disclose the nature and extent of their interest to the board.
Any interested director will not be permitted to vote or count in the quorum.
Different loans to directors
Loans: where the company lends money to a director
Quasi-loans: pays off debt on behalf of director to a third party and the director later reimburses the company
Credit Transactions: includes any transactions entered into between the company and the director where the company provides goods and services on a credit basis which will be paid at a later date
Guarantees or the provision of security for any of the above
Which companies have restrictions on loans?
Private companies not associated with PLCs have fewer restrictions
PLCs or Private Companies associated with PLC have more restrictions
All companies: loans, guarantees or security for directors
Need approval of shareholders by ordinary resolution to make:
- loans to its directors or to directors of its holding company
- give guarantees or enter into security in connections with loans
Extra restrictions for public companies and private companies associated with public companies
In addition to above, also require shareholder approval for:
- loans to a person connected to a director of the company or a director of its holding company
- quasi-loans to, or credit-transactions with: directors, directors of holding co or persons connected to such directors
- guarantees or security in respect of loans, quasi-loans or credit transactions with directors, directors of holding co or persons connected to such directors
Exceptions to shareholder approval for loans and related transactions
- expenditure on company business (up to £50,000)
- loans for defending proceedings brought against a director
- loans for defending regulatory actions or investigations
- minor and business transactions (loans or quasi-loans up to £10,000 or credit transactions up to £15,000)
- Intra group transactions
- money lending companies and loan is made in ordinary course of business
Defences
- director will not be liable where they took all reasonable steps to ensure company complied
- defence for connected person and any director that authorised the transactions that they had no knowledge of the circumstances constituting the contravention
Holding co
If transaction is between company and the director of the company’s holding company or a person connected to a director of the holding co the holding co will also need to approve the transaction.
Wholly owned subsidiary
Approval is not required by members where the company is wholly-owned subsidiary of another company
177 disclosures
Director would need to disclosure the nature and extent to the board
(also disclose indirect interests!)
Procedure
GM:
- reg office for inspection not less than 15 days before
- at metting
Written resolution:
- memorandum should be attached
