Directors

With the passages on directors, one of the Government’s key aims has been to make the law more ‘consistent, certain, accessible and comprehensible’.
To this end, the passages on directors are fixed around a number of themes: the introduction of a statutory statement of directors’ general duties; a rebalancing of the rules on director transactions; and new limitations on liabilities in narrative reporting.

Statutory duties
For the first time, all the duties owned by directors to their company have been set out in statue, in Part 10 (ss.170-181) of the new Act.
The general duties are as follows

• Duty to act within powers
• Duty to promote the success of the company
• Duty to exercise independent judgement
• Duty to exercise reasonable care, skill and diligence
• Duty to avoid conflicts of interests
• Duty not to accept benefits from third benefits
• Duty to declare interest in proposed transaction or agreement

Promoting success
The second item in this list, the duty to promote the success of the company, has been a source of some dispute between business and Government.  The Act stipulates that in undertaking this duty, a director must ‘have regard to’:

• The likely consequences of any decision in the long term
• 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; and
• The need to act fairly as between members of the company

It’s the key phrase ‘have regard to’ which has caused a great deal of concern.
The first concern, of course, is to what extent (if any) will ‘have regard to’ be interpreted as implying, ‘base a decision upon’?  If a director considers these factors, but then takes a decision which seems to attach little importance to them, could he or she be held liable for having given insufficient weight to them?  The Government insists in the Explanatory Notes to the Bill, that in its view the obligation ‘to have regard; to the statutory factors cannot simply be a matter of paying lip service.  Directors must exercise the same degree of skill, care and diligence here as they would in carrying out any other function.
The other big question is, what level of proof will be deemed satisfactory in this regard?  The worry is that minutes of board meetings could end up going into much greater detail than at present in an effort to establish a paper trail.  If a decision is particularly significant, and in the eyes of the directors likely to be contentious, clearly it will be worth their while minuting the discussion in more detail.  Otherwise, companies might want to follow the advice of the Attorney General that they would not ordinarily be expected to minute more than they do at present.

Conflicts of interest
The duty to avoid conflicts of interest is also significant.
S.175 stipulates that this provision applies in particular to the exploitation of any property, information or opportunity, and this duty is not infringed if the situation in question cannot ‘reasonably’ be regarded as likely to give rise to a conflict of interest, or if the matter have been authorised by the other directors.  That authorisation, may only be given by directors independent of the conflict, and only if the company’s articles allow it.  For the majority of public companies (if not all of them), a change in the articles will be required to take advantage of this de-regulatory move.

Existing transactions or arrangements
SS.182-187 require that a director disclose the nature of his interest to the rest of the board before the transaction is approved.
That disclosure should be made as soon as is practicable, either at a meeting of the directors, by notice in writing or by general notice.
Again, a declaration need not be made if the situation in question cannot ‘reasonably’ be regarded as likely to give rise to a conflict of interest, or if the other directors were already aware of it.
The Department of Trade and Industry has confirmed that it will update the explanatory notes to the Act, which may provide some clarity here.

Transactions
The new Act makes various changes to the rules on transactions with directors which require the approval of members.
Among these are the rules on long-term service contracts, substantial property transactions, loans to directors and payments for lass of office.
These rules have been substantially redrafted but remain essentially as they were under the previous law.  They have, though, been brought together under a single chapter, Chapter 4.  The most substantial change is that companies may, with the consent of shareholders, make loans or ‘quasi-loans’, give guarantees or provide security in connection with a loan, to a director – the opposite to the general current prohibition on transactions of this sort.
Where a company proposes making a payment to a director in compensation for loss of his employment as a director of the company beyond his existing contractual entitlement, shareholder approval will be required.

Addresses
There are also significant changes on directors’ addresses, not least of which is the introduction of a new right for directors to file service addresses at Companies House.  This is explained more fully on p.9.

Directors’ Liability

Derivative actions
Under the current law, if some wrong is done to a company, only the company itself – which means, in practice, the directors – can bring an action for damages.
Obviously, if it were the directors themselves doing wrong, the likelihood of their agreeing to pursue a claim against themselves is very small.  This is why the Company Law Review recommended that the ability of shareholders themselves to bring a ‘derivative action’ – in effect, a claim on behalf of the company – needed strengthening.  Derivative actions have been available to minority shareholders through the courts before now, but only at the court’s discretion and only where a majority of independent shareholders were in favour of the action.
The new Act brings that option into statute for the first time.  Part 11 outlines that a member may bring a derivative claim against a director or other person in respect of a course of action ‘arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company’. The claimant will need permission from the court to continue with that claim, and the court in turn may dismiss the application or make another order as it deems appropriate.  It may also give direction as to the evidence which the company should provide to answer the case, and adjourn proceedings until that evidence has been collected.
There is no need, as there is at present, for the claimant to show that the act in dispute amount to a ‘fraud on the minority’, or that the wrongdoers are in control of the company.
The passages on derivative claims have proved controversial. Probably the single biggest concern from the business community is that if putting the right to make such claims in the statute means they prove easer to pursue, the floodgates could be opened for activist shareholders and special interest groups to sue directors.  At the moment, most cases fall at the preliminary stage, but the Act requires that before it dismiss a claim the court consider a number of specific factors.
These include: whether the shareholder is acting in good faith; the importance which a director, acting to promote the success of the company, would have attached to the claim; whether the claim arises as a result of an action or omission yet to occur; whether that action or omission would likely be ratified by the company; whether the company has decided not to bring a claim itself; and, finally, whether the shareholder could bring a claim in his own right, rather than on behalf of the company.  The court must also have regard to the view of any disinterested shareholders.

Reporting
There are also new limitations on liabilities with regard to reporting, particularly the content and accuracy of directors’ reports.
The reporting requirements in the Bill are discussed in more details on p.9, but they include the introduction of a new ‘safe harbour’ that restricts directors’ liability for the content of directors’ reports and remuneration reports, as well as summaries of those reports.  Effectively, a director is only liable to the company for losses resulting from knowingly or recklessly providing untrue or misleading information.  It does not cover statements made outside of those reports.
Also new under the Act is reduced liability regime to protect companies from extended liability as a result of claims brought by investors who have suffered a loss as a result of statements made within periodic reports.  That liability is restricted to the company, but the company itself may in turn pursue a case against the directors on the grounds that they knowingly or recklessly provided untrue or misleading information.

William Booth, Editor, Chartered Secretary magazine

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