CH15 Directors duties PDF

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DIRECTORS’DUTIES❖ Directors as seen in ‘Directors’ chapter are the principal manageme nt organ of the company.↳ they must act for its (company) benefit and they therefore occupy a fiduciary position.❖ 3 sources of directors’ duties : in equity, common law and statute (particularl y part 10 of the CA...

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DIRECT ORS’ DUTIES ❖ Directors as seen in ‘Directors’ chapter are the principal manageme nt organ of the company. ↳ they must act for its (company) benefit and they therefore occupy a fiduciary position.

❖ 3 sources of directors’ duties : in equity, common law and statute (particularl y part 10 of the CA 2006)

❖ origins of Part 10 CA 2006 come from the Law Commissio n and the

1rst step_ to whom are the duties owed?

➔ s170 CA 2006 now deals with this issue (classic case which is now given the force of statute is Percival v Wright [1902]) s170: (1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company. (2) A person who ceases to be a director continues to be subject— (a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and (b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director. To that extent those duties apply to a former director as to a director, subject to any necessary adaptations. (3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director. (4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties. (5) The general duties apply to a shadow director of a company where and to the extent that they are capable of applying so.

⇨ It states that directors’ duties are owed to the company and not to shareholders individually. Consequently, a breach of duty is a wrong done to the company and the proper claimant in proceedings in respect of the breach is the company itself.

➔ Report of the Second Savoy Hotel Investigation (The Savoy Hotel Ltd, and the Berkeley Hotel Co Ltd, Report of an Investigation under s.165(6) of the Companies Act 1948, (HM Stationery Office, 1954)) ◆ it concluded that it was not enough for directors to act in the short-term interests of the company alone, but that regard must be taken of the long-term interests of the company.

Percival v Wright [1902]

1. Mr Percival owned shares per value of £10 in a company whose shares neither had a market price nor were they quoted on the stock exchange and were only transferable with the director's approval. 2. Mr Percival through his solicitors inquired from the company if anybody was willing to purchase their shares £12.55 a price based on independent valuation. 3. Mr Wright who was the chairman of a company, with two other directors, agreed to buy shares from Mr Percival at £12.10 each. 4. Mr Percival then found out the directors had been negotiating with another person for the sale of the whole company at far more than £12.10 a share. 5. The directors had not told Percival. Percival claimed

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Swinfen Eady J held the directors owe duties to the company and not shareholders individually.

‘It was strenuously urged that, though incorporation affected the relations of the shareholders to the external world, the company thereby becoming a distinct entity, the position of the shareholders inter se was not affected, and was the same as that of partners or shareholders in an unincorporated company. I am unable to adopt that view... There is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling. The plaintiffs’ case wholly fails, and must be dismissed with costs.’

Directors' duties debate drags on (about safety and health duties on company directors) It is now looking less likely that new legislation will be introduced to place specific health and safety duties on company directors following a decision by the Health and Safety Commission to concentrate on producing more authoritative guidance while awaiting the outcome of proposed legislation in other areas. At its meeting in May the Commission discussed what had been done since its request to the HSE (health and Safety Executive) in December last year to review current health and safety legislation with a view to amending it to incorporate specific duties for directors. The request was made after the HSC (House and Safety Consultants) rejected the Executive's proposals to publish authoritative guidance backed up by stronger enforcement. The HSE subsequently held further consultation with key stakeholders on the various options, and carried out a Regulatory Impact Assessment of new legislation. While significant areas of agreement did exist among stakeholders on such issues

Scottish Law Commissio n issued a joint report, Company Directors: Regulatin g Conflicts of Interests and Formulati ng a Statement of Duties (Nos 261 and 173, respective ly) in July 1999

In other words, the duty is not confined to the existing body of shareholders, but extends to future shareholders (some assistance in addressing this issue is also given in s.172 → Duty to promote the success of the company). ● = company as a whole

breach of fiduciary duty. Allen v Hyatt (1914)

➔ Subsection 2, codifies the common law position that resignation is no defence to an action ◆ for breach of the no-conflict rule (s.175, section about conflict of interests) or ◆ to an action where a director has accepted a benefit from a third party (s.176, section about the duty not to accept benefits from third parties).

➔ As seen above subsection 3 and 4, direct the courts to have regards to the pre-existing case law for every interpretation of the statute. ◆ Hence, the courts have been able to distinguish Percival v Wright on its facts and have held that fiduciary duties, carrying a duty of disclosure, can be owed to shareholders. For example, when recommending whether a takeover offer should be accepted it has been held that directors owe a duty to the shareholders which includes a duty to be honest and not to mislead ● see allen v Hyatt (1914)

1. The directors approached the shareholders to give them options to buy their shares on the pretence that this would help with the negotiations for the sale of the company.

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It was held that the directors had become the agents of the shareholders and in this capacity owed them a fiduciary duty.

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They had to account for the profit that they had made.

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it an exception to the general rule that directors duties are owed to the company and not to the shareholders individually

2. This was in fact untrue and the directors intended to sell the shares and to keep the profit.

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directors owe a duty to the shareholders which includes a duty to be honest and to not mislead when advising of the terms of takeover.

➔ A derivative claim from an action under s170 is under s260. 2nd step_which duties are relevant? has there been a breach?

Duty to Act within Powers

➔ s171: A director of a company must— ➢ Part 10 of the 2006 Act restates 7 duties for directors : ○

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the duty to act within powers (s.171) the duty to promote the

(a) act in accordance with the company's constitution, and (b) only exercise powers for the purposes for which they are conferred.

⇒ This section restates the duty requiring a director to exercise his powers in accordance with the terms upon which they

Re Smith & Fawcett Ltd [1942]

● 1. The company was formed to take over business carried on by Smith and Fawcett. the company issued shared capital with shares divided between them as its only directors. 2. Art 10 said that “directors may at any time in their absolute and uncontrolled

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That duty is a subjective one that depends on the directors exercising their discretionary powers bona fide in what they, and not the court, consider to be in the interests of the company. Lord Greene MR said: ‘The principles to be applied in cases where the articles of a company confer a discretion on directors . . are, for present purposes, free from doubt. They must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose . . The question, therefore, simply is whether on the true construction of the particular article the directors are limited by anything except their bona fide view as

as the role of director leadership in securing good health and safety performance, and the need for credible and clear guidance, the HSE reported that there was no consensus on the need for further legislation. Even if it were to be proposed, the majority of stakeholders preferred the option of a general duty on directors to take all reasonable steps to ensure health and safety to be placed in a stand-alone section in the main body of the Health and Safety at Work, etc. Act 1974. There was apparently no support for the other option of amending section 37 of the Act, as the "overriding desire" was for a duty that motivates directors and not simply one that makes it easier to prosecute them. The lack of consensus on the issue among stakeholders was reflected among the members of the HSC. A spokesperson for the Commission told : "There was no overall agreement among the commissioners on the options for legislation. A few of them thought legislation was the way to go but it was agreed that it was better to wait and see what happens with other legislation currently in the pipeline, such as the company law reform and corporate manslaughter Bills." Maggie Robbins, UK director of the Centre for Corporate Accountability, which is in favour of a positive duty in law, was at the May meeting. She explained: "When the HSE presented its report there

success of the company (s.172) ○

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the duty to exercise independent judgment (s.173) the duty to exercise reasonable care, skill and diligence (s.174)

were granted (i.e. to comply with the company’s constitution), and do so for a proper purpose (i.e. a purpose for which power was conferred).

➔ (a): ◆ Company’s constitution is defined in s.17 CA 2006 as including the company’s articles of association and decisions of the company taken by the members,as shareholders (= resolution). ●

the duty to avoid conflicts of interest (s.175) the duty not to accept benefits from third parties (s.176) the duty to declare interest in proposed transaction or arrangemen t (s.177).

➢ The duty to declare interest in an existing transaction or arrangement is laid down by s.182.

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critical point: importance of directors appreciating the purposes of the company as detailed in the constitution (fulfil the duty under s.172 to promote the success of the company).

5.

◆ ⚠ The articles of association may increase the burden of the duties ● ex: by requiring directors to obtain shareholder authorisation for their remuneration packages. However, the articles may not dilute the duties except to the extent expressly provided for in the relevant provisions: ●

s.173 (duty to exercise independent judgment) provides that a director will not be in breach if he has acted in

6.

Extrasur e Travel Insuranc es ltd v Scatterg ood [2002]

discretion refuse to register any transfer of share.’ Fawcett died and his executor applied to Smith to be registered as members and to have the plaintiffs (Fawcett’s son and beneficiary) appointed as director. Smith refused the registration and appointment but offered to register shares and buy remaining at a price fixed by himself. Fawcett’s son refused the offer. Smith appointed his solicitor as director and Fawcett’s son again applied to be registered as a member. Application rejected and he sought companies' shares register rectified by inserting his name as holder of shares.

1. Where directors transferred £200 000 to the parent company to help it to pay debts; 2. On one hand, it was argued that directors were acting in good faith

to the interests of the company.’ ●

Lord Greene MR also defined the “proper purpose doctrine”. Proper purpose doctrine has been applied in relation to the issue of shares since this may affect the voting power of shareholders

was dissatisfaction among some of the commissioners. It had previously been decided that clear guidance isn't really sufficient, so the HSC wasn't happy with the HSE proposing it again this time. The decision eventually was to wait for the draft corporate manslaughter Bill to be published and then look at the issue again." But Ms Robbins went on to point out that there is unlikely to be anything in the Bill that will help clarify the directors' duties issue. She said: "The government has made it perfectly clear that it won't include individual offences in the corporate manslaughter Bill, so deciding to wait and see what it says is really just throwing dust in the air."

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the directors were guilty of abuse of power even though they were working in company’s interest. ○ must then identify the substantial purpose for which the power was in fact exercised and decide whether that purpose was proper. ○ More generally, the issue of whether directors have used a

IOSH (Institution of Occupational Safety and Health) president, Neil Budworth, said: "IOSH has consistently argued for the new corporate manslaughter law to be matched with a new ACoP on director's duties. Under the law as it will stand, the organisation has to be prosecuted before an individual director can be prosecuted. We think a change to reg. 5 of the Management of Health and Safety at Work Regulations may be sufficient, rather than changing s37. An expansion of reg.5 could place responsibility for the safe and healthy operation of organisations on directors, which could be supported in the accompanying ACoP."

accordance with the constitution. ●

and 3. on the other hand it was argued that directors were using their power for an improper purpose

s.175 (duty to avoid conflicts of interest) provides that a director will not be in breach where, subject to the constitution, the matter has been authorised by independent directors.

power for a proper purpose arises in relation to their authority to issue shares. ■ ⚠ If shares are allotted in exchange for cash where the company is in need of additional capital the duty will not be broken. ■ But where directors issue shares in order to dilute the voting rights of an existing majority shareholder because he or she is blocking a resolution supporting, for example, a takeover bid, then the duty will be breached

➔ (b): ◆ cases deal with the equivalent common law duty. ◆ codifies the proper purposes doctrine formulated by Lord Greene MR in Re Smith & Fawcett Ltd [1942], where he stated that directors must not exercise their powers for any ‘collateral purpose’. ⚠ -

Need to look at the MAIN purpose!

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But if the substantive purpose it’s to put money in the company → there is no breach of duty.

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The power to issue shares may be exercised for reasons other than the raising of capital provided ⤷ ‘those reasons relate to a purpose benefiting the company as a whole as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their

Howard Smith ltd v Ampol Petroleu m [1974]

1. RW Millers was embroiled in a hostile takeover bid, by a large petrol company called Ampol. 2. Ampol already controlled (with an associated company) 55% of the shares. 3. The directors did not want Ampol to buy the shares of RW Millers as Howard Smithhad better terms for take over by offering employment to the directors even in the future. 4. So the directors of RW Millers issued

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It is argued that these two parts of s.171 should be separated since the first one is about good faith and the second is about collateral purpose and hence different duties

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The Privy Council dismissed the appeal. Lord Wilberforce held that the issue of shares was within power but that it was exercised for an improper purpose. ‘To define in advance [what that means is] impossible.’ It must be judged ‘in the light of modern conditions. The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: that once it is found that the directors were not motivated by self-interest (i.e. by a desire to retain their control of the company or their positions on the board) the matter is concluded in their favour and that the court will not inquire into the validity of their reasons for making the issue... Further it is correct to say that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected... just as trustees who buy trust property are not permitted to assert that they paid a good price. But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made .

friends’ (a lord said in Harlowe’s Nominees Pty Ltd v Woodside (Lake Entrance) Oil Co (1968)).

$10m of new shares. They said it was to finance the completion of two tankers. 5. The shares were given to Howard Smith Ltd who were going to take over RW Millers, and that blocked Ampol’s rival bid. 6. Without the issue, Howard Smith Ltd had no hope of succeeding in taking over the company. 7. But with the new issue, Ampol could not complete its acquisition. Ampol commenced proceedings in the Supreme Court of NSW. a. Street CJ in Eq said that the argument of the directors that the tanker purchase was the dominant purpose was ‘unreal and unconvinci ng’. b. The issue of shares to Howard Smith was held to be invalid. Howard Smith

sought and obtained conditional leave to appeal to the Privy Council. Harlowe’ s Nomine es Pty ltd v Woodsid e (Lake entrance ) Oil Co (1968)

1. Woodside was engaged in oil and gas exploration and collaborated in its exploration with other companies including B. It had issued share capital. 2. Woodside’s directors were concerned about “mystery buyer” acquiring substantial shareholding in the company through purchasing shares and made allotment to B 3. Mystery buyer challenged allotment on grounds it was against proper purpose and not in consideration of the best interests of the company. 4. Contended that as corollary to general fiduciary principle, it could not be suggested that power to issue shares had been exercised bona fide in interests of the company unless the company had at

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“The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to the purpose of benefiting the company as a whole, ...