Company Law-directors duties PDF

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Company Law- Directors Duties Types of Director: 1. Managing Director 2. Executive and non-executive directors 3. De facto directos 4. Shadow directors 5. Alternate directors Thomas Courtney stated in his article that “one of the most far reaching reforms introduced by the Companies Act 2014 is the ...

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Company Law- Directors Duties Types of Director: 1. Managing Director 2. Executive and non-executive directors 3. De facto directos 4. Shadow directors 5. Alternate directors Thomas Courtney stated in his article that “one of the most far reaching reforms introduced by the Companies Act 2014 is the codification of the duties of directors” Directors Duties under Section 228 of the CA 2014: (NB) 228 (1) A director of a company shall— (a) act in good faith in what the director considers to be the interests of the company; (b) act honestly and responsibly in relation to the conduct of the affairs of the company; (c) act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law…… (d) not use the company’s property, information or opportunities for his or her own or anyone else’s benefit (e) not agree to restrict the director’s power to exercise an independent judgment (f) avoid any conflict between the director’s duties to the company and the director’s other (including personal) interests (g) exercise care, skill and diligence Note that the duties under s.228 are fiduciary duties. Directors owe their duties to the company as a whole and not the individual members Duties are Owed to the Company: In Dawson international plc v Coats Paton plc it was stated that there was “no good reason why it should be supposed that directors are, in general, under a fiduciary duty to the shareholders… directors have but one master, the company”. S 227 (1) CA 2014 “a director shall owe the duties set out in s228 to the company (and the company alone)” 227 (2) “The breach by a director of the relevant duties shall not of itself affect— (a) the validity of any contract or other transaction, or (b) the enforceability, other than by the director in breach of that duty, of any contract or other transaction by any person,”

S 227(2) – “but nothing in this subsection affects the principles of liability of a third party where he or she has been an accessory to a breach of duty or has knowingly received a benefit therefrom.” S 227(5) - “The relevant duties (other than those set out in section 228 (1)(b) and (h)) shall be interpreted, and the provisions concerned of section 228 shall be applied, in the same way as common law rules or equitable principles; regard shall be had to the corresponding common law rules and equitable principles in interpreting those duties and applying those provisions” Duties to Shareholders: Directors owe their duties to the company but no rule exists preventing them from also owing duties to shareholders. Directors may owe a duty to shareholders if they represent themselves as acting as agents for the shareholders – in Allan v Hyatt (1914) the directors of a company induced the shareholders to give them options for the purchase of their shares so that the directors could negotiate for the sale of the shares to another company. Instead of selling the shares directly to the other company, the directors used the options to purchase the shares themselves and then resold them to the other company. It was held that the directors had made themselves agents for the shareholders in the sale of the shares and must therefore account to them for the profit they had made on the sale. It also depends on the circumstances. Their fiduciary responsibilities are owed to the company alone. As was held in Crindle investments et al v Wymes [1998] “There can be no doubt that, in general, although directors of a company occupy a fiduciary position in relation to the company, they do not owe a fiduciary duty, merely by virtue of their offices, to the individual members. That was the effect of the decision in the leading case of Percival v. Wright [1902] 2 Ch. 421, but it has been emphasised in subsequent decisions that, in particular circumstances, a company director may indeed be in a position where he owes a fiduciary duty to individual shareholders” Duties to Creditors: Directors of insolvent companies owe duties to creditors to preserve the assets until the company is properly wound up – The case of Re Frederick Inns Ltd is a good example of where the interests of creditors may intrude on the duties of directors. In this case the directors made payments to the Revenue Commissioners not only for the company’s debt but also for the debts of other companies within the group. The court held that such a payment was in breach of the directors’ duties to the general creditors of these insolvent companies and the directors incurred personal liability accordingly. Also a duty owed to creditors when the company is “approaching insolvency” Duties to Employees: Section 224 CA 2014 Employees: No duty at common law – S 224. (1) The matters to which the directors of a company are to have regard in the performance of their functions shall include the interests of the company's employees in general, as well as the interests of its members.

(2) the duty imposed by this section on the directors shall be owed by them to the company (and the company alone) and shall be enforceable in the same way as any other fiduciary duty owed to a company by its directors. Either one of the most incompetent or one of the most cynical pieces of legislative drafting on record” – Len Sealy, ‘Directors’ Wider Responsibilities’ (1987) 13 Monash University Law Review 164 at 177. - describing an identical provision from the UK (s 309 of the UK Companies Act 1985) Section 228(1)(a) 228 (1)(a) A director of a company shall act in good faith in what the director considers to be the interests of the company Acting in good faith means acting honestly – s 228(1)(a) is a duty of loyalty not competence Subjective duty – “in what the director considers” “will, therefore, restate the existing legal position which is that two individual directors may hold diametrically opposing views as to which course of action is in the best interests of their company and both be acting in accordance with their duty. This is in recognition of the fact that there is rarely one right answer and that people can genuinely hold opposing views as to what course is in the best interests of someone else” Interpretation – shareholder value? What does it mean to act in the interests of the company? G & S Doherty v Doherty is still being used as persuasive authority on this subject. For the first time, through the Companies Act 2014, Irish law, encodes directors’ fiduciary duties. It was stated in this case that‘directors are in a fiduciary position, and must exercise their power bona fide for the benefit of the company as a whole, that is to say, the shareholders as a whole’. In Irish Press Plc v Ingersoll Irish Publications Ltd the court found nothing wrong with the appointing body or party having a view as to where the interests of the company lie and ensuring that its nominees follow that discretion provided that in so doing they are not seeking to damage anybody else’s interest in the company. - ‘acting in the interests of the company is no more than acting in the interests of all its shareholders’ Focus on the Company as an Entity: In Re BSB Holdings Ltd Protection of minority shareholders was not to be used to impede the proper management of a company’s affairs. Directors must act in the company’s overall best interests despite prejudice to one class of shareholders. Arden J stated ‘As respects the potential conflict between the interests of the members and the interests of the company, it seems to me….. the interests of the company prevail’. In Dawson International Plc v Coats Platon plc they said that directors owe it to their shareholders to ensure any information given to them is not misleading. [11] So therefore it could be said that any director who does anything contrary to what is stated in section 3 of the code, misleading its shareholders, is in fact acting for his own personal benefit and not for the good for the good of the company as a whole. Such a director breaches his fiduciary duties to the

shareholders. It was held that ‘What is in the interests of current shareholders who are sellers of their shares may not necessarily coincide with what is in the interests of the company. The creation of parallel duties could lead to conflict. Directors have but one master, the company’. The Corporate Objective: Shareholder value – US, Ireland Stakeholder theory Enlightened shareholder value – s 172(1) UK CA 2006 - Directors required to prioritise members but “have regard to” the environment, employees, the local community, suppliers, customers The duty to the wider public interest? Mere pious aspirations? Section 172(1) UK CA 2006 A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (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 Context changing in Ireland? •S 228(1)(b) – New duty to act honestly and responsibly •ODCE •S 228(1)(b) Borrowed from Restriction and disqualification regime which is designed to protect the public interest The La Moselle test Re: La Moselle Clothing [1998] 2 ILRM 345 a) The extent to which the director has complied with the requirements of the Companies Acts b)The extent to which his conduct was so incompetent as to amount to irresponsibility c)The extent of his responsibility for insolvency d)The extent of his responsibility for shortfall in a winding up e)The extent to which he has displayed a lack of commercial probity and proper standards Section 228(1)(c) “A director of a company shall act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law” In Nash v Lancegaye Safety Glass ltd, the plaintiff sought an order reversing a decision of the company’s board of firectors allotting additional shares to a minority shareholder so that he and his familt would have control of the company. Two meetings were held; the first at which the shares were allotted and the second at which a resolution was passed ratifying the earlier allotment. The tranferee was permitted to exercise his voting rights at the second meeting in favour of ratifying

the allotment of shares to him. The judge found in favour of the plaintiff, holding that he allotment had been made in bad faith. In G & S Doherty Ltd v. Doherty, the majority shareholder was MD and the minority shareholders were also directors and wished to sell to the majority shareholder. When they learned that the majority SH was endeavouring to use the company assets to pay for their shares, the minority shareholders held a meeting at which the majority shareholder was dismissed as director and new shares were allotted to remove him from control. The removal of the director was upheld, but the issue of shares was held th be an improper act because its sole purpose was to remove control and therefore was not done in good faith for the benefit of the company as a whole. Section 228(1)(d) 228(d) A director of a company shall not use the company's property, information or opportunities for his or her own or anyone else's benefit unless— (i) this is expressly permitted by the company's constitution; or (ii) the use has been approved by a resolution of the company in general meeting; Courtney states in his article “•It is thought it would be highly unusual for the constitution to give a blanket blessing to directors using the company’s property and that specific blessings by way of special resolution and tailored constitutional exemption for reasonable or de minimis use of company cars, phones, etc are more likely to be appropriate. While s 228 is silent on the point, it is thought that there has to be a limit on the extent to which members can release directors from their duties to the company and that the tipping point will arise where the effect of the release is to harm the interests of the company’s creditors by affecting the company’s solvency.” Profit from Fiduciary Position: Directors cannot profit from their position as a fiduciary. In Regal (Hastings) Ltd v Gulliver, several directors and their solicitor each invested their own money into a cinema which was to be taken over, in order to prevent the cinema becoming insolvent. Following the takeover, the directors and the solicitor made significant personal profit, as did the cinema itself as a result of the investment. The issue was whether the directors and the solicitor liable to the new parent company for their personal profits. It was held that directors were and solicitors were not held liable. This is because as agents of the business, the directors were liable for breaching their fiduciary duties without consent. Strict Application of the Rule: In Bhullar et al v Bhullar and another there was a conflict between fiduciary duty and personal interest presupposed an existing fiduciary duty, but it did not follow that it was a prerequisite of the accountability of a fiduciary that there should have been some improper dealing with property 'belonging' to the party to whom the fiduciary duty was owed. The relevant rule was that no fiduciary should be allowed to enter into engagements in which he had, or could have, a personal interest conflicting or which might conflict with the interests of those to whom he owed a duty. It was stated that “Where a fiduciary has exploited a commercial opportunity for his own benefit, the relevant question, … , is not whether the … company … has

some kind of beneficial interest in the opportunity: … that would be too formalistic and restrictive an approach. Rather, the question is simply whether the fiduciary’s exploitation of the opportunity is such as to attract the application of the rule.” S 228(1)(d): Rejected business opportunities: Peso Silver Mines Ltd v Cropper. In this case Cropper was the managing director of Peso. A prospector, Dickson, made an offer for Peso to purchase certain unproven claims (one of which was contiguous to Peso’s land). The offer was considered by Peso’s full board of directors and was rejected, in part because of Peso’s financial strained financial situation. Cropper and three others took up these claims and each contributed an equal amount to finance the purchase through a newly incorporated company, Cross Bow. After Charter bought a large amount of shares in Peso, Cropper disclosed his interest in Cross Bow, but refused to comply with the chairman's request that he turn over his interest in Cross Bow at cost. Cropper was fired as an officer and eventually resigned as a director. Peso brought an action for a declaration that the shares in Cross Bow acquired by Cropper were held by him in trust for Peso and that he be required to deliver the shares to Peso or to account for the proceeds thereof. It was held that Cropper did not have a duty to account. The Court may find that a bargain made as a personal matter does not give rise to the corporate opportunities doctrine. Where company has not had chance to consider business opportunity found in the case of Industrial Developments Consultants v Cooley in which Cooley, the managing director of IDC, had been negotiating a contract on behalf of the company, but the third party wished to offer the contract to him personally and not to the company. Without disclosing his reason to the company (or its board) he resigned in order to take the contract personally. It was held that He was in direct breach of his fiduciary duty as he had profited personally by use of an opportunity which came to him through his directorship: it made no difference that the company itself would not have obtained the contract. He was therefore accountable to the company for the benefits gained from the contract. Whether or not opportunity is inside or outside the company’s business is immaterial: In O’Donnell v Shanahan, Ms O’Donnell appealed against the dismissal of her petition for an order that her shares in a limited company be bought at fair value by the other two members of it on the grounds of unfair prejudice. She complained that the other shareholders, who were also directors, had diverted a potentially profitable opportunity to another company in which they were together 50% shareholders. At first instance, the court had found that the “no conflict” rule had not been breached as the opportunity was outwith the scope of the company’s business. Remedies available when directors wrongly profit from fiduciary position: General rule – director must account for profits gained to the company – director seen as a constructive trustee for the company's property. There can also be damages awarded instead of an account for profit – Aerospares Ltd v Thomson et al (January 1999, unreported) HC S 228 (1)(e):

A director of a company shall not agree to restrict the director's power to exercise an independent judgment unless— (i) this is expressly permitted by the company's constitution; (ii) the case concerned falls within subsection (2); or (iii) the director's agreeing to such has been approved by a resolution of the company in general meeting;

Exercise of independent discretion: In Boulting v Association of Cinematograph, Television and Allied Technicians, two managing directors of a film company applied for a declaration that while they were performing 'management functions' (e.g. producing and directing) they were not eligible for membership of the trade union (the ACTAT). Until 1950 they had been union members, but then they tore up their cards and paid no further subscriptions. In 1959 the union claimed that they needed to pay up to date for their membership fees, and said they must be members of the union. At this time, like many unions, there was a closed shop agreement. Rule 7 of the union's rules said that "The association shall consist of all employees engaged on the technical side of film production... including film directors." They also wanted an injunction restraining the union from making them join. A majority Court of Appeal held that there was no principle which prevented every employee from becoming union members, stating “It seems to me that no one, who has duties of a fiduciary nature to discharge, can be allowed to enter into an engagement by which he binds himself to disregard those duties or to act inconsistently with them. No stipulation is lawful by which he agrees to carry out his duties in accordance with the instructions of another rather than on his own conscientious judgment; or by which he agrees to subordinate the interests of those whom he must protect to the interests of someone else.” Exercising/Fettering of discretion: Directors duties are positive in nature Directors never allowed to fetter their discretion– In Clarke v. Workman it was stated that it constitutes a contract between every shareholder and all the others, and between the company itself and all the shareholders. It is a contract of the most sacred character, and it is on the faith of it that each shareholder advances his money. Change in position in UK in Fulham Football Club Ltd v Cabra Estates plc, the directors signed an agreement to develop the football ground and gave an undertaking that Fulham Football Club Ltd would not oppose the development at a later date or support a compulsory purchase order. It was held that the directors had not improperly restricted the future exercise of their discretion. – can fetter discretion if it is in the best interests of the company Section 228(2): If a director of a company considers in good faith that it is in the interests of the company for a transaction or engagement to be entered into and carried into effect, a director may restrict the director's power to exercise an independent judgment in the future by agreeing to act in a particular way to achieve this.

Conflicts of Interest: Section 228 (1)(f) A director of a company shall avoid any conflict between the director's duties to the company and the director's other (including personal) interests unless the director is released from his or her duty to the company in ...