#19675 - 3. Directors Duties - Company Law

TOPIC 3:

DIRECTORS’ GENERAL DUTIES

INTRODUCTION

Essential Reading:

Dignam and Lowry, ch.14.

(But: do not bother with: remedies (paras 14.83 – 14.90; loans to directors (14.96 – 14.99)).

Additional Reading:

Lady Justice Arden, ‘Regulating the Conduct of Directors’(2010) 10 Journal of Corporate Law Studies 1-15.
A. Keay, “Company Directors Behaving Poorly: Disc. Options for Shareholders” [2007] JBL 656.

Worthington, chapter 7.

Hannigan: chapters 8-12 (these chapters provide an excellent analysis of directors’ duty, but probably more detailed than you need. Chapter 12 is perhaps the best of them, and worth looking at.)

Outline

1. Duties of which a director owes a company: duty to act within powers; duty to promote the company’s success, duty to exercise independent judgment, duty not to accept benefits from third parties; duty to avoid conflicts of interest

2. Fiduciary position of directors

3. Remedies (not important)

4. Liability of those who assist a director in a breach of a fiduciary duty

5. Three ways in which a director who is in breach may be relieved from liability

Directors are fiduciaries – agents of the company subject to fiduciary duties

• The 20^th century marked a shift in the way judges viewed the office of a director – the courts adopted a stricter approach toward the standard of care and skill expected of directors in performance of their management roles

• Preventing the abuse of considerable powers conferred onto their role.

• Legislation has imposed various duties, devised principally as reactive measures against specific abuses by directors (particularly fraudulent asset stripping)

• General duties of directors were codified in 2006 (part. 10 of the Company Act 2006)

  • General by way of statement of principles

  • Not an exhaustive list – does not prevent the courts from inventing new general principles outside the field.

Duties of directors:

• duty to act within their powers (s 171);

• duty to promote the success of the company (s 172);

• duty to exercise independent judgment (s 173);

• duty to exercise reasonable care, skill, and diligence (s 174);

• duty to avoid conflicts of interest (s 175);

• duty not to accept benefits from third parties (s 176);

• duty to declare interest in proposed transactions with the company (s 177).

Fiduciary position of directors

1. Fiduciaries must not benefit from their position of trust (Aberdeen Rly Co v Blaikie Bros [1854])

   1. It is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature toward their principal - Lord Cranworth

2. Origins of the trustee/director concept – a director is a trustee in the full technical sense (Re Lands Allotment Co [1894])

   1. In Goldtrail Travel Ltd v Aydin⁵ the court accepted that the long-recognised claim to recover trust assets—directors are trustees from the outset of the company’s assets and liable to make good assets which they have misapplied upon the same footing as if they were trustees

3. Nevertheless, unlike trustees, directors do not hold legal title to the property under their control which belongs to the company as a separate legal person.

4. Led by equitable principles – the special relationship with the company generates such duties; their fiduciary commitments to the company take the form of a duty of loyalty and duty to avoid conflict between his personal interests and his duty to the company (Towers v Premier Waste Management [2011])

5. Ss.171-177 CA 2007

6. To whom are the duties owed?

   1. Company

   2. Though not to the creditors, present or future, or to individual shareholders (Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical Services Ltd [1983])

   3. Creditors – s.172(3)

SECTION 170

s.170(1) – general duties specified in Ss.171-177 CA 2007 are owed by a director of the company to the company

• Gives statutory effect to Percival v Wright [1902] – directors who had planned to buy the shareholders’ shares hadn’t disclosed that they were negotiating with an outsider for the sale of the company’s undertaking at a higher price.

  • Shareholders claimed D stood in a fiduciary relationship and the purchase should be set aside for non-disclosure.

  • Court rejected this argument – it would ‘place directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations, a premature disclosure which might well be against the best interests of the company’

  • In reaching this decision, the court stressed, there was no unfair dealing of the directors. The fact that shareholders had themselves first approached the directors requesting the share purchase was material.

(TAKEOVER SITUATIONS) Broad statement of principle; “special factual relationship”

• Gething v Kilner [1972] – directors in recommending that a takeover offer should be accepted owe a duty to the shareholders which includes a duty to be honest and not to mislead (future shareholder element is irrelevant)

  • Fiduciary duties carry with them a duty of disclosure.

• Heron International Ltd v Lord Grade [1983] – where the directors must only decide between rival bidders, the interests of the company must be the interests of the current shareholders

  • the future of the company will lie with the successful bidder.

• In recommending a takeover to shareholders (Sharp v Blank [2019]

  • The directors’ duty to shareholders to exercise reasonable care and skill was consonant with the statutory duty owed under s.174

  • Directors must first consider the shareholders’ best interest (reasonable director)

  • Directors who act on expert advice is material in deciding whether the duty was satisfied, but directors should still reach their own decision

  • [780] - Where directors provide a circular to shareholders when seeking approval of a transaction, they owe a duty of care to set out fairly and candidly matters within their knowledge and to provide sufficient information to allow the shareholders to make an informed assessment of the merits of the proposal.

[12] I take it therefore to be established law, binding on me, that although a director of a company can owe fiduciary duties to the company’s shareholders, he does not do so by the mere fact of being a director, but only where there is on the facts of the particular case a ‘special relationship’ between the director and the shareholders. It seems to me to follow that this special relationship must be something over and above the usual relationship that any director of a company has with its shareholders. It is not enough that the director, as a director, has more knowledge of the company’s affairs than the shareholders have: since they direct and control the company’s affairs this will almost inevitably be the case. Nor is it enough that the actions of the directors will have the potential to affect the shareholders—again this will always, or almost always, be the case. On the decided cases the sort of relationship that has given rise to a fiduciary duty has been where there has been some personal relationship or particular dealing or transaction between them.

[13] The imposition of a fiduciary duty in such circumstances reflects the fact that directors who have a close family or other personal relationship with shareholders, and are entering into transactions with them, may be tempted to exploit that relationship to take unfair advantage of the shareholders for their own benefit.

In the case of competing bids, the directors must do nothing to prevent the shareholders from choosing to take the best price, but the courts do not accept that the board must inevitably be under a positive duty to recommend and take all steps within its power to facilitate whichever is the highest offer.

• Heron International Ltd v Lord Grade [1983] BCLC 244.

• Re a Company [1986] BCLC 382.

If directors take it upon themselves to give advice to current shareholders, they have a duty to advise in good faith and not fraudulently and not to mislead, whether deliberately or carelessly

• Dawson International plc v Coats Paton plc [1989] BCLC 233, CS (OH).

Family companies – directors in a direct fiduciary relationship w/the shareholders

• Coleman v Myers [1977] – in a small private domestic company where the shares were concentrated in the hands of a few family members, a duty of disclosure arises placing the directors in a direct fiduciary relationship with the shareholders

  • Effectually, the directors were treated as agents of the shareholders, not the company. The directors were held to owe fiduciary duties to the shareholders including a duty not to mislead them on the sale of their shares.

  • The court thought the fiduciary obligation arose from the nature of the relationships within this family company where the minority shareholders habitually looked to the directors for guidance on matters affecting their interests

• The courts have observed that the majority of cases where directors have owed a fiduciary duty to shareholders involved closely held family enterprises. It is not a prerequisite, but a clear situation where shareholders would generally place trust in directors.

Limits to a fiduciary duty – Vald Nielsen Holding A/S v Baldorino [2019]

• Directors of a company do not owe a fiduciary to the company’s shareholders when implementing a management buy-out.

• The mere fact that a director has more knowledge about the company’s affairs than its shareholders does not automatically give rise to a fiduciary duty.

• This was decided even though on the facts, they had committed the tort of deceit.

  • Shareholders had a...