Directors' duties
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Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the
corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
that employs them. It is a central part of corporate law and
corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...
. Directors' duties are analogous to duties owed by trustees to beneficiaries, and by agents to principals. Among different jurisdictions, a number of similarities between the framework for directors' duties exist. *directors owe duties to the corporation, and not to individual shareholders, employees or creditors outside exceptional circumstances *directors' core duty is to remain loyal to the company, and avoid conflicts of interest *directors are expected to display a high standard of care, skill or diligence *directors are expected to act in good faith to promote the success of the corporation


Australia


General Law

Directors have
Fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for examp ...
Duties under general law in Australia. They are: *Duty to act in good faith and not to act contrary to the interest of the company *Duty not to use power for an improper purpose *Duty to avoid conflicts of interest *Duty to retain discretion


Statutory Duties

Directors also have duties under
Corporations Act 2001 The ''Corporations Act 2001'' (Cth) is an Act of the Parliament of Australia, which sets out the laws dealing with business entities in the Commonwealth of Australia. The company is the Act's primary focus, but other entities, such as partner ...
: *Section 181: Mirrors the general law duty to act in good faith, in the best interests of the company and for proper purpose. *Section 182: Duty not to misuse position to gain advantage *Section 183: Duty not to misuse information to gain advantage


Breach of Duties

There is an important distinction between the general law and statute in that there are different consequences when it comes for breach *If a director is acting dishonestly or recklessly then there will be criminal liability imported under statute. But not in general law. *At general law where a director breaches their duties the likely remedy will be equitable damages or statutory compensation or recission. But within context of statute it is not possible. If it is a statutory duty, ASIC will enforce statute.


Canada


Tripartite Fiduciary Duty

In Canada, a debate exists on the precise nature of directors' duties following the controversial landmark judgment in '' BCE Inc. v. 1976 Debentureholders''. This Supreme Court of Canada decision has raised questions as to the nature and extent to which directors owe a duty to non-shareholders. Scholarly literature has defined this as a "tripartite fiduciary duty", composed of (1) an overarching duty to the corporation, which contains two component duties — (2) a duty to protect shareholder interests from harm, and (3) a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen".


United States


Business judgment

*'' Smith v. Van Gorkom'', 488 A.2d 858 (Del. 1985) and §102)b)(7) DGCL *'' Dodge v. Ford Motor Co.'', 204 Mich. 459, 170 N.W. 668 (1919) *'' Aronson v. Lewis'' *'' In re Caremark International Inc. Derivative Litigation'' 698 A 2d 959 (Del. Ch. 1996) *'' In re Walt Disney Co. Derivative Litigation'' 907 A.2d 693 (Del. Ch. 2005)


United Kingdom


Acting within powers

*s.171 Companies Act 2006 Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but to defeat a potential takeover bid, that would be an improper purpose. However, in many jurisdictions the members of the company are permitted to ratify transactions that would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution. Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper. The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision of '' Howard Smith Ltd v. Ampol Ltd''. The case concerned the power of the directors to issue new shares. It was alleged that the directors had issued a large number of new shares purely to deprive a particular shareholder of his voting majority. The court rejected an argument that the power to issue shares could only be properly exercised to raise new capital as too narrow, and held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company, or as part of an agreement to exploit mineral rights owned by the company. If so, an incidental result (even desirable) that a shareholder lost his majority, or a takeover bid was defeated would not itself make the share issue improper. But if the sole purpose was to destroy a voting majority, or block a takeover bid, that would be an improper purpose. Not all jurisdictions recognised the "proper purpose" duty as separate from the "good faith" duty however.


Promoting company success

*s.172
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
, "to promote the success of the company for the benefit of its members as a whole". It sets out six factors to which a director must have regards in fulfilling the duty to promote success. These are: * 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 a company This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the
Companies Act 1985 The Companies Act 1985 (c. 6) is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their ...
, protections for non-member stakeholders were considerably more limited (see e.g., s.309, which permitted directors to take into account the interests of employees but that could be enforced only by the shareholders, and not by the employees themselves. The changes have therefore been the subject of some criticism. Directors must act honestly and in ''bona fide''. The test is a subjective one—the directors must act in "'' good faith'' in what they consider—not what the court may consider—is in the interests of the company..." per Lord Greene MR. However, the directors may still be held to have failed in this duty where they fail to direct their minds to the question of whether in fact a transaction was in the best interests of the company. Difficult questions arise when treating the company too abstractly. For example, it may benefit a corporate group as a whole for a company to guarantee the debts of a "sister" company, even if there is no "benefit" to the company giving the guarantee. Similarly, conceptually at least, there is no benefit to a company in returning profits to shareholders by way of dividend. However, the more pragmatic approach illustrated in the Australian case of '' Mills v. Mills'' normally prevails:
" irectors arenot required by the law to live in an unreal region of detached altruism and to act in the vague mood of ideal abstraction from obvious facts which icmust be present to the mind of any honest and intelligent man when he exercises his powers as a director."
*'' Hutton v. West Cork Railway Co'' (1883) 23 Ch D 654, per
Bowen LJ Charles Synge Christopher Bowen, Baron Bowen, (1 January 1835 – 10 April 1894) was an English judge. Early life Bowen was born at Woolaston in Gloucestershire – his father, Rev. Christopher Bowen, originally of Hollymount, County Mayo, ...
,
"money which icis not theirs but the company’s, if they are spending it for the purposes which are reasonably incidental to the carrying on of the business of the company. That is the general doctrine. Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational… It is for the directors to judge, provided it is a matter which is reasonably incidental to the carrying on of the business of the company… The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company."
*''
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Independent judgment

*s.173 Companies Act 2006 Directors cannot, without the consent of the company, fetter their
discretion Discretion has the meaning of acting on one's own authority and judgment. In law, discretion as to legal rulings, such as whether evidence is excluded at a trial, may be exercised by a judge. Some view discretion negatively, while some view it ...
in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings. This is so even if there is no improper motive or purpose, and no personal advantage to the director. This does not mean, however, that the board cannot agree to the company entering into a contract that binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
that the board previously approved).


Care and skill

Traditionally, the level of care and skill a director must demonstrate has been framed largely with reference to the non-executive director. In ''Re City Equitable Fire Insurance Co'' 925Ch 407, it was expressed in purely subjective terms, where the court held that: :"a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of ''his'' knowledge and experience." (''emphasis'' added) However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected and put up with an incompetent decision maker, they should not have recourse to complain. However, a more modern approach has since developed, and in '' Dorchester Finance Co Ltd v Stebbing'' 989BCLC 498 the court held that the rule in ''Equitable Fire'' related only to skill, and not to diligence. With respect to diligence, what was required was: :"such care as an ordinary man might be expected to take on his own behalf." This was a dual subjective and objective test, and one deliberately pitched at a higher level. More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively and subjectively; in the United Kingdom the statutory provisions relating to directors' duties in the new
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
have been codified on this basis.'' Norman v. Theodore Goddard'' 991BCLC 1027 *s.174,
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
*'' Re Barings plc (No.5)''
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1 BCLC 433 *'' Re D’Jan of London Ltd''
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1 BCLC 561


Loyalty and conflicts of interest

Directors also owe strict duties not to permit any conflict of interest or conflict with their duty to act in the best interests of the company. This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In '' Aberdeen Ry v. Blaikie'' (1854) 1 Macq HL 461
Lord Cranworth Robert Monsey Rolfe, 1st Baron Cranworth, PC (18 December 1790 – 26 July 1868) was a British lawyer and Liberal politician. He twice served as Lord High Chancellor of Great Britain. Background and education Born at Cranworth, Norfolk, he wa ...
stated in his judgment that,
"A corporate body can only act by agents, and 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 towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, ''or can have'', a personal interest conflicting ''or which possibly may conflict'', with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..."
*s.175 Companies Act 2006 *''
Keech v Sandford is a foundational case, deriving from English trusts law, on the fiduciary duty of loyalty. It concerns the law of trusts and has affected much of the thinking on directors' duties in company law. It holds that a trustee owes a strict duty of ...
'' (1726) Sel Cas. Ch.61 *''
Regal (Hastings) Ltd v Gulliver , is a leading case in UK company law regarding the rule against directors and officers from taking personal advantage of a corporate opportunity in violation of their duty of loyalty to the company. The Court held that a director is in breach ...
'' 942All ER 378 *'' Cook v Deeks''
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*'' Dorchester Finance Co Ltd v Stebbing'' 989BCLC 498 *'' In Plus Group Ltd v Pyke'' *'' Foster Bryant Surveying Ltd v Bryant'' 007EWCA Civ 200 *''
O'Donnell v Shanahan is a UK company law case concerning the strict prohibition on any possibility of a conflict of interest between a company director's duty to promote her company's success and her own gain. Facts Allied Business & Financial Consultants Ltd was a ...
'' 009EWCA Civ 751 As fiduciaries, the directors may not put themselves in a position where their interests and duties conflict with the duties that they owe to the company. The law takes the view that good faith must not only be done, but must be manifestly seen to be done, and zealously patrols the conduct of directors in this regard; and will not allow directors to escape liability by asserting that his decision was in fact well founded. Traditionally, the law has divided conflicts of duty and interest into three sub-categories. ;Transactions with the company By definition, where a director enters into a transaction with a company, there is a conflict between the director's interest (to do well for himself out of the transaction) and his duty to the company (to ensure that the company gets as much as it can out of the transaction). This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In '' Aberdeen Ry v. Blaikie''
Lord Cranworth Robert Monsey Rolfe, 1st Baron Cranworth, PC (18 December 1790 – 26 July 1868) was a British lawyer and Liberal politician. He twice served as Lord High Chancellor of Great Britain. Background and education Born at Cranworth, Norfolk, he wa ...
stated in his judgment that:
"A corporate body can only act by agents, and 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 towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, ''or can have'', a personal interest conflicting ''or which possibly may conflict'', with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..."
However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution. In many countries there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure. ;Use of corporate property, opportunity, or information Directors must not, without the informed consent of the company, use for their own profit the company's assets, opportunities, or information. This prohibition is much less flexible than the prohibition against the transactions with the company, and attempts to circumvent it using provisions in the articles have met with limited success. In ''
Regal (Hastings) Ltd v Gulliver , is a leading case in UK company law regarding the rule against directors and officers from taking personal advantage of a corporate opportunity in violation of their duty of loyalty to the company. The Court held that a director is in breach ...
'' 942All ER 378 the House of Lords, in upholding what was regarded as a wholly unmeritorious claim by the shareholders, held that: :"(i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in the utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in profit to themselves." And accordingly, the directors were required to disgorge the profits that they made, and the shareholders received their windfall. The decision has been followed in several subsequent cases,''Industrial Development Consultants v Cooley''
972 Year 972 ( CMLXXII) was a leap year starting on Monday (link will display the full calendar) of the Julian calendar. Events By place Byzantine Empire * Spring – Emperor John I Tzimiskes divides the Bulgarian territories, recent ...
1 WLR 443 (corporate information), '' Canadian Aero Service v. O'Malley'' (1973) 40 DLR (3d) 371 (corporate opportunity) and ''Boardman v Phipps'' 9672 AC 46 (corporate opportunity, which again, the company itself had declined to take up)
and is now regarded as settled law. ;Competing with the company Directors cannot, clearly, compete directly with the company without a conflict of interests arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other. *'' Hogg v. Cramphorn Ltd.'' 967Ch 254


Remedies for breach of duty

As in most jurisdictions, the law provides for a variety of remedies in the event of a breach by the directors of their duties: # injunction or
declaration Declaration may refer to: Arts, entertainment, and media Literature * ''Declaration'' (book), a self-published electronic pamphlet by Michael Hardt and Antonio Negri * ''The Declaration'' (novel), a 2008 children's novel by Gemma Malley Music ...
#
damages At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at ...
or compensation # restoration of the company's property # rescission of the relevant
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
#
account of profits An account of profits (sometimes referred to as an ''accounting for profits'' or simply an ''accounting'') is a type of equitable remedy most commonly used in cases of breach of fiduciary duty. It is an action taken against a defendant to recover t ...
# summary dismissal S 176 A Duty not to accept benefits from third parties. A director must not accept financial or non financial benefits from third parties.


See also

*
UK company law The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary lega ...
*
Aktiengesetz (; abbreviated AG, ) is a German word for a corporation limited by share ownership (i.e. one which is owned by its shareholders) whose shares may be traded on a stock market. The term is used in Germany, Austria, Switzerland (where it is equiva ...
*
Delaware General Corporation Law The Delaware General Corporation Law (Title 8, Chapter 1 of the Delaware Code) is the statute of the Delaware Code that governs corporate law in the U.S. state of Delaware. Adopted in 1899, the statute has since seen Delaware become the most im ...
* Say on pay *
Fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for examp ...
*
Non-executive director A non-executive director (abbreviated to non-exec, NED or NXD), independent director or external director is a member of the board of directors of a corporation, such as a company, cooperative or non-government organization, but not a member of th ...
*
Executive director Executive director is commonly the title of the chief executive officer of a non-profit organization, government agency or international organization. The title is widely used in North American and European not-for-profit organizations, though ...


Notes

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