An update on directors’ duties
When you take on an appointment as a director of a company in the UK, you agree (simply by virtue of your appointment) to accept certain duties intrinsic to your role. These duties are owed to the company, however, in certain circumstances it is possible that they extend further than this, which has been the focus of a recent High Court decision in Vald. Nielsen Holdings A/D v. Baldorino [2019] EWHC 1926 (Comm) (Vald v Baldorino).
Background: Directors' duties
Many common law fiduciary duties of directors were codified by the Companies Act 2006. These now form the following statutory duties:
- Duty to act within powers
A director must only act within the powers as granted by the company's constitution. These are specified in the company's articles of association and they should only be exercised for the purposes intended, i.e. for the good of the company rather than the director concerned. - Duty to promote the success of the company
A director has a primary duty to promote the company's success (unless insolvent) for the benefit of its members as a whole. When making decisions as a director, you must consider:
- The potential long-term consequences for the company
- The interests of your employees
- The need to promote good relationships with suppliers and customers
- The company's impact on the environment and local community
- The need to act fairly between members (for example, treating those with few shares in the same manner as institutions with a large shareholding). - Duty to exercise independent judgement
A director must exercise independent judgment. You must consider all shareholders and stakeholders when exercising judgement, rather than an individual or a particular group of shareholders. - Duty to exercise reasonable care, skill and diligence
A director must exercise reasonable care, skill and diligence in his/her role. This applies to both executive and non-executive directors.
The level required to be considered 'reasonable' has been found to vary depending on the experience and qualifications of the director concerned. The more skills and experience you have, the more reasonable it is to expect you to use these appropriately. Anyone with specific training and skills would be expected to apply them to their role as director, for example. - Duty to avoid conflicts of interest
A director must avoid conflicts between his/her role and his/her personal interests. This includes actual and potential 'situational' and 'transactional' conflicts, as well as direct and indirect interests. If a conflict is disclosed, the company's constitution may allow the board of directors to approve it as long as it is sanctioned in the proper manner.
We would always recommend being upfront about any situation which you are concerned may fall within these categories. If in doubt, ask. - Duty not to accept benefits from third parties
Simply put, a director cannot accept benefits from their parties which arise from his/her role.
In practice, it can be difficult to gauge the difference between accepting a 'benefit' and simply trying to engender good relationships with a supplier/customer. Some companies have a written policy to clarify such situations. If in doubt, seek advice on the matter or simply do not accept that which is offered to you. It is not worth the risk. - Duty to declare an interest in proposed transactions and arrangements
A director must always declare to other directors his/her personal interest in any transaction or arrangement which the Company proposes to enter into.
This interest must be declared before the company enters into the transaction or arrangement. The company's articles of association may set out the procedures and requirements for doing so, and how the board should deal with the matter.
These duties are owed to the company. As a general rule, directors do not, solely by virtue of their office, owe fiduciary duties to the shareholders.
Recent caselaw
In Vald v Baldorino the High Court considered the circumstances in which the duties owed by a director may extend to the company's shareholders as a result of a fiduciary relationship.
The claim related to an MBO scenario whereby the claimants argued that the company's shareholders were misled by false representations of the directors (who in this case were the buyers) and as a result sold their shares for less than they were worth. The claimants argued that the directors had breached their fiduciary duties and sought to recover an account of profits to compensate.
A fiduciary duty is a common law duty arising from a relationship where person A and person B agree that A will act on behalf of, or for the benefit of, B in circumstances which give rise to a relationship of trust and confidence. i.e. A has some discretion or power which affects B's interests. B, in turn, relies on A for advice.
In this case, the High Court re-affirmed the general principle and went on to say that unless there are special circumstances or something unusual about the nature of the relationship between the director in question and the shareholders, then no fiduciary duty arises as a result of that relationship.
However, it is worth noting that the instances where a fiduciary relationship has been found to exist between a director and shareholders generally concern small private companies, often with family or other personal relationships and the context of a particular transaction involving a director and shareholder(s).
In assessing whether a fiduciary duty arises, the substance of the relationship must be examined in light of the commercial context and the bigger picture with respect to the accepted obligations and extent of trust and reliance in the relationship (not just the label given to it).
What happens if it all goes wrong?
If you breach your duties as a director and as a result a shareholder, creditor or the company suffers a loss, then they can take action against you personally. In practice such action is usually taken by the company at the director or request of the shareholders.
For an example of where such action was taken against a director for breach of the duty to act in good faith, please see Stephen Woodman's "Fowl Play" article dated 6 August 2019.
What do you need to be doing now?
Familiarise yourself with your duties as a director and make sure that if you are both a director and a shareholder you are making decisions for the right reasons and with the right 'hat' on.
If you or your fellow directors have any particular concerns or would like further guidance or directors' duties please get in touch with any member of our Corporate team.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.
