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Your annual appraisal includes an offer from your boss to join him on the board of directors. The title ‘director’, rather than ‘executive’, looks good on your business card so your inclination is to accept. However, what will your new directorship entail? Could you be penalised if the company fails? Is there a guide to provide assistance as to how you should conduct yourself? In fact, you might have a list of pressing questions, beginning with: What are my duties as a director?
For several years, there has been much talk of a definitive list of directors’ duties being introduced. Despite lobbying from the likes of the Law Commission, a one-stop shop statutory code has still not been enacted. A reform bill has been published and provides an advance preview of what future legislation might contain. The bill sets out several general duties:
• To act within powers;
• To promote the success of the company for
benefit of its members;
• To exercise independent judgment;
• To exercise reasonable care, skill and diligence;
• To avoid conflicts of interest;
• Not to accept benefits from third parties;
• To declare interest in proposed transaction
with the company
In addition there is detailed guidance on issues such as declaration of any interests; service contracts; transactions requiring shareholder approval; company loans and appointment/ removal from office. Duties and powers will also be set out in the company’s memorandum and articles of association (and possibly in any shareholders’ agreement). Generally, the management of the company will be entrusted to a board of directors. The board will often delegate, to a managing director or an executive committee, wide powers of day-to-day management.
You must exercise your powers in what you honestly consider to be the ‘best interests of the company’. You should have regard to the interests of shareholders and the company’s employees. If the company is, or could be, insolvent, the interests of the company’s creditors are of paramount importance.
As a director, you must not put yourself in a position where there is an actual or potential conflict between your personal interests and your duty to the company. This general restriction is often modified by a company’s articles of association, which often provides that you can retain an interest in a transaction if you disclose your interest to the board of directors.
Executive directors will often have restrictions in their service agreements stopping them doing other work. Even if you are not formally bound by this restriction, you must take into account that another job may still create conflicts of interest or prevent you from fulfilling your role as a director with sufficient skill and attention.
Within five days of your appointment, you must notify the company in writing of any interest you may have in shares of the company and other companies within the group. Most persons, including directors, come under an obligation to notify a public company when an interest in that company’s issued equity share capital of an aggregate value equal to or more than three per cent of the nominal value of that share capital is acquired. There is also an obligation to notify the public company when that holding is altered by at least one per cent. This notification must be made in writing within two days after the event.
Where a director has inside information it is an offence to deal in ‘price affected securities’ on a regulated market or in reliance on a professional intermediary. The City Code on takeovers and mergers also forbids those who are aware that there is an intention to make an offer, or who are privy to preliminary negotiations, from dealing in the relevant securities until a press announcement has been made. The Listing Rules require a fully listed company to adopt internal rules governing dealings by its directors in securities of that company.
What offences can be committed by directors?
Misleading Statements
Be careful not to make any false or misleading statements or to permit the inclusion of a false or misleading statement in any document issued by the company.
Loans
There is a general restriction on loans to directors or to persons connected with them. Restrictions also apply to a company guaranteeing loans made by third parties to directors. This ban applies to directors both of the company and its holding company. A director who procures such a loan commits a criminal offence and may also face civil liability. However, loans by a holding company to a director of its subsidiary are permitted.
Raising Funds/Market Abuse
The Companies Act 1985 and the Financial Services and Markets Act 2000 (FSMA) each contain a wide variety of statutory requirements. FSMA provides a regulatory regime regarding financial promotions. Generally, it is a criminal offence for a person, in the course of a business, to communicate a financial promotion unless it is approved by an authorised person (such as a financial adviser or broker) or sent to exempt persons such as investment professionals. Directors of listed companies must also be aware of the civil offence of market abuse introduced by FSMA (which supplements the criminal offences of insider dealing and misleading statements and practices).
Health and safety
With cases such as the prosecution of Railtrack directors, this is a very topical area of the law. As a distinct legal entity, a company has the primary responsibility to ensure compliance with health and safety legislation. A director can still be prosecuted if his negligence resulted in health and safety contravention by the Company.
Others: Other examples of potential personal liability for directors include where the company, is liable for the costs of cleaning up contaminated land or water under environmental legislation, Knowingly infringes a third party’s trade marks or copyright, commits a breach of its obligations under consumer protection legislation, especially with regard to food and product safety and consumer credit.
Other Consequences
Personal liability on insolvency: A director may be made personally liable to contribute to a company’s assets if the company has gone into insolvent liquidation. This risk arises where the director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid insolvency. A director who resigns before a company goes into insolvent liquidation may still be liable. Also where it appears in the course of the liquidation, that a director has, among other acts, misapplied company property or been guilty of any breach of duty to the company, he or she may again be liable for the company’s debts.
Disqualification
One of the ultimate sanctions is for the passing of a court order to disqualify you from acting as a director, or from being involved in the management of a company, for a certain period of time of between two and 15 years. New ‘fast track’ procedures were also introduced recently allowing directors to give an undertaking containing similar restrictions to an order. Breach of an undertaking/order carries criminal
and civil penalties.
Other Rules and Regulations
Several responsibilities also come with your new powers as a director and failure to take your new role seriously, can leave you out of pocket;
disqualified and even in jail. If you do decide to accept your boss’ offer and
become a director we suggest you follow these three basic maxims.
• Use your common sense
• Be aware of and take an active interest in your company’s activities, especially its financial and trading position, at all times.
• Read the draft directors’ duties members bill for a good introduction to your duties.
If you are ever unsure or in doubt about any matter relating to the company or your duties and responsibilities, consult your legal or financial advisers immediately.
VTR
Paul Taylor is a partner at Faegre & Benson LLP.
For further information tel: 0207 450 4500 or www.faegre.co.uk
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