The One-Tier Board (IVOR nr. 85) 2012/2.6.6:2.6.6 Fiduciary duties

The One-Tier Board (IVOR nr. 85) 2012/2.6.6

2.6.6 Fiduciary duties

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There are six sub-groups of fiduciary duties for directors, executive or nonexecutive. The first three duties are:

1.

to act within the scope of powers conferred on them;

2.

to act in good faith to promote the success of the company;

3.

to exercise independent judgment;

directors also have the following three duties, which stem from their obligations to avoid conflicts, namely the duty:

4.

to avoid entering into transactions with the company ("self-dealing");

5.

to avoid conflicts of interest;

6.

not to accept benefits from third parties.

Re 1 — Act within powers

This means the duty to act in accordance with the company's articles of association and to exercise powers only for the purposes for which they are conferred (section 171 Companies Act 2006).

This concerns cases of ultra vires, payments of dividends, directors' remuneration or the issue of shares or financial assistance. In such cases the acts can be voided by the company, except where this would harm the interests of bona fide third parties,1 such as the bona fide purchaser for consideration, where a director could be held liable. The same reasoning applies to unlawful distributions to shareholders and section 847 of the Companies Act 2006. Malafide shareholders have to pay back, bona fide shareholders do not and in that case the company can hold directors liable.2

Re 2 — Promote the success of the company

Section 172 of the Companies Act 2006 is the modern version of the duty of loyalty.3 Section 172 reads:

172 Duty to promote the success of the company

(1)

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,

(e)

the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)

the need to act fairly as between members of the company.

(2)

Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, sub-section (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieve those purposes.

(3)

The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

This is a much debated section. In the first part of sub-section (1) and in sub-section (2) it describes the principle of "enlightened shareholder value" and the duty of loyalty. In the second part of sub-section (1) and in sub-section (3) it gives examples of all the factors (including stakeholder interests) to which the directors should have regard, but is subordinated to the overriding duty to promote the success of the company. This is a requirement of care, in the positive sense of thoughtfulness and cynically a requirement of box ticking and not a method by which the courts are required to second guess the wisdom of the choice (resembles the Delaware business judgment rule). It is for this "have regard" that board meetings in the UK are usually carefully minuted. Cynically there is boiler plate language: "we have considered all factors".

The Attorney General, Lord Peter Goldsmith, explained clearly that this section describes one all-inclusive duty of loyalty to the company and not one of pluralism.4' 5

Re 3 — Independent judgment

The directors must exercise independent judgment, and not submit to other directors or influences. They may delegate and enter into contracts that bind the company such as long-term exclusive delivery contracts with non-competition clauses or an agreement to develop football grounds as wished by a sponsor.6 This is set out in section 173 of the Companies Act 2006.

Re 4 — Avoid conflicts of interest

Section 175 of the Companies Act 2006 describes the duty to avoid conflicts of interest. Conflicts of interest are to be taken broadly and examples are: corporate opportunities should be lelt to the company and, dealing with a company of which the director is also a director. The duty is not infringed if the matter has been authorised by the directors, who may give this authorisation in the case of a private company. The articles of association usually permit such authorisation7 and in the case of listed companies it is a requirement that there is a provision in the constitution enabling the directors to provide this authorisation.8 Most constitutions of listed companies have a provision about this possibility. Another requirement is that a quorum of independent directors gives this authority.

Section 177 of the Companies Act 2006 obliges a director who has a conflict of interest to give notice to the other directors of the conflict before the transaction. This adds a duty of extra vigilance to the duty to avoid conflicts. It follows that the proper practice is for the conflicted director to inform the board and attend the debate and for the others to vote. Usually the articles of association describe that the director, who has informed the board, may participate in the discussions and count for the quorum of presence and vote.

In Meyer v. Scottish Co-operative (1959)9 nominee directors appointed by Scottish Cooperative on the board of the subsidiary Scottish Textiles had the subsidiary enter into contracts which were bad for the subsidiary but good for Scottish Co-operative. They did not inform their co-directors, minority shareholders in the subsidiary. The nominee directors had breached their duty of care.

In Royal Hastings v. Gulliver (1967)10 the directors had profited by the sale of the company without having informed the new shareholders. There was no fraud or negligence, but the case went against the directors anyway, differently from Bell v. Lever Brothers, exactly because they had profited without informing shareholders.

Re 5 — Avoid entering into transactions with the company (selfdealing)

Section 188 of the Companies Act 2006 provides that long-term service contracts with directors need the approval not only of the board but also of the members, i.e. shareholders. Such a contract is void if the "members'" approval is absent (section 189). Here the contract is void and not voidable, because no third parties are involved.

Section 190 provides that sales of assets by or to directors and persons connected with them need the approval of the "members". Sections 198-203 provide for the same requirement of "members'" approval in case of loans, quasi-loans, credit transactions and related transactions. Such transactions are voidable by the company, unless third party rights have intervened.11

In Harrisson (2001)12 Peter Harrisson bought land from the company and sold it at a huge profit. When he bought it he knew the bidden benefits of planning permits were due to being confirmed. He did not inform bis board members of this profit and the Court of Appeal held him accountable.

Re 6 — Not to accept benefits from third parties

Section 176 provides that directors may not receive benefits from third parties, such as bribes. The company may choose to rescind the arrangement or hold the third party and the director jointly and severally liable. Here, differently from section 175, there is only an exception if the shareholders' meeting has given consent.

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