corporate clips

Directors' Duties and Liabilities - Time for Reform

August 2005

Background

Following a process of review and consultation over the last several years, the Government has set out its proposals for modernising Company law by way of a draft Company Law Reform Bill (the “Bill”). The full provisions of the Bill are set out in the DTI White Paper, which was published on 17 March 2005 . Following last month’s Corporate Clips, which provided an overview of the reforms, this article looks in more detail at the provisions set out in the Bill which relate specifically to the duties and liabilities of directors.

Key Provisions

The following is a list of the key proposals set out in the Bill:

There will be a statutory statement codifying the duties of directors. The proposed legislation is set out in Schedule 2 to the Bill (“General principles by which directors are bound”). The codified duties will apply to all the directors of a company, regardless of any particular duties they might have under service agreements as employees.
The statutory statement will require directors, in fulfilling their duty to “promote the success of the company for the benefit of its members as a whole”, to take account of both the long and short term consequences of their decisions, as well as the interests of employees, suppliers, customers, the community and the environment. The Government refers to this as the concept of “Enlightened Shareholder Value”.
Although it is intended that the statutory statement will replace the existing common law and equitable rules, it is clear from the draft clauses of the Bill that regard should still be had to the existing common law authorities and equitable rules in interpreting the statutory statement.
The proposed statutory statement provides that a company’s rights may be waived by the board, acting independently of any conflicted director, where there is a conflict between a director’s duties to the company and his or her personal interests or duties to others. This concept might come in to play where, for example, a director wishes to exploit a business opportunity which might also be exploited by the company. At present, the director would need to obtain the agreement of the members to do so, even if the company did not wish to exploit the opportunity itself. This would no longer be necessary under the new provisions.
The Bill proposes that Part 10 of the Companies Act 1985 (the “1985Act”), which contains a variety of provisions designed to deal with situations in which a director has a conflict of interest, be restated and amended. Proposed changes include:
- deregulation which will enable certain companies to make loans to directors with the consent of shareholders;
- expanding the disclosure requirements for directors’ interests to also require directors to disclose the interests of connected persons (thereby removing the existing loophole in the legislation); and
- broadening of the definition of a director’s service contract and providing that members have the right to be provided with a copy of the service contract.
The Government is also considering whether the requirements relating to disclosure of transactions in which directors are interested (in accordance with s317 of the 1985 Act) could be simplified without any loss of protection to shareholders.
Although corporate directors will still be allowed, the proposals require that at least one director be a natural person;
The provisions remove the restrictions on directors over 70 years old, and provide (for the first time) that 16 will be the minimum age for a director;
Directors of a UK incorporated company will be able to provide a service address for the Companies House record, with their home address being protected in a separate restricted access database.

Comment

The benefits of a statutory statement of directors’ duties are clear. The general duties which directors owe to a company are currently found in case law and there has long been a need to clarify the law in this area to make it more consistent and easier to understand. The “Enlightened Shareholder Value” statement, therefore, looks to consolidate the existing position at law. As a consequence, although the concept of a statutory statement of directors’ duties is novel, the scope and nature of the duties themselves are essentially unchanged. It must be borne in mind however, that the provisions of the Bill may be subject to significant amendment to incorporate additional recommendations in the White Paper.