Implementation of New Directors’ Duties
The next stage of implementation of the Companies Act 2006 (“the Act”) occurred on 1st October 2008. Some of the new changes that have been brought about by the Act include those relating to directors duties to avoid conflicts of interest; duties not to accept benefits from third parties; consent, approval or authorisation of members; the duty of directors to declare interests in proposed transactions or arrangements; the duty of directors to declare interests in existing transactions or arrangements; and provisions relating to corporate directors and underage directors.
Company directors are responsible for managing the company and making significant decisions on behalf of the company. As a result, various statutory duties are imposed on directors and codified in the new Act for the sake of certainty.
With the introduction of these new changes, certain measures will need to be taken to ensure that directors and members of a company together with its corporate documentation comply with the Act. This note aims to introduce some of the significant changes with effect from 1st October 2008 and to give you some useful tips as to how it affects companies and what can be done.
The New Directors Duties
Duties of directors to avoid conflicts of interest (s 175)
The Act now provides that a director must avoid situations in which he has or can have a direct or indirect interest that conflicts with or may conflict with the company's interests. This applies to the exploitation of property, information or opportunity (whether or not the company could take advantage of the property, information or opportunity).
This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company itself, nor is it infringed if the situation cannot be reasonably regarded as likely to give rise to a conflict of interest or if the matter has been authorised by the directors.
When may authorisation be given by the directors?
Where the company is a private company and nothing in the company’s constitution invalidates authorisation by the directors, by the matter being proposed to and authorised by the directors. Where the company is a public company and its constitution includes provisions enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.
Authorisation will only be effective if the requirements as to the quorum at the meeting at which the matter is considered are met without counting the director in question or any other interested director i.e. the matter must be have been agreed to either without the director voting or without their votes having been counted.
Duties of directors not accept benefits from third parties (s176)
Directors must not accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director.
This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Benefits conferred by the company, its holding company or subsidiaries and benefits given by the director's service contract are excluded.
In effect, there is a requirement that a director obtaining a benefit from a third party can only be authorised by the members of the company, rather than by the board.
Duty to declare interest in proposed transaction or arrangement with the company (s177)
Directors must declare to the other directors the nature and extent of any interest, direct or indirect in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply. Where a declaration of interest proves to be, or becomes inaccurate or incomplete, a further declaration must be made. However, this is only necessary if the company has not yet entered into the transaction or arrangement at the time the director becomes aware of the inaccuracy or incompleteness (or ought reasonably to have become so aware).
No declaration is required where the director is not aware of his interest or where the director is not aware of the transaction or arrangement in question.
Consent, approval or authorisation of members - s 180 (1)
Where the duty to avoid conflicts of interest or the duty to declare an interest in a proposed transaction or arrangement is complied with, the transaction or arrangement is not liable to be set aside by any common law rule or equitable principle requiring the consent or approval of the shareholders. This is without prejudice to any enactment, or provision of the company's existing constitution, requiring such consent or approval. This is a change to the law on directors' conflicts of interest as it allows the directors to authorise the conflict.
Compliance with the duty to avoid conflicts of interest and the duty not to accept benefits from third parties is not necessary where transactions requiring approval of the members applies and either approval is given under the Act or the Act specifies that approval is not needed.
Modifications of provisions in relation to charitable companies - ss 181(2) & (3)
Directors of charitable companies are under a specific statutory duty to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
Authorisation may however be given by the unconflicted directors to a conflict of interests where the company’s constitution includes provision enabling them to provide such authorisation.
Declaration of interest in existing transaction or arrangement (ss 182-187)
The Act requires a director to declare an interest in a transaction or arrangement that has been entered into by the company, unless he has already made a declaration under the Act. A declaration must be made at a board meeting or by written or general notice under the relevant provisions of the Act. A failure to comply with these provisions is an offence.
The obligations extend to shadow directors. In the case of a company with a sole director, where the company is required to have more than one director, the declaration must be recorded in writing.
Provisions relating to corporate directors and underage directors (ss 155-159)
A company will be required to have at least one corporate director who is a natural person (individual) but there is a grace period until October 2010 for any company that only had corporate directors on 8 November 2006 (i.e. when the Act received Royal Assent).
The provisions introduce a minimum age for a director of 16 years. Existing under-age directorships will cease, with no notification to the Registrar required, however the company will be required to amend the register of directors to reflect the fact that the appointment has ceased. If the company is left without an eligible director, it will be in default and will need to appoint a director to remedy this position.
What should directors and companies do?
Companies, Company Officers and Members should consider the following:-
- Review Memorandum of Association and Articles of Association and consider what changes to make to comply with the new duties under the Act including changes relating to the duty to avoid conflicts of interest.
- Directors need to be informed and educated in respect of their duties and factors to consider, especially those directors holding multiple directorships. companies should implement training for their directors so that they understand the new regime and how it affects their company.
- Adopt specific additional directors’ duties to reflect the company’s specific industry, practice or board expectation.
- Procedures for board meetings, minutes and need for extensive review of board paper policies and document review, particularly in relation to briefing papers and presentations should be considered.
- Following careful review of matters in light of the relevant duty and specified facts, Companies may wish to create a Compliance and Review checklist.
- Review decision making processes and ensure that directors and those involved in discussions with directors understand the factors which are relevant under the Act.
- Review directors' indemnities and the way in which directors are protected against liability. Review various internal policies in existence including ethics, compliance and corporate responsibility and human resources.
- Review member’s written resolutions in respect of seeking independent director authorisation and ensuring that there are no contradictory provisions in their articles of association.
- Review company employment handbook, service contracts, letters of engagement to comply with new legislative changes. Companies should ensure that all members of staff, in particular, directors and senior management, are aware of the new implications introduced especially in relation to conflicts of interest.
- Refer to the Companies House website for more information- http://www.companieshouse.gov.uk/
For further details on this topic, please contact a member of the Corporate Team http://www.sheridans.co.uk/services/corporate.asp.
Issued November 2008.
