Companies Act 2006 Directors duties Scott Cochrane, Partner 17 April 2008 10/10664535
Overview of the 2006 Act: scope Radical overhaul covering all aspects of UK company law Will replace the company law provisions in the 1985 Act completely when fully in force Stated aim is deregulation - but 2006 Act is almost twice as long as the 1985 Act Received Royal Assent in November 2006 There is a staggered commencement timetable (and corresponding staggered repeal of the 1985 Act): January 2007, April 2007, October 2007, April 2008, October 2008 and now October 2009 1
The scope of the changes to company law Covers all aspects of company law Company constitution memorandum and articles Statutory statement of directors duties New statutory regime for derivative actions by members Communications, meetings and resolutions Shares, share capital and capital maintenance Accounts and audit Some deregulation for private companies Concentrating today on directors duties, conflicts and directors liabilities and derivative actions 2
Codification of directors duties Part 10 of 2006 Act: Directors duties and other issues relating to directors Directors common law duties to be codified as a statutory statement government s stated purpose is to create clarity and certainty The statutory duties cannot be excluded or changed by a company except as specifically permitted in the 2006 Act Expressed to be based on common law rules and equitable principles and to have effect in place of them But regard to be had to the corresponding common law rules and equitable principles when interpreting and applying the statutory duties Ultimately it will be for the courts to interpret the effect of the new statutory statement 3
The seven directors duties set out in the 2006 Act In force from October 2007 1. Duty to act within the powers conferred by the company s constitution 2. Duty to promote the success of the company for the benefit of its members 3. Duty to exercise independent judgement 4. Duty to exercise reasonable care, skill and diligence In force from October 2008/2009 5. Duty to avoid conflicts of interest 6. Duty not to accept benefits from third parties 7. Duty to disclose any interest in a proposed transaction or arrangement with the company 4
Duty to promote the success of the company 1 October 2007 The wording 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: the likely consequences of any decision in the long term; the interests of the company s employees; the need to foster the company s business relationships with suppliers, customers and others; the impact of the company s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company. 5
Duty to promote the success of the company 1 October 2007 The nature of the duty Equivalent common law duty is the fiduciary duty to act in good faith in the best interests of the company Statutory duty encapsulates the concept of enlightened shareholder value Duties still owed to the company for the benefit of the members as a whole, and not to any other stakeholders If company s purpose is something other than for the benefit of members (eg charitable) then this can apply instead or alongside For investment companies, stakeholder issues not likely to be relevant. Rather, focus on long term consequences and acting fairly between members Duty to creditors still retained as common law concept for companies on verge of insolvency 6
Duty to promote the success of the company 1 October 2007 Advice and behaviour in practice? Investment companies do not fit the traditional company model for which these rules were drafted However, duty cannot simply be ignored. Balance to be sought between properly discharging duties and imposing unhelpful and unnecessary regulatory burden Do not want a situation in which it becomes necessary to record consideration of every factor on every decision but some change in board papers/board minutes, for example on important decisions, is inevitable GC100 has produced helpful guidance on documentation for board meetings 7
Duty to promote the success of the company 1 October 2007 Advice and behaviour in practice? In any event duty will need to pervade all decisions by directors, including those by individual directors outside the board room Key is proportionate response depending on nature of decision and the type of company and its business Particular issues for investment companies: Relationship with investment manager Multiple share classes Ensuring that activities of manager/placing agents is positive to reputation of company as a whole 8
Duty to promote the success of the company 1 October 2007 Key is actual consideration of the factors, not just box ticking/paying lip service to factors Review internal documentation and administrative arrangements for board meetings Boards may wish to review their activities against the duty on a regular basis to ensure continued compliance Overlap with business review purpose in 2006 Act stated to be to demonstrate performance of the duty to promote the success of the company 9
Duty to exercise reasonable care, skill and diligence 1 October 2007 The duty This means the care, skill and diligence that would be exercised by a reasonably diligent person with: the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and the general knowledge, skill and experience that the director has. What it means Subjective and objective test Reflects Insolvency Act concept and the more recent case law as to what a director s duty of care and skill should be 10
Directors' Conflicts of Interest under the Companies Act 2006 Victoria Younghusband 17 April 2008 CP2:1264438.1
Agenda Section 175 avoid conflicts unless authorised in advance Related areas s176 benefits from third parties Practical Tips s177/182 declare interests in transactions s180 consents and approvals by members 2
Section 175 From 1 October 2008, statutory duty on a director to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company No breach if authorised in advance by directors or cannot reasonably be regarded as likely to give rise to a conflict Public company directors can only authorise if articles permit Immaterial if Company could not take advantage of exploitation of information, property or opportunity Need to consider subsidiaries separately 3
The GC100 paper (1) Group of general counsel of 85+ FTSE 100 companies Summarises 2006 Act provisions Explains changes companies might make to their articles Proposes a paragraph for inclusion in the AGM circular to shareholders Gives guidance to directors including suggested procedures for authorising and reviewing authorisations Describes a number of potential conflict situations 4
The GC100 paper (2) GC100 considers most companies will want a general power in their articles The overriding need for the authorising directors to have regard to their own duties should act as shareholder safeguard The change in law will generate more formal processes but potential conflicts remain manageable ABI supportive of GC100 approach 5
How to exercise the power (1) First, determine whether a real conflict Each situation should be considered separately on its particular facts. Not possible to prescribe those conflicts that should be authorised Recommend that company secretary writes to all directors well in advance of October 2008 Directors to consider all other posts in a wider context than in the past (eg including any consultancy work) and posts of their connected persons Board to decide whether or not to approve the situation taking account of their general duties Conflicted director excluded from vote and quorum Late recognition of conflict 6
How to exercise the power (2) Directors can approve if, on balance, they each think it is in the interests of the company to retain/appoint the relevant individual How far should the authorisation go? Board also needs to consider how to deal with: information that is confidential to a third party duties owed under other directorships Directors should be alert to changes or circumstances when may need to revert to the board Options if post authorisation a serious direct conflict arises: exclude director from information exclude director from [parts of] meetings require director to resign 7
Real/Possible Conflicts for Investment Trust Directors Fund manager representative(s) on Board Significant shareholder Recently retired fund manager/adviser Other directorships/significant shareholdings in competing funds/managers/investee companies Close relative s connection with manager/adviser Trustee eg of pension fund of self-managed Trust
GC 100 recommended ongoing obligations Committee / Board to review conflict authorisations regularly Could do annually as part of Board evaluation under Combined Code/AIC Code Maintain a list of authorisations granted Consider how to give assurance to shareholders that power exercised properly 9
Conflicts Article No GC100 model article Should empower non-conflicted directors to authorise the appointment/continuation of conflicted director and the conflict matter on such terms as they may determine Also deal with confidential information and accounting for remuneration/profit Effective on and from 1 October 2008
Interests in transactions with the Company Not s175 s177 duty to declare interest in proposed transaction/arrangement s182 duty to declare interest in existing transaction/arrangement s185 general notice treated as sufficient 11
s176 Duty not to accept benefits from third parties Not infringed if acceptance cannot reasonably be regarded as likely to give rise to conflict of interest (or of duties or interests and duties) No provision for authorisation/ratification Use common sense Glyndebourne vs Caribbean resort smell / City diary test 12
S180 consent, approval or authorisation by members If members' approval required under Chapter 4 (eg substantial property transaction with director) not necessary also to comply with s175 or 176 Where the Articles contain provisions for dealing with conflicts, general duties not infringed by anything done or omitted by the directors, or any of them, in accordance with those provisions (s180(4) (b)) 13
Practical Tips asap review Articles of Company [and subsidiaries] and amend as necessary (UKLA pre-approval of circular not required). EGM if necessary but may consider can wait till next AGM. all Directors should notify conflicts/potential conflicts by, say, end August 2008 hold board meeting to authorise existing conflicts on or as near as possible to 1 October 2008 maintain list of authorised conflicts include in induction process agenda item at every Board meeting
AIC Seminar on directors duties and liabilities under the Companies Act 2006 Directors Liabilities and other practical issues Thursday 17 April 2008 Ronald Paterson, Eversheds LLP
Effect of codification of duties Duties may have been restated but the consequences of breach remain the same Civil Criminal Regulatory
New rights for shareholders New rules on derivative actions New rules on ratification
Indemnification of directors under 1985 Act General rule: no exemption from/indemnity against liability for negligence, default, breach of duty or breach of trust relating to the company Company could indemnify directors against 3 rd party proceedings Company could pay director s defence costs as incurred even if company is claimant Could obtain insurance for directors against the above Shareholders can ratify directors breach (unless fraud on minority ) Independent directors can agree not to sue or to settle or release a claim by the Company
Indemnification of directors under 2006 Act ss232-239 Broadly the same as 1985 Act Effective: 1 October 2007 2006 allows an indemnity to a director of a trustee company of an occupational pension scheme But not against criminal fines, regulatory penalties or defence costs in criminal proceedings where convicted (s235)
Review scope of insurance Prospectus insurance on a case by case basis Deeds of indemnity Inappropriate exclusions (eg failure of any investment to perform as expected) Manager s employees not hit by double insurance with each policy in excess of the other
Insurance cover must include Derivative actions Defence costs relating to claims for declaratory relief Defence costs arising out of regulatory intervention (beware of low limits on this)
Ratification (s239) Ratification of a director s negligence, default, breach of duty or breach of trust Decision to ratify must be by shareholder resolution Votes in favour of resolution by relevant director (and persons connected with him) must be ignored s239 does not affect directors ability to agree not to sue, or to settle or release a claim made by them on behalf of the Company But shareholders may try to bring the claim as a derivative action
Derivative Actions: Shareholder claims on behalf of a Company S260-269 Effective: 1 October 2007 In respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director No requirement to show that a director has benefited personally or that the directors control the company Shareholder must get Court s permission to carry on a derivative action Ensure D&O cover is available to defend derivative actions
Court must refuse permission for a derivative claim if a person acting in accordance with the duty to promote the success of the Company would not continue the claim if the claim relates to a future act or omission which has been authorised by the Company
Other factors for the Court to consider Whether the shareholder is acting in good faith Likelihood of ratification or authorisation by the Company Whether the Company has decided not to pursue Views of shareholders with no direct or indirect interest
Auditor Liability Limitation: old law Could indemnify auditor Could indemnify auditor for costs of success defence Could buy insurance for auditor
Auditor Liability Limitation from 6 April 2008 (ss532-538) Still cannot indemnify auditor against negligence or other default Still can indemnify auditor against costs of successfully defending a claim Cannot buy insurance for auditor But can make new liability limitation agreements
Auditor Liability Limitation Agreements Authority by ordinary resolution before agreement, approving principal terms: kind(s) of acts or omissions covered financial year it relates to limit of auditor s liability Authority by ordinary resolution after agreement, approving the agreement Authority may be removed by ordinary resolution before start of agreement or before start of relevant financial year
Auditor Liability Limitation Agreements Must be renewed annually July 07 FRC Group Guidance (public consultation) Limits are always subject to Court s review
Access to shareholder register/proper purpose test AIC guidance
Practical Steps Training for directors Training for company secretaries and administrators Board papers Decision taking and minutes Review D&O policy Articles of Association and Directors Indemnities
Ronald Paterson, partner t: +44 (0) 845 497 0578 e: ronaldpaterson@eversheds.com