1. Written by Calum, on 28-05-2010 08:58
The duties of directors have, since October 2008, been codified in the Companies Act 2006 (CA 2006).
The three most relevant statutory duties in this context are the duties to: promote the success of the company; avoid conflicts of interest; and exercise independent judgment. Notwithstanding the statutory basis of directors’ duties, CA 2006 provides that, in interpreting them, the courts must consider decided cases.
In the recent case of Hawkes v Cuddy Heath, the Court of Appeal concluded that the fact that a director of a company has been nominated to that office by a shareholder does not of itself impose any duty on the director to his appointor. The director may owe duties to his appointor if he is a director of the appointor, or by agreement with his appointor, but such duties do not inherently arise out of his nomination and cannot detract from his overarching duty to the company of which he is a director when he is acting as such.
This means that in a situation where a conflict of interests arises between the company and the appointor, any decision made by the nominee must be capable of being justified as being in the best interests of the company. A nominee cannot, without risk of a claim of breach of duty, simply vote as directed by his appointor.
This decision appears simply to reaffirm the primacy of the principle that a director owes his duties to the company of which he is a director. Nevertheless, it is useful as recent precedent.
So, what practical advice can be offered to appointors and their nominees?
First, the appointor and nominee should seek at the outset to identify any actual or incipient conflicts of interest. These should be disclosed by the nominee to the board.
Second, since CA 2006 specifically authorises the independent directors of a company to sanction a conflict of interest, the articles of the company should set out the matters falling within the scope of a possible authorisation.
Third, the nominee should insist on D&O insurance and, possibly, indemnification by his company for any claims brought against him for breach of duty by dint of acting in accordance with his appointor's wishes.
Last, the nominee will need to be sufficiently robust, on occasion, to vote against his appointor's interests in order to promote the company's. Those of a nervous disposition should not apply.
Posted on behalf of Glafkos Tombolis, partner at Charles Russell LLP.
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