Friday 21 November 2008

UK: England and Wales: directors' duties and nominee directors

Judgment was given yesterday in Cobden Investments Ltd. v RWM Langport Ltd & Ors [2008] EWHC 2810 (Ch). There is much of interest in the case (a petition for unfair prejudice relief under Section 994 of the Companies Act 2006). Two points are particularly noteworthy with regard to directors' duties.

The first concerns the codification of directors' duties within Part 10 of the Companies Act 2006. The trial judge (Warren J) observed that the common law duty to act bona fide in the best interests of the company is "the same thing" as the duty in Section 172 to "promote the success of the company for the benefit of its members as a whole". His Lordship added, however, that he was not required to consider whether the statutory duties differ from the common law and equitable duties on which they are based (many of the allegations before him arose prior to the coming into force of the new statutory duties). Some would argue, nevertheless, that Section 172 goes further than the common law duty by requiring directors to consider various interests (employees, the community and environment) in promoting the success of the company. 

The second point concerns the duties of nominee directors. Warren J articulated seven principles regarding the duties of a nominee director, as follows (to quote directly, with minor changes, from para. [67]):
  • He owes the same duties to the company as any other director.
  • He owes his duties as a director to the company alone.
  • The company is entitled to expect from the director his best independent judgment.
  • These duties can be qualified in the case of a nominee director just as they can be qualified in the case of any other director. In particular, such duties (except perhaps for certain core duties) can be qualified by the unanimous assent of the shareholders.
  • It is doubtful whether, as a matter of English law, it is possible to release a director from his general duty to act in the best interests of the company.
  • Even if it is possible to do so, it would require strong evidence to demonstrate that that had been done, ideally an express written agreement signed by all of the shareholders. The onus must lie on those saying that the general rule has been attenuated or, to use another word, relaxed, as a result of unanimous shareholder approval to demonstrate that such approval has been given. And, I must add, they must show the extent to which the general rule has been relaxed.
  • However, I see no reason in principle why in relation to specific areas of interest, a director should not be released from his fiduciary duty to give his best independent judgment to the company. In particular, if a director is charged with negotiating on behalf of his appointor an agreement with the company where the interests of his appointor and the company are opposed, the shareholders can unanimously agree that he may conduct such negotiation without regard to the interests of the company. But if that were to be done, it might be expected that the director concerned would, by the same agreement, be precluded from discussions of the board relating to the negotiations and certainly from voting on the issue.
These principles raise several questions. First, is it correct to refer to the director's duty to act in the best interests of the company as a fiduciary duty (and indeed to refer to a fiduciary duty to give best independent judgment)? Second, why insist on shareholders' unanimous approval for a director to act in the interests of another? Is this easy to obtain where, for example, there is dispersed ownership? Why not, say, 75%?  What about provisions in the articles of association? 

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