Business Law II Company Directors

Dr Udo C Braendle

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Company Directors
Distribution of power within a company
Regulation 70 of Table A states that The business of the company shall be managed by the directors
Hiring and firing employees Entering into contracts on behalf of the company Bringing legal actions to enforce the rights of the company

Shareholders can sack directors and sue them in case of breach of duty

Two decision-making bodies within a firm Board of directors and general meeting of shareholders
Relationship between this two bodies is governed by the articles Directors have the power which the general meeting gives to them
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Company Directors
Distribution of power
Can shareholders take back the management of the company?
Salmon v Quin & Axtens Ltd [1909] 1 Ch 311
Articles required both managing directors to approve the purchase of property One of the managing directors did not approve of a proposed purchase General meeting passed an ordinary resolution approving the purchase It was held that the purchase had not been validly approved If the general meeting wants to take management power away from the directors it must pass a special resolution to alter the articles of association
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Company Directors

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Company Directors
Distribution of power
Can shareholders take back the management of the company? Mitchell & Hobbs (UK) Ltd v Mill [1996] 2 BCLC 102
Case concerning the interpretation of article 70. R was managing director and majority shareholder of the company. There was one other director who was also shareholder. M was shareholder and also the company secretary. M took 3,900 out of the company bank account. R arranged for the company to bring proceedings against him but without calling a board meeting to obtain a resolution to bring proceedings (the other director would not have been prepared to agree to the proceedings against M). R contended that article 70 means that any director, acting on his or her own, has full power to manage the company. The court refused to accept this. It was also held that a managing director did not have any more power than the other directors unless these powers had been given to him in some way
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Company Directors
Removal of directors
Section 303 CA 1985 provides that directors are removable by ordinary resolution The section makes clear that the director will still have his remedies for breach of contract and under the Employment Protection legislation

Directors duties
Being vested to manage the company does not mean that they can manage the companys affairs for their own benefit Directors are said to be fiduciaries Management powers are held on trust for the company Law does not want to interfere with genuine business decisions Courts only interfere when they are concerned with the propriety of the acts of directors 68

Company Directors
Fiduciary duties of directors
To act bona fide in the best interests of the company: directors have to use their powers to further the interests of the company and not of some third party
Re (W&M) Roith Ltd. [1967] 1 WLR 432
Company agreed to pay a pension to the widow of one of the directors if he died in office. It was held that the company was not bound by this agreement. Board of directors had used its powers to benefit the widow rather than the company Exercice powers to benefit the shareholders and not, for example, creditors or the local community If, however, the company is insolvent then the directors must have regard to the interests of creditors 69

Company Directors
Fiduciary duties
West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 A director had guaranteed payment of a debt of the company. The company was insolvent. He arranged for the company to pay off the debt. Held that he was in breach of his duty by acting in disregard of the interests of the creditors Applicable to groups? Can the directors of a parent company arrange for the company to guarantee the debts of a subsidiary? Charterbridge Corporations Ltd v Lloyds Bank Ltd [1970] Ch 62
A company A gave a guarantee of the debts of an associated company B Judge said that this was acceptable if an intelligent and honest man in the position of the directors of company A could have reasonably believed that their actions were for the benefit of company A. Note that the test is subjective. If the directors honestly believe that an action is in the interests of the company, the court will only interfere if no reasonable man could have held this belief 70 Other stakeholders like employees were therefore not taken into account. Section 309 CA 1985 requires to take employees into account as well

Company Directors
Exercise the powers of a company for a proper purpose
Often arisen in the context of the power to issue shares Hogg v Cramphorn Ltd [1967] Ch 254
B approached the companys board to discuss a takeover offer. The directors honestly thought that the takeover would be bad for the company. They issued shares to an employees share scheme of which they were directors and therefore prevent the bid Held to be invalid. The power to issue shares was given to the directors to allow the company to raise capital and not to prevent takeovers This test has been somewhat relaxed by later decisions. It might well be acceptable to use the power to issue shares to fight a well-known corporate looter If the directors do exercise their powers for an improper purpose then the transaction can be set aside, that means that the share issue is invalid General meeting can ratify the wrong-doing. In Hogg v Cramphorn 71 the general meeting gave their approval

Company Directors
Avoid a conflict of interest Directors must not place themselves in a position in which there is a conflict between their duties to the company and their personal interests or duties to others
Aberdeen Railway Co. v Blaiki Bros (1854) 2 Eq Rep 1281
Company entered into a contract with a firm for the supply of certain manufactured articles. The companys chairman was also a partner in the firm supplying the articles. This was held to be a breach of this fiduciary duty Reason is obvious if director benefits personally from transaction, there is the danger that he will not get the best possible deal for the company

Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488
Company A and company B entered into a contract. One of the directors of company A held shares of company B on trust for someone else. It was held that the contract was invalid because of the conflict of duties as director and trustee. The company has several possible remedies where the directors have allowed their duty and interest to conflict The contract is voidable at instance of the company The company can call upon the director to account for gains he has made Company can ratify the transaction (general meeting) Directors are required to declare his interest at a board meeting (s 317 CA 1985) Remember s 322 CA 1985 (ultra vires). Transaction between company and one or more of its directors is voidable at the instance of the company 72

Company Directors
Duty not to appropriate assets belonging to the company Director must account to the company for any profit that he has made by reason of opportunities that have arisen by virtue of the fact that he is a director Regal (Hastings) Ltd v Gulliver (1942) [1967] 1 AC 134n
Plaintiff company formed a subsidiary to buy two cinemas. The company could not raise all of the money so its directors bought shares in the subsidiary. The shares were later sold at a profit. The directors were held to be in breach of fiduciary duty and had to account to the company for the profit

Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162

Cooley was the managing director of IDC. The Eastern Gas Board were not prepared to contract with IDC but they would contract with Cooley personally. Cooley did not disclose this fact to IDC but secured a release from his contract with them. Cooley then entered into a contract with the Gas Board. He was made account to IDC for the profit he had made from the contract

Directors may be able to retain profits made out of opportunities which were first offered to the company if the company has actually considered and rejected the proposition
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Company Directors
Duty not to appropriate assets belonging to the company
Peso- Silver Mines Ltd v Cropper (1965) 56 DLR (2d) 117
The company rejected an offer to certain mineral claims. The companys finances were strained and it already had enough land. Three of the directors then acquired the claims. It was held that they did not have to account for their profit

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Duty not to appropriate assets belonging to the company Eagle Trust plc v SBC Securities Ltd (No. 2) [1996] 1 BCLC 121
A director, acting in breach of trust, paid money belonging to his company to the defendant. The director owed the money to the defendant in his personal capacity. Could the company recover the money from the defendant? This involves considering the question as to when a recipient of misapplied funds can be held liable as a constructive trustee The bank had underwritten a rights issue. In addition, the company was intending to take over another company and it was offering its own shares to the shareholders of the target company as payment for the shares in the target; the bank had agreed to buy Eagle Trust shares from the target shareholders who wanted to sell their newly-acquired Eagle Trust shares. The director in question agreed to sub-underwrite the banks commitment. In the end he stole money from Eagle Trust to allow him to meet his subunderwriting obligations. Eagle Trust wanted to recover the money from the bank. Arden J. said that where the defendant receives the money as payment of a lawful debt then the defendant must have actual knowledge of the breach of trust before it will be made to repay the company. It would not be enough that there were circumstances which would make the reasonable man ask further questions to find out whether or not there had been a breach of trust It was held that the bank did not have actual knowledge of the breach of 75 trust. It did not, therefore, have to repay the money it had received

Company Directors
Duty of skill and care
Courts require some degree of competence from directors No high standard and care Higher requirements in Insolvency Act 1986 and Company Directors Disqualification Act 1986 Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 Liquidator of the company brought an action against the directors alleging breach of duty Propositions in the judgement
Directors need not exhibit any greater degree of skill than may be reasonable be expected of a person of his knowledge and experience (subjective test) A director is not bound to give continuous attention to the affairs of the company Directors do not have to attend all board meetings but must attend whenever they reasonably can If any duties may properly be left to some other official then, in the absence of grounds for suspicion, the director is justified in trusting that official to perform those duties honestly 76

Company Directors
Remedies
Two particular provisions of Company Act 1985
Section 310 CA 1985 prohibits companies from agreeing in advance not to bring proceedings against directors in respect of any negligence or breach of duty Section 727 CA 1985 allows the court to excuse a director who is liable for any breach of duty or negligence. The court can excuse the director if it feels that the director has acted honestly and reasonably
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Company Directors
Directors service contracts
Parliament has added some specific provisions to the CA 1985 to provide further protection to shareholders against the possibly dishonest or self-interested actions of directors Directors might be tempted to exercise their management powers in their own favour when they have to decide upon transactions which concern themselves. Disclose to the board of directors any personal interest that they might have in a contract with the company Some provisions go even further and require the approval of shareholders to be obtained in certain circumstances Sections 318 and 319 CA 1985
Section 318 requires companies to allow shareholders to inspect a copy of directors service contracts. This allows shareholders to consider whether the terms of directors service contracts (concerning pay, for example) are reasonable Section 319 goes even further and provides that service contracts of 5 78 years or more require the approval of the shareholders (ordinary resolution)

Company Directors
Substantial property transactions
Section 320 of the Companies requires shareholder approval (ordinary resolution) for substantial property transactions between a company and its directors
Substantial property transaction is one between a company and one or more of its directors involving an asset of the requisite value Following rules are to be applied when deciding whether or not an asset is of the requisite value
Asset < 2,000 is not of the requisite value Asset > 100,000 is of requisite value Asset 2000 < x < 100,000 is of requisite value if its value 79 exceeds 10% of the companys asset value

Company Directors
Substantial property transactions
In re Duckwari plc [1997] 2 WLR 48 C was a director of D plc and also owned all of the shares of O Ltd. O Ltd had bought a house for development purposes for 495,000 and C offered to sell the house on to D plc for the same price. Although the transaction involved Cs company, rather than C himself, it was still caught by section 320. The necessary approval of the shareholders of D plc was not obtained. Shortly afterwards, the property market crashed and, although 495,000 was a fair price for the house at the time of sale, it came to be worth only 90,000. Did the breach of s. 320 mean that C, the director, had to compensate the company for the loss of value? C argued that he did not have to do this; the loss did not arise out of the terms of sale to D plc but to the fact that the property market crashed disastrously after the sale. The judge agreed and said
as I see it, the mischief, and only the mischief, addressed by these provisions is acquisition by the company at an inflated value or disposals by the company at an undervalue
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Company Directors
Substantial property transactions
British Racing Drivers Club Ltd v Hextall Erskine and Co [1997] 1 BCLC 182 Silverstone Racing Circuits Ltd (SRCL), a wholly-owned subsidiary of British Racing Drivers Club, operates Silverstone Motor Racing Circuit. SRCL proposed to buy a half interest in TWR Group Ltds motor retail business; one of SRCLs directors was the chairman and substantial owner of TWR. This transaction therefore amounted to a substantial property transaction caught by section 320 (section 320 catches transactions between a company and a person connected with one of its directors; TWR fell within the definition of a connected person). As a result, the transaction required the prior approval of SRCLs shareholders in general meeting. SRCLs solicitors Hextall Erskine & Co, failed to spot the point. Once the transaction had been completed, the shareholders of SRCL were told about it. They were unhappy and insisted that SRCL extricate itself from the agreement. In doing this, SRCL suffered a loss of 2.3m together with various associated costs and fees. Hextall Erskine, who admitted that they had been negligent in 81 failing to advise about s. 320, were held liable to pay this amount in compensation

Company Directors
Loans to directors
Section 330 CA 1985 prohibits a company from making loans to its directors
Exceptions for small loans and, subject to approval by the company in general meeting, for loans made to enable a director to properly perform his duties

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