Longman Law Series- Pettet, Lowry & Reisberg\'s Company Law
Comprehensive and complete lecture notes on all directors' duties under the Companies Act 2006. Referenced in writing first-class company law coursework. Covers theories, arguments, and controversies of Companies Act 2006 director's duties, as well as other more niche points of "sleeping directors"...
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12, 13, 14. Directors’ dutiesy
Reading
- Cases as referenced throughout
Lecture 12: Pettet’s Company Law, chapter 8 pages 166-171 (section 8.1 Introduction and section 8.2 (A) The duty to
act within powers) only.
Lecture 13: Pettet’s Company Law, chapter 8 pages 171-181 only (section 8.2 B ‘Duty to promote the success of the
company’ to section 8.2 D ‘duty to exercise reasonable care, skill and diligence’ inclusive).
Lectuyre 14: Pettet’s Company Law, chapter 8 pages 181-194 only (Section 8.1 E ‘Duty to avoid conflicts of interest’
to and including Section 8.1 G ‘Duty to declare interest in a proposed or existing transaction or arrangement’).
12.1. BACKGROUND TO THE DUTIES......................................................................................3
Context: why are these duties imposed?............................................................................3
How did we end up where we are now?.............................................................................4
Statutory statement.................................................................................................................4
Directors as fiduciaries............................................................................................................ 5
12.2. TO WHOM AND BY WHOM ARE THE DUTIES OWED?...................................................5
A. To whom are the duties owed? A: prima facie the company...............................................5
Does a duty arise to individual shareholders?.....................................................................6
B. By whom are the duties owed?...........................................................................................8
Current directors: de jure, de facto + shadow.....................................................................8
Former directors.................................................................................................................8
12.3. PRELIMINARY MATTERS TO NOTE.................................................................................9
Statutory guidance to interpret directors’ duties.......................................................................9
How should we treat the common law in light of these duties?...........................................9
Concurrent application + contracting out.............................................................................9
12.4. SECTION 171, CA 2006 - DUTY TO ACT WITHIN POWERS..........................................10
s171(a) Defining constitution.................................................................................................10
s 171(b): codifying the ‘proper purposes’ doctrine.................................................................10
Proper purposes doctrine:.................................................................................................10
Is s171(b) an Objective or subjective test?.......................................................................11
Proper purposes doctrine: application + mischief..............................................................11
Paradigm issue: share dilution..........................................................................................11
Where there might be multiple reasons for a director issuing shares?..............................12
S171 applies to all powers, not just allotting shares..........................................................13
13.1 SECTION 172, CA 2006 - DUTY TO PROMOTE THE SUCCESS OF THE COMPANY. . .17
Paradigm shifting? s172(1)....................................................................................................18
Good faith belief.................................................................................................................... 18
What if directors don’t consider the interests of their company (are simply thinking abt the
other group)?.................................................................................................................... 19
Limits to a purely subjective test?.....................................................................................19
Satisfying the subjective test.............................................................................................20
Defining success: promoting the “success” of the company..................................................20
Have “regard” to.................................................................................................................... 20
Statutory factors.................................................................................................................... 20
Statutory factors................................................................................................................ 21
Duty to creditors.................................................................................................................... 22
, Standing + enforcement........................................................................................................ 23
Enforcement challenges...................................................................................................23
13.2 SECTION 173 CA 2006, DUTY TO EXERCISE INDEPENDENT JUDGMENT..................23
13.3 SECTION 174 CA 2006, DUTY TO EXERCISE REASONABLE CARE, SKILL AND
DILIGENCE............................................................................................................................... 25
Negligence based duty.......................................................................................................... 25
What is the standard to be applied....................................................................................26
Can we have this universal standard? Tldr: depends on size, NEDs................................27
A reminder: sleeping directors..........................................................................................28
Delegation, not abrogation................................................................................................28
14.1. CONTEXT......................................................................................................................... 29
14.2. SECTION 175 CA 2006, DUTY TO AVOID CONFLICTS OF INTEREST.........................30
Conflict of duties.................................................................................................................... 30
Strict application that is capacity-based............................................................................30
Corporate opportunity doctrine.........................................................................................31
On personal capacity IDC Ltd v Cooley............................................................................32
Obligation to inform........................................................................................................... 32
Multiple directorships............................................................................................................. 33
In Plus Group Ltd v Pyke [2002] EWCA Civ 370...............................................................33
Authorisation......................................................................................................................... 34
Post-termination breaches.....................................................................................................34
Prepatory steps: What preparatory steps can a director take when leaving a company so
they won’t breach when they leave office?.......................................................................34
Know-how v trade secrets.................................................................................................35
Causal Connection:.......................................................................................................... 36
14.3. SECTIONS 177 and 182 – SELF DEALING DUTIES.......................................................36
Paradigm case of breach.......................................................................................................36
The self-dealing rule applies strictly..................................................................................36
s 177: Declaration of interest in a proposed transaction........................................................36
s 182: Declaration of interest in an actual transaction...........................................................37
Consequences of breach..................................................................................................37
Duty to disclose Boulting v ACTAT...................................................................................37
Informal disclosure?.......................................................................................................... 37
14.4. SECTION 176, CA 2006 - DUTY NOT TO ACCEPT BENEFITS FROM THIRD PARTIES
................................................................................................................................................... 38
S176, CA 2006 - duty not to accept bribes............................................................................38
Meaning of benefit............................................................................................................ 38
Exceptions to s176................................................................................................................ 38
14.5. TRANSACTIONS WITH DIRECTORS..............................................................................39
Different transactions requiring specific consent...................................................................39
Scope of application......................................................................................................... 39
General framework................................................................................................................ 39
Where multiple sections apply (s 225 CA 2006):..............................................................40
LONG-TERM SERVICE AGREEMENTS..............................................................................40
, Directors’ long-term service agreements: shareholder approval.......................................40
s 189, CA 2006: civil consequences of breach.................................................................40
SUBSTANTIAL PROPERTY TRANSACTION (SPT).............................................................40
s 190, CA 2006: substantial property transactions............................................................40
Example of a connected person:......................................................................................41
Non-cash asset?............................................................................................................... 41
Exceptions for requirement to seek approval for SPT.......................................................42
s 195 CA 2006: civil consequences of breach..................................................................42
LOANS, QUASI-LOANS AND CREDIT TRANSACTION.......................................................42
s 197, CA 2006: loans to directors....................................................................................42
Defining loan:.................................................................................................................... 43
ss 198-9, CA 2006: quasi-loans to directors.....................................................................43
ss 201-2, CA 2006: credit transactions with directors.......................................................44
s 213 CA 2006: civil consequences of breach..................................................................44
PAYMENTS FOR LOSS OF OFFICE....................................................................................45
s 215 CA 2006: payments for loss of office.......................................................................45
Exceptions........................................................................................................................ 45
s 222 CA 2006: civil consequences for payments made without approval........................45
12.1. BACKGROUND TO THE DUTIES
Significant: The CA codified directors’ duties - whereas before it was just common law duties +
equitable principles
- The whole idea being that: directors acting in their own interests, duties codified in the
CA to counter human nature
Context: why are these duties imposed?
● The law Managing the relationship between the board and the company
○ The power very much concentrated in the board of directors: fiduciary role +
entrepreneurial role
○ Earlier: directors v much on social standing and shareholders could tell directors
a bit more what to do
○ 20th century: rise of the professional director, separation between shareholders
and directors; corresponding rise in problems w directors and abuses the court
had to deal with and conflicts of interests
● Role of Chancery court (following JSCA 1844)
○ Chancery court used to the trustees being sued; comfortable role of the
Chancery court used to deal with director abuses
● Changing role of directors
○ Directors no longer free to do what they wished (pursuant to Art 3 Model articles)
● Re Cardiff Savings Bank, Marquis of Bute’s Case [1892] 2 Ch 100
○ Marquis of Bute case, Sterling LJ - inherited their position on the board from their
father
, ■ Son was a NED for 38 yrs, only attended 1 board meeting, never said a
word. Discharged his duty as a NED; described as being an ornament
■ NEDs: Tried to encourage shareholders to invest in the companies; be
paid for this role, but take no part in running the company
■ Model director basically just seen as decorative - almost commercial but
don’t rly say shit
■ Things changed when common law changed things → common
law, statutory requirement
● Automatic Self-Cleansing Filter Syndicate Co Ltd c Cunninghame [1906] 2 Ch 34 (cf: Isle
of Wight Railway Company v Tahourdin (1884)
● Art 3, Model Articles
How did we end up where we are now?
Law Commission: formulating a statement of duties
● 250 years of case law
● Making duties economically efficient?
3 key pillars
● High level of generality: flexibility
● Efficient disclosures rather than approvals
○ Instead of approval by the court, efficient disclosures
○ How do we have a mechanism for this rather than seeking specific approval
● Comprehensive, not exhaustive
● Accessibility
→ Company Law Review (1998)
● Significant review
● A ‘third way’ – think small first, making the law accessible
● Picked up Law Commission’s work on directors
○ Codification of duties: too reductive?
○ High level of generality: certainty?
○ Accessible: that “general” directors know the duties to be kept
● But we should try obtain high level of generality to allow scope for
Statutory statement
● Duty to act within powers (s 171, CA 2006)
● **Duty to promote the success of the company (s 172, CA 2006)
● Duty to exercise independent judgment (s 173, CA 2006)
● Duty to exercise reasonable care, skill and diligence (s 174, CA 2006)
● Duty to avoid conflicts of interests (s 175, CA 2006)
● Duty not to accept benefits from third parties (s 176, CA 2006)
● Duty to declare interest in proposed transactions with the company (s 177, CA 2006)
Note some more controversial, some adopting common law duties, that’s kind of just where
we’re at. All these r statutory equivalents of fid duties, and apply to shadow directors
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