Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them. It is a central part of corporate law and corporate governance. Directors' duties are analogous to duties owed by trustees to beneficiaries, and by agents to principals.
Among different jurisdictions, a number of similarities between the framework for directors' duties exist:
directors owe duties to the corporation,e.g. Percival v Wright Ch 421 and not to individual shareholders,e.g. , where the board is authorised by the shareholders to negotiate with a takeover bidder. It has been held in New Zealand that "depending upon all the surrounding circumstances and the nature of the responsibility which in a real and practical sense the director has assumed towards the shareholder," employees or creditors outside exceptional circumstances directors' core duty is to remain loyal to the company, and avoid conflicts of interest directors are expected to display a high standard of care, skill or diligence directors are expected to act in good faith to promote the success of the corporation
Australia
General Law Directors have fiduciary duties under general law in Australia. These are: Duty to act in good faith and not to act contrary to the interest of the company Duty not to use power for an improper purpose Duty to avoid conflicts of interest .. Duty to retain discretion
Statutory Duties Directors also have duties under Corporations Act 2001: Section 181: Mirrors the general law duty to act in good faith, in the best interests of the company and for proper purpose. Section 182: Duty not to misuse position to gain advantage Section 183: Duty not to misuse information to gain advantage
Breach of Duties There is an important distinction between the general law and statute in that there are different consequences when it comes for breach If a director is acting dishonestly or recklessly then there will be criminal liability imported under statute. But not in general law. At general law where a director breaches their duties the likely remedy will be equitable damages or statutory compensation or recission. But within context of statute it is not possible. If it is a statutory duty, ASIC will enforce statute.
Canada
Tripartite Fiduciary Duty In Canada, a debate exists on the precise nature of directors' duties following the controversial landmark judgment in BCE Inc. v. 1976 Debentureholders. This Supreme Court of Canada decision has raised questions as to the nature and extent to which directors owe a duty to non-shareholders. Scholarly literature has defined this as a "tripartite fiduciary duty", composed of (1) an overarching duty to the corporation, which contains two component duties — (2) a duty to protect shareholder interests from harm, and (3) a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen".
Not all Canadian jurisdictions recognise the "proper purpose" duty as separate from the "good faith" duty. This division was rejected in British Columbia in Teck Corporation v. Millar (1972).
United States
Business judgment
Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) and §102)b)(7) DGCL Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919) Aronson v. Lewis In re Caremark International Inc. Derivative Litigation 698 A 2d 959 (Del. Ch. 1996) In re Walt Disney Co. Derivative Litigation 907 A.2d 693 (Del. Ch. 2005)
United Kingdom
Acting within powers s.171 Companies Act 2006
Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but to defeat a potential takeover bid, that would be an improper purpose..
However, in many jurisdictions the members of the company are permitted to ratify transactions that would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution.
Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper.
The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision of Howard Smith Ltd v. Ampol Ltd.. The case concerned the power of the directors to issue new shares.Following Hogg v. Cramphorn Ltd. Ch 254 It was alleged that the directors had issued a large number of new shares purely to deprive a particular shareholder of his voting majority. The court rejected an argument that the power to issue shares could only be properly exercised to raise new capital as too narrow, and held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company, or as part of an agreement to exploit mineral rights owned by the company.Teck Corporation v. Millar (1972) 33 DLR (3d) 288 If so, an incidental result (even desirable) that a shareholder lost his majority, or a takeover bid was defeated would not itself make the share issue improper. But if the sole purpose was to destroy a voting majority, or block a takeover bid, that would be an improper purpose.
Promoting company success
s.172 Companies Act 2006, "to promote the success of the company for the benefit of its members as a whole". It sets out six factors to which a director must have regards in fulfilling the duty to promote success. These are: 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 a company
This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the Companies Act 1985, protections for non-member stakeholders were considerably more limited (see e.g., s.309, which permitted directors to take into account the interests of employees but that could be enforced only by the shareholders, and not by the employees themselves. The changes have therefore been the subject of some criticism.Director's duties Directors must act honestly and in bona fide. The test is a subjective one—the directors must act in "good faith in what they consider—not what the court may consider—is in the interests of the company..." per Lord Greene MR.Re Smith & Fawcett Ltd Ch 304 However, the directors may still be held to have failed in this duty where they fail to direct their minds to the question of whether in fact a transaction was in the best interests of the company.Re W & M Roith Ltd 1 WLR 432
Difficult questions arise when treating the company too abstractly. For example, it may benefit a corporate group as a whole for a company to guarantee the debts of a "sister" company,a company with 100% the same shareholder even if there is no "benefit" to the company giving the guarantee. Similarly, conceptually at least, there is no benefit to a company in returning profits to shareholders by way of dividend. However, the more pragmatic approach illustrated in the Australian case of Mills v. Mills normally prevails:
"[directors are] not required by the law to live in an unreal region of detached altruism and to act in the vague mood of ideal abstraction from obvious facts which [sic] must be present to the mind of any honest and intelligent man when he exercises his powers as a director." at p. 164 per Latham CJ.
Hutton v. West Cork Railway Co (1883) 23 Ch D 654, per Bowen LJ, "money which [sic] is not theirs but the company’s, if they are spending it for the purposes which are reasonably incidental to the carrying on of the business of the company. That is the general doctrine. Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational… It is for the directors to judge, provided it is a matter which is reasonably incidental to the carrying on of the business of the company… The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company."
Boulting v Association of Cinematograph, Television and Allied Technicians 2 QB 606
Independent judgment s.173 Companies Act 2006
Directors cannot, without the consent of the company, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings.Although as Gower points out, as well understood as the rule is, there is a paucity of authority on the point. But see Clark v. Workman 1 Ir R 107 and Dawson International plc v. Coats Paton plc 1989 SLT 655 This is so even if there is no improper motive or purpose, and no personal advantage to the director.
This does not mean, however, that the board cannot agree to the company entering into a contract that binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the contract that the board previously approved).
Care and skill
Traditionally, the level of care and skill a director must demonstrate has been framed largely with reference to the non-executive director. In Re City Equitable Fire Insurance Co Ch 407, it was expressed in purely subjective terms, where the court held that:
"a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience." (emphasis added)
However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected and put up with an incompetent decision maker, they should not have recourse to complain.
However, a more modern approach has since developed, and in Dorchester Finance Co Ltd v Stebbing BCLC 498 the court held that the rule in Equitable Fire related only to skill, and not to diligence. With respect to diligence, what was required was:
"such care as an ordinary man might be expected to take on his own behalf."
This was a dual subjective and objective test, and one deliberately pitched at a higher level.
More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively and subjectively; in the United Kingdom the statutory provisions relating to directors' duties in the new Companies Act 2006 have been codified on this basis.Norman v. Theodore Goddard BCLC 1027
s.174, Companies Act 2006 Re Barings plc (No.5) 1 BCLC 433 Re D’Jan of London Ltd 1 BCLC 561
Loyalty and conflicts of interest