What are the powers and duties of a company director?
Every company must have a director and public companies need at least two. Directors are sometimes described as the directing mind and will of the company. The company’s constitution will give the power to manage the business to the directors, but there will generally be a power to delegate these functions and the board will usually appoint one of their number to be managing director, although there is no legal obligation to do so.
Directors owe duties to their company, that is to say to their shareholders and to their employees, and these duties fall into two major categories:
(1) a duty of care and skill — they should be prudent in conducting the company’s business. This duty is not onerous; the reported cases establish that the courts take a lenient view of directors’ shortcomings of ability.
(2) fiduciary duties — they must act with integrity and honesty. By contrast with the duty of care and skill (above) fiduciary duties are applied very strictly. If there is any possibility of a conflict between a director’s personal interest and his duty to the company, his duty to the company is paramount.
Some early cases like Aberdeen Railway Co v Blaikie (1854) Macq HL 461 suggested that any contract with his company concluded by a director (without disclosure) would be automatically unfair, but this rule may now be modified by the courts to limit it to contracts which are, in fact, unfair. This is certainly what happens in the USA. In Globe Woolen Co v Utica Gas & Electrical Co (1918) 224 NY 483, where a director of the plaintiff company who was also a director of the defendant company did not disclose all aspects of the contract under which the defendant would supply electricity to the plaintiff, the contract was set aside as unfair. The principle is clearly that directors should obtain the best possible deal for their company. If the company, with full knowledge of the facts, approves the contract then there is no breach of duty.
The duty of directors not to place themselves in a position where their duties to the company and their personal interests conflict extends well beyond the limitations of entry into contracts with the company. They are under a duty not to make personal profits while acting as directors. The cause celebre is Regal (Hastings) Ltd v Gulliver [2] 1 All ER 378. Regal owned a cinema. The directors wished to acquire the leases of two other cinemas with a view to selling the whole as a going concern. Regal had insufficient funds to purchase leases and the directors were unwilling to purchase in their own names, thereby making themselves personally liable without limit. So they formed a company, “Amalgamated”, with a capital of 5,000 £1 shares. Regal subscribed for 2,000 shares and the directors and their friends subscribed for the rest. Eventually the three cinemas were sold as a going concern by a sale of the shares in both companies. The directors received almost £3 profit per share on the sale of their shares in Amalgamated. The company sued for the recovery of this profit.
It was held that the directors used their opportunities and special knowledge as directors to make a secret profit for themselves. They were accountable to the company for the profits made. In its decision the House of Lords recognised that the directors, as controlling shareholders, could have passed a resolution at a general meeting to approve their retention of their profit, but they had not done so. Thus, the (potential or actual) breach of duty may be authorised or ratified by the general meeting, provided the effect of this is not to permit fraud on the minority shareholders.
The decision seems harsh. The profit made by the directors in selling their shares was provided by willing purchasers who were the very people to benefit from the House of Lords’ decision (by a return of part of the purchase price). The case well illustrates, however, the very strict nature of the fiduciary duties of a director.
A clearer case of breach of duty is Cranleigh Precision Engineering Ltd v Bryant [5] 1 WLR 1293. Bryant was an engineer and managing director of the plaintiff company. He invented an “above-ground swimming pool”, but before a patent was granted he left the plaintiff’s employment. He stripped the plaintiff company of assets — tools, materials, contracts, files and correspondence — and transferred them to a company that he set up independently. His former employers obtained an injunction to restrain him from making use of the confidential information which he obtained while working for them.
Industrial Development Consultants Ltd v Cooley [2] 2 All ER 162 provides another example of the court acting to prevent sharp practice. Here a director who (fraudulently) procured his release from his contract of employment so that he could obtain a personal contract for design work with the Gas Board was held accountable for the profit which he made on the contract. One’s sympathies are all with the former company, but the decision is open to challenge, as the Gas Board would not have dealt with the company, since it had objections in principle to the company’s set-up. Could it really be said that the former director took advantage of a corporate opportunity?
In Horcal Ltd v Gatland [4] BCLC 549 the defendant was a director who took the personal benefit of a contract which should have been the property of his company. The company was in business as building contractors. The director took a telephone call from a Mrs K who wanted work done at her house. Instead of executing the work through the company the defendant (unknown to Mrs K) took the benefit of the contract himself. He was held accountable for the profit of the contract, although he was allowed to keep his “golden handshake”, which had been agreed shortly before he diverted the contract.
It is probably in order for a director to pursue a business opportunity which has been rejected by the company, provided that he has not influenced the company’s decision. There is no English authority on this point, but a Canadian decision involving mining options, which would be persuasive here, indicated that the director is free to press ahead (Peso Silver Mines v Cropper [6] 58 DLR 281).
One other important feature of a director’s fiduciary duties relates to competition with his company. Rather surprisingly, the only judicial pronouncements on this indicate that a director can compete with his company. This was stated in an old case in 1891, [1] WN 165 London & Mashonaland Exploration Co v New Mashonaland Exploration Co. Usually, a director’s contract will indicate that competition is prohibited. Even if there is no express prohibition of competition, it seems unlikely, today, that competition would be tolerated by the courts. It is well documented, for example, that a director cannot make use of business contacts, goodwill, lists of clients etc.
The duty of good faith placed on directors is very strict. Directors must promote the interests of their companies and must not let their personal interests intrude.
Directors’ duties — eight dos and don’ts
(1) Directors must consider their shareholders’ interests when deciding how to act.
(2) Directors must also take into account the interests of their employees.
(3) Directors owe a duty to act with care and skill.
(4) Directors must not make a secret profit from their position as directors.
(5) Directors must not compete with their companies.
(6) If a director has a personal interest in any proposed contract that the company may be proposing to conclude he or she must disclose it to the company.
(7) A director must not take an opportunity that comes the way of the company unless the company decides independently not to take the opportunity.
(8) Even if a director resigns he cannot take an opportunity that came the way of the company while he or she was a director.
