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UK statutory directors have a number of legal responsibilities under the Companies Act 2006 which must be complied with. There are many other specific duties and obligations which must be observed in connection with this role like filing accounts and ensuring compliance with a wide variety of further laws and regulations such as those relating to insolvency. The below is a non-exhaustive guide to the general standards a statutory director must adhere to and the facts of each circumstance and context in which a statutory director acts are also salient points to consider when applying the following these duties:
A director of a company must act in accordance with the company’s constitution and only exercise his/her powers for the purposes for which they have been conferred.
A director must act (in good faith) in a way which would most likely to promote the success of the company for the benefit of its members as a whole. In so doing, the director must have regard to:
The duty is subject to any enactment or rule of law requiring directors in certain circumstances to consider or act in the interests of the creditors of the company.
Accordingly, the duty is displaced when the company is insolvent, and may be modified by an obligation to have regard to the interests of creditors as the company nears insolvency.
Directors must exercise their powers independently, without subordinating their powers to the will of others.
For example, a director could not agree with a third person (such as his or her appointing shareholder) to vote at board meetings in any particular way, even if voting in that way would not otherwise have breached his or her duties to the company.
This duty will not prevent directors relying on advice, as long as the directors exercise their own judgment in deciding whether or not to follow the advice.
A director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both:
So, at a minimum, a director must display the knowledge, skill and experience set out in the objective test, but where a director has specialist knowledge, the higher subjective standard must be met.
A director must avoid situations in which they have or can have a direct or indirect interest that conflicts with, or may conflict with, the company’s interests. That applies, in particular, to the exploitation of property, information or opportunity, and whether or not the company could take advantage of the property, information or opportunity.
The duty will not be infringed:
This is the fiduciary rule prohibiting the exploitation of the position of director for personal benefit.
Directors must not accept any benefit (including a bribe) from a third party which is conferred because of his or her being a director or doing or not doing anything as a director.
Directors must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply.
The declaration must be made before the company enters into the transaction or arrangement.
No declaration will be required:
Where shareholders feel that a director is not achieving the standards required, they may wish to consider removing him/her. The situation can be challenging if the director in question does not leave voluntarily, however, there is a useful mechanism available to shareholders under the Companies Act 2006 to terminate an unwanted person’s directorship.
A vital first step to this process is always to review the Company’s constitutional documents as well as any investment agreements or shareholder agreements. Additionally, it is worth considering whether the terms of any service agreements apply and whether contractually agreed termination provisions need to be followed.
To commence the process, a shareholder will need to request a General Meeting to vote on a resolution to terminate the directorship of the director in question. A notice should therefore be sent by a shareholder to the board of the Company calling for the General Meeting and detailing the resolution to be voted on.
The director in question will also need to be served with notice of the resolution and meeting to take place as well as be informed of rights to make representations to the board regarding the proposed termination.
Throughout the process, there will be strict timing formalities to comply with as any failure to adhere these will risk the entire process being undermined – preparation and careful planning are therefore essential.
Should you require assistance in such matters or any other aspects of your company’s arrangements with its shareholders or board of directors, our experienced corporate solicitors can be on hand to guide you.
There is no statutory definition of a Non-Executive Director (NED), but they are usually required to devote part of their time and affairs to a company as an independent adviser, e.g. by attending regular board meetings.
Companies recruit NEDs for a number of reasons, including:
NEDs are usually senior, experienced individuals who offer a wider perspective on matters under discussion. As a director, they are subject to the statutory duties under the Companies Act 2006. NEDs appointed to listed companies are also subject to the UK Corporate Governance Code.
Finding the right person to become a NED of a company can be complex and time-consuming for the existing board. Not only does the NED need to have appropriate experience, but they also need to accept the culture of the company and be able to support its goals and objectives.
Further complications can arise when agreeing on the role and obligations of the NED and negotiating their remuneration package, especially with regards to giving shares in the company.
You can see more information on recruiting a non-executive director here.
It is also important to consider a NED’s status. By definition, a NED should not be an employee nor have an executive capacity. However, a NED will have specific duties and, occasionally, these can increase to such an extent that the NED can claim that they are entitled to the protection of worker or employment rights. This can include unfair dismissal rights, the right to paid holidays and protection against discrimination. Therefore, the scope of the appointment should be clearly defined. It is also useful to make clear in the appointment documentation that, whilst being a director of a company, the NED is not an employee.
It is common (but not required) for a private limited company to issue shares to a NED on appointment or grant them the right to acquire shares at a future date pursuant to an option agreement. The type of shares or share options issued will be subject to certain tax considerations relating to both the company and the NED.
The type of share that is issued will also vary depending on the NED’s role and objectives, which may lead to different classes of share being issued by the company, for example:
There are benefits to the NED in each of growth and hurdle shares as the amount payable for them by the NED will be nominal as at the date of issue. This is because they will have no or little value as they are excluded from participating in the current value of the company.
The timing of the issue of the shares will also be the subject of discussion, i.e. are some of the shares issued on appointment and more at a later date or are all of the shares to be subject to an option which is only exercisable upon the satisfaction of certain agreed conditions. Again, this will be subject to tax considerations and the role and objectives of the NED.
If you are considering appointing a NED or are a NED seeking a new appointment with a company, we have years of experience in assisting clients with the relevant processes and ensuring that the terms agreed are suitable to all parties.
As well as giving you advice, there are also a number of legal documents that we can assist in preparing or reviewing, including:
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