Directors Duties and Derivate Actions
The phased implementation of the Companies Act 2006 continues, with more of the new law on directors’ duties coming into force on 1 October 2007. There are five core duties in s171 CA 2006 (to exercise independent judgment; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties; and to declare an interest in any proposed transaction or arrangement).
In addition, there is a new requirement for directors to act in a way which they consider in good faith would be most likely to promote the success of the company for the benefit of its members as a whole (s172 CA 2006). In fulfilling this duty, directors must have regard to, among other things:
- the likely long-term consequences of any decision;
- the interests of the employees;
- the need to foster the company’s relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and environment;
- the desirability of maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members and the company.
Directors must continue to have regard to general equitable principles and common law rules in interpreting and applying their duties. The other key aspect of the new law relates to conflicts of interest, and these provisions will come into force in October 2008.
One likely outcome of the new regime is that risk-averse directors will want to record the reasons behind all their decisions, resulting in a box-ticking exercise to record that they considered the factors set out (even if those factors were then dismissed). Likewise, board minutes are likely to be longer and more detailed. There is a feeling that, despite the duty on directors to exercise reasonable care, skill and diligence, these well-intentioned changes will simply result in more formulaic procedures and ever-longer paper trails.
Alongside the changes to directors’ duties, shareholders now have an expanded statutory right to sue directors in derivative actions. A derivative action may be brought in relation to an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust.
Significantly, a derivative action is now expressly available for a director’s breach of his or her duties (which have been broadened as discussed above). This is so even if the director has not benefited personally from the breach, and shareholders need not have been members of the company at the time of the misconduct of which they complain.
There are, however, certain procedural safeguards, and it remains the case that any action must be brought in the name of the company and only the company can be awarded damages in the event of a successful claim. In theory, directors will be exposed under the new law to greater risk of claims, but we will have to wait and see how this plays out in practice.
Rachael Taylor, Solicitor – Company Commercial Department
