Cl i e n t Al e r t

November 2008

London office 2006 — Directors’ Duties 30 St Mary Axe London EC3A 8EP The latest phase of changes introduced by Duty to promote the success of the the Companies Act 2006 (the “Act”) came company Authors into force on 1 October 2008. Several of This is a duty to act in good faith to James Green these changes relate to directors’ duties promote the company’s business for the +44 (0)20 7220 5788 and build upon other duties that the Act benefit of the members as a whole. Most [email protected] introduced in October 2007. This note pro- directors will consider that they discharge Christopher Raggett vides an overview of the new landscape this duty naturally in their efforts to +44 (0) 20 7220 5769 facing directors and how the changes will maximise profits. However, the pursuit of [email protected] affect the way that companies are run. short-term profits may not be sufficient; The Act codifies directors’ duties that had this duty imposes an obligation on direc- Contacts previously evolved through case law. tors to exercise their judgement in a way Martin Thomas The new provisions apply to all company that will bring about a “long-term increase +44 (0)20 7220 5760 directors, including shadow directors, and, in value” for the company. In doing so, the [email protected] in certain circumstances, even to former directors must have regard to the following directors. Although the relevant provisions non-exhaustive list of factors that are set Paul Tetlow of the Act largely reflect the previous case out in the Act: +44 (0)20 7220 5780 law, there are nevertheless some signifi- [email protected] ÆÆ the likely consequences of any deci- cant changes. It is therefore important that sion in the long term; Charles Ashton directors within any size of organisation +44 (0)20 7220 5765 understand precisely what these codified ÆÆ the interests of the company’s [email protected] duties are, especially in light of the new employees; ability of shareholders, under the Act, to Dearbhla Quigley ÆÆ the company’s relationships with sup- bring derivative claims against directors on +44 (0)20 7220 5709 pliers and customers; [email protected] behalf of a company. ÆÆ the company’s impact on the environ- Danny Heathwood The Duties ment and community; +44 (0)20 7220 5776 Although the Act has codified directors’ [email protected] ÆÆ the impact on the company’s reputa- duties in an unprecedented way, regard tion; and Richard Jordan must still be had to the rules +44 (0) 20 7220 5767 and equitable principles that pre-existed ÆÆ the fair interests of the company’s [email protected] it. However, for the most part, the duties shareholders. Jennifer Lovesy listed below will determine how directors This has introduced the concept of the +44 (0)20 7220 5753 should exercise their powers. “enlightened shareholder”, as a result [email protected] Duty to act within powers of which directors are forced to ask Angela Bourton This relatively simple restriction outlaws themselves, with the over-arching aim +44 (0) 20 7220 5738 acts and means that directors of maximising the long-term value of the [email protected] must act within the constraints of the business, what a socially and fiscally company’s constitution, namely its articles responsible person would do. This is a James Williams large extension of the previous concept +44 (0) 20 7220 5708 of association. which required the directors only to [email protected] have regard to the best interests of the

Hunton & Williams shareholders. The effect is that the The Act does provide for transitional Practical Effects arrangements, so that no authorisation notion of corporate responsibility is now The codification of directors’ duties is needed for conflicts existing prior to 1 enshrined in legislation. clarifies the issues that the board must October 2008. However, if the circum- Duty to exercise independent consider when running the company. stances of the conflict change after this judgement However, it is still unclear exactly how date, the General Counsel 100 (a group A director must act solely in accordance the courts will interpret some of the of in-house legal advisers representing with his own good faith judgements new duties in practice and this naturally FTSE 100 companies) recommend and must not be influenced by external introduces an element of uncertainty. seeking authorisation under the new factors. regime. The Act does make clear that the duties Duty to exercise reasonable skill, must be read in context, so that they Companies should therefore review care and diligence all apply equally, even in the event of the existing provisions in their articles a conflict. In such instances, directors A director must exercise the care, skill of association in relation to conflicts will need to demonstrate that they have and diligence which would be exercised in light of these changes, as well as properly considered all the factors set by a reasonably diligent person with ensuring that all directors disclose all out in the Act (and any others that may both the general knowledge, skill and their existing conflicts and those of their be relevant) when reaching their deci- experience that may reasonably be connected persons and that any future sions. expected of a person in such a role as changes to such conflicts are reported well as the actual knowledge, skill and to the company. The description and reality of each experience that the particular director director’s role should be analysed care- has. The first, objective element to the Duty not to accept benefits from third fully to ensure that they are not exposed test means that it is important that all parties to the objective test of what knowledge directors are properly qualified to carry This precludes directors from accepting they should have for a role for which out the roles that they are assigned. any benefits which may be granted due they are not appropriately qualified. to their position as a director. This duty Duty to avoid conflicts of interest Directors should be asked to ensure does not apply if it could not reasonably that they have disclosed all their existing Directors must not put themselves in be expected to result in a conflict of conflicts and those of their connected a position which may, directly or indi- interest nor to benefits conferred by persons, and systems should be in rectly, conflict with the interests of the companies within the same group. company. This does not apply to trans- place to ensure that any future changes actions with the company which must Unlike the procedure for generic to such conflicts are reported to the simply be notified to the other directors. conflicts above, this duty can be waived company. only with authorisation from the share- Further, a test of materiality applies, Finally, existing constitutional holders. in that there is only a breach of the documents, particularly the articles of duty where a could Duty to declare an interest in association, should be reviewed and reasonably be expected to arise. This is proposed and existing transactions updated, if necessary — especially wider than the previous restriction — it is with the company in relation to the new provisions on not enough now for a director to absent All directors must declare to the other conflicts of interest. himself from a meeting at which a matter directors the nature and extent of their is discussed in relation to which he has interest in both existing and proposed How We Can Help a conflict. Simply allowing the possibility transactions with the company. This Hunton & Williams’ London office has of such a conflict arising may place the includes both the director’s own over 15 lawyers able to assist with any director in breach of his duties. interests and those of his connected concerns arising from the implementa- Unlike the previous regime, conflicts of persons. It is an objective test, applying tion of the Companies Act 2006 and interest may be authorised by directors to interests of which the director ought any other corporate or commercial legal in a private company where the constitu- reasonably to have been aware. A issues. If you would like to discuss tion does not specifically invalidate the materiality test also applies to this duty. further any of the issues discussed in authorisation. The situation is slightly There is no need to disclose interests this note, please contact James Green more onerous for public companies of which the other directors were aware or Christopher Raggett at this Firm. where the constitution must specifically prior to 1 October 2008. allow the authorisation.

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