ALL CHANGE IN THE BOARDROOM
On 1 October 2008, new directors' duties will come into effect in terms of the Companies Act 2006 (the "Act") This e-bulletin summarises the changes and explains why directors need to take action now to prepare themselves for those changes.
What will change from October 2008?
The Act introduced a new statutory code of directors' duties which came into force on 1 October 2007. However, implementation of three of the new duties was delayed until October 2008. These new duties are:
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to avoid a conflict of interest;
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to declare interest in a proposed transaction or arrangement;
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not to accept benefits from third parties.
Duty to avoid conflicts of interest
The law currently only requires a director not to place himself in a situation where his personal interests conflict with his duties to the Company. Where such a conflict does exist, the Company's articles of association will generally permit the director to vote at the relevant meeting and be counted in the quorum.
From October 2008, directors will be under a positive duty to avoid a situation where the director has or can have a direct or indirect interest that conflicts or possibly may conflict with the interests of the Company. The duty is very widely drawn and covers situations rather than specific conflicts as well as direct and indirect interests.
The Act however provides two exceptions to the general duty. The first is that the duty will not be infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest. The second is that the board may authorise a conflict of interest.
There is a distinction between the method by which the board can authorise the conflict for private and public companies. The board of a public company can only authorise a conflict if its articles of association allow the board to do so and the matter is proposed to and authorised by the board in accordance with those provisions.
The board of a private company may authorise a conflict if the shareholders have resolved that such authorisation can be given. While this allows conflict authorisation by means of an ordinary resolution of shareholders, it is expected that the majority of private companies include a specific provision in their articles to this effect.
Once a conflict has been authorised, the director having the conflict must not be counted in the quorum for the meeting and is not permitted to vote on the matter. This could lead to difficulties for some companies whose articles prescribe that certain directors must be present to constitute a quorum and could lead to meetings being inquorate in certain situations if the articles are not amended.
It is important to note that authorisation of a conflict does not mean that the directors can disregard their other statutory duties, most notably their duty to promote the success of the Company for the benefit of its members as a whole. However, the Act contains a "safe harbour" provision which provides that where a company's articles contain a provision for dealing with conflicts of interest, the directors' general duties are not infringed by anything done or omitted to be done by the directors when following those provisions.
This new duty is likely to have a significant impact on boardroom practice both in the period leading up to 1 October 2008 and beyond. In particular, in advance of October 2008, boards will need to identify existing conflicts and potential conflicts, ensure that their constitutional documents contain the necessary authorisations for such conflicts and consider the extent to which authorisation should be given. As a matter of good governance, procedures and policies may also require to be put in place to ensure conflicts are reviewed on an ongoing basis.
Duty to declare interest in proposed transactions/arrangements
A director who is directly or indirectly interested in a contract or a proposed contract with the company currently has a duty to declare the nature of his interest at a board meeting. The Act splits this duty into two separate duties- one relating to contracts which are proposed and one relating to contracts which have already been entered into. The significance of the distinction is that a failure to declare an interest in an existing contract results in the director committing a criminal offence.
The Act prescribes that the "nature and extent" of the interest must be declared. While this goes beyond the current common law requirement to only declare "an" interest, it is unlikely to have much practical effect as most articles of association already prescribe that the nature and extent of the interest must be disclosed.
Directors do not however have to declare an interest that cannot reasonably be regarded as likely to give rise to a conflict of interest, where the interest concerns his service contract or where the other directors are already aware of it.
Duty not to accept benefits from third parties
Directors will be under a duty not to accept a benefit from a third party conferred by reason of his being a director or doing anything as a director. The Act does not specify any de minimis limit for benefits which can be accepted and there is no method of authorisation via the articles. The Act does however provide that the duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. In practical terms, boards may wish to put in place guidelines on the acceptance of gifts, corporate hospitality etc and consider whether a register of such matters should be retained.
Other changes effective October 2008
A number of other provisions relating to directors also come into force in October. Notably, from that date any person under the age of 16 years cannot be a director. Another change will be that companies will be required to have at least one natural person as a director- therefore companies with only corporate directors will require to appoint an individual to the board although there is a grace period allowed until October 2010 in certain circumstances.
What do I need to do?
Boards need to start planning for the changes now. In particular, they need to identify existing and potential conflicts and determine what, if any changes need to be made to their constitutional documentation and internal procedures in advance of the October implementation date.
How can McGrigors help?
The McGrigors team can assist you with the above and provide practical and tailored advice to assist you to implement the changes.
If you would like to discuss this briefing further, please get in touch with your existing contact at McGrigors. Alternatively, please contact one of the partners below:
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Patrick Martin Head of Corporate Corporate Team Tel. 0207 054 2658 patrick.martin@mcgrigors.com |
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Alan Diamond Partner Corporate Team Tel. 0131 777 7067 alan.diamond@mcgrigors.com |
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