Nominated Directors: some recent issues
Max Hudson examines some of the recent issues that have arisen concerning nominated directors.
When parties enter into joint ventures, or make a significant investment in another company, the investor will often seek to protect itself by nominating either a trusted individual or someone regarded as "independent" to the Board of the target company. A recent case has highlighted the problems which can emerge for all the parties involved, including the individual handed the particular chalice.
The recent Court of Appeal decision in Hawkes v Cuddy & Others (2009 EWCA CIV 291) has demonstrated the problems that can arise where there is no clear mechanism or procedure in place for dealing with the conflict of interest which may arise between an investor and the target company. In this particular case, which involved what were in every sense the competing interests of Welsh rugby football clubs, the documentation referred to general objectives rather than specific procedures. This meant that there was an argument as to whether the appointed directors duties were primarily to the instructor appointing him or to the company in question. The Court of Appeal found that, in this case, the basic duty was to the company to the Board of which the nominee had been appointed not to the person appointing him. This might have given rise to further conflicts if the appointor had been the employee of another party.
The clear message as a result of the case is that it is essential for the investor, the target company and the person appointed to identify between themselves where the problems lie,including:-
- the focus of the investment and what role the appointee is expected to pay
- where conflicts may arise
- what information may be confidential to each of the companies involved
- what separate duties arise under the contract of employment of the appointee, or the existing terms of engagement if the appointee is also a member of other corporate boards involved in the joint venture
- any other business interests of the appointee if he is appointed by virtue of his "professional" status or as an independent expert
- whether any other fiduciary duty is involved, for example the position of a trustee in relation to a trust corporation.
Having identified the areas of conflict, it is then appropriate to take advantage of the provisions of the Companies Act 2006 which permit conflicts of interest to be addressed by:
- each of the companies involved going through the appropriate corporate procedures, including members' approval if that is of assistance
- the adoption of appropriate provisions in the Articles of Association of each of these companies involved containing provisions for dealing with the conflicts of interest, and procedures adopted in line with those set out in Section 175(4) where the matter has been authorised by the directors and the relevant company's constitution does not invalidate that authorisation
It is in everyone's interest to have the procedures set up at the outset. The consequences of any breach of the general duties, which includes addressing conflicts of interest, are that the director in question may be held liable by the company to which he owed that duty. The appointee should check which, if any, directors' and officers' insurance policy may protect him.
In some cases an agreement may provide that an individual has a right to attend at a board meeting but without a specific appointment as a director. The issue any "observer" needs to note in such cases is that, under the provisions of company law, "a director is a director by whatever name called". If, therefore, that observer takes an active role in the relevant discussions, then there is a danger that the individual is treated as a director for the purposes of liability and consequently will need to consider his own position. This is particularly the case in relation to the new statutory duties to act in good faith in the way most likely to promote the success of the company on whose board he is sitting.
The need for a clear set of procedures and appropriate guidance is greater than ever before, and specialist advice is essential at the outset.
Max Hudson is a Partner in the company commercial department at Payne Hicks Beach
This publication is not intended to provide a comprehensive statement of the law. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken.