Directors Duties Andrew Keay LLB, M Div, LLM, PhD Professor of Corporate and Commercial Law Centre for Business Law and Practice School of Law University of Leeds Professorial Research Fellow Deakin Law School Deakin University Melbourne Barrister, Kings Chambers (Manchester, Leeds and Birmingham) Legal Practitioner (Aust)
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CONTENTS Preface to the Third Edition Preface to the Second Edition Preface to the First Edition Table of Cases Table of Statutes Table of Statutory Instruments v vii ix xxi xlv li Chapter 1 Introduction 1 Chapter 2 Directors: Background and Role 9 I Introduction 9 II Types of director 9 A General 9 B Executive and non-executive 10 III Directors recognised at law 12 A De jure directors 13 B De facto directors 13 C Shadow directors 18 D Distinguishing between de facto and shadow directors 23 IV The director s position as a fiduciary 23 V Groups of companies 27 VI Duration of duties 27 Chapter 3 Directors in the Corporate Governance Process 29 I Introduction 29 II Defining corporate governance 29 III Separation of ownership and control and directorial discipline 31 IV To whom are duties owed? 35 A Shareholder value principle 36 1 From a theoretical viewpoint 36 2 From a positive perspective: What do the cases say? 43 B Stakeholder theory 48 C Summary 55 D Duties to individual shareholders? 56 E Duties to creditors? 56
xiv Directors Duties V Agency theory 57 VI Process 58 VII Recording actions and decisions 59 Chapter 4 Codification and an Introduction to the General Duties 61 I Introduction 61 II Codification 61 III Interpretation 67 IV Fiduciary duties 70 V Scope and nature of the duties 73 VI Former and shadow directors 75 VII Other duties 77 VIII Proceedings for breach of duties 79 A Who takes proceedings? 79 IX Summary 86 Chapter 5 Duty to Act within Powers 87 I Introduction 87 II The duty to act in accordance with the company s constitution 88 III The duty to exercise powers for the purposes for which they were conferred 91 A Introduction 91 B Complications 96 C Background 99 D The purpose 105 E The but for test 113 F Focus on the best interests of the company 115 G An assessment 119 IV Summary 126 Chapter 6 Duty to Promote the Success of the Company 127 I Introduction 127 II The section 129 A Generally 129 B Companies not focused on member benefits 130 C Duties to creditors 130 III The development of the duty 131 A The Company Law Review 131 B Company Law Reform: the first Government White Paper 133 C Company Law Reform: the second Government White Paper 133 D The Company Law Reform Bill 134 IV The interpretation of the section 135 A Introduction 135 B Good faith 139 C Success 152
Contents xv D Benefit members as a whole 154 E Factors to which regard is to be had 155 1 Long term 161 2 Employees 167 3 Suppliers and customers 169 4 The community and the environment 169 5 High standards of business conduct 172 6 Members 172 7 Summary 173 F Have regard to 174 V What will constitute a breach? 180 VI Enforcement of the duty 183 VII In practice 187 VIII Assessment 192 IX Conclusion 195 Chapter 7 Duty to Exercise Independent Judgment 197 I Introduction 197 II The existing common law 199 A The general rule 199 B The exceptions 201 III The special case of nominee directors 203 IV The provision section 173 211 V Conclusion 212 Chapter 8 Duty of Care, Skill and Diligence 215 I Introduction 215 II Background 220 III The perceived change in judicial approach 225 IV The new provision 228 V Care 232 A Monitoring 234 B Keeping themselves informed 240 C Delegation 242 D Records and accounts 246 E Reliance 250 F The objective standard 255 G Decisions and hindsight 258 H The business judgment rule 261 I Professional advice 266 VI Skill 269 VII Diligence 272 VIII Non-executives 275 IX Enforcement of a breach 278 X Defences 280
xvi Directors Duties XI Concluding remarks 281 A What will the courts consider? 281 B Assessment 282 C Summary 283 Chapter 9 Avoiding Conflicts of Interest: the Duty 285 I Introduction 285 II Background 287 III The rationale for the avoidance of conflicts 295 IV The section 295 V Conflict of interest 296 VI Possible conflict 297 VII Exceptions 298 VIII Examples of conflict 305 IX Competing directorships 306 X Former directors 312 XI The effects of a conflict 315 XII Opting out 315 XIII Conclusion 316 Chapter 10 Avoiding a Conflict of Duty: Application 317 I Introduction 317 II Resignation of directors 317 A Introduction 317 B Exploiting opportunities 320 C Establishing a competing business 323 1 Preliminary/preparatory steps 323 2 Other factors 329 III Exploitation 330 A Introduction 330 B Corporate information 331 C Corporate opportunities 332 1 Introduction 332 2 A strict approach 334 3 A more liberal/flexible approach 337 4 Restraint of trade and hindering entrepreneurialism 343 5 Company not being able to exploit the opportunity 345 6 The company would not have succeeded in obtaining the opportunity 346 7 The company chooses not to pursue an opportunity 347 8 Third party preference 348 9 The role in which the director is acting 348 10 The North American experience 352 11 What is an opportunity? 353 12 Directorial conduct 358 IV Conclusion 359
Contents xvii Chapter 11 Duty not to Accept Benefits 361 I Introduction 361 II The provision 362 III Exceptions 363 IV Third party 364 V Former directors 364 VI Benefit 364 VII Secret profits and bribes 365 VIII Authorisation and defence 370 IX Effects 370 Chapter 12 Duty to Declare an Interest 375 I Introduction 375 II The provision 376 III Exceptions 379 IV An interest 381 V The disclosure 381 A Generally 381 B The manner of disclosure 381 C To whom is disclosure to be made? 382 D Implied disclosure? 383 E Participation of the disclosing director 383 F Disclosure and single directors 383 VI Effects 384 VII Disclosure under section 182 385 Chapter 13 Duty to Consider the Interests of Creditors 389 I Introduction 389 II Policy and legislative background 390 III The basis of the duty 393 IV The case-law development 395 V The triggering of the duty 400 VI How should directors act? 408 A Generally 408 B When the company is insolvent 413 C When the company is in a pre-insolvency position 419 D Factors to consider 425 VII Is the obligation a duty to creditors? 427 VIII To which creditors is an obligation owed? 430 IX Conclusion 433 Chapter 14 Derivative Proceedings 435 I Introduction 435 II The common law: some background 439
xviii Directors Duties III The statutory derivative action 442 A Introduction 442 B The elements for gaining permission 443 C The practice and procedure 445 IV The criteria for determining whether permission will be granted 449 A Specified criteria which courts must consider 450 1 Prima facie case 450 2 Elements as to which the court must be satisfied 458 3 Other relevant factors 466 4 Good faith 467 5 Importance to a person acting in accordance with section 172 476 6 Likelihood of authorisation or ratification 477 7 The company has decided not to pursue the claim 479 8 Alternative remedy 479 9 Views of members with no personal interest in the matter 486 B The best interests of the company 488 C Costs 490 V Following permission 494 VI Common law proceedings and retrospective effect 494 VII Companies in liquidation or insolvent 496 VIII Multiple derivative actions 499 IX Foreign derivative claims 502 X Appeals from derivative claim hearings 502 XI The effect of the new procedure 503 XII Conclusion 504 Chapter 15 Consequences of Breach 507 I Introduction 507 II The relief 508 A Damages or equitable compensation 509 B Account of profits 515 C Restoration of the company s property 519 D Injunction and declaration 520 E Rescission 521 F Money had and received 521 G Dismissal 522 H Proprietary relief 522 I Choice of relief 523 III Constructive trustee 524 IV Allowance to directors 527 V Third parties 529 A Generally 529 B Knowing assistance 533 C Knowing receipt 539 D Relief 543 E Summary 545
Contents xix Chapter 16 Authorisation and Ratification of Breaches of Duty 547 I Introduction 547 II Consent, approval or authorisation by the members 549 III Ratification by the members 550 A The essence of, and background to, ratification 550 B Position at common law 553 1 What may be ratified? 553 2 What about unanimous voting? 559 3 Who is bound by ratification? 560 C The section 562 D Ratification of breaches of statutory duties 565 E Sole director/shareholders 565 F Exclusions from voting 566 G A limit on ratification 568 Chapter 17 Judicial Excusing of Breaches 571 I Introduction 571 II The provision 571 III Background 573 IV Procedure and evidence 574 V Rationale for the provision 575 VI The provision and the duty of care 575 VII The ambit of the provision 579 VIII The conditions 584 A Honesty 585 B Acting reasonably 588 C Fairness 593 IX Apprehended liability 596 X Conclusion 599 Index 601