This guide outlines the legal issues related to the appointment of a nominee director, subsequent to nomination pursuant to a shareholders agreement or otherwise, and the extent to which such director may be regarded as subject to the wishes of the nominator in addition to or in the place of his fiduciary duties.

Background

In general, a director may not fetter his discretion by contracting with other directors or with third parties to act in a certain way in the future. In other words, a directors obligation to act in accordance with his fiduciary duties would usually take precedence over any course of conduct he may have previously agreed with codirectors or third parties. However, there are exceptions to the principle referred to above.

The above issues are considered further below.

Duties of directors

The duties of the directors of a company incorporated under the Companies (Jersey) Law 1991 (“Companies Law”), comprise a combination of statutory and common law duties. English case law on directors’ duties will carry weight and/or be persuasive in the Jersey courts. For current purposes, the key duties may be summarised as follows.

  • Statutory duty

Article 74(1) of the Companies Law enshrines in statute the general duties of a director to act honestly and in good faith and with due care, diligence and skill.

  • Common law duties

A director has a duty to act in what he bona fide considers to be the best interests of the company. He must not act for any collateral purpose. Even if the directors are acting in good faith and in the interests of the company as a whole, the directors must nevertheless use their powers for the purposes for which they were conferred.

Duties of nominee

The term nominee is not used in the Companies Law. Although the English law equivalent in the form of the Companies Law 2006 also does not define the term nominee director, in the 1998 consultation paper on directors’ duties (CP 153), the Law Commission noted the definition as follows:

“persons who, independently of the method of their appointment, but in relation to their office, are expected to act in accordance with some understanding or arrangement which creates an obligation or mutual expectation of loyalty to some person or persons other than the company as a whole”

An important issue which arises from the above statement and generally is the extent to which a director who is appointed as a nominee director may be subject to a duty to act in accordance with the wishes of his nominator. In Hawkes v Cuddy (2009) EWCA Civ 291 Stanley Burton LJ stated that:

“In my judgement, the fact that a director of a company has been nominated to that office by a shareholder does not, of itself, impose any duty on the director owed to his nominator. The director may owe duties to his nominator if he is an employee or officer of the nominator, or by reason of a formal or informal agreement with his nominator, but such duties do not arise out of his nomination, but out of a separate agreement or office. Such duties cannot however, detract from his duty to the company of which he is a director when he is acting as such.

As the Australian cases to which the judge referred indicate, an appointed director, without being in breach of his duties to the company, may take the interests of his nominator into account, provided that his decisions as a director are in what he genuinely considers to be the best interests of the company; but that is a very different thing from his being under a duty to his nominator by reason of his appointment by it.”

We are of the view that as the Companies Law does not expressly contemplate or provide for any duty towards a nominator, a director of a company established under the Companies Law would not be obliged to the person who nominated him purely by that fact alone.

A related question is whether it is possible for a director to agree with his nominator to act in a particular manner, without regard to the best interests of the company, if the shareholders of the company had agreed to such conduct. In Cobden Investments Ltd v RWM Langport [2008] EWHC 2810 (Ch) it was recognised that the shareholders could, by unanimous consent, agree that a nominee director could negotiate with the company on behalf of his nominator without regard to the best interests of the company. We are of the view that the same position would apply in the case of a Jersey company, in particular on the basis of Article 74(2) of the Companies Law which provides:

“Without prejudice to the operation of any rule of law empowering the members, or any of them, to authorize or ratify a breach of this Article, no act or omission of a director shall be treated as a breach of paragraph 74(1) if:

  1. all of the members of the company authorize or ratify the act or omission; and
  2. after the act or omission the company will be able to discharge its liabilities as they fall due.”

Nevertheless, we are also of the view that the members of the company would need to be aware of the material facts of the act or omission which they were authorising and, accordingly, a blanket or advance general authorization would probably not suffice.

Fettering of discretion

In general, a director may not fetter his discretion by contracting with other directors or with third parties to act in a certain way in the future.

In other words, a directors obligation to act in accordance with his fiduciary duties would usually take precedence over any course of conduct he may have previously agreed with co-directors or third parties.

However, there is authority in the law to the effect that a director would not be fettering his discretion where he has entered into a contract for the company on a bona fide basis which requires the director or any number of directors to act in a certain way in order to give effect to the contract. It would appear that in this case, provided the decision to enter the contract is made in accordance with the fiduciary duties of the director, the consequence of the manner in which he may be required to act in accordance with the contract remains as a result of the exercise of fiduciary duties. This would not be the case in the event of a contract binding a director to exercise his discretion in a certain way, which has not been entered into for or on behalf of the company at all, or for or on behalf of the company other than in accordance with the fiduciary duties of the director.

In the Australian case, Thorby v Goldberg (1964) 112 CLR 597 (“Thorby”), which mainly dealt with the restructuring of the capital of a company and agreement in advance to certain steps which would be taken, Kitto J said:

“The argument for illegality postulates that since the discretionary powers of directors are fiduciary, in the sense that every exercise of them is required to be in good faith for the benefit of the company as a whole, an agreement is contrary to the policy of the law and void if thereby the directors of a company purport to fetter their discretions in advance: see Gower on Modern Company Law 2nd ed (1957) p 478. It is said that the agreement in the present case does purport to bind those of the O Group who are directors to take future steps as to which it is their duty to exercise an unfettered discretion when the time comes for taking those steps. There may be more answers than one to the argument, but I content myself with one. There are many kinds of transactions in which the proper time for the exercise of the directors’ discretion is the time of the negotiation of a contract, and not the time at which the contract is to be performed. A sale of land is a familiar example. Where all the members of a company desire to enter as a group into a transaction such as that in the present case, the transaction being one which requires action by the board of directors for its effectuation, it seems to me that the proper time for the directors to decide whether their proposed action will be in the interests of the company as a whole is the time when the transaction is being entered into, and not the time when their action under it is required. If at the former time they are bona fide of opinion that it is in the interests of the company that the transaction should be entered into and carried into effect, I see no reason in law why they should not bind themselves to do whatever under the transaction is to be done by the board. In my opinion the defendants’ contention that the agreement is void for illegality should be rejected.”

Litton J said that:

“If, when a contract is negotiated on behalf of a company, the directors bona fide think it is the interests of the company as a whole that the transaction should be entered into and carried into effect they may bind themselves by contract to do whatever is necessary to effectuate it.”

Owen J said:

“For all that appears from the plea, the directors of the Company may, before the execution of the agreement, have given proper consideration to the desirability of entering into it and decided that it was in the best interests of the Company that it should be made. If so, it would be impossible to argue that they had by executing the document, improperly fettered the future exercise of their discretion”.

Thorby was approved by the English decision of Fulham Football Club v Cabra Estates plc (1992) BCC 863 (“Fulham”). In this case the Court of Appeal was concerned with a number of arguments relating to an agreement between shareholders and directors relating to planning permission to develop certain ground for residential purposes. Among other arguments, the directors argued that the restraints imposed by the covenants contained in the agreements were unenforceable as being illegal and contrary to public policy; that they could not be bound by the undertakings so far as they conflicted with their fiduciary duties to the club as directors. The judge accepted the first and second arguments, and rejected the third on the basis that the directors had assumed the obligations in question as the only members of the company. Neill LJ said that:

“Before the judge it was argued by the plaintiffs that it was an implied term of the undertaking that the directors would not thereby be required to do anything that would be inconsistent with the fiduciary duties owed by them to the company. It was further argued that, whether or not any such term should be implied, as a matter of law a director of a company may not fetter the exercise of his fiduciary duties by contractual undertaking. Both these arguments were rejected by the judge but were revived before us by a respondent’s notice. It is trite law that directors are under a duty to act bona fide in the interests of their company. However, it does not follow from that proposition that directors can never make a contract by which they bind themselves to the future exercise of their powers in a particular manner, even though the contract taken as a whole is manifestly for the benefit of the company. Such a rule could well prevent companies from entering into contracts which were commercially beneficial to them.”

Further on, Neill LJ says that:

“We were referred to two English cases at first instance where in each the court held that an undertaking by directors to use their best endeavours to ensure that their shareholders should approve a particular deal by the company (in one case a purchase, in the other a sale) was unenforceable. The cases are Rackham v Peek Foods Ltd [1990] BCLC 895 and John Crowther Group plc v Carpets International plc [1990] BCLC 460 . In neither case was Thorby v Goldberg cited. It may be that these decisions can be justified on their particular facts, but they should not be read as laying down a general proposition that directors can never bind themselves as to the future exercise of their fiduciary powers. If they could be so read then they would be wrong.”

There are cases under English law, including Rackham v Peek Foods [1990] BCLC 895 (“Rackham”) and John Crowther v Carpets International [1990] BCLC 460, which were referred to in Fulham, which suggest that an undertaking given by a director of a company to act in a certain way, will remain subject to the director’s fiduciary duty to act bona fide and in the best interests of the company at the time. Nevertheless, on a reading of these cases it becomes apparent that they very much turn on the wording of the agreements in question. In Rackham, Templeman J said that:

“Of course, directors normally recommend a conditional agreement because otherwise they would never have allowed the company to enter into the agreement itself. But, if, after the date of the conditional agreement, the directors consider that the bargain has become unacceptable from the point of view of the shareholders, it is the duty of the directors so to advise the shareholders and that advice by the directors does not constitute a breach of the ‘best endeavours’ covenant by the company. Similarly, although Bates had given a ‘best endeavours’ covenant, they were nevertheless entitled and bound to give honest advice to Consolidated and could not be in breach of their covenant if they gave honest advice, albeit that the advice resulted in the agreement failing to become unconditional.”

It would appear that the common law would support that, whilst it is a general principle that a director may not fetter his discretion, entering into a contract on a bona fide basis in the best interests of the company, with the result that the director is obliged by the contract to act in a certain way in the future, may not be construed as an improper fettering of discretion.

Apart from fiduciary duties, other issues arise in the case of a director attempting agree to act in a certain manner in the future. Notably, where the future conduct being agreed to is uncertain in relation to the facts, it gives rise to the following contractual issues:

  • certainty – whether an agreement requiring a director to vote in a certain manner is sufficiently certain as a matter of contract law, in particular if the manner in which he should vote, and subject matter with respect to which he will vote, remains unknown at the time he enters into the agreement; and
  • legality – whether an agreement may be void for illegality on the basis that it is too broad and constitutes an unlawful fettering of discretion. In this regard, we anticipate that a distinction may be drawn between a case where the future conduct agreed to is agreed in the absence of knowledge of the specific facts to which the agreed conduct will apply.

Summary

The directors of a company incorporated under the Companies Law are subject to statutory and common law fiduciary duties. The mere appointment as a nominee does not imply a duty to act in favour of the nominator. However, in certain circumstances it may be open to the director of a Jersey company to fetter his discretion by agreeing to act in a certain way in respect of decisions he may make in the future. Much of this may depend on the facts.