The nominee director is appointed to the board much like any other director. The difference is that he or she is appointed, quite openly, at the request of a third party, to look after its interests. The appointer may be a creditor or an equity investor – a venture capitalist or possibly the majority owner. If the company is the vehicle for a joint venture, there will be nominee directors appointed on all sides. The company itself might be in textiles, garden centres or financial services. It might run a rugby club in South Wales or an abattoir in Somerset. The common theme is that, while appointed to the board and owing it all the normal duties, the nominee director is – or is under the apprehension that he is – beholden to another. So much more the case if the nominee is also a director of his appointer.
The obvious question is: to whom does a nominee director, appointed by B to sit on the board of company A, owe his or her duties? A or B? The answer cannot now be in doubt: the nominee director owes his or her duties to company A. The nominee must simply not assume that, since everyone knows he was appointed by B to look after its interests, he can proceed to do just that. To the contrary, his overriding duty is to company A.
The more interesting question is: what duties does the nominee director owe to company A?
It is all too easy to turn to the "code" of directors' duties in the Companies Act 2006 and pick out those that appear most relevant to the nominee's predicament: the duty to exercise independent judgement; the duty to avoid conflicts of interest; and, of course, the duty to promote the success of the company (as opposed to that of his appointer). The better starting point is to consider that the directors of a company, entrusted as they are with the management of its affairs, are in a relationship of trust and confidence with the company. This means that they owe it a range of fiduciary (or trustee-like) duties, and the nominee director is no exception. Notably, only some of these duties found their way into the Act. The duty of confidentiality, for example, didn't make the cut. Yet there is no doubt that this is a duty of every director, nominee included.
More insidiously, the "code" might deceive the reader into thinking that the statutory duties of directors are fixed and unchangeable. They are in fact highly fact-specific. Take the Welsh rugby case. In 2003 Welsh rugby was reorganised, producing five regional teams. One, born of long-time rivals Neath and Swansea, was christened 'the Ospreys'. When the Ospreys grew more important than either of the two founder clubs, acrimonious litigation at Neath was the result. A key question in the case was: to what extent was a nominee director appointed by Neath to sit on the board of the Ospreys entitled (or obliged) to have regard to the wishes of his appointer? The judge concluded that the answer lay not just in company law but also in the terms of that nominee's appointment and of a shareholders agreement signed by Neath and Swansea. In this case Neath, as 50% owner of the Ospreys, had agreed that its interests lay in developing the Ospreys to best advantage. In these circumstances therefore the nominee was entitled to have regard to Neath's interests, but only to the extent that they were not incompatible with his duty to act in the Ospreys' interests (now, in the language of the 2006 Act, to promote their success). He was certainly not required to prefer the interests of Neath when a conflict of interest arose between Neath and the Ospreys.
That directors' duties may, up to a point, be modified is well illustrated by another recent case. Two families, the Cobdens and the Heffers, set up a 50/50 joint venture company called Southern Counties Fresh Foods Limited. Each made the usual promise, in a shareholders agreement, to promote and enhance the Fresh Foods business, essentially that of an abattoir. As time went on, a company owned by the Heffers became a larger and larger customer of Fresh Foods, selling the end products on to the supermarkets. When the families fell out, with the Cobdens complaining that the terms of trade had become unduly favourable to the Heffers' company, it became of critical importance to understand the precise scope of the duties owed by the Heffers to Fresh Foods when sitting on Fresh Foods' board. The case turned on the extent to which the directors' ordinary fiduciary duties had been modified by the agreement of all the shareholders. The judge decided that, when the Heffers made decisions on behalf of their family company, they were perfectly free to act in its interests. However this did not mean that they owed no duties to Fresh Foods when they came to give consideration to the same issue on its behalf. In fact they owed it a duty to "to act fairly", to ensure that their family company was not in breach of its obligations. (This duty replaced their normal duty to act in the interests of Fresh Foods.) Where an issue arose calling for negotiation between the two companies, they were in a different position again. Yes, they were entitled to have regard to the interests of the family company but only in a way which was consistent with their duty to bring their best independent judgement to the affairs of Fresh Foods. This case was decided in November 2008, on the basis of a situation which arose before implementation of the 2006 Act. Now the Act specifically provides that the director's duty to exercise independent judgement comes second to the constitution of the company concerned.
There are two other issues to be addressed: conflicts of interest and confidentiality.
Since 1 October 2008, two distinct regimes govern directors' conflicts of interest. The first applies where a conflict arises in relation to a transaction or arrangement with the company – which we shall assume not to be an issue here. In all other cases, the nominee director must either avoid a situation which might result in a conflict of interest or ensure that the matter in question is authorised by the company (i.e. by shareholders or, where permitted, directors). The Act goes on to say that, where a company's articles of association contain provisions for dealing with conflicts of interest, a director's duties are not infringed by anything done or not done in accordance with those provisions. To that extent therefore shareholders can effectively modify the duties owed to their company by its directors. Of course no director can contract out of his fiduciary duties entirely. Nevertheless, in practice, the nominee director must first consider whether the situation in question gives rise, or is likely to give rise, to a conflict of interest at all. The nominee's duties may have been modified. The very situation he finds himself in may have been anticipated in the articles. If not, he will need to seek authorisation.
What if the nominee is also a director of his appointer? Again it may be that his duties have been modified. (In the abattoir case for instance the judge took the view that there was no need for the Heffers, who naturally were directors of their own family company, to resign as directors of Fresh Foods.) The companies' articles may cater for just this situation. And it may be arguable that the situation is not one that is likely to give rise to a conflict of interest at all (though the nominee will probably not be the best judge of this). But what if the two companies in question are effectively competing businesses? Even assuming his terms of service allow, a nominee who proposes to become involved in even a remotely conflicting business should seek authorisation from both companies. Admittedly this is no cure-all. The nominee will still need to promote the success of each company. He is a fiduciary in relation to both. He must serve each as loyally as if it were his only master! Obviously circumstances may arise when this becomes an impossible task. Given that fiduciary duties are strictly applied, and that breach may have unwelcome consequences (including a liability on the nominee's part to pay compensation and hand over any profits), nominee directors should proceed cautiously. The time may come when resignation is, if not a perfect solution, the next best thing.
Lastly, confidentiality. As a practical matter, receipt by a nominee director of information that is confidential to company A (or for that matter to company B) may put him in a bind. Must he pass it on to the other company? May he pass it on? The starting point as always is that a director is in a relationship of trust and confidence with his company. He is under a duty not to pass confidential information to a third party unless authorised to do so. Here are three relevant questions to ask. First, does the company's constitution, or any shareholders agreement or investment agreement to which the company is a party, entitle shareholders to information they would not otherwise have a right to receive? Secondly, is the nominee authorised to pass on information which under normal circumstances he would need to keep confidential? Is to do so consistent with his other duties? Thirdly, is the nominee himself entitled to the information in question? A case last year reminds us that even a director's right to see his company's books is not unconfined. It exists only for the purpose of enabling the director to carry out his duties for the benefit of the company. The court will not permit a director to inspect the books for some other purpose (e.g. to give his appointer an unfair advantage).
Happily, some of the problems in this area cry out for practical solutions. Read Wragge & Co's action points for nominee directors.