An extract from The Corporate Governance Review, 10th Edition
The principal leadership role for any company is played by the board of directors. The role of the director is governed principally by the Companies Act, the primary source of corporate law in Ireland, and by principles established by case law (in this regard, it is worth noting that English case law is generally regarded as having persuasive authority in Ireland). This body of law is further supplemented by a growing suite of statutory regulations, codes and guidelines, many of which have been mentioned elsewhere throughout this chapter. Below is a brief (and non-exhaustive) discourse on some of the more significant aspects of the law surrounding directors and the structures and practices of boards in Ireland.i Board structure and practicesOne-tier structure
Generally, the board of directors of an Irish company is structured as a one-tier body (usually comprising both executive directors and non-executive directors), unlike in other jurisdictions where two-tier structures are more common. Irish law does not prohibit the two-tier board, but it does not arise in practice: were it to do so, directors would be likely to face the same liability regardless of their position within a two-tier board system.Composition of the board
Every Irish public company must currently have at least two directors, but the articles of association of the company (i.e., its constitution) may provide for a greater minimum number (as may any applicable corporate governance code that applies to the company). Since the Companies Act, private companies limited by shares are permitted to have a sole director, but they must also have a separate company secretary. A body corporate is prohibited from becoming a director of an Irish company. As in other jurisdictions, a public company or a large private company will generally have a combination of executive and non-executive directors on its board, whereas a small private company will generally have all executive directors.Authority of the directors to represent the company
A director can only enter into a proposed contract on behalf of a company where it is within his or her permitted delegated authority to do so, unless that contract or commitment has been approved by the board. The authority of the director may be actual or ostensible. Actual authority is usually rooted in the service contract between a company and the director. It can also be implied, for example, by the ordinary course of the business of the office that the director holds, such as managing director or chief executive officer. However, even where no actual authority exists, the company may still be bound by the director's actions when he or she acts within his or her ostensible or apparent authority (i.e., where he or she is held out by the company as having the authority, for example, of a particular office holder such as managing director or chief executive officer). In grappling with the principles surrounding actual and ostensible authority, it is also necessary to bear in mind the internal management principles, which mean that, if a third party is dealing with a company, he or she is not obliged to enquire into the regularity of its internal proceedings. However, this rule is not absolute, and there are limits to its scope and operation. The board of directors and individuals authorised by the company are entitled to bind it. Persons authorised may be registered on a register maintained in the public Companies Registration Office as being entitled to bind the company, although this is not a mandatory requirement.Legal responsibilities of the board
The root source of all corporate authority lies with the shareholders. However, as in other jurisdictions, shareholders generally delegate the management of the company to the board of directors and allow them to exercise all the powers of the company except a specific number of matters that must, under statute, be exercised by the shareholders.Chair
While the chair of a company has specific roles (and, to an extent, responsibilities), including chairing the board of directors and shareholder meetings, he or she does so as a director. As a director, he or she is subject to the same duties and has the same authority as that of any other board member. Where a company adopts a standard constitution or articles of association, the chair will enjoy an additional vote in the event of an equal number of votes being cast in respect of any matter at board level.
Significantly, for companies listed on Euronext Dublin, the Corporate Governance Code contains a number of provisions relating to the role of chair. The chair has responsibility:
- to ensure that a culture of openness and debate prevails;
- to ensure that directors receive accurate, timely and clear information;
- to ensure that all directors are made aware of shareholders' views: in particular, the chair must seek regular engagement with major shareholders on matters such as governance and performance against strategy;
- to consider a regular externally facilitated board evaluation; and
- subject to limited exceptions, not to remain in the post for a term of longer than nine years.
In general, the board of directors may delegate its authority to an individual director, to employees or to committees established by the board. Having delegated powers, the directors are not absolved from all responsibility in relation to the delegated actions, as the directors will continue to be under a duty to investigate the operations of the company diligently and with skill.
It is also open to a director, subject to the constitution or articles of association of the company, to appoint an alternate to fulfil his or her duties on his or her behalf, generally in relation to a specific action or time period. Whereas the alternate is personally liable for his or her own actions, the appointing director again is not absolved and can be held responsible along with the alternate.Chief executive officer
Irish law is not particularly prescriptive in relation to the role of managing director or chief executive officer. In general, the powers of the chief executive officer are not fixed by law, but depend instead upon the terms of the service agreement agreed from time to time between the board and the chief executive.
To ensure that there is a clear division of responsibilities between the running of the board and the running of the company's business, the Corporate Governance Code and CBI Requirements (among others) recommend that the role of chair and chief executive officer should not be fulfilled by the same individual. The Corporate Governance Code also suggests that no former chief executive officer should become chair of the same company, and that the division of responsibilities between the chair and the chief executive officer be clearly established, set out in writing and agreed by the board.Committees of the board
As previously mentioned, Irish companies commonly delegate certain matters to committees established by the board. Under Irish company law, public limited companies are required to establish an audit committee. The Listing Rules require that certain listed companies are further required to constitute certain other governance committees. Credit institutions, insurance or reinsurance undertakings and other regulated entities are subject to separate requirements under applicable authorisation regimes.Board and company practice in takeovers
The two principal sources of responsibility imposed upon directors of a company in the course of a takeover offer are common law and the Rules of the Irish Takeover Panel (Takeover Rules), which have the force of law in Ireland. Two other important sources of duties and obligations are the Listing Rules and the Companies Act.
The Takeover Rules, in particular, cover a wide range of matters relating to takeovers, and it is the responsibility of each company director, whether executive or non-executive, to ensure, so far as he or she is reasonably able, that the Takeover Rules are complied with during offer periods. In essence, the Takeover Rules prohibit a company from taking any action that might frustrate the making or implementation of an offer for the company, or depriving the shareholders of the opportunity of considering the merits of such an offer at any time during the course of the offer or at any earlier time at which the board has reason to believe that the making of such an offer may be imminent.ii DirectorsNon-executive or outside directors
Under Irish law, no distinction is drawn between the non-executive director and any other director, so non-executive directors owe the same duties as other directors to the company, its creditors and employees.
Where non-executive directors are appointed on the nomination of a third party, most commonly a shareholder, the nominee is entitled to have regard to the appointer's interests, but only to the extent that they are not incompatible with his or her duty to act in the interests of the company.
The non-executive director role has attracted much attention recently in terms of the importance of the role as an independent watchdog. The Corporate Governance Code, for example, requires the non-executive directors of listed companies to constructively challenge board strategy. In addition, it recommends that the board should appoint one independent non-executive director to be the senior independent director to provide a sounding board for the chair, and that the board should not agree to a full-time executive director taking on more than one non-executive directorship or the chair in a FTSE 100 company or equivalent Irish company (FTSE 350 equivalent). There are some recent sources of guidance for non-executive directors on care, skill and due diligence, which are available to Irish non-executive directors.Duties of directors
The duties of directors in Ireland are grounded in case law, legislation and related rules and codes. These duties, predictably, echo those in other jurisdictions.
Since 1 June 2015, a codified set of principal directors' duties has been in force in Ireland, under the Companies Act. The list of eight codified duties has its origins in the common law historically developed by the courts in Ireland and the United Kingdom.
The principal fiduciary duties of directors that have been enumerated in the Act are as follows:
- the duty to act in good faith in what the director considers to be in the interests of the company;
- the duty to act honestly and responsibly in relation to the conduct of the company's affairs;
- the duty to act in accordance with the company's constitution and exercise his or her powers only for the purposes allowed by law;
- the duty to not use the company's property, information or opportunities for his or her own or anyone else's benefit unless this is expressly permitted by the constitution or approved by resolution of the members in a general meeting;
- the duty to not agree to restrict the director's power to exercise an independent judgement, unless this is expressly permitted by the company's constitution, or the director believes in good faith that it is in the interests of the company for a transaction or arrangement to be entered into for him or her to fetter his or her discretion in the future by agreeing to act in a particular way to achieve this, or the directors agreeing to this has been approved by resolution of the members in general meeting;
- the duty to avoid any conflict between the director's duties to the company and his or her other (including personal) interests unless the director is released from this duty in accordance with the constitution, or by a resolution of the members in general meeting;
- the duty to exercise the care, skill and diligence that would be exercised in the same circumstances by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the director; and the knowledge and experience that the director has; and
- the duty to have regard to the interests of the company's employees in general and of its members.
These duties are owed to the company and are enforceable by the company in the same way as any other statutory duties owed by the director to the company. The Act provides that these principles are based in common law and equitable principles, and that the new statutory duties must be interpreted and applied as such.Directors' compliance statement
As a result of an obligation introduced by the Companies Act, public limited companies are required to include a compliance statement in the directors' annual report accompanying their company's financial statements. This requirement applies in respect of financial years commencing on or after 1 June 2015.
Directors must acknowledge that they are responsible for securing their company's compliance with its relevant obligations (which includes obligations under tax law, and some of the more serious capital maintenance and financial disclosure and reporting obligations).
Directors must also, on a comply or explain basis, confirm:
- athat they have drawn up a compliance policy statement appropriate to their company setting out the company's policies regarding compliance;
- that appropriate arrangements or structures are in place that are, in the director's opinion, designed to secure material compliance with its relevant obligations; and
- that they have reviewed, during the financial year, the arrangements or structures that have been put in place to secure this material compliance.
If these statements, confirmations and reviews have not been made or carried out, the directors must specify in their directors' report the reasons why not.Statutory audit confirmation
The Companies Act introduced a new statutory obligation on the directors of all companies to include a statement in their directors' report that so far as each director is aware, there is no relevant audit information of which the company's auditors are unaware, and each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information, and to establish that the company's auditors are aware of that information. This is similar to the obligation that has existed in the United Kingdom since 2006.Liability of directors
Directors are not liable for the commitments and obligations of the companies they serve.
Directors can be held personally liable or subject to fines and, in very serious circumstances, imprisonment for breaches of various statutory provisions such as those relating to company law, environmental law and health and safety law. Examples under the Companies Act include where the director engages in insider dealing or where the director makes false or misleading statements in certain circumstances.
Under the Companies Act, a new streamlined summary approval procedure (SAP) has been created to enable companies to carry out certain activities that would otherwise be prohibited (such as financial assistance, capital reductions and repayments, mergers). The SAP is only available to public limited companies for a members' voluntary winding up, the prohibition on pre-acquisition profits or losses being treated in a holding company's financial statements as profits available for distribution, and the prohibition on entering into loans or quasi-loans to directors or other connected persons.
Under the SAP rules, a directors' declaration of solvency and shareholder approval is required, and in some cases a confirmatory auditors' report is also required. The SAP rules provide that a court may declare a director personally responsible, without any limitation of liability, for all or any liabilities of the company where a declaration is made without having reasonable grounds for the opinion on the solvency of the company as set out in the declaration.
In the context of entering a contract on behalf of a company, a director can be made personally liable where he or she commits a tort or fraud on behalf of the company (or induces the company to do so), where he or she gives a personal guarantee, or where he or she fails to make the other party aware that he or she is acting as an agent for the company.
In the context of insolvency, directors may also face personal liability in a limited number of circumstances: for example, where they engage in fraudulent or reckless trading, misapply company assets or make an incorrect declaration of solvency in the context of a voluntary liquidation. On insolvency, a director may also face restriction for five years or disqualification for up to five years or such other period as the courts think fit.Appointment, term of office, removal
The appointment and removal of directors is generally governed by the company's constitution or articles of association. The right to elect directors is generally reserved to shareholders save where a casual vacancy arises. The directors usually have the right to fill a casual vacancy, by a resolution of the directors passed at a board meeting or by unanimous written resolution of the directors, but this appointment might then, particularly with public companies, be subject to shareholders' confirmation at the next annual general meeting (AGM) after such an election. Under the Companies Act, the directors of a public limited company are required to retire by rotation unless the company's constitution provides otherwise. For listed companies to which the Corporate Governance Code applies, all of the directors must be reappointed annually.
Apart from the terms of the constitution or articles of association, shareholders also have a statutory right to remove directors by way of resolution passed by simple majority, subject to the director's right to attend the shareholders' meeting in question and to make representations.Conflicts of interest of directors
The area of directors' conflicts of interest has been the subject of a number of judicial decisions over a number of years, and an extensive body of case law has developed around it. The key principles are, as mentioned, that a director should not place himself or herself in a position where his or her duty to the company conflicts with his or her own personal interests, and that a director should not gain from his or her fiduciary position. Added to this common law is a host of statutory provisions setting out different checks and balances primarily aimed at the protection of shareholders and creditors.