A number of provisions of the Companies Act 2006 (the Act) are now in force. As part of the phased implementation of the Act, further provisions will come into effect on 1 October this year. There will then be one final implementation date, 1 October 2009.
Among the provisions of the Act coming into force this October, a number will affect directors. The Act has introduced a statutory statement setting out the general duties of directors. This statement is a partial codification of existing common law and equitable principles. Of the seven statutory duties, four came into force in October 2007: the duty to act within powers; the duty to promote the success of the company; the duty to exercise independent judgment and the duty to exercise reasonable care, skill and diligence.
The remaining three duties, all dealing with directors’ conflicts of interest, will come into force this October.
In addition, new rules will be introduced governing corporate directorships and imposing a minimum age for directors.
What are the new statutory duties relating to directors’ conflicts of interest?
- the duty to avoid conflicts of interest: section 175.
- the duty not to accept benefits from third parties: section 176.
- the duty to declare interests in proposed transactions or arrangements with the company: section 177.
Existing transactions and arrangements are covered by section 182 of the Act which will also come into force on 1 October.
What is the scope of the statutory duty to avoid conflicts of interest under section 175?
The new statutory duty is widely drafted and is probably broader than the existing common law rule: a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. The duty applies in particular to the exploitation of property, information or opportunities and will apply whether or not the company itself could take advantage of any such property, information or opportunity.
The section 175 duty will, for example, cause problems for directors who hold more than one directorship. The situation will be particularly acute if the companies concerned operate in the same industry sector or are parties to a commercial arrangement.
However, the Act allows for more flexibility than the old regime in that a director’s conflict of interest may be authorised by the other directors provided that the authorisation is given by non-conflicted directors who must also be able to form a quorum. Under the existing common law rule, such authorisation may only be given by the shareholders.
Do the articles need to be amended before the new board authorisation procedure may be used?
This will depend upon the status of the company. Public company articles must contain a specific provision enabling the board to use the new process. Private companies incorporated on or after 1 October may use the approval procedure if nothing in their constitution invalidates this. For existing private companies, however, specific authority for use of the new board approval process must be given by way of shareholder resolution.
In addition, the articles of both public and private companies may contain ‘safe harbour’ provisions to deal with situations of conflict of interest that might otherwise result in breach of duty.
A number of public companies have already amended their articles to allow for the new approval procedure to be used as from 1 October and, at the same time, have included certain safe harbour provisions in their articles. Safe harbour provisions may, for example, aim to protect a director holding multiple directorships if he does not disclose to the company confidential information obtained in another role, even if that information would be of benefit to the company.
What about the duty not to accept benefits from third parties?
Under section 176, a director must not accept any benefit from a third party conferred by reason of his directorship unless acceptance of the benefit cannot ‘reasonably be regarded as likely to give rise to a conflict of interest’.
Unlike section 175, there is no statutory provision giving boards the power to authorise directors to accept benefits from third parties.
However, companies may wish to include safe harbour provisions in their articles to provide that, where directors accept benefits below a specified value, they will not be in breach of duty.
What about declarations of interest?
The section 175 duty described above does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company: situations of this kind are dealt with under sections 177 and 182 of the Act.
Under section 177, a director must declare to the other directors the nature and extent of any interest, direct or indirect, which he has or will have in a proposed transaction or arrangement with the company.
Under section 182, an analogous rule applies to existing transactions and arrangements, to the extent that the interest has not already been declared under section 177.
What other changes will affect directors this October?
There are two further changes:
- The Act introduces a new requirement for companies to have at least one director who is a natural person.
This requirement will come into force on 1 October although there will be a grace period until October 2010 for any company which was in existence on 8 November 2006, the date the Act received Royal Assent, but did not have a natural person as a director at that time.
- As from 1 October, the Act introduces a minimum age for directors of 16 years.
What steps should companies be taking to prepare for all these changes?
We recommend that companies take the following action:
- review/amend their constitutions in light of the new regime on conflicts of interest.
- brief directors on the new duties being introduced on 1 October.
- arrange for a board meeting to be held before 1 October to consider post 1 October conflict situations and to authorise these where appropriate.
- in readiness for that meeting, request directors to disclose details of any situations which could give rise to conflicts after 1 October.
- at the same time, request directors to make any necessary declarations of interest under the new rules (to the extent that these have not already been disclosed).
- put in place procedures for dealing with the new regime on directors’ conflicts and declarations of interest on an on-going basis.
The same considerations should be applied to subsidiary companies and the position of corporate directorships of subsidiary companies reviewed.