Issue number 1 of 3

Background

A number of provisions of the Companies Act 2006 (the Act) are coming into force on October 1 2007. This alert is specifically tailored for directors and provides a guide to what you need to know. What are the key changes affecting directors?

The main changes include: 

  • a statutory statement (codification) of director’s general duties 
  • an extended right for shareholders to sue directors (derivative actions) 
  • new rules relating to directors’ service contracts

What do I need to know about the codified statutory duties?

The codified duties largely replace the general duties of a director currently found in case law. They do not provide a comprehensive list of the duties of a director who will, for example, also remain subject to various other statutory duties as at present.

The Act sets out seven general duties, of which four will come into force on October 1 2007: 

  • the duty to act within the company’s powers 
  • the duty to promote the success of the company. Among other things, there are six specific statutory factors to which a director must have regard when discharging this duty. These include: the interest of the company’s employees; the need to foster the company’s business relationships with suppliers and customers and the impact of the company’s decisions on the community and the environment 
  • the duty to exercise independent judgment 
  • the duty to exercise reasonable care, skill and diligence

The remaining codified duties will come into force in October next year.

The codified duties will be owed to the company and not to individual shareholders. Shareholders, will, however, be able to enforce these duties under the new statutory derivative action.

What do I need to know about the new right to sue directors?

The Act extends the current common law position by allowing shareholders to sue directors (in the name of the company) for a wider range of conduct than at present. Under the Act, shareholders may sue in respect of loss suffered by the company as a result of any negligence, default, breach of duty (including breach of any of the codified duties) or breach of trust by a director of the company. There are, however, certain procedural safeguards to prevent frivolous claims proceeding.

What about directors’ service contracts?

As from October 1 2007, shareholder approval will be needed for a director’s ‘service contract’ as defined in the Act if it is of more than two years’ duration. All directors’ service contracts are to be open for inspection by members who will also have a right to obtain copies. The new rules apply to both private and public companies.

What practical steps should companies be taking to prepare for these changes?

Practical steps include: directors’ duties: 

arrange training for directors on the new statutory duties 

review internal policies as well as the board’s decisionmaking processes and documentation to take account of the detailed requirements of the codified duties derivative actions: 

  • in light of increased shareholder activity, consider/ implement a policy for dealing with threatened derivative actions to counter detrimental publicity (especially listed companies) 
  • check whether directors’ and officers’ (D&O) insurance policy covers the cost of defending derivative claims service contracts: 
  • review/update directors’ service contracts to reflect the codified duties 
  • implement internal procedures to ensure that all relevant contracts are passed for shareholder approval 
  • inform appropriate personnel that all directors’ service contracts are to be made available for inspection and copying by members

Are any other changes particularly affecting directors coming into force at a later date?

Yes: key changes, all taking effect on October 1 2008, include: 

  • the introduction of the remaining codified duties. These relate to conflicts of interest 
  • new rules allowing directors to provide a service address for the public record 
  • a new requirement that at least one director must be a natural person

Are any other provisions of the Act coming into force on October 1 2007?

Yes: there are provisions affecting the directors’ report and business review. For further details, please see issue number 2 in this series of Alerts