• Companies need to act quickly to get shareholder approval or amend articles of association before October
  • Shareholders to decide what types of benefits directors are allowed

Under new Companies Act changes which come into effect later this year, Directors will be forced to seek shareholder approval before accepting certain gifts and benefits from third parties, warns City law firm Wedlake Bell. This will apply to everything from corporate events to lavish dinners and expensive gifts.

Tim Bird, Head of Corporate at Wedlake Bell, explains: “If Directors don't get shareholder approval and set limits on what acceptable and unacceptable benefits are, before they accept such gifts, they could be in breach of their Directors' duties.”

“Potentially they could be liable for damages if the company suffers any loss as a result of the breach. Ultimately, they could even face criminal sanctions if the breach amounted to bribery. However the most likely sanctions would be action by the company.”

The misuse of corporate hospitality has recently been at the centre of two scandals in the US. Earlier this year several members of staff at Fidelity Investments were charged with improperly accepting gifts and the company itself was fined $8m for allowing them to do so. Telecoms company Lucent recently paid out $2.5m in fines and civil penalties following an investigation into extravagant trips offered to Chinese officials.

Says Tim Bird, “These new rules add an extra layer of red tape for companies.”

“Problems could arise if activist shareholders, who are already revolting over excessive pay packages, decide they want to use this vote as an opportunity to attack directors that they think are taking advantage of their position by accepting overly lavish entertainment or gifts.”

Tim Bird adds, “These changes are tricky because there is absolutely no guidance given in the Companies Act as to what types of benefits should be considered acceptable. Although the new requirement only applies where there is a potential conflict of interest, this will be very subjective and companies will have to come up with their own yardsticks.”

“This will depend on the size and type of company – so the types of benefits directors are and are not allowed to accept would need to be reasonable and proportionate to their role. Companies should consider adopting a formal policy and making arrangements for it to be reviewed on a regular basis.”

Companies should act now to seek a shareholder resolution or amend articles of association before October

“Larger public companies may have started adopting policies and amending their articles of association in the latest AGM round but the majority of companies have not even looked into what is involved in these new laws,” says Bird. “They need to realise they can't leave this until the eleventh hour as getting shareholder consent may take a while.”

Tim Bird advises companies to amend their articles to permit benefits from third parties under a specified level and to check D&O policies to ensure that directors have insurance protection for breach of this general duty.

The new rules come into force on 1 October.