Alternate directors are already quite widely used in New Zealand and may become even more popular when the New Zealand resident director requirements in the Companies and Limited Partnerships Amendment Bill become operative. We look at the role of an alternate director.
Appointment of an alternate
The New Zealand Companies Act regards directors as directors “by whatever name called”. Hence it makes no specific reference to alternate directors but requires them to satisfy the normal registration and consent to act procedures applying to regular directors.
This is in contrast with the Australian Corporations Act which provides (section 201K) that, with the other directors’ approval, a director may appoint an alternate to exercise some or all of the director’s powers for a specified period. This ‘replaceable rule’ can be changed by an Australian company constitution.
The only authority to appoint an alternate director in New Zealand is the company’s constitution. Typical constitutional provisions include:
- a method for appointing the alternate – usually by notice from the appointer, and often requiring a majority of directors to agree to the appointment
- that the alternate cannot have an alternate
- that the alternate’s tenure ceases when his or her appointor ceases to be a director
- the terms on which the alternate is to act.
The Companies Office website provides some additional guidance:
- an alternate must sign the usual director’s consent to act, and
- the company must notify the Registrar of Companies of the appointment within the required 20 days (making no mention of the alternate status as this is “an internal matter for the company, recognised by the fact that the Companies Act refers simply to directors without further distinction”).
Uses of an alternate
Alternate directors are commonly used:
- to maintain a quorum where board numbers are small
- to preserve the collective voting position of nominee directors appointed by a particular shareholder, or
- where an overseas-domiciled director has been appointed to provide specific expertise or knowledge but whose attendance at board meetings will be necessarily patchy.
Duties of an alternate director
The fact that the Companies Act does not distinguish between directors and alternate directors means that for the purposes of New Zealand law, they are one and the same and are subject to the same duties and obligations.
This is also the burden of the limited international case law which exists on the subject.
The following three cases are significant.
In Markwell Bros Pty v CPN Diesels1, the Supreme Court of Queensland found that, although the alternate directors in question had little control over the company, they were “in the eyes of the law in the same position as any other director” and as such, were “subject to the normal duties which a director owes to his company”.
In Trustees of the Orange River Land & Asbestos Co v King2, the High Court of Griqualand West in South Africa found that the alternate director rather than his or her appointor is responsible for any misdeeds or omissions while acting as a director:
“The director left an alternate behind him as he was authorised to do...He might fairly have assumed that his co-directors and his alternate would perform their duties as directors during his absence”.
And in Strathmore Group Limited v Fraser & Ors3, the High Court of New Zealand held that:
“an alternate director is a director pro tem. When he or she is acting as a director, he or she has the rights, powers, privileges, duties and responsibilities of a director. When he or she is not acting as a director, then he or she has no legal status.”
Alternate directors can expect to be held to the same tests as their appointor would in the same circumstances. Although they are serving in place of their appointor, they cannot blindly follow any instructions their appointor (or others) may give them.
They are required to apply their own judgement.
Hence the courts’ findings in recent litigation concerning directors’ duties both in New Zealand and Australia are as relevant to alternate directors as to any directors. These include the Australian Securities and Investments Commission v Healey4 decision, where the Federal Court of Australia ruled:
“...there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor”
“Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her".
Chapman Tripp’s discussion of this and other key cases – Backsides exposed if noses in, fingers out means hands off, eyes closed – is available here.
Chapman Tripp comments
The risks associated with being an alternate director are relatively high given that he or she will be held equally accountable by the courts and yet it would seem a stretch to expect occasional alternates to have the same familiarity with the company and the issues confronting the company as would a regular director.
Alternates need therefore to be sure that they have all of the information they need to make decisions and need to keep asking questions until they are thoroughly satisfied that they are equipped to make an informed decision.
It is also fair to ask whether technology may have overtaken the need for alternate directors. Skype and video-conferencing technology mean that it may no longer be necessary to be in the physical boardroom to participate in a board meeting.
However, the latest litigation in the long-running James Hardie saga is a reminder that if the relevant documents are circulated in hard copy only and you are not in the room, you should either insist that the matter is deferred until you have seen the relevant documentation or you should abstain from voting.
When the James Hardie board approved a misleading statement to the ASX, two of the directors were participating by telephone and had not seen the text. The NSW Court of Appeal imposed lower civil penalties to reflect the fact that they had not been able to read the document – but only slightly lower.
The Court found that [at paragraph 298] they had breached their duty as a director by failing to ask for a copy of the draft release, or at least failing to abstain from voting to release it, thereby dissociating themselves from the decision.