Disagreeing company directors take note: don’t spill the beans outside the boardroom or you risk facing the courtroom. Dissenting directors tempted to go public could, as a recent ruling emphasises, risk breaching a number of company law responsibilities.
Boardroom disputes are often difficult and can boil over, but where this happens directors must ensure they confine the areas of argument and discussion to the boardroom itself. They should also understand the limits to the duty to exercise an independent mind.
What’s the background?
These proceedings were the latest step in a boardroom battle of a substantial, publicly quoted company. Problems arose within the company including falling share prices under the new management and allegations that company funds had been misused. A boardroom dispute arose and a dissenting director – who had initially been dismissed before being reappointed, and then finally summarily dismissed – talked to others outside the remit of the boardroom.
This director criticised fellow board members, campaigned for the chairman of the board to be removed, divulged confidential information to persons outside of the company, and corresponded with non-directors about a boardroom dispute. He also arranged a petition and a letter from senior employees to the board requesting a change of directorial direction.
In one example, the dissenting director sent a letter to other shareholders. As a shareholder he was entitled to do so, but it was written in his capacity as “Executive Director and Shareholder of Stobart Group Limited”. It referred to matters that a reader would assume could only have been based on knowledge acquired by him within the boardroom as a director. Furthermore, the letter was found to be seriously misleading and amounted to “guerrilla tactics”, which was wholly inappropriate action for a director, especially given the fact that he had not discussed his actions with the board beforehand.
The company brought an action against the director for damages for, among other things, alleged breaches of directorial duties and conspiracy. While the claim for conspiracy was rejected, the company was successful in claiming there was a breach of various duties.
What duties did he breach?
There were two limbs of duties with which the director had to comply, firstly his fiduciary duties as a director under company law, and secondly, the duties that arose under his service agreement with the company. He was found to be “serious breach” of a variety of duties.
Fiduciary duties
Directors are under a duty to comply with certain duties under the Companies Act 2006. The High Court held that two such duties were breached by the director;
- Duty to promote the success of the company
- Duty to exercise independent judgement
Under the duty to promote the success of the company, the director was under an obligation to act in good faith and in the best interests of the company. Through his actions, the High Court determined that he had had a “de-stabilising effect upon the company’s management”, which is contrary to pursuing its best interests.
As for the duty to exercise independent judgement, this prevents a director from revealing disputed issues within the boardroom to others, without prior consent of the board. The High Court held that the actions of the director were a clear violation of this fiduciary duty. Perhaps surprisingly the dissenting director attempted to rely upon the duty to exercise independent judgement as a justification for lobbying other shareholders in his capacity as director. He believed that it was his duty to reach his own independent view on matters discussed within the boardroom, and is was within his powers to share this with the shareholders. The court made it clear that a director’s duty to exercise independent judgement exists in order to support the board’s management of the company’s business in an efficient and competent manner. It commented;
“something has gone very seriously wrong if the director seeks to short-circuit the board by taking his ‘issues’ over management direct to just some of the shareholders. A director who does that will have forgotten that the company (again, the members as a whole) has delegated management matters to the board of which he forms part.”
Service agreement terms
Over and above fiduciary duties, directors need to be aware of any duties contained within service agreements. While some duties may be stated expressly, others will be implied. With regards to this particular director, the High Court found that he had breached these duties in relation to his service agreement;
- Express duty of confidentiality
- Express and Implied duty of trust and confidence and fidelity
The duty of confidentiality was breached when he shared confidential information with a potential investor, who was an outsider to the company. With regards to the duty of trust and confidence and fidelity, this was breached through his private conversations with shareholders, and his campaign to undermine the management.
What does this mean?
It can be tempting to discuss boardroom disputes with others, including shareholders and employees. However, the law requires directors to comply with important duties to ensure the company’s best interests are promoted. Following the decision of the High Court, this involves maintaining a high level of discretion over matters covered within the boardroom.
Furthermore, it is now evident that there are limits as to what a director can do under his ‘independent judgement’. According to the High Court, this explicitly excludes “any entitlement to speak or act as if he were not a member of the board without responsibilities to that collective decision-making body”. Independent judgement does not give directors free rein to speak their mind, and it is worth noting this limit to prevent acting in a manner beyond the remit of this duty.
One final point to note is that there are multiple sources for directorial duties. Despite having a service agreement which determines many of their duties, directors will still be subject to the fiduciary duties under company law, and any implied contractual duties. Being aware of these obligations and duties is a good first step in avoiding potential claims such as the one mentioned above.
How can we help?
We advise directors on their duties and responsibilities and companies of all sizes on their corporate matters. For strategic advice and representation on all your commercial arrangements, contact the expert commercial solicitors at Herrington Carmichael as early as possible.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
