When Not to Do as You Are Told
Date: 27/02/2024 | Corporate
Often investors in a private company will have the right to appoint a director to represent them on the board. That director is usually viewed by the rest of the board as being a mouthpiece for the investors to ensure that their rights are observed and complied with, and that the investors’ views on the development of the Company going forward are heard. It is not unusual for directors appointed by investors to believe that serving their appointor is their only duty, which can lead them to take actions clearly in the interests of the investors only rather than on behalf of the shareholders as a whole.
For example, a director appointed by a venture capital fund may well be focused on getting a sale of the Company concluded within a 5-year time frame due to the fund life of his appointor. In fact, to maximise value for all shareholders, it may be better to sell the Company at a later date. Is the director right to push the investors’ agenda in those circumstances?
In such a situation, investor directors need to remember that they are required under the Companies Act to make decisions on their own merits to benefit all shareholders and that they should not agree with their appointor to vote in any particular way on an issue. They need to be aware that although they are appointed by investors, they are still required to act independently of them.
The courts have stated that:
“an appointed director, without being in breach of his duties to the Company, may take the interests of his nominator into account, provided that his decisions as a director are in what he genuinely considers to be the best interests of the Company.”
Where a board has concerns that a director is acting solely in the interests of their appointor and not in the best interests of the Company and its shareholders, this should be flagged to the appointed director with a reminder that breach of their duty to all shareholders can have serious consequences.
It leaves the director open to claims from the Company or its shareholders. If successful, such claims can lead to directors being required to pay damages to the Company and the termination of the director’s relations with the Company, and even an unsuccessful claim can lead to serious reputational damage.
Directors need to work as a team to get the best results for shareholders and this duty to act independently from an appointor reflects that objective – all for one and one for all is the motto, not every man for himself!
Disclaimer
The matter in this publication is based on our current understanding of the law. The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.
