Advising Directors

• Published date: 01 November 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Appleby
• Author: Mr John Wasty and James Batten

The company, limited by shares, is the most common corporate entity worldwide. A company generally has two decision making groups: the company in general meeting (i.e. the shareholders) and the board.

Typically, the board will retain day to day control of the management of the Company but the shareholders, through the power to appoint and remove directors, can exercise control over the board.

When a company requires advice, it is usually sought by management, acting under the board's authority. Advising a company however, requires not just an understanding of the options available to the company, but the options properly open to the board and the litigation risk associated with board action.

In most jurisdictions, there will be two general sources of law regulating directors' conduct:

• the jurisdiction's company law; and
• the constitutional documents of the company.

An analysis of these sources of law will be the starting point when advising directors on a particular course of action. If a course of action may conf‌lict with either general company law or the constitutional documents of the company, the board should be advised.

A director's duties as a matter of company law will depend on the jurisdiction of incorporation. Many jurisdictions impose duties on directors to act in the best interests of a company and to exercise a certain, minimum level of skill in the exercise of their duties.

Another common feature of these general duties owed by directors is the imposition of duties that have a f‌iduciary nature. A duty of loyalty owed by the director to the Company is often cited as the key f‌iduciary obligation. Other duties f‌low from that core duty of loyalty, such as a duty to avoid conf‌licts, a duty of conf‌identiality and a duty of candour. These duties again will vary from jurisdiction to jurisdiction in form and substance.

The starting point for considering any course of action will be to consider whether the proposed act ions conf‌lict with any of the directors' duties.

In addition to considering the directors' general duties, a company's constitutional documents should also be reviewed. The constitutional directors will set out what matters fall within a board's power and how decisions can be taken by a board.

The core constitutional document of a company is described in various jurisdictions as articles of association, articles of incorporation, bye-laws, memorandum of association or a company charter.

There may be a secondary constitutional...