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 document, regulating the shareholders’ rights and obligations, which may also confer power or obligations on a board or at least will need to read alongside the articles of association to fully understand a board’s duties. This agreement is often referred to as a shareholders’ or stockholders’ agreement.
If decisions on certain matters are reserved to or vested in the shareholders, a board may not be able to pursue a course of action in relation to such matters. If a decision is made by a board in one of these areas without shareholder approval, it may be void or voidable as a decision taken outside of the board’s powers.
Keeping a careful record of decisions made by a board is good practice, including the information on which decisions are based. In the event of a challenge to the power for making a decision, or of a challenge to the decision itself.
Advising directors becomes yet more complicated when cross-border issues arise. Directors may need advice from lawyers in multiple jurisdictions to ensure that they are not in breach of their duties in those various jurisdictions, particularly when the company in question is part of a wider group and there is overlap between the officers of the different members of the group.
The starting point will always be the jurisdiction in which the Company is incorporate d, as this is the most likely forum for any dispute in relation to the Company’s governance. Although uncommon, a shareholders’ agreement may be subject to a different jurisdiction than that in which the Company is incorporated.
If a company has operations in a jurisdiction, boards should consider seeking advice on their duties in that jurisdiction in addition to the jurisdiction in which they are incorporated to ensure that there is nothing that affects the course of their duties.
Some courts may accept jurisdiction over any company that operates within the jurisdiction. For example, in New York, there have been a number of derivative actions launched against directors and officers on the basis that the companies in question ‘transact business’ in New York State. Under the Rome II Regulation (i.e. in Europe and the United Kingdom, jurisdiction for breaches of duty may be established where damage is suffered, where the parties are located or any other jurisdiction with a close connection. There is often no single or straightforward answer to establishing the likely jurisdiction of a dispute.
Significant issues arise in relation to a company in financial distress. A comp any m ay be liable to be wound up in jurisdictions other than its place of incorporation, if it operates in that jurisdiction, and it is common for various differing duties to apply to directors of an insolvent company. Directors of a foreign company may therefore find themselves exposed to litigation risk for breaches of duty in any jurisdiction in which the company is liable to be wound up.
Under some insolvency processes, a board is displaced by insolvency practitioners; under other insolvency processes, a board can remain in place subject to the supervision of insolvency practitioners, the Court or both. Under either scenario, com plex issues of control frequently arise and directors may well be subject to the scrutiny of multiple jurisdictions simultaneously.
Directors duties in different jurisdictions will often significantly overlap: doing what is in the best interests of the Company is usually the first consideration for directors of a solvent company. Directors duties can however quickly become complex, and directors may require assistance from advisors in multiple jurisdictions in order to fully understand their duties.
Directors of multiple companies within a cross-border group should be particularly alert to these issues. A sentiment we often hear expressed is the desire from board-member s to re-domicile or rationalise group structures in order to avoid double regulation, including regulation of the board’s conduct.
Directors of companies in financial distress with operations in multiple jurisdictions, or who are part of a cross- border group, must be particularly aware of issues that may arise. A key consideration for these directors will be their potential, personal exposure to civil or even criminal penalties if they get things wrong. Seeking early advice is essential.
One of the positive impacts of the pandemic is that directors and their advisors are now more familiar with video-conferencing and remote working technology, which makes assembling a tea m of advisors from different parts of the world easier than it has ever been before.
