Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them. It is a central part of corporate law and corporate governance. Directors' duties are analogous to duties owed by trustees to beneficiaries, and by agents to principals.
Among different jurisdictions, a number of similarities between the framework for directors' duties exist:
- directors owe duties to the corporation,[1] and not to individual shareholders,[2] employees or creditors outside exceptional circumstances
- directors' core duty is to remain loyal to the company, and avoid conflicts of interest
- directors are expected to display a high standard of care, skill or diligence
- directors are expected to act in good faith to promote the success of the corporation
Australia
General Law
Directors have fiduciary duties under general law in Australia. These are:
Statutory Duties
Directors also have duties under Corporations Act 2001:
Canada
Tripartite Fiduciary Duty
In Canada, a debate exists on the precise nature of directors' duties following the controversial landmark judgment in BCE Inc. v. 1976 Debentureholders. This Supreme Court of Canada decision has raised questions as to the nature and extent to which directors owe a duty to non-shareholders. Scholarly literature has defined this as a "tripartite fiduciary duty", composed of (1) an overarching duty to the corporation, which contains two component duties — (2) a duty to protect shareholder interests from harm, and (3) a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen".[6]
Not all Canadian jurisdictions recognise the "proper purpose" duty as separate from the "good faith" duty. This division was rejected in British Columbia in Teck Corporation v. Millar (1972).
United States
Business judgment
- Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) and §102)b)(7) DGCL
- Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919)
- Aronson v. Lewis
- In re Caremark International Inc. Derivative Litigation 698 A 2d 959 (Del. Ch. 1996)
- In re Walt Disney Co. Derivative Litigation 907 A.2d 693 (Del. Ch. 2005)
United Kingdom
Acting within powers
Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but to defeat a potential takeover bid, that would be an improper purpose.[7]
However, in many jurisdictions the members of the company are permitted to ratify transactions that would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution.
Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper.
The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision of Howard Smith Ltd v. Ampol Ltd.[8] The case concerned the power of the directors to issue new
See also
- UK company law
- Aktiengesetz
- Delaware General Corporation Law
- Say on pay
- Fiduciary
- Non-executive director
- Executive director
References
- e.g. Percival v Wright [1902] Ch 421^
- e.g., where the board is authorised by the shareholders to negotiate with a takeover bidder. It has been held in New Zealand that "depending upon all the surrounding circumstances and the nature of the responsibility which in a real and practical sense the director has assumed towards the shareholder," 1976^
- . —^