Director's Duties

Jackson v Dear and anr [2012] EWHC 2060 (Ch)

In an increasingly savvy and bearish market, and perhaps prompted in part by the rise of venture capital and private equity, shareholders in private limited companies now commonly seek further safeguards beyond those protections conferred on them by the Companies Act 2006 or case law. A prospective shareholder may, for example, attempt to predicate his investment on being able to appoint a director to the board of the company, or indeed on becoming a director of the company himself. The directors of a company are responsible for its day-to-day management. By becoming or appointing a director to the board, a shareholder may feel he has a more active role and say in how the company is run. 

As such, it is not unusual to discover that a shareholder is also represented on the board of a company. It is important, however, to draw a clear distinction on the respective roles and decision making processes of a shareholder and a director. 

Shareholders may have certain key veto rights, whether under the Companies Act or a company's constitution or shareholders agreement, such as amending the Articles of Association of the company, changing the company's name, or increasing its share capital. If more than 50% of the shareholders should vote in favour, under the Companies Act the shareholders can also resolve to remove a director from office. Shareholders are generally free to vote on such company matters as they see fit and in a manner that suits their personal interests. 

In contrast, the directors of a company have a number of statutory duties enshrined in the Companies Act 2006 to which they must adhere. There is a common thread to these duties; principally that directors should not act self-interestedly when fulfilling their responsibilities, but instead act in the best interests of the company at all times. Directors owe, amongst others, duties to the company to avoid conflicts of interest, to exercise independent judgement, to declare any interest in a proposed transaction, to refrain from accepting benefits from third parties and to promote the success of the company for the benefit of the members as a whole. Although a director may have been appointed by a shareholder, he must comply with these director's duties and put the interest of the company first, even if this may be to the detriment of his appointor.

For the most part these dual interests (those of the shareholders personally and the company itself) should be aligned: if the company is managed to perform well then the shareholders will share in this success. However, there are occasions, as demonstrated in the recent case of Jackson v Dear and another [2012] EWHC 2060 (Ch) (Jackson), when such interests are competing.

Alexander Jackson (the claimant) entered into a shareholders' agreement with Patrick Dear and Reade Griffith (the defendants), which regulated their relationship as shareholders of Polygon Credit Holdings II Limited (PCH). PCH held all the voting shares in a Guernsey company called Tetragon Financial Group Limited (TFG). Under the terms of the shareholders' agreement Mr Dear and Mr Griffith had, in their capacity as shareholders, expressly granted Mr Jackson the right to be nominated and appointed as a director of TFG at each of the company's annual general meetings.

Mr Dear and Mr Griffith were also directors of TFG. Having fallen out with Mr Jackson, they sought to rely on a provision in TFG's Articles of Association which, in contradiction with the shareholders' agreement, conferred a power on the directors to remove one of their number by written notice given by all the other directors. Mr Dear and Mr Griffith made use of this inconsistency and, in their capacity as directors, terminated Mr Jackson's appointment. In other words, as shareholders, Mr Dear and Mr Griffith had made a commitment to Mr Jackson's appointment as a director, but as directors they had removed him from office.

Mr Jackson brought a claim against the defendants in relation to his termination heard by Mr Justice Briggs in the High Court. Although directors of Guernsey companies are not bound by the Companies Act 2006, similar statutory directors' duties apply under Guernsey law. The defendants claimed they were duty bound in accordance with their general and fiduciary responsibilities as directors to terminate Mr Jackson's appointment, and entitled to do so under TFG's articles.

The High Court disagreed, ascertaining that an implied term existed in the shareholders' agreement that Mr Dear and Mr Griffith were not to take any steps to remove Mr Jackson as a director of TFG. Mr Justice Briggs considered that such an implied term was necessary within the context of the shareholders' agreement as a whole in order to make it consistent with its express terms. The agreement also contained a further assurance clause, which required the parties to "take such other actions as may be reasonably required to authorise, and approve and otherwise give effect to this Agreement." Pursuant to this clause, the defendants should have amended the Articles of TFG to remove the provision allowing them to remove Mr Jackson as a director.

Whilst the ruling in the Jackson case primarily focused on the current law relating to implied terms and interpretation of contracts, it serves as an illustration of the court's stance in relation to decisions of directors that may be influenced by the personal interests of some of the company's shareholders. Although the defendants had made a contractual commitment as shareholders to retain Mr Jackson's services as a director, they wanted to remove him and attempted to do so using powers conferred on them as directors. Mr Justice Briggs was keen to stress the rightful separation of directors' and shareholders' decision making and the problem on these facts of allowing, "to be done at board level what the [shareholders'] agreement clearly prohibits at voting shareholder level".

Jackson also highlights the importance when drafting of reconciling the terms of a shareholders' agreement with the provisions of relevant Articles of Association, so that these documents are consistent, unambiguous and convey the same meaning. In so doing, one greatly reduces the possibility of a wrangling between the parties thereafter as to their intentions when they contracted. Moreover, commercial practitioners should pay careful attention to boilerplate clauses, such as the further assurance clause referred to in Jackson, which, when properly drafted and included, can be of assistance in the event of a dispute.

For more information please contact:
James Lyons - j.lyons@ashfords.co.uk
John Finlay - j.finlay@ashfords.co.uk

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