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With effect from 1 October 2007, Part 10 of the Act will introduce a statutory statement of seven general duties owed by directors (and shadow directors) to their companies, namely the duties:
- to act within his powers (section 171);
- to promote the success of the company for the benefit of its members as a whole (section 172);
- to exercise independent judgement (section 173);
- to exercise reasonable care, skill and diligence (section 174);
- to avoid conflicts of interest (section 175*);
- not to accept benefits from third parties (section 176*);
- to declare to the other directors any interest in a proposed transaction or arrangement with the company (section 177*).
*(sections 175-177 come into force on 1 October 2008)
Apart from the duty to act with due care and skill, the seven statutory duties are fiduciary in nature and enforceable as such. Although the duties are owed to the company, shareholders can, in some circumstances, bring derivative actions against the directors for default (essentially on the company’s behalf).
Section 172 (which replaces the common law duty to act in the “best interests” of the company) may represent the most controversial change to directors’ duties. It requires directors, as a matter of statute, to have regard to a number of factors, including the interests of the employees, and the likely long-term consequences of any decision taken on behalf of the company. The Explanatory Notes to the Act make it clear that it will not be sufficient for directors to simply pay lip-service to these factors; however, the Notes do not give specific guidance as to how directors “have regard” to the factors, or what weight should be assigned to each. This may lead to a greater emphasis being placed on documentary records by directors who want to prove that they had due regard to all of the necessary factors.
Another key change, from an employment perspective, is the fact that shareholder approval will now be required for all directors’ contracts in excess of 2 years, as opposed to 5 years. Any fixed-term or notice provision agreed to in breach of this requirement will be void, and the contract deemed to be terminable on reasonable notice. In addition, regardless of length, or whether terminable within 12 months, copies of all directors’ contracts of service, contracts for services and letters of appointment must be kept available for inspection by members, and for a year after they expire/terminate.
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