You are on page 1of 11

Definition of Director

One who, or that which, directs; one who regulates, guides, or orders manager or superintendent. One of a body of persons appointed to manage the affairs of a company or corporation; as, the directors of a bank, insurance company, or railroad company. A part of a machine or instrument which directs its motion or action. A slender grooved instrument upon which a knife is made to slide when it is wished to limit the extent of motion of the latter, or prevent its injuring the parts beneath.

Duties and responsibilities of Directors
Directors' duties are a series of statutory, common law and equitable Obligations owed primarily by members of the 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. Directors owe duties to the corporation, and not to individual shareholders, employees or creditors outside exceptional circumstances Directors' core duty is to remain loyal to the company, and avoid conflicts of

skill or diligence Directors are expected to act in good faith to promote the success of the corporation Acting within powers S. It was alleged that the directors had issued a large number of new shares purely to deprive a particular shareholder of his voting majority. such as a director looking to feather his or her own nest or divert an investment opportunity to a relative. The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision of Howard Smith Ltd v. The court rejected . It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution. in many jurisdictions the members of the company are permitted to ratify transactions that would otherwise fall foul of this principle. While in many instances an improper purpose is readily evident.Interest Directors are expected to display a high standard of care. Ampol Ltd.The case concerned the power of the directors to issue new shares. were a director to issue a large number of new shares. such breaches usually involve a breach of the director's duty to act in good faith. that would be an improper purpose. However. For instance. Directors must exercise their powers for a proper purpose.171 CA 2006 Directors are also strictly charged to exercise their powers only for a proper purpose. while acting in good faith. is serving a purpose that is not regarded by the law as proper. Greater difficulties arise where the director. not for the purposes of raising capital but to defeat a potential takeover bid.

customers and others The impact of the company’s operations on the community and the environment The desirability of the company maintaining a reputation for high standards of business conduct. or a takeover bid was defeated would not itself make the share issue improper.172 CA 2006. that would be an improper purpose. These are: The likely consequences of any decision in the long term The interests of the company’s employees The need to foster the company’s business relationships with suppliers. Promoting company success S. It sets out six factors to which a director must have regards in fulfilling the duty to promote success. If so. an incidental result (even desirable) that a shareholder lost his majority. "to promote the success of the company for the benefit of its members as a whole". and held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company.an argument that the power to issue shares could only be properly exercised to raise new capital as too narrow. or as part of an agreement to exploit mineral rights owned by the company. But if the sole purpose was to destroy a voting majority or block a takeover bid. .

protections for nonmember stakeholders were considerably more limited (see e. Similarly.. even if there is no "benefit" to the company giving the guarantee.. Previously in the United Kingdom." Independent judgment S.. s. Mills (1938) 60 CLR 150 normally prevails: "[directors are] not required by the law to live in an unreal region of detached altruism and to act in the vague mood of ideal abstraction from obvious facts which must be present to the mind of any honest and intelligent man when he exercises his powers as a director. The test is a subjective one—the directors must act in "good faith in what they consider—not what the court may consider—is in the interests of the company. the directors may still be held to have failed in this duty where they fail to direct their minds to the question of whether in fact a transaction was in the best interests of the company. conceptually at least. This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. However. which permitted directors to take into account the interests of employees but that could be enforced only by the shareholders. and not by the employees themselves.309." per Lord Greene MR. Directors must act honestly and in bona fide.173 CA 2006 . However. there is no benefit to a company in returning profits to shareholders by way of dividend. The changes have therefore been the subject of some criticism.and the need to act fairly as between members of a company.g. Difficult questions arise when treating the company too abstractly. it may benefit a corporate group as a whole for a company to guarantee the debts of a "sister" company. under the Companies Act 1985. the more pragmatic approach illustrated in the Australian case of Mills v. For example.

" However. and effective control residing in the shareholders. this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making. This does not mean. fetter their discretion in relation to the exercise of their powers. Care and skill Traditionally. and cannot bind themselves to vote in a particular way at future board meetings. The company remains bound. however. where the court held that: "a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. even if certain actions in that course will require further board approval. if they elected .Directors cannot. without the consent of the company. and no personal advantage to the director. that the board cannot agree to the company entering into a contract that binds the company to a certain course. the level of care and skill a director must demonstrate has been framed largely with reference to the non-executive director. In Re City Equitable Fire Insurance Co [1925] Ch 407. This is so even if there is no improper motive or purpose. it was expressed in purely subjective terms. but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the contract that the board previously approved).

Sandford (1726) Sel Cas. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into. the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. even where the conflict of interest or conflict of duty is purely hypothetical. and it is. the directors can be forced to disgorge all personal gains arising from it.. Ch. with the interests of those whom he is bound to protect. or can have. And it is a rule of universal application that no one.175 CA 2006 Keech v. Blaikie (1854) 1 Macq HL 461 Lord Cranworth stated in his judgment that.61 Regal (Hastings) Ltd v Gulliver [1942] All ER 378 Cook v Deeks [1916] 1 AC 554 .. of course. This rule is so strictly enforced that. In Aberdeen Ry v. a personal interest conflicting or which possibly may conflict." S. shall be allowed to enter into engagements in which he has. they should not have recourse to complain. Loyalty and conflicts of interest Directors also owe strict duties not to permit any conflict of interest or conflict with their duty to act in the best interests of the company.. Such agents have duties to discharge of a fiduciary nature towards their principal. having such duties to discharge. "A corporate body can only act by agents..and put up with an incompetent decision maker.

officer or employee of a company is prohibited from improperly using that information to gain an advantage for themselves or someone else.Duty of care and diligence Directors have a duty to exercise their powers with the degree of care and diligence the public would expect of a reasonable person in a similar position in a similar company to take. or to cause detriment to the company. when a director makes a business decision. or have been. Duty to prevent insolvent trading . they are seen to have discharged their duty of care and diligence if: • The decision is made in good faith and for a proper purpose • They do not have a significant personal interest in the decision • They have informed themselves about the subject matter of the decision • They believe that the decision is in the best interests of the company. Improper use of information A person who obtains information because they are. In this respect. a director.

. and whose name is entered in the firm's register of members when the firm is registered (or incorporated). or to cause detriment to the company. In corporate legislation. Improper use of position A director. Shareholders who join a firm at its inception are called founder members. a member is generally defined as (1) the subscriber to a firm's memorandum of association (or articles of incorporation) who is deemed to have agreed to become a member of the firm. Definition of Members Shareholder (stockholder) of a firm. secretary. Duty to act in good faith Directors have a duty to exercise their powers and discharge their duties in good faith in the best interests of the company.Directors have a duty to prevent a company incurring a debt while it is insolvent. (2) Every other person who agrees to become a member of the firm and whose name is entered in the firm's register of members. Conflict of interest Directors have a duty to avoid situations in which there is a real possibility of conflict between their personal interests and the company's interests. officer or employee of a company cannot improperly use their position to gain an advantage for themselves or someone else.

To protect other owners of the LLC. . Managers of an LLC who are not owners are held to the same standard. since such a manager is not involved in the day-to-day activities of the company. then that member is in a position of trust. The duties of loyalty and care are similar in partnership law. The duty of loyalty prevents a member from competing with the LLC in another business. The operating Agreement of the LLC can impose further obligations upon the members. reckless. However. The duty of care requires a member to refrain from grossly negligent. Fiduciary Duties If a member of an LLC is also a manager of the LLC.Duties And responsibilities of Members Members of a limited liability company (LLC) have duties and rights that are in Many ways comparable to those of a partner in a partnership. a member who is not a manager of an LLC is not bound by the same duties. these members owe the LLC the duty of loyalty and the duties of care. A member must refrain from dealing with a person or business with interests adverse to those of the LLC and must account for any benefits received from use of LLC property or from the winding up of LLC affairs. or intentional misconduct.

. However. such as those related to the right to manage the company. the ULLCA provides that members are required to make contributions according to the agreement of the owners of the company. However. These provisions can be altered in the operating agreement. Similarly. in all states. Other states. which is similar to rights provided in partnership laws. including those that have adopted the ULLCA. without unanimous agreement of all of the other members. Rights related to transferability of interests can be modified in the operating agreement. An operating agreement will often set forth such indemnity and contribution rights The default rules regarding distributions to members differ among the states. a member cannot transfer full ownership interests. These rights are similar to those provided to partners in a general partnership. Some states provide that members receive a share of distributions in the same proportion as their contributions to the LLC (pro rata distribution). Transferring Interests A member may transfer his or her financial rights to profits and losses. and the right to receive distributions. most state statutes do not address indemnity rights. provide for equal distribution among the members (per capita distribution).Indemnity and Contribution Rights The Uniform Limited Liability Company Act (UCCLA) provides that a member must be reimbursed for payments made on behalf of the LLC and indemnified for liabilities incurred by the member during the ordinary course of the LLC’s business.