Directors have powers to take majority business decisions on behalf of the companies. Consequently, various duties are imposed on them, to ensure that the companies’ interests are protected.
Directors’ duties including duty to act in good faith to the best interest of the company; duty to avoid conflicts of interest; duty not to profit from their offices, and duty of care and skill are enshrined in the common law rules and equitable principles and also in statutes such as the Company Law of Cyprus Cap 113.
Summarized below are the seven general duties:
1. Duty to act within their powers.
This codifies the common law rules that directors should exercises their powers under the terms that were granted for a proper purpose. A director’s powers are normally derived from the company’s constitution, i.e. its memorandum and articles of association.
2. Duty to promote the success of the company.
This is a new duty developed from one of the heads of the overriding principles of the fiduciary duties, i.e., duty of good faith to act in the company’s best interest. The Law imposes a duty to act in the way a director considers, in good faith, would be most likely to promote the success of the company. Although this duty is still owned to the member as a whole, when exercising this duty the director is required to have regards to various non-exhaustive list of factors including the long term consequence of the decisions as well as the interests of the employees; the relationships with suppliers, customers; and the impact of the decision on community and environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.It can be seen that among other things, this duty introduces wider corporate social responsibility into a director’s decision making process.
A director of a company is expected to exercise the same level of care, skill and diligence as he carries out any other functions in deciding which factors he will take into consideration when making a decision subject to his overall responsibility to the success of the company.
3. Duty to exercise independent judgment
A director must first exercise a judgment and secondly he must exercise the judgment independently. Prima facie, this rule would impinge on so-called ‘sleeping directors’ who play no active role in the management and leave decisions to others. By analogy, this would impact on ‘shadow directors’.
Arguably, if a director is to exercise independent judgment, then there will be no scope for shadow directors. This duty is not infringed upon if a director acts in accordance with an agreement that was duly entered into by the company.
4. Duty to exercise reasonable care, skill and diligence
This prescribes the degree of ‘care, skill and diligence’ expected from a director; that is: care, skill, diligence that would be exercised by a reasonably diligence person with-
a. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and
b. the general knowledge, skill and experience that the director has
The subjective test requires a director to carry out his duty with the general knowledge, skill and diligence he in fact possess. Therefore, a director who has more experience, knowledge and skill will have a higher threshold in discharging this duty.
5. Duty to avoid conflicts of interest
Note that this duty applies to a transaction between a director and a third party, such as the exploration of any property, information, opportunity. In other words, the duty does not extend to a transaction between a director and his own company, in respect of which, different rule applies which requires a director to declare his interest to the other directors.
This duty might impact on a director who holds multiple directorships and discourage a director to hold especially non-executive directorships.
On the other hand, it should be noted that the saving provision, i.e., authorization by non-conflicted directors on the board goes some way towards easing the concerns.
6. Duty not to accept benefits from third parties
This reinstates the existing rule known as ‘non-profit’ in that a director is not permitted to accept a benefit from a third party by reason of (a) his being a director or (b) his doing or not doing anything as a director.
Benefits cover both monetary and non monetary including for example, non executive directorship and even corporate entertainment. However, a director will not be in breach of this duty if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. Duty to declare interest in proposed transaction or arrangement with the company
It is required by a director to disclose his interest to the board of the company when a transaction is proposed between a director and his company. However, it goes further by requiring a director to declare the nature and the extent of the interest to the other directors. Further, disclosure must be made where a director is considered ‘ought reasonably to be aware of’ the conflicting interest.
The requirement for disclosure is dispensed in circumstances where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or if other directors are already aware or ‘ought reasonably to be aware’ of the director’s interest.
In the light of the above, it is suggested that directors continue to seek advice if unsure and in the meantime overhauling their decision making process and companies’ constitutions so as to minimize the risks of derivative claims and other potential legal challenges.