Managing director responsibilities range from a duty to avoid conflicts of interest, to disclosing self dealing, to promoting the company’s interests. The same responsibilities arise for any other director. Complying with the rules is a mandatory exercise.
Here, we outline the 7 key legal points for managing directors and highlight some of the risks of non-compliance for managing directors and other directors.
A common misconception is that the status of managing director imposes additional legal obligations and duties on a director. In strict company law terms this is incorrect – the duties apply equally to all directors. All directors are subject to identical fiduciary and statutory duties set down by the Companies Act 2006. This includes non-executive directors.
There is no legal requirement to appoint a managing director. The appointment is a matter of pure discretion and practicality. But, if the role is defined, then the company will have greater leverage to remove the managing director from his role if he fails to perform.
Under the Companies Act, the majority of a company’s shareholders can remove a director from office. The procedure is lengthy. For that reason, it is common to find a short and simple method set out in the directors’ service agreement. Business disruptions can be avoided.
There is no legal requirement for a managing director to be signed up to a written service agreement. A director is usually also an employee. The roles are separate. If there is no written service agreement, then the company may run into problems trying to dismiss the managing director from either or both positions.
The powers of a managing director should be set out in the service agreement. However, the powers are subject to the provisions of the Companies Act. The provisions exist to seek to protect minority shareholders.
Directors can find themselves in a position of conflict. But, that does not mean that the director cannot act. Conflicts can be authorised by the board. Alternatively, a company’s articles may authorise a director to act.
The articles should set out a procedure as a safeguard measure. Under the Companies Act, the approval of the company’s shareholders will be required for:
There are exceptions, so that approval from the shareholders will not be required. For example, there is a de minimis exception for substantial property transactions and loans with directors. The position needs checking before proceeding.
If shareholder approval is not sought, then the contract or transaction will be void. Result is that the contract or transaction can be undone.
There may be internal agreements on the scope or limitation of the managing director’s authority. However, in legal terms, third parties are generally entitled to assume the managing director has authority to bind the company.
Unless a third party is specifically made aware that a managing director lacks the actual authority to bind the company, the third party is entitled to assume that the managing director does indeed have the authority. Third parties can make this assumption regardless of the importance or value of the underlying matter or contract.
A shadow director can cause problems. A shadow director will be bound by the same duties and responsibilities as any other director. However, the public may not know that the shadow director is representing the company as a director. So, it is appropriate for the company to seek an indemnity from a shadow director for any engagement outside the scope of duties and or authority that causes the company to suffer loss.
A shareholders’ agreement can hugely benefit a managing director who is also a shareholder. The shareholders’ agreement can:
A shareholders’ agreement can also give the managing director authority to enter into certain transactions, without first consulting the shareholders of the company. That right will be subject to the Companies Act, so care should be taken when drafting.
A shareholder’s liability is limited to the amount, if any, unpaid on shares. The same does not apply to a director. A director can be personally liable for a company’s losses. Examples being:
Worst case is that directors can be made bankrupt, and disqualified from holding an officer’s position.
John Deane is a partner in the commercial team. John’s clients range from start-ups to established trading companies. Please do not hesitate to get in touch with John if we can be of assistance.