Fiduciary Duties of Non-Executive Directors and Capacity

It has been a while since I focused on this topic. Today I returned to it reading an article on the topic by Witney, 'Corporate Opportunities Law on the Non-Executive Director (2016) 16(1) JCLS 145.

The work cites my piece in the Company Lawyer that seeks to explain that a fiduciary duty of a director is often misunderstood because people struggle to grasp that an executive director generally takes responsibility for all interests of the company, which are broadly defined because a company cannot act by itself. It is completely reliant on its directors. But people look to narrow the interests of the company and focus on defining its interests rather than what the director takes responsibility for, which is the orthodox for fiduciaries. Thus, they seek to change the fiduciary jurisdiction and apply it differently to all directors than they would to other types of fiduciaries because they look to focus on the interests of the principal rather than what interests the director is responsible for.

Whilst it is possible to vary when it is owed, as the article explains by focusing on the scope, it is not possible to change the application of the duty once it is owed. Duties, including fiduciary ones, are monolithic. They cannot be varied once owed. They are inflexible, not flexible as Witney claims. Only when they apply is flexible because, as my article shows, it depends on what the fiduciary has responsibility for to the principal's interests.

The argued changes to application of fiduciary duties for directors, as a result of that confusion, comes in many different forms, that this article tries to advance with little plausible justification for it. For one, there is no such thing as corporate opportunities law. There is no such doctrine in the UK. He tries to use this to explain that the capacity you are acting in can affect whether you can avoid the application of fiduciary duties. That is also not possible. It shows a complete disregard for the meaning of loyalty. The purpose of the duty of loyalty is to regulate self-interest within the scope of the undertaking to the principal's interests. It bans self-interest to fulfil this purpose and demands loyalty to the principal's interests that you are responsible for. This is because the director stands in the stronger position, capable of manipulating information to prefer their own interests ahead of the ones they undertook to act for. It is therefore complete fiction that the capacity you are acting in affects the fiduciary duty. The idea that we can simply argue we were acting in a personal capacity to avoid acting for the interests you undertook to protect is a complete disregard for the duty. His example given, that it is none of the company's business to be offered investment opportunities that the director invests in personally, is just one way the duty could be abused and undermine that purpose. Witney offers no justification as to why it would not be a breach other than 'capacity' (I note he cites a couple of cases where there has been no breach of duty such as CMS Dolphin, Plus Group v Pyke, and West Coast Capital but all have been misapplied as to why there was no breach in those instances, I return to one example below). On that ground I could argue any conflicting investment was not conflicting simply because I was acting in a personal capacity. The duty of loyalty is strict in its application. Is there a risk of conflict i.e. did your personal interest conflict with the interests of the company you undertook to protect? If yes, there is a breach. Capacity is not an excuse and never has been. The flexibility Witney refers to is misapplied to fit his thesis. The flexibility is when the duty is owed, not how it is applied.

To return to the cases he cites, mentioned above: He says these cases show that it is clear that a director is not bound by their duties all the time. Is it? But consider Plus Group v Pyke and CMS Dolphin that are glossed over to advance his thesis. Of course a director can resign even though it would be harmful to the business. But there is clearly no conflict of interest in resigning. What interest is he acting in conflict with by resigning? None. But take the example further. The director resigns to take an opportunity personally. If the director has responsibility for the interest that is a conflict of interests. He is still well within his right to resign but his motivation makes it a breach because he is doing it due to a conflict of interests. It has nothing to do with his capacity.

Thus Witney misunderstands what I said when I advance that a court needs to consider what the director has responsibility for. He says this is only one relevant factor in determining whether the duty was owed as a director cannot unilaterally determine the scope of their duty. No, it is the only factor in determining the scope initially, because there are no constructive fiduciaries and yes, they cannot unilaterally determine the scope of duty as much as the principal cannot unilaterally determine it. The scope is set based on what the parties mutually agreed the fiduciary's responsibility would be. If the director did not take responsibility for the matter then they cannot be required to owe a duty of loyalty. If the director does take responsibility, whether it be unilaterally, voluntarily, or contractually then the duty is owed.

I agree with the premise of Witney's article though, that the broad application of fiduciary duties can make it difficult for non-executives to practically take on multiple roles, which they often do. However, that is not the company's problem. The House of Lords have long shown little sympathy for an individual who puts themselves in a position of conflicting duties. A non-executive does not have to take on multiple roles to fulfil their function to one principal. The Court of Appeal made it clear that the court will only permit self-interest where acting for multiple principals is inherent to the business. If non-execs want to take on conflicting opportunities then get authorisation from the principal. The conservative line is not a problem. Flagrant disregard for the duty is, however.

Now to apply this to non-executives, as my paper briefly did, they do not necessarily take responsibility for all the interests of the company. Executive directors generally do as a presumption because the company simply cannot act without them. Therefore, there is some flexibility in when the duty is owed for non-executives to accommodate their multiple appointments, but that is not the same as advocating a change in the way the duty is applied. The added benefit of this approach compared to the capacity approach is certainty. We can say with certainty what the director's (non-exec or exec's) responsibility was. Saying what capacity they were acting in is riddled with uncertainty.

So finally, to return to Plus Group v Pyke, the director in that case avoided liability because the facts demonstrated he no longer had responsibility for the interests of the company as they had been effectively forced out of the company in all but name. It had nothing to do with capacity. Capacity has never been inherent in common law or equity.

Can Companies Vote in the EU Referendum?

With the impending EU referendum, there is a natural drive to get those who can vote to register. Who can and cannot vote is not always straight forward, but the question here is whether companies can vote?

The answer is, of course, no. Thank-you very much for reading this post...

but this leads to another question, should companies be able to vote? So, on some quick research in to politics and the law on voting, a helpful comment from a colleague, pre existing knowledge of company law I will tackle this question.

To me, this question took on more pertinence after the decision in Prest v Petrodel Resources Ltd [2013] UKSC 34. It arguably has significance well beyond simply acknowledging the obscurity of piercing the veil. To summarise the decision, the court effectively held that the court will never pierce the corporate veil and hold those behind it responsible for the company's liabilities and obligations. Privity applies to companies as much as it does to you or me. Where the company is used as a vehicle to avoid personal liability and obligations, there is always an equitable tool on hand to hold the company liable in its own right. So in Prest, the husband's transfer of assets to the company were held on a bare trust in divorce proceedings for the wife. It did not have to hold the company liable for the divorce to recover the property, which would have been absurd.

What we see an emergence of here is that final step to full recognition of the company as a separate legal entity. Responsible completely by itself, with no lingering possibility of controllers being liable personally for the company's debts. Its limitations are merely practical, not legal. I often remember being taught in my undergraduate days that a company cannot drive a lorry, used as an example to demonstrate the limits to its legal liability. Whilst it is true that it cannot drive a lorry, this is not a legal limit, it is a practical one. It could still be liable, where that lorry crashes, for negligence, if they failed to train the driver properly, for example.

Therefore, something I often say to anyone who asks about company liabilities, rights, or obligations, if you find yourself treating the company differently than you would a natural person then you have done something wrong. For example, saying shareholders own the company is treating a company differently from a natural person, as you cannot own a person. A shareholder merely owns the share. Whilst the law may seek to regulate the company's relationships in a way that is responsive to nuances, that is no different from other relationships involving natural persons.

Therefore, now the company has been fully recognised as a separate legal person, completely responsible for its own rights, liabilities and obligations, should it not be able to vote on those issues that can affect those rights, liabilities and obligations?

Now, I am not pretending that there are not some obvious and strong arguments that they should not vote. Nor am I advocating that they should, simply exploring if they should. I am also hoping I am not completely ignorant of some reason why the shouldn't or can't vote in a way that makes this post seem more ridiculous than it might already appear. So let's review some of the arguments and authorities.

The starting point is that there is nothing that says a company cannot vote because the law sets out that citizens can vote and provides a, seemingly exhaustive, list of those who cannot, which does not include companies.

The Treaty on the Functioning of the European Union, Art 22 provides that a citizen is entitled to vote. Equally, who can vote has to be compliant with any Human Rights provisions. But who can vote has always been a national decision, so a 'citizen' is defined nationally under the British Nationality Act 1981. While a company might not, yet, be classed as a citizen, the legislation includes the ability to apply for citizenship. To apply there needs to be a 'real' connection and capacity. The latter would not be an issue, but the 'real' connection might be difficult, but if its registered office and place of incorporation is in the UK then this, or either, might be enough to establish a real connection.

The next step would be whether they are entitled to vote if they are a citizen. The Representation of the People Act 2000 bases this on citizenship, in line with Art 22, with no restrictions on companies.

Ignoring the existing law, one may consider whether the law should enable it to do so, if it currently does not permit it.

The policy argument is the one stated, if they are a separate legal person with its own capacity it should be able to have a democratic voice on how its position may be effected by political decisions.

Now there are obviously practical difficulties in voting as a company. In a referendum though it is a one off vote, not linked to any particular constituency. The directors, as the guiding mind of the company. The vote would need in the best interests of the company, compliant with Companies Act 2006, s.172.

Granting a person with legal capacity the right to vote would not be anything new, as there is precedent for it. Women over the age of 30 were granted the right to vote in 1918 and over 21 in 1928. Whilst companies were recognised as having separate legal status in 1897 in Salomon v Salomon (1897) AC 22, it was not until a few years ago that it was fully recognised that a company's controllers will not be liable for the company's obligations. Therefore, an argument advanced that 'why would companies be given the vote when women did not have it', cannot be sustained without question. A woman had clearly become a separate legal person with full legal capacity from their husband or the like, and should be given the vote. This was not as clear for companies. It is now after the decision in Prest.

One point is that allowing a company to vote would destroy the equality among citizens, regardless of wealth and education but they are equal for the purposes of the democratic principle. Yet, companies are of different size and wealth. They may be less or more powerful than an individual or another company. The principal 'one person, one vote' never said that person had to be natural.

Another is that certain companies may operate contrary to public policy. One argument presented is that a tobacco company's view cannot prevail as it should be restrained for health reasons. But on such logic you could ban any smoker from voting. That itself is contrary to the democratic process. Take a more concrete example and prison inmates' rights to vote. Their incarceration might be a result of a law they disagree with. Their right to vote for a politician that might support their release by overturning such a law should not be banned from voting. Therefore, a company should be entitled to vote to support their position, even if it runs contrary to the current public policy of the existing Parliament.

One practical problem is subsidiaries. How many votes should a group of companies get? If companies were to get votes, specialised rules would have to be set out to prevent abuse, with the democratic process eroded by faceless, shell companies dictating the direction of the legislature.

A historical point might offer some further pause for granting the vote to companies. It is the legislature who needs to control who votes. Otherwise it cannot be taken to be seen as supreme. Thus, when companies were granted that status, it was previously as a result of Royal Charter. Parliament, however, was the donor of the right to vote. Giving companies the right to vote would enable to Crown to reassert some power over voting, questioning Parliamentary supremacy. However, companies are now traditionally formed through registration with a public body, in the UK that is Companies House. Therefore, such companies registered would not undermine parliamentary supremacy. However, other type of companies, such as those formed under a Royal Charter should be denied such a right if companies were to be given one.

A final problem might be a result of a company's practical limitations. It cannot age per se and therefore could never reach the age of maturity to vote. Yet this could be overcome by adjudging its age by number of years since its incorporation.

Overall, the company, now with full legal capacity, has a case for the right to vote. If it were to be given a vote, it should be one vote, with certain restrictions. But it is arguably undemocratic to not allow one with full legal capacity to vote.

Any observations, always welcome to hear them.