COMPANIES: THE DIFFERENT TYPES OF DIRECTOR
Study Unit
COMPANIES: THE DIFFERENT TYPES OF DIRECTORS ~23 min
A company is owned by its shareholders, but the day-to-day strategic and operational decisions of the business are made by its directors.
(A) APPOINTMENT, NUMBER AND COMPOSITION OF THE FIRST DIRECTORS A private limited company must have at least one director and a public limited company must have at least two. In both cases, there must be at least one director who is a ‘natural person’ and any additional director(s) can be a natural person or a corporate body. The appointment of a director is governed by a company’s Articles and there are no real statutory restrictions except that any individual director must be: (i) over 16 years old; (ii) cannot be the company’s auditor; and (iii) cannot be an undischarged bankrupt. A director can either be employed by the company or enter into a service contract. A register of directors must be kept at the company’s registered office and Companies House must be notified of any changes to the register within 14 days. Any director officially registered at Companies House can be referred to as a de jure director.
(B) THE CHIEF EXECUTIVE OFFICER AND CHAIRPERSON The Chief Executive Officer (CEO) or Managing Director (MD) typically refers to the same position but the exact nature of the role may differ between companies. The CEO holds the most senior executive role in the company and is ultimately responsible for how the company is performing. The CEO is usually only second-in-command to the company’s Chairperson, often referred to as the ‘Chair’, who may give the CEO guidance but is mainly there to control board meetings and additionally has the power to appoint and replace directors, including the CEO. Public companies with a premium listing of ordinary shares on the London Stock Exchange are required to consult the UK Corporate Governance Code and apply its principles. This code states that there should be a clear division of responsibilities between the roles of CEO and Chair.
(C) ALTERNATE, SHADOW AND DE FACTO DIRECTORS An alternate director can be appointed by a principal director, on approval by the board, to take the place of the principal director at board meetings for an agreed period. A shadow director is defined as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”, which therefore includes any person who provides guidance to the board which is frequently acted upon, although there are exceptions for advice given in a professional capacity, such as by the company’s lawyers. Finally, a de facto director performs the functions of a director but has not been formally appointed in accordance with the company’s Articles and is not registered at Companies House. If there is a dispute as to whether a director is to be defined as a shadow or a de facto director this is determined by the courts on a case-by-case basis.
It is clear through common law and legislation that de jure directors owe fiduciary duties towards the company, as do de facto directors. However, the position regarding shadow directors is less clear. Legislation states that a shadow director owes the same duties and liabilities as a de jure director in relation to wrongful trading, director disqualification and duties to declare an interest in existing transactions. However, whether shadow directors owe fiduciary duties has been an issue debated in litigation.
In Ultraframe (UK) Ltd v Fielding (2005), the High Court stated that the fact a person fell within the definition of shadow director would not usually be enough to impose on him or her the same fiduciary duties as are owed by a de jure or de facto director. Conversely, in the case of Vivendi SA v Richards (2013), it was held that a shadow director will usually owe a duty of good faith to act in the company’s best interests in relation to directions or instructions they give to de jure directors. In Instant Access Properties Ltd v Rosser; Murphy v Rosser, (2018), it was held that whether shadow directors owe fiduciary duties or not will depend on the facts of each individual case.
Read A, B and C opposite and match the terminology in the box below with the correct person from the list which follows.
(a) natural person (c) undischarged (e) Chief Executive (g) alternate (i) shadow director (b) auditor (d) de jure bankrupt Officer director (f) chair (h) principal (j) de facto director director director 1. Jeremy Thompson: I am the ultimate authority within the company when it comes to making top-level managerial decisions. I am also referred to as the Managing Director of the company. 2. Chris Robinson: I ensure that board meetings run smoothly, remain orderly, and that board members are able to reach a consensus when it comes to making important decisions. 3. Emma Gerrard: I recently attended a very important board meeting to represent the views of one of the executive directors who was unable to be there due to a clash of diary commitments. 4. Melissa Swift: I was formally appointed to the board in 2016 and have been registered as a director with the Registrar of Companies since April of that year. 5. Georgia Lannister: I had to work abroad recently, so the board appointed an alternate director with the same powers to receive notice, attend, speak and vote at board meetings during my absence. 6. Karl Hughes: My sole trader business failed, and my house was sold to pay my creditors. I am restricted from doing certain things for a few more years, including acting as a company director. 7. Susan Attwood: I am a shareholder and it’s necessary for someone like me to own a share in a company, as at least one shareholder must not be a corporate body. 8. David Wright: I am a qualified Chartered Accountant. I independently review the accounts of various companies to make sure they’re accurate and fair. 9. Natalie da Costa: I am not a de jure director, but I carry out that role. Last month a dispute ended up in court and the judge decided I wasn’t a shadow director, but only after hearing all of the facts. 10. James Edwards: I am an accountant and although I have no formal role in my son’s business, I often give him business advice that he and the other director usually act upon.
Complete the following sentences with one of the highlighted words or phrases from B and C opposite.
1. If a company has a (1) ….. on the London Stock Exchange, it means that the company meets the highest standards in helping shareholders to understand the regulatory obligations the company is expected to comply with. 2. If legal proceedings are decided on a (2) ….. it means that decisions are made individually, each according to the facts of the particular situation. 3. If various types of directors owe (3) ….. to the company it means that those directors are in trusted positions with regard to finance or property to act in the best interests of others. 4. (4) ….. may be defined as occurring when a director allows a business to continue trading knowing that insolvent liquidation of the company is already inevitable. 5. In the case of Ultraframe (UK) Ltd v Fielding it was not enough that someone (5) ….. of shadow director for the court to conclude that he or she owed the same duties as a de jure or de facto director.
DISCUSSION POINT • Do you have shadow or de facto directors within your legal system? If so, do you think they should owe the same legal duties to shareholders as other directors?
Speaking & Writing for this topic
Two short tasks scored against TOEFL rubrics. The prompt is generated for this topic — use the vocabulary you have just studied.