A board of directors will not always find themselves in agreement and it is often the case that through frank and thorough dialogue, the directors can agree upon what action to take. However, it is not unusual for one or more directors to remain opposed to a decision that the rest of the directors support.
If a director finds himself opposed to the majority view, particularly where at least some members of the board are family members, emotions are likely to be running high and it can be difficult for those concerned to separate emotion from the business decisions that need to be taken. It is important that all parties take appropriate action to safeguard the interests of the business and avoid the matter blowing up out of proportion or unnecessarily diverting significant amounts of the directors’ time and energy from the job of running the business.
This article explores in practical terms the legal rights and responsibilities of a dissenting director.
Directors are collectively responsible for the management of the company in question. Unlike partners in a trading practice, directors do not enjoy individual rights to act on behalf of the company in any matter which has not been authorised or delegated to them by the Board. This makes the position of a dissenting director a challenging one, as he is, in the main bound to accept the will of the majority. However, there are practical steps that he can take and these are explored below.
Directors should be familiar with the particular duties owed by a director to a company, which have largely been codified in the Companies Act 2006 (sections 170 to 181). Most notably, directors are required to act in good faith to promote the success of the company, exercise independent judgement, and exercise reasonable care, skill and diligence. Much commentary already exists about directors’ duties and it is beyond the scope of this article to look at these in detail but it goes without saying that directors must have these duties in mind at all times. One important point to note, however, is that the duty to exercise independent judgement is one that operates upon each director in the context of him operating as a member of the board of directors. A director should not act independently to the board.
A director who is in the minority must ensure that he clearly makes his case to the board at the meeting at which the board is discussing the matter in question. The director will need to bring all of his skills of persuasion to the job of convincing the other board members of his point of view. In particular, and if he suspects that he is likely to be in the minority, a director may wish to circulate a summary of his position in advance of the meeting.
If the majority of the board make a decision which a director disagrees with, then the dissenting director will need to consider whether he can accept the position or whether he feels that he should take some further action. Further action will clearly be needed if the decision is unlawful or will have serious adverse consequences for the company.
Most of the time, a director will simply accept the decision of his fellow board members. He may feel sorry that he has been unable to persuade his fellow directors around to his point of view, but he should bear in mind that in accepting the position of the majority, he is likely to be doing what is in the best interests of the company and that the best interests of the company should take precedence over his own personal position.
If the director decides that it is his duty to take further action then he should consider some or all of the following steps.
This should provide the dissenting director with some measure of protection if the decision is later challenged or found to be wanting.
This is relevant where the director feels that he has not had a fair hearing and so that the matter has not been properly considered.
Where he considers that the action the board is proposing to take is unlawful, or will expose the business to a legal claim which has not been considered, the director should insist that appropriate advice is sought from the company’s legal advisors.
This option will be open to a director or shareholders holding (in aggregate) 10% or more of the voting rights.
This is a serious step as it takes the director in question into open conflict with the remainder of the board and draws the attention of the shareholders.
The shareholders cannot overturn decisions made by the board but they may have the following powers:
If there is wide support at shareholder level for the dissenting director’s position, the remainder of the board will need to give their position careful thought. Clearly a board that is in fundamental disagreement with its shareholders is unlikely to remain in office for very long.
If a director is not able to call a shareholders’ meeting, or the outcome of the shareholders’ meeting is not as he had hoped his only option may be to resign from his position as a director.
In deciding whether to resign, a director should consider what is in the best interests of the company as well as any personal risk. He may decide that he can positively influence matters from his position on the board and therefore, it would be in the best interests of the company for him to remain on the board.
Whatever the outcome, it is important that the board speaks with one voice. Directors’ duties taken in the round mean that it is not appropriate for individual dissenting directors to engage directly with shareholders about such matters outside of the proper channels. A dissenting director needs to carefully consider his position and whether or not he is exposing himself to a legal claim.
Recent case law has looked unfavourably on dissenting directors who approach shareholders behind the board’s back. Dissenting directors who brief shareholders against the board will potentially be in breach of their directors’ duties and can be lawfully removed as a director. Any communications with shareholders should be with prior board approval or in the presence of the board. Communications with shareholders should also not be misleading and detail all of the facts/ views.
Similarly, commercially sensitive or confidential information discussed at board meetings should not be shared with third parties (with the exception of professional advisors).
If at any stage the dissenting director has concerns about the company’s solvency that he feels are not being addressed in any meaningful way, he should take immediate action. In this situation, the director in question should seek legal advice immediately. Where a company is approaching insolvency, the duty to promote the interests of the creditors becomes paramount.
Although there are a range of options available to a director who disagrees with the board, this is a complex area of law with potentially serious consequences for the business as well as the individuals concerned. The options are summarised in this article, but it can be particularly challenging to navigate through these in practice. It is therefore important that legal advice is sought should you find yourself in this difficult position.