UK: Boardroom Disputes And Directors' Duties

Last Updated: 28 August 2019
Article by David Collins, Richard Barham, Candice Chapman and Anna Janik

Boardroom disputes and directors' duties

A recent High Court decision serves as a reminder of the collective nature of board responsibility and provides legal and practical pointers both for a disaffected director and a board dealing with such a director.

Facts

The case relates to the highly public disagreement between Mr Tinkler (T), an executive director (and former chief executive) of Stobart Group Ltd, a FTSE 250 company, and the majority of the board, in particular the chairman of the board whom T wished to see removed.  

The case revolved around various steps that T took in advance of the company's 2018 Annual General Meeting (AGM). These included:

  • raising his concerns about the board's management with key shareholders without first raising them with the board;
  • writing an open letter in his capacity as an executive director, which the court described as "seriously misleading", to the company's shareholders encouraging them not to re-elect the chairman;
  • forwarding a copy of the letter to the company's employees, and orchestrating an employee petition asking the chairman to step down; and
  • sharing confidential budget information outside the board.

The court also considered the steps taken by the board in response.  These had included establishing a committee of directors to consider T's future; using a power in the company's articles to remove him as a director before the AGM and subsequently again the day after the AGM (at which he had successfully moved a resolution to have himself re-elected); and transferring treasury shares into an employee benefit trust before the AGM. 

A significant part of the case centred around directors' duties, with both parties alleging breaches by the other.  Although the company was incorporated in Guernsey and the relevant directors' duties were those at Guernsey law, the court acknowledged that these were the same as the fiduciary duties that a director of an English company owed before the Companies Act 2006.     

Decision

The court found that T's various actions put him in breach of certain fiduciary duties that he owed to the company.  The board's actions with respect to the treasury share transfers also amounted to a breach of fiduciary duty.  Particular points of interest are as follows.

The duty to exercise independent judgment (now codified in the UK as section 171 of the Companies Act 2006): This duty operates on each director in the context of being a member of the board of directors.  It exists to support the board's management of the business and does not allow a director "to go off and do his own thing, independently of the board, in relation to matters that fall within the sphere of management of the company's business.".  T was therefore not entitled to rely on this duty to justify his actions in "briefing against the board".     

The duty to act in good faith in the company's best interests (now codified in the UK as section 172 of the Companies Act 2006):  Directors must act in the best interests of the shareholders as a whole. The other directors were therefore not in breach of this duty when they took the decision to remove T under the power in the articles even when he had been re-elected at the AGM the previous day.  They owed their duties to the company as a whole, not to the 51.44% of shareholders who had voted at the AGM in favour of T's re-election.

The duty to act for proper purposes (now codified in the UK as section 173 of the Companies Act 2006): Even where directors consider in good faith that something is in the company's best interests, they must still exercise their powers for proper purposes.  In this case, the board had believed that it was in the company's best interests for the chairman to be re-elected.  However, transferring a large packet of shares held in treasury to the company's employee benefit trust shortly before the AGM so that the scheme trustee could vote in favour of the chairman's re-election, was not a proper use of their powers.

(The effect of the transfer in breach was that the transfer was voidable, meaning that the court had discretion over whether to unwind and declare the chairman's re-election invalid.  However, on the facts the court was not prepared to do this – the trustee had given good receipt and had deliberated properly over how to exercise its voting rights.)

Comment 

The decision highlights a number of useful points for boards and directors.

  • Raising matters at board level: The management of a company's affairs rests with the board as a whole. It follows that if a director has concerns over the management of a company, they should raise these concerns with the board either as part of the majority or as a dissenting voice.  
  • Discussions with shareholders: Even if a director's views have been properly aired at board level, a director must not "pick off" particular shareholders and air their own views on management matters.  This carries a real danger that the director will fall foul of the duty to act in the best interests of the shareholders as a whole.  If a director has been unable to persuade the board of their views and feels the need to speak publicly, they should only do so in a forum that is open to all shareholders.
    Generally, information about management matters should only be discussed by a director with shareholders in the presence of the rest of the board or with the prior approval of the board.  
  • Confidentiality: A director should never share confidential information inappropriately. 
  • Dissenting voice: Being a dissenting voice on a board does not require a director to resign, even if the decision in question is a momentous one.  A director can discharge their duties by raising an objection.  But if a dissenting director, having failed in their opposition, feels sufficiently strongly about a proposed course of action they may consider that they have no option but to resign.   
  • Board responses: The board must always exercise its powers for proper purposes. Transferring shares out of treasury to manipulate the outcome of a shareholder vote is not a proper purpose, even if the board believes that the outcome is in the best interests of the company.

Stobart Group Ltd v. Tinkler [2019] EWHC 258 (Comm)

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