The role of a nominee director ("Nominee") involves traversing the inherent tensions between the interests of your appointor and the company's.
You're generally appointed by an investor (or employee group) to look after and represent their investment, usually on the expectation of a loyalty to them. Despite being appointed by a stakeholder to represent their interests, you still owe the same duties to the company as other directors.
The tightrope gets harder to balance on when a company is struggling financially. This is when stakeholders often stop thinking as a cohesive group with common goals, but instead start trying to protect their own interests. A director’s behaviour is inevitably questioned most by members and creditors when a company is struggling. So, having an appointing stakeholder instructing the Nominee to protect their, and not the company’s, interests puts the Nominee in a difficult spot. It is at this point the Nominee should seek professional advice. Not only to ensure that the right thing is done, but also to create some breathing space from an appointor who may be instructing the Nominee to do something they are not comfortable with.
There are various general duties, which include specific duties (amongst others) to:
- exercise independent judgment.
- avoid conflicts of interest.
- promote the success of the company for the benefit of its members as a whole.
- not to accept benefits form 3rd parties.
These are the areas where we often see nominee directors trip up, although there are other further specific duties also laid out in the Companies Act.
Duty of confidence
While not specifically listed in the Companies Act, all directors owe a duty of confidence to the company (greater than a Nominee's obligations to their appointor). Nominees should not disclose confidential information they obtain as a director to their appointor without the company's consent. This puts Nominees in at odds with their appointor, especially if they perceive this as a perk of having a Nominee. The best way to navigate this is for the board of the company, and the appointor, to agree (before the Nominee's appointment) what information they can / cannot disclose. Then record that decision, ideally in a shareholders’ agreement or the company’s articles of association.
Exercising independent judgement & dealing with conflicts of interest
This can be a juggling act for a Nominee. The Companies Act provides some help when it states that:
- A director's duty to exercise independent judgment will not be infringed by them acting in a way that is in accordance with an agreement by the company that restricts their exercise of discretion, or authorised by the company’s constitution.
- A director will not be in breach of their general duties if they act in accordance with mechanisms provided in the company’s articles for dealing with conflicts of interest.
The case law on this point is lengthy, but was summarised in Cobden Investments Ltd v RWM Langport Ltd. However, the summary was obiter (which means it is not binding, although it gives a useful indication of the Court's likely approach). The summary was this:
- A Nominee owes the same duties to the company as any other director;. They owe their duties as a director to the company of which they are a director alone;. The company is entitled to expect the Nominee to use their best independent judgment.
- Subject to the next point, some duties (except core duties) can be qualified by the unanimous consent of all members (to whom the directors owe an overriding duty, except in the case of insolvency, when that switches to creditors).
- It is doubtful whether a director (Nominee or otherwise) can be released from their general duty to act in the best interests of the company (i.e. promote its success). Even if they can be, it would require strong evidence to demonstrate that this had been done, and ideally an express written agreement signed by all members. The onus is on those saying that the general rules have been relaxed to prove it (and the extent to which they have).
- There is no reason why, in principle at least, in relation to specific areas of interest, a director (Nominee or otherwise) could not be released from their fiduciary duty to give his best independent judgment to the company, subject to the above point and strong evidence that they have clearly been released from it by all members of the company.
There is doubt over whether that release can ever apply to their 'core duties', which is unhelpfully not defined, but clearly seems to include their duty to promote the success of the company for the benefit of all members.
A common practice at investor Nominee level is to have the right to appoint a director to all group companies but only to appoint to the non-trading topco (unless appointment to all group companies is required because of issues with management– although that can be done at the time if the need arises). As most transactions are by the trading company, a Nominee who is only on the group board is unlikely to be exercising judgement on day to day trading decisions. This limits the potential to find themselves in a conflict of interest.
Duty to promote the success of the company for the benefit of all members
This is a core duty specified in the Companies Act 2006. As set out above, there is debate as to whether this duty can ever be modified or relaxed. The difficulty is that, while the Companies Act provides a mechanism that allows a company's articles to permit a director to act, despite a conflict of interest, there is currently no case law that specifically deals with the question of whether that relaxes the specific statutory duty to promote the success of the company. Indeed, the current case law (albeit not binding) suggests not.
Until there is a clear case addressing this specific point, we suggest that a Nominee should exercise caution around it (and work on the basis it cannot be released). If they do decide to derivate from this duty then they should be aware of the potential risks it exposes them to personally and do all they can to mitigate them. Unless this duty is clearly waived by the unanimous written agreement of all members, they should assume that they must act in the way that will promote the success of the company for the benefit of members as a whole. As always, we would advise that specialist guidance is sought.
Duty not to accept 3rd party benefits
A director must not accept a benefit from a 3rd party made by reason of them being a director and / or doing (or not doing) something as a director. They are permitted to accept benefits where either:
- the director's services are provided to the company by that 3rd party
- the acceptance cannot reasonably be regarded as giving rise to a conflict of interest.
Our suggestion is that, if a nominee director is to be paid for their services by their appointor, then there is a clear service agreement in place between the appointor and the company under which the appointor provides the director's services, and that the agreement is negotiated and implemented before the nominee director takes office.
For more information, please contact Frank Bouette or you can give us a call 0345 070 6000.