For the majority of companies in the UK, the directors are also the majority shareholders. However, for UK subsidiaries of overseas companies, often the board of directors will include permanent UK based directors and employees seconded to the UK subsidiary for a defined period.
For all such directors, we set out some key issues in this newsletter and in a series of newsletters to follow.
Simple question - who is a director?
A simple question but not always a simple answer. The Companies Act simply says that a director is “anyone occupying the position of director, by whatever name called”.
Clearly, anyone correctly appointed a director will be a director (known formally as a de jure director*). The law, however, also covers anyone who, although not properly appointed, nevertheless takes on the responsibilities of directorship (known formally as a de facto director**). To complicate things further, there is also the concept of shadow directorship - a shadow director is a person under whose directions or instructions the directors of a company are accustomed to act.
Does it make a difference?
Legally, all of the above will be treated as a director and will therefore be generally subject to the duties and obligations that apply to all directors (for more information on this please see a forthcoming newsletter).
Operationally, any company that wants the outside world to know who its directors are will want all its directors properly appointed as de jure directors.
So how do you appoint directors?
That will depend on the company’s articles of association. Generally speaking, the board of directors will have the right to appoint a director to fill a vacancy or to add additional directors to the board. The shareholders will also have the right to appoint a director (unless restricted by the articles).
The company should then file a notice of the appointment at Companies House.
What about executive and non-executive directors - what’s the difference?
The term executive director is generally used to refer to a de jure director who carries out executive functions in the company and is usually a full-time employee of the company.
The term non-executive director is used to refer to a de jure director who is not an employee of the company or holder of an executive office. Such a director would usually devote only part of their time to the affairs of the company.
Company law does not on its face distinguish between executive and non-executive directors as regards the duties they owe to the company. However, the steps that they will be expected to take to discharge the duty to exercise reasonable care, skill and diligence will vary because of their different roles on the board.
Is there anything different about a director who is appointed as a nominee of a shareholder?
To add to the different names of directors referred to above, the phrase “nominee director” is also often used. There is nothing wrong with a shareholder appointing a director as its nominee, and this is often done with joint venture companies. However, the key thing to remember is that even a nominee director must be left free by the appointing director to exercise his or her best judgment in the interests of the company and not the interests of the appointing shareholder. In joint venture companies, there will often be provisions in the joint venture agreement permitting the disclosure of information from a nominee director to the appointing shareholder to avoid placing the director in breach of general duties such as that of confidentiality.
For more information on the above, please do get in touch. We will also be issuing further newsletters covering topics such as directors’ duties and transactions with directors.
*In law and government, de jure describes practices that are legally recognized, regardless of whether the practice exists in reality.
**In law and government, de facto describes practices that exist in reality, even though they are not officially recognized by laws. It is commonly used to refer to what happens in practice, in contrast with de jure, which refers to things that happen according to law.