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The duties that company directors have to adhere to are in the process of being changed,

28th June 2007, Page 42
28th June 2007
Page 42
Page 42, 28th June 2007 — The duties that company directors have to adhere to are in the process of being changed,
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Which of the following most accurately describes the problem?

report Christopher Sykes and Peijun Xia.

1. Duty to act within their powers Directors should exercise their powers for a proper purpose.These normally come from the company's constitution. The scope of the powers may be affected by the terms of their service contract and other contractual terms such as those in a shareholders' agreement.

2. Duty to promote the success of the company The Companies Act 2006 imposes a duty to act in the way directors consider, in good faith, is most likely to promote the success of the company. They must bear in mind factors including the long-term consequence of a decision; the interests of employees; the relationships with suppliers and customers; the impact of a decision on community and environment: the need to maintain a reputation for high standards of business conduct: and the need to act fairly between members of the company.

3. Duty to exercise independent judgement Directors must exercise judgement — and exercise that judgement independently.

4. Duty to exercise reasonable care, skill and diligence The more experienced and knowledgeable a director is, the more the law expects of him. 5. Duty to avoid conflicts of interest This applies to a transaction between directors and third parties. The act makes it easier for directors to enter into transactions with third parties when directors' interests conflict with the company's interests. Such transactions can be authorised by the non-conflicting directors.

6. Duty not to accept benefits from third parties This restates the existing 'non-profit' rule in that directors are not permitted to accept a benefit from a third party by reason of (a) their being a director or (h) their doing or not doing anything as a director. Benefits cover monetary and non-monetary items including, for example, non executive directorship and corporate entertainment. Directors will not be in breach if such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

7. Duty to declare an interest in a proposed transaction or arrangement with the company This requires directors to disclose their interest to the board when a transaction is proposed between directors and their company. It further requires directors to declare the nature and extent of the interest to other directors. The disclosure must be made where directors "ought reasonably to be aware of" the conflicting interest. Disclosure also extends to a person connected with the directors, for example their partners and children.

In the long term, it is believed the changes will benefit companies, but some argue that in the short term they may create confusion and uncertainty in some areas. This could result in more claims being brought against directors in the short term as dissatisfied (minority) shareholders bring "derivative actions" test cases. A derivative right is the right of a member of a company to bring a claim on behalf of it against a director for breach of duty or negligence.

Directors should seek advice if they are unsure about their position,Without changes, directors cannot minimise the risks of claims and other potential legal challenges or take advantage of the benefits introduced by the act.

• ChristopherSykes is a senior partner, Pei un ha a commercial solicitor at Sykes Anderson LLE E-mail: chris.sykes@sykesanderson.com; peijun.xia@sykesanderson.cont


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