Are you considering becoming a director of a joint venture? Do you know what duties directors are bound by in these positions?
Joint ventures may take on any one of a variety of different legal structures – here we assume that a private limited company has been adopted as the preferred structure and we consider the duties owed by these directors.
Different types of directors
An important point of consideration is the nature of the individual’s directorship.
A distinction is often made between executive directors, for whom the directorship is a part or full-time role and who have significant responsibility in relation to the day-to-day running of the business, and non-executive directors who are not responsible for the routine management of the business and take on a more advisory role in support of the executive directors.
It is important to keep in mind that although their level of involvement in the business may be less, that non-executive directors owe the same duties to their company as executive directors. If a shareholder has appointed a director to the joint venture, then their obligations are not reduced simply by virtue of the non-executive nature of their appointment. They will still be subject to the same directors’ duties discussed below.
In a similar vein, parties who have not been appointed as directors could still find themselves subject to the directors’ duties regime as so-called shadow directors. A shadow director is a person or legal entity who acts in the capacity of a director without being formally appointed to the board. Shadow directors are recognised due to the influence and control they have over a company and were codified in Section 251 of the Companies Act 2006.
Accidentally taking on a shadow directorship is a particular concern for joint ventures. Members of the joint venture should take care that any influence exerted over the decision-making of the entity does not cross the threshold into shadow directorship, as this could open the shareholder up to liability in exercising director’s duties.
The directors' duties
So, what are the directors' duties? Directors' duties stem from the fiduciary duty the director owes to their company. Historically these duties were developed through common law in the UK, however, Sections 171 to 177 of the Companies Act 2006 codified seven core duties owed by directors to their companies:
Section 171 – duty to act within powers.
Section 172 – duty to promote the success of the company.
Section 173 – duty to exercise independent judgement.
Section 174 – duty to exercise reasonable care, skill, and diligence.
Section 175 – duty to avoid conflicts of interest.
Section 176 – duty to not accept benefits from third parties.
Section 177 – duty to declare interest in a proposed transaction or arrangement.
These statutory duties form the crux of a director’s obligations towards their company. It should however be noted that the fundamental fiduciary duty of a director to act in the utmost good faith can result in other uncodified directors duties arising, such as a duty of confidentiality with commercially sensitive information and, in certain circumstances, fiduciary duties to interested third parties, e.g. creditors.
Specific considerations
It is common practice for a director to be appointed to the board of a joint venture company by one of the parties undertaking the joint venture, but special care must be taken by such directors to ensure that they do not fall foul of such duties. Below we will consider some of the common pitfalls joint venture directors face in exercising their duties.
Section 172 requires directors to promote the success of the company for all members. This means that in an instance where the interests of the appointor and the interests of the company do not align, it is the director’s duty to act in the company’s best interests for all of its members rather than the appointor.
Section 173 requires directors to exercise independent judgement. Generally, a shareholder and their appointed director cannot agree that the director will vote on matters in a way prescribed by the appointing shareholder. This applies even if voting in such a way would not breach any director duty.
Section 175 requires directors to avoid situations where they have a direct or indirect conflict of interest. This can create issues in a joint venture where a shareholder has chosen to appoint a specific director who also has a role with that shareholder (such as an employee, officer, or consultant of the appointing shareholder). However, Section 175(4)(b) of the Companies Act 2006 provides that this duty is not infringed if the matter has been authorised by the directors. It is common for joint ventures to approve such conflicts on the appointment of any director to the joint venture or, alternatively, in accordance with Section 180(4)(b), to pre-approve such conflicts of interest in the company’s articles.
Section 177 requires that, if a director does have an interest (direct or indirect) in a proposed transaction or arrangement, then they must declare this to the other directors before the company enters the transaction or arrangement.
Additional considerations
Duty of confidentiality
Although not codified in statute, a common law duty of confidentiality arises from the fiduciary relationship between the director and their company.
In the context of a joint venture, this duty generally prevents a director from disclosing confidential information about a company to the shareholder appointing them to the board, without the authority of the company to do so. It would therefore be usual to see provisions in the joint venture agreement and constitution of the joint venture company authorising the disclosure of certain confidential information to a director’s appointer.
Duties to creditors
Given that joint ventures are often undertaken for sole projects and tend to live budget-to-budget, directors need to remain mindful of their duties when the company faces financial stress or distress.
At the point that a company becomes insolvent (on either a balance sheet or cash flow basis), is on the verge of on insolvency, or is likely to become insolvent, the directors’ duties will shift from acting in the best interests of the shareholders to owing a duty to ensure that the interests of the company's creditors are protected and, as such, acting in the best interests of the creditors. Should directors breach their duties in this regard, they risk incurring personal liability and/or disqualification from acting as a director.
Thinking of entering into a joint venture?
As above, there are many elements for directors to carefully consider both before being appointed and during any appointment to a joint venture company.
If you require further information on this or another related matter, please get in touch with our Corporate Finance team.
This article was co-authored by Trainee Jack Mitchell.