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Directors' rights.

[check] This checklist provides a quick and easy guide to the main employment entitlements, rights and protections afforded to company directors through a number of disparate sources. They apply equally to non-executive directors.

A director may or may not be an employee of the company: it depends on individual circumstances. Employee status affects national insurance, pension rights and many other matters. An executive director is usually an employee and a non-executive director is usually not an employee.

Legislation changes and this may affect the explanations given below. If there is any doubt, seek professional advice.

Definition

This Checklist outlines the employment rights and protections afforded to company directors by current legislation, by common law, and by custom and practice. Members are the people who are entitled to vote at general meetings and ultimately control the company. They may be shareholders, but "members" is the correct term. Not all companies have share capital and shareholders.

(NB. The masculine form is used throughout to refer to both men and women.)

The sources of directors' rights

Directors' rights come from several sources and are not codified in a single place. They are therefore relatively difficult to check and explain. The following are the main sources:

* The Companies Act 1985 (as amended)

This is the principal Act relating to companies and company directors. Some of its provisions are absolute, and some apply unless they are overridden by individual company articles.

* Other statutory law

An example is the Health and Safety at Work Act.

* Company articles

All companies must adopt articles. Regulations issued in conjunction with the Companies Acts form model sets of articles, which individual companies may adopt, reject or amend. For a company limited by shares it is Table A, and for a company limited by guarantee it is Table C. The appropriate table is deemed to apply to the extent that it has not been excluded. Company articles are always very important and significantly affect the rights of directors. A wide range of possibilities may be encountered. Company articles cannot, of course, override statutory law.

* Common law

This is judge-made case law built up over a long period.

* Custom and practice

This ranks behind the above sources but may have some validity.

* The Combined Code

Issued in 1998 by the London Stock Exchange, the Combined Code comprises the Principles of Good Governance and Code of Best Practice. The Code is based on earlier recommendations of the Cadbury, Greenbury and Hampel reports on corporate governance and directors' remuneration.

The Code does not have the force of law but it has been adopted by the London Stock Exchange for listed companies. Some of its provisions relate to the rights of directors.

1. Remuneration

The fees of an executive director are usually included in his salary and paid with it. Non-executive directors will normally receive a fee rather than a salary.

Directors have no automatic right to receive fees for their services. This means that they will not receive fees unless the articles permit it and they have negotiated the right to receive fees with the company. Reg. 82 of Table A states:</p> <pre> 'The directors shall be entitled to such remuneration as the company may by ordinary resolution determine and, unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day.' </pre> <p>The procedure for setting directors' remuneration will be governed by the articles. Many systems may be encountered, but in most cases the remuneration is set by the directors themselves, acting collectively.

2. Service contracts and compensation for loss of office

If a director is an employee, he has basic employment rights conferred by law. A non-executive director who is not an employee does not have these. Many directors have service contracts though not all. A service contract should set out a director's rights and obligations and include provision for compensation for loss of office.

A service contact requiring a company to employ a director for more than five years will not be valid unless the prior approval of the members is obtained.

There has been much criticism of directors' service contracts that give lengthy security. The Combined Code calls for progress to a period of not more than a year, though this applies only to listed companies.

Compensation for loss of office will normally be payable according to the terms of the contract, if one exists.

Compensation will not normally be payable if the director is in breach of the terms of the contract. Examples of a breach may be fraud or unauthorised absence by the director.

3. Directors' expenses

Directors are normally entitled to claim reimbursement of all reasonable, legitimate expenses incurred on company business. This is subject to the articles which may impose conditions or limits. Reg. 83 of Table A states:</p> <pre> 'The directors may be paid all travelling, hotel, and other expenses properly incurred by them in connection with their attendance at meetings of directors or committees of directors or general meetings or separate meetings of the holders of any class of shares or of debentures of the company or otherwise in connection with the discharge of their duties.' </pre> <p>4. Indemnity out of company assets

It is normal for a director to be indemnified by the company for the consequences of actions taken in the exercise of his duties as a director of the company--provided that it is permitted by the articles (it is permitted by Table A).

It is not possible for a company to indemnify a director for any liability incurred for negligence, breach of trust or breach of duty committed by him against it. An attempt to do so by means of company articles or a service contract will fail.

5. Resignation as a director

Subject to any restrictions in the articles (there are no restrictions in Table A), a director may resign at any time. The resignation may be with immediate effect (from the time that it is communicated to the company) or from a specified future date. A director should not abandon a company in financial difficulties unless he believes that it is being left in capable hands.

6. Removal as a director

A director has the right to remain in office until he resigns or is properly removed. Whilst he remains a director he has the full rights of a director, even if this is not the wish of the other directors.

Unless the articles provide otherwise, a director may not be dismissed by the board, only by the members. This is the position under Table A, but articles do sometimes give dismissal powers to the directors acting as a whole.

Subject to the articles, a director must receive notice of a resolution to remove him at a members' meeting. His rights then are:</p> <pre>

Subject to the articles, he can attend and speak at the members'

meeting. He can make written representations to members. These must be sent to members by the company at company expense, and if there is not time to do this they must be read out at the meeting of members. There are restrictions relating to defamatory remarks, etc. </pre> <p>7. The right to hold a number of directorships

Subject to the articles, a director may hold any number of directorships. However, there is a minimum amount of attention that a director must give to each company and should not take on more directorships than he can manage. All directorships must be notified to each company, which must in turn report them to Companies House. A director must notify each company of any conflict of interest that may arise as a result of having more than one directorship.

8. The right to delegate powers

Subject to the articles, a director's powers may be delegated. However, a director still retains responsibility and has a duty of care. Some powers cannot be delegated.

9. The right to bind the company

Each director may (subject to the articles) bind the company by signing a contract within the scope of activities of a director of his type. A managing director may bind the company by signing any contract that is within the normal course of the company's business.

10. Access to company records

All directors have the right of access to a company's statutory registers, minutes and accounting records. They may inspect and copy all other documents relevant to their own area of responsibility and their statutory duties.

11. Rights concerning board meetings

Subject to the articles, all directors have equal rights to attend board meetings and all directors' votes have equal weight. All directors must be informed of a forthcoming board meeting; if this does not happen, proceedings at the meeting will probably be invalid. This will probably be the case even if all the other directors attend and reach a unanimous agreement. If Table A applies, a director need not be informed of a board meeting if he is not in the United Kingdom, but this provision must not be misused with the purpose of excluding a director.

12. Rights to call a board meeting

Board meetings are usually called by the chairman or in accordance with an agreed schedule or procedure. However, any director can insist that a board meeting be held in the reasonably convenient near future. The company secretary must call a board meeting if so instructed by any director.

13. Appointment of the chairman

Subject to the articles, the chairman of the board is appointed by the directors as a whole and he may be removed from that position (but not as a director) by the directors acting as a whole. This is the position if Table A applies.

14. Rights concerning the company secretary

Subject to the articles, the company secretary is appointed by the directors as a whole and may be removed by the directors as a whole. A director may be company secretary so long as he is not the sole director. All directors have the right of access to the company secretary who has a duty to all of them.

15. Members' meetings

The directors as a whole may call an annual general meeting or an extraordinary general meeting. There are circumstances in which they must do so.

All directors must be sent notices relating to forthcoming meetings of members.

All directors may attend and speak at meetings of members, even if they are not members. However, they may not vote unless they are members.

Subject to the articles, the chairman of the board will act as chairman of a members' meeting if he is present and willing to act. If this is not the case, the role will be filled by any director who is present and willing to act. Table A provides for this and also provides for the chairman to have a casting vote.

Useful reading

Company directors desktop guide, 2nd ed, David M Martin

London, Thorogood, 2004

Becoming a director : learn the basics and become an effective and successful

director, Victor

Hughes

Oxford, How to Books, 2004

The combined code on corporate governance

Financial Reporting Council

London, 2003

Corporate governance and chairmanship : a personal view, Adrian Cadbury

Oxford, Oxford University Press, 2002

The company directors guide : your duties responsibilities and liabilities,

Tony Renton and John Watkinson

Institute of Directors, London, Kogan Page, 2001

Boards at work : how directors view their roles and responsibilities, Philip

Stiles and Bernard Taylor

Oxford, Oxford University Press, 2001

Useful addresses

Companies House, Crown Way, Maindy, Cardiff , CF4 3UZ

Tel: 0870 333 3636 www.companieshouse.gov.uk

Companies House, 37 Castle Terrace, Edinburgh, EH1 2ED

Tel: 0870 333 3636 www.companieshouse.gov.uk
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Title Annotation:Checklist 186
Publication:Chartered Management Institute: Checklists: Small Business
Geographic Code:4EUUK
Date:Oct 1, 2005
Words:1942
Previous Article:Reading a profit and loss statement.
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