Definition of Director

One who, or that which, directs; one who regulates, guides, or orders manager or superintendent. One of a body of persons appointed to manage the affairs of a company or corporation; as, the directors of a bank, insurance company, or railroad company. A part of a machine or instrument which directs its motion or action. A slender grooved instrument upon which a knife is made to slide when it is wished to limit the extent of motion of the latter, or prevent its injuring the parts beneath.

Duties and responsibilities of Directors

Directors' duties are a series of statutory, common law and equitable Obligations owed primarily by members of the directors to the corporation that Employs them. It is a central part of corporate law and corporate governance. Directors' duties are analogous to duties owed by trustees to beneficiaries, and by agents to principals. Directors owe duties to the corporation, and not to individual shareholders, employees or creditors outside exceptional circumstances Directors' core duty is to remain loyal to the company, and avoid conflicts of

Interest Directors are expected to display a high standard of care, skill or diligence Directors are expected to act in good faith to promote the success of the corporation

Acting within powers

S.171 CA 2006 Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but to defeat a potential takeover bid, that would be an improper purpose. However, in many jurisdictions the members of the company are permitted to ratify transactions that would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution. Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper. The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision of Howard Smith Ltd v. Ampol Ltd.The case concerned the power of the directors to issue new shares. It was alleged that the directors had issued a large number of new shares purely to deprive a particular shareholder of his voting majority. The court rejected

an argument that the power to issue shares could only be properly exercised to raise new capital as too narrow, and held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company, or as part of an agreement to exploit mineral rights owned by the company. If so, an incidental result (even desirable) that a shareholder lost his majority, or a takeover bid was defeated would not itself make the share issue improper. But if the sole purpose was to destroy a voting majority or block a takeover bid, that would be an improper purpose.

Promoting company success

S.172 CA 2006, "to promote the success of the company for the benefit of its members as a whole". It sets out six factors to which a director must have regards in fulfilling the duty to promote success. These are: The likely consequences of any decision in the long term The interests of the companys employees The need to foster the companys business relationships with suppliers, customers and others The impact of the companys operations on the community and the environment The desirability of the company maintaining a reputation for high standards of business conduct,

and the need to act fairly as between members of a company. This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the Companies Act 1985, protections for nonmember stakeholders were considerably more limited (see e.g., s.309, which permitted directors to take into account the interests of employees but that could be enforced only by the shareholders, and not by the employees themselves. The changes have therefore been the subject of some criticism. Directors must act honestly and in bona fide. The test is a subjective onethe directors must act in "good faith in what they considernot what the court may consideris in the interests of the company..." per Lord Greene MR. However, the directors may still be held to have failed in this duty where they fail to direct their minds to the question of whether in fact a transaction was in the best interests of the company. Difficult questions arise when treating the company too abstractly. For example, it may benefit a corporate group as a whole for a company to guarantee the debts of a "sister" company, even if there is no "benefit" to the company giving the guarantee. Similarly, conceptually at least, there is no benefit to a company in returning profits to shareholders by way of dividend. However, the more pragmatic approach illustrated in the Australian case of Mills v. Mills (1938) 60 CLR 150 normally prevails: "[directors are] not required by the law to live in an unreal region of detached altruism and to act in the vague mood of ideal abstraction from obvious facts which must be present to the mind of any honest and intelligent man when he exercises his powers as a director."

Independent judgment
S.173 CA 2006

Directors cannot, without the consent of the company, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings. This is so even if there is no improper motive or purpose, and no personal advantage to the director. This does not mean, however, that the board cannot agree to the company entering into a contract that binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the contract that the board previously approved).

Care and skill

Traditionally, the level of care and skill a director must demonstrate has been framed largely with reference to the non-executive director. In Re City Equitable Fire Insurance Co [1925] Ch 407, it was expressed in purely subjective terms, where the court held that: "a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience." However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected

and put up with an incompetent decision maker, they should not have recourse to complain.

Loyalty and conflicts of interest

Directors also owe strict duties not to permit any conflict of interest or conflict with their duty to act in the best interests of the company. This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461 Lord Cranworth stated in his judgment that, "A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which possibly may conflict, with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..."

S.175 CA 2006 Keech v. Sandford (1726) Sel Cas. Ch.61 Regal (Hastings) Ltd v Gulliver [1942] All ER 378 Cook v Deeks [1916] 1 AC 554

Duty of care and diligence

Directors have a duty to exercise their powers with the degree of care and diligence the public would expect of a reasonable person in a similar position in a similar company to take. In this respect, when a director makes a business decision, they are seen to have discharged their duty of care and diligence if: The decision is made in good faith and for a proper purpose They do not have a significant personal interest in the decision They have informed themselves about the subject matter of the decision They believe that the decision is in the best interests of the company. Improper use of information A person who obtains information because they are, or have been, a director, officer or employee of a company is prohibited from improperly using that information to gain an advantage for themselves or someone else, or to cause detriment to the company. Duty to prevent insolvent trading

Directors have a duty to prevent a company incurring a debt while it is insolvent. Duty to act in good faith Directors have a duty to exercise their powers and discharge their duties in good faith in the best interests of the company. Improper use of position A director, secretary, officer or employee of a company cannot improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company. Conflict of interest Directors have a duty to avoid situations in which there is a real possibility of conflict between their personal interests and the company's interests.

Definition of Members
Shareholder (stockholder) of a firm. In corporate legislation, a member is generally defined as (1) the subscriber to a firm's memorandum of association (or articles of incorporation) who is deemed to have agreed to become a member of the firm, and whose name is entered in the firm's register of members when the firm is registered (or incorporated). (2) Every other person who agrees to become a member of the firm and whose name is entered in the firm's register of members. Shareholders who join a firm at its inception are called founder members.

Duties And responsibilities of Members

Members of a limited liability company (LLC) have duties and rights that are in Many ways comparable to those of a partner in a partnership. The operating Agreement of the LLC can impose further obligations upon the members.

Fiduciary Duties
If a member of an LLC is also a manager of the LLC, then that member is in a position of trust. To protect other owners of the LLC, these members owe the LLC the duty of loyalty and the duties of care. The duty of loyalty prevents a member from competing with the LLC in another business. A member must refrain from dealing with a person or business with interests adverse to those of the LLC and must account for any benefits received from use of LLC property or from the winding up of LLC affairs. The duty of care requires a member to refrain from grossly negligent, reckless, or intentional misconduct. The duties of loyalty and care are similar in partnership law. Managers of an LLC who are not owners are held to the same standard. However, a member who is not a manager of an LLC is not bound by the same duties, since such a manager is not involved in the day-to-day activities of the company.

Indemnity and Contribution Rights

The Uniform Limited Liability Company Act (UCCLA) provides that a member must be reimbursed for payments made on behalf of the LLC and indemnified for liabilities incurred by the member during the ordinary course of the LLCs business. These rights are similar to those provided to partners in a general partnership. However, most state statutes do not address indemnity rights. Similarly, the ULLCA provides that members are required to make contributions according to the agreement of the owners of the company, which is similar to rights provided in partnership laws. An operating agreement will often set forth such indemnity and contribution rights The default rules regarding distributions to members differ among the states. Some states provide that members receive a share of distributions in the same proportion as their contributions to the LLC (pro rata distribution). Other states, including those that have adopted the ULLCA, provide for equal distribution among the members (per capita distribution). These provisions can be altered in the operating agreement.

Transferring Interests
A member may transfer his or her financial rights to profits and losses, and the right to receive distributions, in all states. However, a member cannot transfer full ownership interests, such as those related to the right to manage the company, without unanimous agreement of all of the other members. Rights related to transferability of interests can be modified in the operating agreement.