An Appraisal of the Duties of Directors of a Public Company in Nigeria
Chapter One
Objectives of study
The aim of this research is to analyse the responsibilities of the board of directors to promote the principles of corporate governance and recommendations in terms of the Company law Report and the Code. Such an analysis therefore requires research into the nature of corporate governance, the enforceability and efficacy of the Company law Report and the Code, the links between the Companies Act of 2008 and the extent to which the directors’ responsibilities under the Company law Report and the Code constitute legal duties.
CHAPTER TWO
LITERATURE REVIEW
Corporate Benefit and the Position under the English Law
At common law, transactions which were not apparently beneficial to the company were set aside as being void as against the company. In Piercy v S Mills & Co. the English Court held that a power to issue shares in a limited company given to directors for the purpose of enabling them to raise capital when required for the purpose of the company is a fiduciary power to be exercised by them bona fide ‘for the general advantage of the company.’ In the same vein, in Charterbridge Corporation Ltd. v Lloyds, the English Court considered the benefit of a guarantee given on behalf of a ‘parent company’ by a ‘subsidiary’. In that case, C. Ltd., a duly incorporated company was one of the large group companies headed by D. Ltd. The account of D. Ltd. with the defendant bank was overdrawn and the defendant bank pressed for security. C. Ltd guaranteed payment on demand of all money and liabilities owing or incurred by D. Ltd. to the bank and thereafter, C. Ltd deposited the title deeds of one of its property with the bank. Not long after this, C. Ltd. again entered into another agreement to sell the said property to the plaintiff company. The plaintiff company later took a writ seeking a declaration that the legal charge created in favour of the defendant bank was created for purposes outside the scope of C. Ltd’s business and purposes and was ultra vires and invalid. The Court, however, held that the directors, acting as intelligent and reasonable men, might reasonably have concluded that the transaction would have enured to the benefit of C. Ltd and that where, as here, a company is carrying out the purposes expressed in its memorandum, and did an act within the scope of a power expressed in it, that act was within the powers of the company.
Similarly, in Hogg v Cramphorn Ltd., the directors of the company held some issued shares and were approached by B, who offered to buy the entire issued share capital. The directors, allegedly acting in good faith and believing that the establishment of a trust and avoidance of the acquisition control by B would benefit the company, devised a scheme, the primary purpose of which was to ensure control of the company by the directors. By a deed, the company established a trust for the acquisition of shares in the company to be held by the trustees, the individual defendants, for the benefit of the company’s employees. A loan was also given to the trustees to pay for the issued shares. The Plaintiff, suing as a registered shareholder, asked the court to determine whether the trustees were given the loan to hold in trust for the company. It was held that the loan was not made out with the single-minded purpose of benefitting the company otherwise than by securing control for the directors and that the power to issue shares was a fiduciary power, and if exercised for an improper motive, the issue was liable to be set aside.
The principle of corporate benefit or what amounts to ‘the interests of the company’ was again considered in Hutton v West Cork Railway Co.,18 where the English Court of Appeal held that the paying of a gratuity to employees prior to their dismissal was an improper exercise of the powers of the company, because the company was no longer a going concern, and thus stood to obtain no benefit.
As a general rule in Nigeria, directors are expected to act primarily in the interest of the shareholders as a whole. The position in Nigeria is aptly captured by Pennington’s Company Law where the point is put succinctly as follows: “In exercising their powers, directors must act primarily in the interests of the shareholders of the company as a whole”. In the same vein, Gower and Davies, in their book, Principles of Modern Company Law, while noting the reformulation of the common law principle as it applies to the phrase ‘the best interests of the company’ gave a trajectory account of the recent position in Nigeria thus:
…the proper formulation of the director’s duty of loyalty was a matter of considerable controversy, both during the deliberations of the Company Law Review and during the passage of the 2006 Act through the Parliament. That controversy was all the more intense because this was an area of directors’ duties where it was not proposed that the statute should simply repeat the common law. The common law duty was typically formulated as one which required the directors to act in good faith in what they believed to be “the best interests of the company.” This is clearly a significantly different formulation from that which is to be found in section 172(1) of the Act. This section requires the director to act “in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
Furthermore, Gower and Davies, while decrying the ambiguity with the use of the phrase “in the interests of the company”, opined as follows:
…a requirement, as in the common law, that directors must act in the interests of “the company” comes close to being meaningless. This is because the company is an artificial legal person and it is impossible to assign interests to it unless one goes further and identifies with the company the interests of one or more groups of human persons…
To say, without more, that directors must exercise their powers in the interests of the company is thus to give very imprecise guidance to those directors about what the law requires, unless it is further specified which group or groups of persons are to be identified as ‘the company’. [Emphasis added]
In the case of Brady v Brady, however, Nourse L. J. asserted that “[t]he interests of a company, as an artificial person, cannot be distinguished from the interests of the persons who are interested in it”. On the contrary, the Law Society has expressed the view that “the concept of the company as a legal entity separate from its members, and in whose interests the directors must act, is well understood”.
At this juncture, it is quite apposite to note that the current position of the law in Nigeria is that the directors are under a duty to act in the way they consider, in good faith, would most likely promote the success of the company for the benefit of its members as a whole. In other words, the current test for determining whether a director of a duly registered (public) UK company is acting ‘in the best interests of the company’ is whether the director ‘personally,’ using the subjective test, believes he or she is acting in the best interest of the members of the company as a whole. Driving this point home, Gower and Davies submitted succinctly as follows:
Hence, the current formulation that the director must act “in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”. The persons who are to benefit from the directors’ efforts to promote the success of the company are clearly identified as the company’s members, i.e., normally its shareholders. This is the central duty imposed by the section.
It should, however, be noted that the subjective test used with respect to the fiduciary duty of a director cannot be extended to the duty of care imposed on a director where the English law seems to have ‘moved away from the subjective duty of care’ established by Romer J. in Re City Equitable Fire Insurance Co. to an objective standard. The legal position on directors’ duty of care will be considered in greater detail under another heading in this article.
CHAPTER THREE
DUTY TO AVOID CONFLICT OF INTERESTS
In addition to a director’s fiduciary duty to ‘act in good faith, in the best of interests of the company’, another important fiduciary duty of a director of a (public) company is the duty to avoid conflict of interests. The law requires that directors must not place themselves in a position where their personal interests conflict with the duties they owe to the company of which they are directors. Section 280 CAMA expressly precludes a director of a (public) company from allowing his or her personal interest to conflict with any of his or her duties as a director under the law. It would appear that the duty of a director to avoid conflict of interests’ situations was inspired by the English case of Aberdeen Railway Co v Blaikie Brothers, where Lord Cranworth opined as follows:
…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.
As aptly noted by Stephen Bainbridge, ‘[c]onflicted interest transactions take two forms. In a direct transaction, the director is dealing directly with the firm, such as where a director sells property to the firm. In an indirect transaction, a person or entity in which the director has an interest is dealing with the firm’. The present authors equally align with Bainbridge when he opined that both forms of conflicts of interest captured above ‘potentially create a conflict of… interest transactions’.
On another note, it is apt to mention and as further noted by Bainbridge, that the early common law principle which made a ‘conflicted interest transaction voidable without regards to fairness or board or shareholder approval, no longer exists. The foregoing notwithstanding, the present authors are minded to agree with some scholars who have asserted that conflicts of interest situations are not necessarily ‘inherently fatal to a transaction’ but that it is the failure of the affected directors to disclose and manage such conflicts that give cause for legal concerns.
CHAPTER FOUR
DUTY OF CARE OF A DIRECTOR
The directors’ duty of care emanates from common law rules which require corporate directors to exercise that amount of reasonable skill, care and diligence which ordinarily careful and prudent men would use in similar circumstances. In meeting the duty of care standard, a director is expected to exercise due diligence in making decisions and must be able to show that, in reaching a decision, he has considered all ‘reasonable’ alternatives. It is quite instructive to note that it is this common law duty that has now been codified in section 282 CAMA which expects every director of a company to ‘exercise the powers and discharge the duties of his office honestly, in good faith and in the best interests of the company’, and also exercise the degree of care, diligence and skill which a ‘reasonably’ prudent director would ordinarily exercise in comparable circumstances’.
CHAPTER FIVE
CONCLUSION
REMEDIES FOR BREACH
It is trite law that where there is a right (wrong) in law, there must be a remedy. The learned silk, Yusuf Ali, SAN, capturing the remedies that can be resorted to where a director is in breach of his statutory duty, listed the following: injunctions or declarations; damages or compensation; revision of contract in which the director is interested; and accounting for profit.
CONCLUSION
From the ‘sudden bankruptcy of Enron in 2001’ to WorldCom and Tyco joining ‘the ranks of infamy’ as well as ‘the collapse of Lehman Bros.’, adherence to sound corporate governance principles plays cannot be overemphasized. Gone are the days when public companies and even non-companies alike could afford to ‘keep doing business the same old way’ without any form of ‘corporate ethics’ to guide corporate dealings. Such public companies definitely need not be told that it is in always in the best interest of public companies to ensure that directors not only discharge their duties as required under the law but also in accordance with sound principles of corporate governance. Consequently, whilst it is noted that the SEC Governance Code is not intended as a rigid set of rules but expected to be viewed and understood as a guide to facilitate sound corporate practices, it is pertinent to note, as rightly stated by the very respected learned Professor of Law and Senior Advocate of Nigeria, Prof. Konyinsola Ajayi SAN that: “[a] genuine embrace of Corporate Governance will bring about a positive multiplier effect on the corporate success and wellbeing of a corporation”.
The reason for the legal and regulatory requirements was because of the global financial crisis, high profile corporate collapses and the previous corporate law regime was considered outdated and in need of modernisation. This has led to the DTI policy paper which articulated three interrelated impetuses that collectively form the need for the overhaul of the law of corporate governance in Nigeria. It is submitted that the DTI have accomplished what it has set out to do.
In addition, a new innovation of the Act is the incorporation corporate governance issues. Company law sets the framework in which the company operates and the recommended practices set out in the Company law provides guidance for directors as to how they should direct the business of the company and make decisions on behalf of the company. It is submitted that the Act and Company law complement each other.
The Companies Act 71 of 2008 contains provisions which allow certain bodies established under the law to make regulations. Furthermore, securities exchange regulations such as the JSE listing requirements determine the requirements that companies must fulfil in order to have their shares listed on the stock exchange. Listed companies in Nigeria, have to comply with many legal and regulatory requirements.
It is submitted that the link between governance principles and the law is stated in Company law and these duties of the board of directors under Company law constitute legal duties.
The fact that Company law operate on an ‘apply or explain’ basis and in the ‘apply or explain’ approach, the board of directors, in its collective decision making, could conclude that to follow a recommendation would not, in the particular circumstances, be in the best interests of the company. The board could decide to apply the recommendation differently or apply another practice and still achieve the objective of the overarching corporate governance principles of fairness, accountability, responsibility and transparency. Explaining how the principles and recommendations were applied, or if not applied, the reasons, results in compliance.
It is therefore submitted that these principles does not suit or apply or fulfil a specific company’s need, it could be amended or left out. The one size fits all approach is heavily criticised.
Furthermore, the global financial crisis has raised many corporate governance issues and this has led to many reviews and changes to the corporate governance system in Nigeria. The Corporate governance Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the Code. They must either confirm that they have complied with the Code’s provisions or they must provide an explanation for non-compliance.
References
- Howard v Herrigel NO 1991 (2) SA 660 (A).
- Hulse-Reutter v Godde 2001 (4) SA 1336 (SCA).
- Minister of Water Affairs and Forestry v Stilfontein Gold Mining Co Ltd & Others (2006) (5) SA 333 (W).
- Phillips v Fieldstone Africa (Pty) Ltd 2004 (3) SA 465 (SCA).
- Re Smith & Fawcett Ltd [1942] Ch 304.
- Robinson v Randfontein Estates Gold Mining Company Ltd 1921 AD 168.
- S v De Jager & Another 1965 (2) SA 616 (A).
- Nigerian Broadcasting Corporation Ltd v Mpofu [2009] 4 ALL SA 169 (GSJ).
- Australian Corporations Act 2001. (Australia)
- Basic Conditions of Employment Act 75 of 1997. (Nigeria)
- Broad-Based Black Economic Empowerment Act 53 of 2003. (Nigeria)
- Broadcasting Act 4 of 1999. (Nigeria)
- Companies Act 2006. (United Kingdom)
