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Company Law

Analysis - guidance - compliance

15 APR 2014

Board minutes: recording directors' compliance with their duties

Board minutes: recording directors' compliance with their duties

One of the functions of board minutes is to protect directors against any subsequent allegations that they failed to comply with their duties under the Companies Act 2006.

The introduction of the success duty in section 172 gave rise to a considerable amount of debate amongst corporate lawyers in this connection, for there were different views as to whether, and if so how, to record the fact that the directors had taken into account the six mandatory factors, but the codification of the other duties did not attract the same level of interest as far as the question of recording compliance was concerned.

A recent case - Eclairs Group Ltd v JKX Oil & Gas plc [2013] EWHC 2631 (Ch) - has highlighted the importance of ensuring that minutes refer not only to the success duty, but also to any of the other statutory duties which may subsequently form the basis of attacks on the directors' conduct.

The conventional approach to recording compliance

Most board minutes will deal with the directors' duties to promote the success of the company (section 172) and declare interests in proposed transactions with the company (section 177).

  • Section 172

A resolution to undertake an action of any significance will normally either incorporate an explicit reference to section 172, or be phrased so as to reflect the wording of the statutory duty, and this will be reflected in the board minutes. Thus, where the board is taking a decision to commit the company to the disposal of one of its businesses, for example, the minute of the decision may read as follows:

"Having carefully considered the proposal to sell the Company's retail business to Buyer, the directors resolved, in accordance with section 172 of the Companies Act 2006, that the sale would promote the success of the Company for the benefit of its members as a whole."

The resolution may be supplemented by additional wording referring to some or all of the factors to which, under section 172(1), the directors are obliged to have regard, as well as to any other factors which might be relevant.

  • Section 177

If any of the directors have an interest in the proposed transaction which is under consideration, they are obliged to declare that interest to the other directors, and the minutes will duly reflect that declaration. Wording along the following lines is typical:

"Mr Smith declared, in accordance with section 177 of the Companies Act 2006, that he was interested in the proposed sale of the Company's retail business to Buyer by virtue of the fact that he owned 5% of the issued ordinary shares of Buyer."

The minutes will also normally go on to record any consequences which flow from the declaration. In the above scenario, they might note, for example, that, in accordance with a provision of the company's articles, Mr Smith did not count in the quorum and was not permitted to vote on the resolution to proceed with the sale.

The minutes may also, by their nature, afford the directors protection against allegations that they breached their other duties. For example, simply by noting that Mr Smith's vote did not count, the minutes would be recording the fact that the directors were acting (at least in that respect) in accordance with the company's constitution pursuant to section 171(a). Similarly, a record of the board's discussion of the advantages and disadvantages of the proposed sale would assist the directors should they ever need to demonstrate that they were acting with reasonable care pursuant to section 174. In many cases, however, the minutes will not contain any direct reference to any of the duties other than those in sections 172 and 177.

Eclairs Group Ltd v JKX Oil & Gas plc [2013] EWHC 2631 (Ch)

One of the questions with which the High Court was faced in Eclairs Group Ltd v JKX Oil & Gas plc was whether directors of a listed company had exercised a power under its articles for an improper purpose. A particular point of interest, as far as the topic under consideration in this article is concerned, was that the court received no assistance in determining the purpose for which the directors had exercised the power from the company's board minutes.

The relevant facts of the case were as follows.

  • JKX Oil & Gas plc was a London-listed company which, as its name suggests, operated in the oil and gas sector.

  • Its shareholders included Hanover Nominees Ltd (which held a 27.55% stake) and Lynchwood Nominees Ltd (which held an 11.45% stake).

  • The Hanover shares were beneficially owned by Eclairs Group Ltd, which in turn was, in effect, owned by a Mr Kolomoisky and his associate, a Mr Bogolyubov. The Lynchwood shares were beneficially owned by Glengary Overseas Ltd, which in turn was largely owned by a Mr Zhukov.

  • Mr Kolomoisky was described by the judge, Mann J, as having the reputation of being a "corporate raider" (that is, a shareholder who uses his minority stake - possibly in a disruptive way, for example by obstructing the company's attempts to raise funds - with a view to acquiring control of the company at a discount).

  • In March 2013, Eclairs sought to use section 303 of the Companies Act 2006 (shareholders' power to require directors to call a general meeting) to place before the JKX Oil & Gas plc shareholders resolutions to remove the company's CEO and commercial director and appoint three new directors to the board. The section 303 notice was rejected as being invalid.

  • Amidst concerns that Eclairs might be working with other shareholders to try to gain control of the company, the company issued section 793 notices (notices requiring information about interests in the company's shares) to various parties, including Eclairs.

  • In April 2013, the company gave notice of its AGM, at which the resolutions to be considered would include resolutions to re-elect three of the directors (including the CEO), an ordinary resolution authorising the directors to allot shares, a special resolution disapplying the statutory pre-emption right and a special resolution authorising a share buyback.

  • On 13 May 2013, the company issued a second set of section 793 notices to Eclairs and others, asking amongst other things for information as to any agreements entered into by the recipient concerning the exercise of voting rights in the company.

  • On 23 May 2013, Eclairs published an open letter to JKX Oil & Gas plc shareholders in which it urged them to vote against the re-election of the CEO, the authority to allot, the disapplication of the pre-emption right and the authority to undertake a share buyback. The letter stated that Glengary, too, had concerns about the company's management.

  • On 30 May 2013, the board of JKX Oil & Gas plc held a meeting at which it considered the responses to the section 793 notices, which were to the effect that there were no agreements between Eclairs, Glengary or the individuals behind those two companies. The board concluded that it had cause to believe that the responses were incorrect and exercised a power under the company's articles to issue "restriction notices", which prevented the shareholders (ie Hanover and Lynchwood) from voting at any general meeting of the company. The board minutes recorded the fact that the directors felt that the issue of the restriction notices would promote the company's success, but were, it seems, silent as to the purpose for which the restriction notices were being issued.

  • Eclairs and Glengary challenged the validity of the restriction notices, and obtained a court order allowing them to vote their shares at the AGM pending a trial to determine whether the votes would count.

  • One of the grounds upon which they challenged the restriction notices was that, in issuing them, the directors had acted for an improper purpose. Their submission was to the effect that whereas the purpose for which the power to issue the restriction notes was conferred was to acquire information, in this instance a substantial and improper purpose for which it had been exercised was to affect voting control within the company and ensure that the resolutions at the AGM were passed. The company, on the other hand, submitted that the power had been exercised for the purposes of acquiring information and protecting the company pending proper disclosure of that information, and that these were both legitimate purposes.

Mann J's first task in dealing with this challenge to the restriction notices was to ascertain, as a matter of fact, the purpose or purposes for which the power to issue them had been exercised. In this connection, he noted as follows:

"The formal minutes of the board meeting ... do not advert to the desirability of getting the missing information, or to the protection of the company pending that information being forthcoming, or anything like that. They refer in general terms to the [sic] promoting the success of the company and to directors' duties. This does not help Mr Swainston's [counsel for JKX Oil & Gas plc's] analysis." (paragraph 188)

Since the directors' witness statements, too, were largely silent on their reasons for issuing the restriction notices, the judge was left to reach his decision on this point chiefly on the basis of the directors' evidence during cross-examination. In the event, he concluded that a substantial purpose for which the majority of the directors had voted in favour of the restriction notices was to protect the company (as they saw it) by disenfranchising Eclairs and Glengary, and went on to hold that this was an improper purpose.

Can we learn any lessons from the case?

At the time of writing, an appeal against Mann J's decision is pending, so it remains to be seen to what extent the Court of Appeal agrees with his observations on the substance of section 171(b) (and, indeed, with the other aspects of his decision). For the purposes of this article, however, the most important feature of the case is the fact that the board minutes apparently did not expressly address the question of the directors' compliance with section 171(b), and the lesson to be drawn on this point is that the protective function of board minutes as far as directors' duties are concerned is not confined to recording compliance with sections 172 and 177.

Specifically:

  • where draft minutes are prepared in advance, so that they act as an agenda for the meeting, those charged with drafting them should consider whether any duties in addition to those set out in sections 172 and 177 might be relevant

For example, if the directors are planning to undertake a contentious transaction, might a disgruntled shareholder subsequently allege that in approving the transaction they were exercising their power to do so for an improper purpose, contrary to section 171(b)? Or if the directors have been offered a gift by a potential supplier, might the shareholders subsequently allege that the gift went beyond acceptable corporate hospitality, and constituted a breach of the duty under section 176 not to accept benefits from third parties?

If it is anticipated that any such issues might arise, the inclusion of appropriate compliance wording in the minutes will serve as a reminder to the directors of their obligation to comply with the duties in question. A notable feature of Eclairs Group Ltd v JKX Oil & Gas plc was that the directors did not seem to have given the matter of compliance with section 171(b) adequate consideration; not only were the board minutes apparently silent on the point, but Mann J expressed his surprise at the fact that, for the most part, even the directors' witness statements did not address section 171(b).

  • whether or not draft minutes are prepared in advance of the meeting, the final version of the minutes should, where appropriate, record fully any discussions concerning the directors' duties

Taking, again, the example of section 171(b), if the directors have, indeed, given the duty their full consideration, the minutes should record both their assessment of the purpose for which the power in question was conferred upon them (a point on which they may well wish to take legal advice) and the fact that they were exercising the power for that purpose.

Conclusion

Clearly, board minutes should tell the story of what happened at the meeting, but it is not always easy to decide what to include and what to leave out. As far as directors' duties are concerned, the point to bear in mind is that the minutes seek to offer the directors protection against subsequent allegations of breach, and if this function is kept in mind it will be obvious that the minutes should record compliance with all relevant duties - and not just those in sections 172 and 177 - as comprehensively as possible.

Of course, a sense of perspective needs to be maintained. Thus, whilst everything the board does involves the exercise of a power, it would be inappropriate for the minutes to record compliance with section 171(b) in relation to all - or even most - decisions.

Where, however, a decision is potentially controversial, the inclusion of suitably detailed compliance wording in relation to all of the relevant duties will afford the directors a degree of protection in the event of a future challenge to their conduct.

Board minutes are not merely dry, legal documents. They matter in the real world, and directors who appreciate their importance will want to ensure that they are prepared with due care and attention.

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