Tag Archives: commercial law

Director duties

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Responsibilities of Directors

In the UK there is only a legal requirement for individuals wishing to be a director to hold any qualifications in a few narrow professions, such as an investment company. In most industries, almost anyone can be a director; directors can even be other limited companies. The list of people who cannot become a director include:

  • Auditor of the Company;
  • People disqualified from such a position by the Court;
  • Undischarged bankrupts (Court’s permission is required).
  • And any individual under 16 years of age.

A director has a duty to the Company he is serving rather than the shareholders; these duties are enshrined in the Companies Act 2006. If a director is unsure of his responsibilities it is critical that they take legal advice to ensure they are not breaching any of their duties. A basic outline of their duties are to:

  • Promote the long term success of the Company;
  • Declare any direct or indirect personal interest in any transactions;
  • Avoid any conflicts of interests which may harm the Company;
  • Not to accept benefits from third parties which may harm the Company’s interests;
  • Always use independent judgement;
  • And to act within the constraints laid out in the Company’s constitution.

It is the overall duty of the director to promote the long term success of the Company as a whole rather than the short term benefits for the shareholders. Other stakeholders have to be considered by the director such as employees of the Company and creditors owed money by the Company.

It is possible for a director to have private dealings with the Company to which he is a director of however some restrictions apply. A director may only have private dealings with his own Company if the Company’s Articles of Association permit and all information relevant to the transaction and the Director’s interest has been submitted to the board. The Companies Act 2006 has a provision which will catch any transaction that is valued at over £100,000 or 5% of the assets of a company. If the transaction falls within these criteria there is a separate procedure that will need to be followed.

If a director believes that there is any chance of a conflict of interest arising in any potential transaction of the Company it is advisable for them to disclose this to the board of directors. It is a criminal offence for a director not to disclose a conflict of interest so it would be advisable for any director who believes that there is a chance of a conflict of interest to declare it.

It is a general rule that service contracts to directors should be approved by the board. If the service contract is for a period of 2 years or longer then it will also have to be approved by the shareholders of the Company.

It is a further duty of the director to ensure that the Company files a record of the past years’ financial results at Companies House, this record is usually called an ‘annual return’. There are penalties for failing to file annual accounts at Companies House. Although this responsibility may be delegated to the Company Secretary, if there is someone fulfilling this role, ultimate responsibility still lies with the director.

It is imperative that before accepting their role as a director, the party has carefully examined the Articles of Association of the Company as this document will contain all the duties and restrictions which the director will have imposed on him. It should not just be assumed that every Company will have standard Articles of Association.

It is not only the Companies Act 2006 to which a director can be seen as breaching, a director may also be held personally responsible under for example, the Health & Safety at Work Act if he has failed to ensure workers’ safety in the workplace.

There are various penalties to which a director could be found to suffer, these include disqualification from being a company director for a determined period of time, becoming personally liable for the Company’s’ debts for example.

A director may still be seen as liable even after he has left his role with the Company if they still exert influence over the board. If the director has no lingering authority within the Company than he would not be liable for any problems arising after he has left the Company, however, resignation aside the director would still be liable for any issues which occurred whilst still holding a directorship in the Company.

This advice is provided by Jonathan Green of Darlingtons Solicitors, providers of high quality, cost effective commercial law advice for businesses of all types and sizes.

Joint venture tips

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Joint Ventures – 14 tips

Joint venture can describe any alliance between businesses. Here are some useful tips about joint ventures :-

  1. Joint ventures are usually structured by forming a new limited company for the sole purpose of the joint venture. This allows the businesses entering the joint venture to be limited in their liability should the joint venture not go as planned. If the limited company set up for the joint venture becomes insolvent, the businesses would only be liable for the amount that they had paid for their initial shares.
  2. There are however some tax consequences to think of when setting up a limited company for this purpose, especially if assets are to be transferred into the joint venture. If this is the case a partnership or in particular a limited liability partnership may be more fitting.
  3. Any assets transferred into the joint venture could be liable to pay stamp duty and capital gains tax if the value of the asset has increased since being bought. There are ways to avoid this, however, such as by allowing the joint venture company the right to use the assets rather than owning the assets outright.
  4. It is crucial that a business selects the right partner for any joint venture. The perfect joint venture partner would be a business with complementary strengths. When entering a joint venture with a partner it is critical that a business has in mind the end-game of the arrangement, it is ideal therefore for objectives to be drawn at the outset that suit both parties.
  5. With large businesses potentially in a dominant position already, a joint venture has the potential to raise some competition issues which may need to be investigated by the Office of Fair Trading. This will be the case if the creation of the joint venture leads to it having a significant market share. A joint venture will normally only arouse the suspicions of the Office of Fair Trading if the collaboration leads to the joint venture having more than 25% of the combined market share. Competition law outlaws some forms of alliance in any circumstances and this will remain the same for cases involving joint ventures, these include, fixing prices or agreements being in place to share markets in certain ways.
  6. During the negotiations prior to the forming of a joint venture it is fairly standard that both parties will sign a confidentiality agreement. This will restrict the parties from disseminating any confidential information which they may come in contact with in the course of negotiations. It is also common for a memorandum of understanding to be signed at this time in the negotiations. The memorandum sets out both parties commitment to the joint venture and the points the parties fundamentally agree on.
  7. Due diligence will need to be carried out by both parties to the joint venture to ensure that the other party is able to enter the joint venture itself and that they can live up to the commitments they are making to the joint venture. Generally due diligence is conducted to ensure the validity and legality of any agreements entered into.
  8. If the joint venture is created through a new joint venture company, the new company should have articles of association and a shareholders’ agreement should also be drafted.
  9. There are several implications to consider with regards to the transfer of employees in relation to a joint venture. One option would be to transfer a whole business into the joint venture including all employees. All contractual rights of the employees will continue as at before the transfer and be fully protected. The employees may be able to claim for unfair dismissal in this scenario if the transfer changes the circumstances under which they are working. If the business and all employees are to be transferred to the joint venture, TUPE regulations should be considered. A further option would be to ask the employees to resign from their positions before taking up new positions within the joint venture.
  10. The businesses entering into the joint venture may have separate intellectual property which they will move into the joint venture. The most common way of getting around this would be for the business which owns the intellectual property to grant or sell their intellectual property to the joint venture through a licence. A licence will be granted to the joint venture and this will specify certain rights and restrictions on the use of the intellectual property. A licence ensures that if the joint venture doesn’t turn out to be as successful as hoped that the holder of the intellectual property is protected.
  11. A business’ degree of control in a joint venture will depend solely on the outcome of negotiations between the parties. The outcomes of these negotiations are usually put in writing. If a new joint venture company is created, these can generally be found in a shareholders’ agreement. A similar document can be drafted if the joint venture is to be formed using another form of company structure. Considerations will need to be put in place if there is a deadlock between the parties on key decisions.
  12. Businesses in a joint venture will want to receive the same accounting information as they currently receive for their own company. The most expedient way of receiving this would be to have a member of the business appointed as a director of the joint venture. Equally the rights of the business to receive this information can be entrenched in the shareholders agreement.
  13. If a joint venture is pursued through a new joint venture company, profits can be taken through dividends if the cash flow of the new joint venture company allows. If the joint venture is structured through a partnership, both businesses will automatically share the profits as per the Partnership Agreement.
  14. The most common way of ending a joint venture is for one of the parties to buy the other party out. It is crucial that from the beginning of the joint venture there are plans in place for what is to occur at termination. This may be provisions such as the process one party has to follow to purchase the others or how the assets of the joint venture are to be split.

Many thanks to Jonathan Green of Darlingtons Solicitors for this article. If you are considering any form of joint venture in business or require commercial law advice, Darlingtons can help.