It is little wonder why Andrew Tinkler’s removal from the Stobart Group (and subsequent court case) attracted so much media attention:
- a household name (albeit this was the airport operator and not the ubiquitous road transport business);
- a disgruntled director who had risen from within the ranks to CEO;
- a dismissal, shareholder re-election and next day removal;
- allegations about the misuse of company funds (up to £5 million) including the hire of helicopters; horseracing sponsorship and money spent on performances by Ronan Keating;
- a plummeting share price; and
- a majority shareholder base that sided with the dissenting director rather than the rest of the board.
Notwithstanding the above, the case provided some interesting judicial guidance on what an unhappy director can, and more importantly, cannot do, having regard to his duties as a director.
Some legal background
Since the Companies Act of 2006, English law has codified the duties of directors as follows:
- to act within the company’s constitution and only exercise powers for a proper purpose;
- to act in good faith to promote the success of the company;
- important for this case, to exercise independent judgement
- to exercise reasonable care, skill and diligence;
- to avoid conflicts of interest;
- not to accept benefits from third parties; and
- to declare interests in proposed transactions or arrangements with the company.
The law has long since recognised that individual directors are free, and now even required, to exercise independent judgement. This is further backed up by legislation, such as section 214 of The Insolvency Act 1986 (wrongful trading), where directors are judged on a subjective, as well as objective basis, on their conduct leading up to insolvency.
If a director does not agree with the actions of their board, that director should request that his dissenting view is properly minuted. If the board refuses to listen to him, the ultimate action is to resign.
As a director, you can accept advice from others but the final decision is your own. You cannot simply follow the decision of a third party (including a fellow director). You need to consider the interests of the company (often this will be having regard to the interests of the creditors generally) and believe in your decision.
Too much independent judgement?
Much of the case focused on the actions that Mr. Tinkler took outside the board, including:
- speaking to the company’s significant shareholders and agitating for the removal of the Chairman;
- disclosing confidential information outside the board;
- corresponding with shareholders and other non-board members regarding the dispute; and
- orchestrating a ‘petition’ and letter to the Board from senior staff.
It is worth noting the exact judicial guidance in this area:
“In my judgment, the authorities cited to me by each side support the unsurprising proposition that the duty to exercise independent judgment is one that operates upon each director in the context of him operating as a member of the board of directors. This obligation comes with the office of director and does not carry with it some kind of entitlement or licence for an individual director to go off and do his own thing, independently of the board, in relation to matters that fall within the sphere of management of the company’s business. It is only as a member of the board that the director has been entrusted within information about management matters in the first place. Therefore, any discussion by him of those matters with shareholders should either be in the presence of the rest of the board or with the prior approval of the board…
The individual director should therefore (as appropriate) raise, debate, reflect upon and then decide upon his own position on such matters at the level of the board, either as part of the majority or as a dissenting voice. Only by doing so will he facilitate his fellow directors’ compliance with their own duties to exercise an independent judgment and to act in the best interests of the company. The duty upon each director to exercise an independent judgment exists in order to support the board’s management of the company’s business in an efficient and competent manner. By invoking it to justify what might be, or border upon, freelance activity on his part, a director is likely to hinder rather than contribute to the board’s management of the business.”
Other cases in this area
Cases in this area have often focused on the appointment of directors by material shareholders and how such appointees must walk the tightrope between loyalty to the mothership whilst still acting in the interests of the investee company.
In other examples, the Royal Court of Guernsey cleared the Carlyle Group in respect of the actions of so called independent directors. Allegations were made that so called independent directors were not truly independent, but merely acted as a rubber stamp for decisions made by Carlyle directors.
The judge accepted that the:
“broad principle behind this duty is that the company is entitled to the benefit of an actual and freely arrived at decision or judgement from those who are its directors. A director will therefore breach this duty if he merely does what he is told by others for whatever reasons, or acquiesces without question or consideration in what he is asked to do or told by others.”
The Judge however then went on to qualify that:
“a duty to exercise an independent judgement does not mean a duty to act entirely alone, nor to act without taking into account any views expressed or even decisions which are made by his fellow director. A director must exercise his own judgement according to his own assessment of the facts but where, for example, a director does not possess a particular expertise but is aware that one of his fellow directors does, there is nothing in this duty which obliges the first director either to make a decision without ascertaining the views of the expert director or without having regard to them, or to make himself a sufficient expert in the area that he can assess the opinions of the expert director from a position of expertise.”
There have also been press comments on the question of whether directors need to stand behind board decisions on the same basis as a Cabinet minister has to support the collective will of the Cabinet. It is also interesting to note that many directors (including Mr Tinkler) fall foul of expenses guidelines; a common bear trap that catches out many of our Westminster friends!
From the above there are few clear points to take away:
- A director should be aware that information they obtain through their role as a director should be kept on a confidential basis and only shared outside the board if there is clear prior consent.
- Independent judgement is not only encouraged but now expected pursuant to the Companies Act 2006. However the exercise of the same should be very much within the confines of healthy debates at board meetings.
- The dissenting director needs to be very careful if he chooses to take the battle outside such forum.
- If the individual wears multiple hats such as a material shareholder (as was the case with Mr. Tinkler) or is an employee, there are other remedies which could be sought or action taken. However they should be clear that they are not acting in their capacity as a director, nor utilising information obtained from such capacity.