Dissenting Directors: Don’t Take Disputes Outside The Board
A recent ruling ought to be a salutary lesson for any company director involved in a boardroom dispute not to go public or to ‘short-circuit’ the board.
In this case (1), the director was found to have breached a number of company law duties, such as the duty to exercise independent judgement, when he took the dispute outside the board.
What’s the background?
This dispute followed a series of issues between the directors of a large company which saw the ‘dissenting’ director being sacked and removed as a director, reinstated and then resigning. Other problems included falling share prices and allegations that company funds had been misused.
The dissenting director engaged in conduct which led to a successful damages claim for breach of duty. His conduct included criticism of other board members, campaigning for the removal of the board chairman, divulging confidential information to non-directors about the dispute and arranging a petition by group employees.
Furthermore, in a letter sent to other shareholders written in his capacity as “Executive Director and Shareholder of Stobart Group Limited”, he referred to matters that the reader would assume could only have been based on knowledge acquired by him within the boardroom. This letter was found to be seriously misleading; it amounted to “guerrilla tactics”; and had little if anything to do with genuine concerns over corporate strategy and direction.
Breach of directors’ duties
The dissenting director was found to have breached a number of his legal duties as a director. For instance, in having private discussions with shareholders, he had breached the duty to act in good faith and in the best interests of the company, and the implied terms of trust and confidence and fidelity. He had also improperly shared confidential information with individuals outside the company and breached his duty of loyalty to the company.
The duty to exercise independent judgement
Notably, the director had also breached his duty to exercise independent judgment (section 173 Companies Act 2006), i.e. an independent mind. This is a duty which, the court emphasised, does not entitle a director to speak or act as if he were not a member of the board without responsibilities to that collective decision-making body.
Perhaps surprisingly, this dissenting director relied in part on the duty to exercise independent judgement to justify his action in speaking to shareholders. He maintained that he had a duty to reach his own independent judgement on matters arising for the board’s consideration and was entitled (certainly if asked) to impart his view to those shareholders.
But there are clear limits to this duty – and they do not extend to the covert action on the dissenting director’s part in discussing the issues with shareholders. The judge stated:
“the authorities … 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.
The court made clear that the duty exists to support the board’s management of the company’s business in an efficient and competent manner.
What does this mean?
Serious disputes between directors can be difficult to resolve but the issues must remain within the board. No director has the legal right to go behind the board in a covert attempt to get others ‘on side’.
As the court said: “something has gone very seriously wrong if the director seeks to short-circuit the board by taking his “issues” over management direct to just some of the shareholders. A director who does that will have forgotten that the company … has delegated management matters to the board of which he forms part”.
So if you are a director, be sure to keep boardroom disputes within the board - or risk a claim for breach of duty.
(1) Stobart Ltd v Tinkler [2019] EWHC 258
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