The end of the transition period is now firmly on the agenda of both the government and most affected businesses. The UK’s exit from the EU will result in multiple legal and regulatory changes and challenges. With such changes firmly in sight, directors of businesses need to be cognisant of their duties throughout this period.
The full impact of Brexit will not be known immediately, but companies should be putting in place processes to allow for as smooth a transition as possible even thought this has been complicated by areas where government guidance is not yet in place. Preparation is key, but it is understood that not all actions are as simple since the relevant details have not been published by the government.
Nevertheless, one thing is consistent in this fluid landscape and that is that directors of UK companies will be held to the same standards on the 31 December 2020 and 1 January 2021.
The basic rule is that the directors should act together as a board (if more than one director), but the board may also delegate certain powers to individual directors or a committee of the board. Moreover, it must be remembered that the duties are owed to the company and not the shareholders (although derivative actions could be brought by shareholders in some circumstances).
This article details all directors’ duties. Directors should be particularly mindful of the first three duties outlined below in the context of Brexit.
Promote the success of the company
Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
“Success” is widely defined and could mean a long-term increase in value but fundamentally each director should decide, in good faith, whether it is appropriate for the company to take a particular course of action.
Exercise independent judgment
Directors must exercise independent judgment and make their own decisions.
This does not prevent a director from acting under the company’s constitution or an agreement into which the company has entered.
Exercise reasonable care, skill and diligence
Directors must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as the director in relation to the company; and
- the general knowledge, skill and experience that the director actually possesses.
This standard is measured against both objective and subjective tests. A director’s actual understanding and abilities may not, however, be enough if more could reasonably be expected of someone in his or her position.
Act within your powers
Directors must act under the company’s constitution, and only exercise his or her powers for the purposes for which they were given.
The company’s constitution includes its articles of association, any resolutions and agreements of a constitutional nature (e.g. shareholder or joint venture agreements).
Avoid conflicts of interest
A director must avoid a situation in which he or she has, or could have an interest that conflicts, or may conflict, with the interests of the company. This applies, in particular, to the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.
This duty is not infringed if:
- the situation the director is in cannot reasonably be regarded as likely to give rise to a conflict of interest; or
- if the situation has been pre-authorised.
Authorisation may be given in the articles of association, by specific shareholder resolution or, in certain circumstances, by the other directors who do not share the same conflict.
Not accept benefits from third parties
Directors must not accept a benefit from a third party. If a director has been given one either in their capacity as a director or because the director does (or does not do) anything as a director.
This duty is not infringed if the director’s acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Declare interests in proposed or existing transactions or arrangements with the company
If a director is in any way, directly or indirectly, interested in a transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors.
In the case of a proposed transaction, a director must do this before it is entered into. In the case of an existing transaction, the director must do this as soon as reasonably practicable.
This duty is not infringed if:
- the interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest; or
- an interest has not been declared because the director is unaware he or she has the interest or the other directors are already (or ought reasonably to be) aware of it.
Practical steps to take
Directors need to be able to demonstrate that they have satisfied these duties. A simple way of doing this is through the holding of board meetings with a specific focus on Brexit and ensuring that these meetings are adequately minuted. For certain companies it might be appropriate to appoint sub-committees that have a specific focus on Brexit. Such committees could undertake:
- a cost benefit analysis of the company’s organisation structure;
- a review of supply chains and potential strengths and weaknesses;
- a contract review with suppliers and customers;
- an analysis of workforce to determine if EU workers have the correct status to continue working in the UK; and
- a review of planning for best- and worst-case scenarios.
In addition, companies may consider the use of professional advisers to assist in their accountancy, legal and tax planning. For example, companies trading with the EU will need to consider VAT consequences of importing and exporting with the EU and the impact this could have on cashflow. If companies have branches or subsidiaries in the EU, then there are likely going to be changes to the way these entities operate.