Partner Piece – How vulnerable am I as a director of a SME?

October 5, 2016

Partner Piece – How vulnerable am I as a director of a SME?

You may have been one for years within your owner managed SME or just been offered a position which includes the role as part of it, but how do you have any idea what your obligations are as a director: are they onerous and should you still be able to sleep at night? In anticipation of a sale when you will be called upon to give warranties as to conduct of the company, are any likely to give you a problem because you don’t really know what your director duties are?

This article will concentrate upon the duties owed by directors who are either registered in that office at Companies House or otherwise regarded as occupying that position, because their directions or instructions the other directors are accustomed to act on.

Directors hold a position of trust within a company: day to day management of it is delegated to the directors by the shareholders. Decisions of the directors are taken collectively by the board.

What are the duties?

Directors have for years had a number of common law duties. The Companies Act 2006 has codified them and for the first time put them on a statutory basis. The duties are owed to the company and not to individual shareholders. We will examine them briefly in turn.

There is a duty to promote the success of the company under the Companies Act 2006 (the “Act”). Success is undefined but the Government suggest it will usually mean long-term increase in value. Ultimately, that is a matter for the director’s good faith judgment. As long as there is evidence of actual consideration of best interests of the company, the test to be applied is a subjective one: did the director honestly believe he’d acted in a way most likely to promote the company’s success? If there’s no such evidence though, the test is objective: would an intelligent and honest man in the director’s position in the circumstances have reasonably believed the transaction was for the benefit of the company?

The relevant section in the Act does however give a list of matters a director should have regard to in acting out this duty:

the likely consequences of any decision in the long term;
the interests of the company’s employees;
the need to foster the company’s business relationships with suppliers, customers and others;
the impact of the company’s operations on the community and the environment;
the desirability of the company maintaining a reputation for high standards of business conduct;
the need to act fairly as between the members of the company

A director must act within powers, as contained in the company’s constitution which will include its memorandum and articles, any other decisions taken in accordance with them and any superseding resolutions or agreements. It doesn’t matter if the director considers his conduct was otherwise in the best interests of the company: if the governing documents don’t allow for it then it is prohibited conduct for the director.

A director must exercise his own independent judgment, or put another way not fetter his own discretion. So, it would be wrong for example to restrict himself from exercising his judgment on the company’s behalf by, say, agreeing with his appointing shareholder to vote at board meetings in a particular way.

There is a duty to avoid conflicts of interest. This might be in relation to the use of information or opportunities or competing with the company. If in practice, a conflict does arise it is the director’s duty to resolve it in the company’s favour and the test of whether or not there has been a breach of this duty is an objective one: it does not depend on whether the director is aware what he is doing is a breach of the duty.

A slightly related duty is the duty to declare interest in a proposed transaction or arrangement with the company. A company’s articles of association will usually include a procedure as to how to declare and deal with any potential conflicts at the point when the matter in which they arise are due to be discussed and/or decided upon. Follow the articles and you won’t go too far wrong.

A director must exercise reasonable care, skill and diligence, that is of a reasonably diligent person with both the general knowledge, skill and experience that may reasonably be expected of a person carrying out his functions in relation to the company and the general knowledge, skill and experience that the director actually has – so both an objective and a subjective element to the test.

Finally, a director is under a duty not to accept benefits from third parties. Benefit is undefined so can potentially mean anything although the duty will not be infringed if accepting the benefit cannot reasonably be regarded as likely to give rise to a conflict.

Directors are also subject to a number of other statutory requirements and restrictions. These include a duty to keep proper books and records and restrictions on entering into certain transactions with the company.

A breach of these duties can result in a director being disqualified from acting as such and in some cases can lead to the director incurring personal liability.

What are a director’s liabilities?

Directors are not generally personally liable to third parties unless they have given a personal guarantee in respect of the liabilities of the company. However, various statutes have imposed personal liability on directors in a wide range of situations from health and safety to environmental and competition matters.

Directors should not act outside the scope of the powers delegated to them. A director who exceeds powers may incur personal liability for the performance of the company’s obligations. As will the director if in the course of an insolvent winding up or administration of a company, it appears that he knew or ought to have concluded at some point before the commencement of the liquidation or administration that there was no reasonable prospect that the company would avoid going under, the liquidator or administrator can seek a court declaration that the director make a contribution to the company’s assets. So there is an onus upon the director to consider the prospects of the company at each and every point a transaction is entered into so as to be sure that he won’t in some way be held personally liable for committing the company to it. Similarly, if in the course of the winding up or administration of a company, it appears that any company business has been carried on with the intent to defraud creditors or for any other fraudulent purpose, the liquidator or administrator can seek a court declaration that a director knowingly party to the fraudulent business make a contribution to the company’s assets.

Can the company ameliorate the effects of a breach of duties or the incurring of liability?

Although a company cannot exempt a director from any liability for negligence, default, breach of duty or trust in relation to the company, it can agree to indemnify a director against defence costs. Furthermore, it can purchase insurance for its directors in respect of the risks which it cannot shake off.

We can offer you advice on all aspects of your obligations as a director whether it is on a prophylactic basis or in any given situation. We also offer registered office and company secretary services to assist the director in his duty to keep proper books and records. If you have any doubts about whether or not you should take on a directorship in a given situation, it is best to contact us and we can guide you on the extent of your obligations.

For further information please contact Andrew Firman (Partner) andrewfirman@cartercamerons.com

Testimonials

“We were delighted with the services that Bluebox offered us. Bluebox’s attention to detail through their Diamond Programme ensured that we were well prepared for when the business was taken to market and that the sale process itself was managed expertly.

We challenged Bluebox with finding the right strategic buyer and thereafter negotiating a deal that met our requirements. In helping initially to identify and to secure the deal with Mountville Mills they accomplished just that. Communication throughout was excellent and professional, managing each stage of the process. I would have no hesitation in recommending Bluebox to any corporate shareholder or private business owner looking to divest their business.”

Richard Millward, Former Client

“We were delighted with the services that Bluebox offered us. Bluebox were challenged with finding us the right strategic investor and, thereafter, negotiating a deal that met our complex requirements. In identifying and securing the deal with LGC they have done exactly that. The process itself was efficient and smooth, largely due to the excellent communication from the Bluebox team, who also demonstrated excellent experience at managing a very engaging auction process. I would be delighted to recommend Bluebox to any corporate shareholder or private business owner looking to divest a business.”

Helen Dickinson, Former Client

It has been a real privilege working with the team at Bluebox over this last year or so. Bluebox’s attention to detail ensured that we were well prepared for when the business was taken to market and the sale process itself was managed expertly. Starting the process, I had no idea exactly what this would entail and the volume of work that has been produced by everyone and the result reached today is nothing short of brilliant.

Hugh Morris, Former Client

We are delighted with the services that Bluebox was able to offer. They showed an intimate knowledge of a deal cycle, managed a tight auction process and were highly communicative from the start. I would happily recommend Paul and his team to business owners contemplating a sale of their business in the next 24 months. Experience is key and this has paid off for us.

Laurence Seward, Former Client

Aligning ourselves early with Bluebox, and entrusting the team to guide us through their process proved to be a highly rewarding investment from all viewpoints. Bluebox’s support significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years. The earlier the engagement the better so far as I am concerned.

Mike Minett, Former Client

We began working with Bluebox in early 2015 through their Blue Diamond Programme, as we were contemplating an exit. We found that the process focussed our minds on the key areas of growth in the business, and prepared us well for the inevitable rigours of due diligence. During the sale process itself, the advice offered by the Bluebox team was invaluable. We found them to be helpful, straightforward and honest.

David Stokes, Former Client

When selecting our adviser, it was extremely important that they had access to international buyers and were experienced in cross-border M&A. The team at Bluebox proved to be invaluable by identifying a strategic acquirer from America who was not known to us and by negotiating an excellent deal for all parties. I was also impressed with the process management from Bluebox, which ensured that the deal was closed in a timely fashion.

Jeff Weinstein, Former Client

When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.

Bill Ballard, Former Client

Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.

Alan Montgomery, Former Client

The pre-sale planning programme that we signed up for with Bluebox made us develop our strategies and focus on the bigger picture. It proved to be a very rewarding investment from all viewpoints and significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years.

Nigel Parsons, Former Client

I have experienced first hand the value that can be created through highly structured pre-sale planning. It amazes me that it is not something that everyone does. It is so disappointing to see around 90% of transactions collapse before they complete and pre-sale planning will not only enhance your price, but also significantly enhance your chance of a closed deal.

James Caan, Investor

We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.

Marten Nielson, Former Client

We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.

Paul Duckworth, Former Client

I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.

Peter Bennett, Former Client

Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.

James Averdieck, Gü, Former Client

The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.

Jon Parslow, Former Client

“We selected Bluebox after a fairly long round of evaluating potential advisors because of their scientific, yet challenging approach to maximising value. During our initial meetings they showed us how far short of “ready” we were and consequently we completed more preparation in the early stages which meant we were equipped for what was to come. We were delighted with our choice of Corporate Finance partner. I do not hesitate in recommending Bluebox for any SME to consider.”

Simon English, Former Client

Bluebox provided invaluable advice in managing the negotiations with incoming investors. Their skills in handling these discussions were evident from the outset and the vital interface that they provided between the incumbent team and the incoming investors was truly beneficial.

Henry Braham, Former Client

Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.

Matt Evans, Former Client

The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.

Victor Lewis, Former client

Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.

Simon Hulme, Former Client

Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.

Michael Clapper, Former Client

I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.

Mark Rodol, Former Client

I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.

Steven Davies, Former Client

With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter

Clive Hillier, Former Client

The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.

Harpal Singh, Former Client

I chose Bluebox because they were the only CFA we considered who were a real ‘solution sales’ organisation rather than a team of accountants and/or ex-bankers! Selling a business is a solution sell and therefore a sell-side CFA requires this skill at its core.

Jeremy Harford, Former Client

Bluebox were a full solution in every respect. As an example, I never spoke with any of the potential or actual buyers directly. This separation allowed Bluebox to do what they do best which is to sell companies for the best price and on the most favourable terms.

Jeremy Harford, Former Client

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