Founder Series: Top Tips on Complying with Directors’ Duties Under English Law

11 minute read | April.27.2023

Orrick's Founder Series offers monthly top tips for UK startups on key considerations at each stage of their lifecycle, from incorporating a company through to possible exit strategies. The Series is written by members of our market-leading London Technology Companies Group (TCG), with contributions from other practice members. Our Band 1 ranked London TCG team closed over 320 growth financings and tech M&A deals totalling US$9.76bn in 2022 and has dominated the European venture capital tech market for 7 years in a row (PitchBook, FY 2022). In our previous instalments, we have guided founders through the process of incorporating a private limited company, building their team, how to use share options to attract and incentivise their employees, protect their ideas, identified key compliance considerations, what to consider when raising their round, and how to navigate the evolving cyber threat landscapehow to flip to a Delaware corporationhow to steer a company through financial difficulties and what to consider when raising bridge financing.

As a new founder, becoming a director often comes with questions and concerns: what additional duties are you now subject to, what processes and procedures can you put in place to ensure that you are complying with your duties, and what does directors’ personal liability mean? In the eleventh instalment of Orrick's Founder Series, our Technology Companies Group outline key considerations in your role as director and the ways in which you can mitigate the risk of breaching your directors’ duties.

  1. Consider directors’ fiduciary duties and general statutory duties. The seven general directors’ duties can be summarised as follows:

    1. To act within powers. Act in accordance with the company's constitution and only exercise powers for the purposes for which they were conferred. These include the appointment and removal of directors, the running of board and shareholder meetings, the handling of shares and how to manage directors' conflicts of interest.

    2. To promote the success of the company. Act in a way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Keep in mind factors like 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 and customers, and the need to act fairly as between members of the company. Where a factor is key to a particular decision, or where a decision is significant or controversial, the consideration of such factors should be clearly recorded in any board meeting / written resolutions of the directors.

    3. To exercise independent judgment. This duty largely codifies the common law requirement for directors to exercise their powers independently, without subordinating their powers to the will of others and without fettering their discretion. Directors should not therefore simply follow other directors' decisions without assessing the facts and circumstances.

    4. To exercise reasonable care, skill and diligence. Exercise such reasonable skill, care and diligence as would be exercised by a reasonably diligent person with:

      • the general knowledge, skill and experience that could reasonably be expected from a person carrying out the director’s functions; and
      • the director’s actual general knowledge, skill and experience.

      Directors should therefore read board papers and reports in advance of meetings and be prepared to discuss and question them.

    5. To avoid conflicts of interest. Avoid situations in which you have, or could have, a direct or indirect interest that conflicts, or could conflict, with the interests of the company. This could for example include avoiding holding multiple directorships or an advisory role with a competitor or on the board of a major shareholder or making personal use of the company’s information or taking up an opportunity in order to make personal profit.

    6. Not to accept benefits from third parties. Unless approved by the company’s shareholders, a director should not accept a benefit from a third party which is given because of the position held by the director, or because of anything the director has done in their capacity as a director, unless it can reasonably be regarded that it will not give rise to a conflict of interest.

    7. To declare an interest in a proposed transaction or arrangement. Disclose any direct or indirect interest you have in a proposed or existing transaction or arrangement with the company. Any interests should be clearly recorded in any board meeting / written resolutions of the directors.

    Complying with directors’ duties is crucial, as a breach of general duties may, in certain circumstances, be grounds for termination of an executive director’s service contract, lead to disqualification, or cause company directors in breach to be characterised as acting in bad faith. The company could, for example, seek damages where a director has been negligent or rescind a contract in which the director had an undisclosed interest.

    As a director, you will also have certain administrative duties, such as the duty to keep the company’s statutory books up to date, file returns, and to consider the interests of the company’s creditors (especially where there is a possibility of insolvency). These general duties are owed to the company, and therefore only the company will be able to enforce them (except in limited circumstances where shareholders could bring a derivative claim for breach of duty on the company’s behalf). Our UK Corporate Solutions team can take on the administrative burden of making your Companies House filings and maintaining your registers so that you can focus on building your startup.

  2. Steer clear of wrongful and fraudulent trading. It is a criminal offence under the Insolvency Act 1986 ("IA 1986") to knowingly carry on the business of a company with the intention of defrauding creditors (or for any other fraudulent purpose).

    If prior to the start of the winding up of a company, a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, they may also be liable under the IA 1986 to make a contribution to the company's assets on its winding up.

    Directors should keep minutes of board meetings which record the decisions made by the board. These will form part of the evidence that the directors acted appropriately. The directors should also frequently monitor the finances of the company by reviewing the management accounts. We unpack the topic of wrongful and fraudulent trading in greater detail in the ninth instalment of the Founder Series (Top Tips on How to Steer a Company Through Financial Difficulties) here.

  3. Implement appropriate anti-discrimination policies. Under the Equality Act 2010, a director (as an employee or agent of the business) can be personally liable for unlawful discrimination committed by them in the course of their employment. A director may also be personally responsible (or jointly and severally liable with the company) for unlawful discrimination, harassment or victimisation, even where this takes place in the ordinary course of business or is authorised by the company.

    Directors should make sure appropriate policies are in place in the employee handbook to ensure proper processes are followed to avoid any potential claims of discrimination. We talk more about the policies and procedures you should look to implement in your company in our second instalment of the Founder Series (Top Tips to Follow When Building Your Team) here.

  4. Implement robust health and safety protocols. An individual director, company secretary or manager of a company can be held responsible for health and safety offences under UK law where:

    • the company itself is found guilty of a health and safety offence; or
    • the offence was committed with the consent or connivance of or was attributable to the neglect of a director or manager.

    A director convicted of a breach can also be disqualified from holding a director position for up to 15 years.

    Directors should make sure appropriate policies are in place in the employee handbook to ensure proper processes are followed to avoid any potential claims. We talk more about the policies and procedures you should look to implement in your company in our second instalment of the Founder Series (Top Tips to Follow When Building Your Team) here.

  5. Protect against bribery and corruption. The Bribery Act 2010 contains four main offences:

    1. offering, promising or giving a bribe;

    2. covering requesting, agreeing to receive or accepting a bribe;

    3. bribing a foreign public official to obtain or retain business; and

    4. failure of commercial organisations to prevent bribery by their associated persons acting on their behalf.

    Where a company (and not merely individuals acting on its behalf) is convicted of an offence under (a) to (c) above, its directors can be held liable jointly with the company. The directors would have to have consented to the bribery to be prosecuted. A director found guilty of any of these offences could face a maximum penalty of 10 years imprisonment and/or an unlimited fine. A director convicted of bribery could also face disqualification from holding a director position for up to 15 years.

    Whilst this offence relates to the company rather than directors individually, the board needs to be satisfied with the company's overall approach to preventing bribery.

    Directors should ensure that adequate procedures are in place to protect against bribery and corruption offences.

  6. Implement procedures to allow for proper delegation. Directors can mitigate their liability through the implementation of proper and structured management systems, led by competent and dedicated personnel, with proper training and accountability to the board of directors. Such systems should ensure, so far as possible, that the company is compliant with the obligations outlined in its constitutional documents. Directors must, however, continue to supervise and hold those carrying out the tasks to account. Regular meetings should be organised, ideally more frequently than board meetings, for updates and to monitor progress.

  7. Put in place proper insurance. Putting in place insurance (for example, Directors & Officers liability (D&O) insurance) for the company’s directors (and the directors of an associated company) against liability in connection with any negligence, default, breach of duty or breach of trust by them in their roles as directors could be crucial.

    If the company already has insurance in place, a new director should ensure that the insurer is aware of their appointment and confirm that they will be covered by the policy.

  8. Consider a directors’ indemnity. The company may indemnify a director against the costs of a claim against them. This includes defence costs and/or costs incurred in an application for relief to the court (further described below), provided that the director repays the costs if they are unsuccessful. A company will not, however, be able to indemnify a director from any liability for negligence, default, breach of duty or breach of trust in relation to the company.

    The articles of association of a company usually permit the company to indemnify directors. However, the indemnity itself must be contained in the director's service contract or a standalone deed of indemnity.

    Any indemnities given to directors have to be disclosed each year in the directors’ report that accompanies the audited accounts of the company, and their terms have to be available for inspection by shareholders at all times.

  9. Consider ratification of previous decisions. All is not lost if you make a mistake. Certain matters of conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company can be ratified, by a process regulated by the Companies Act 2006. Any decision must be taken by members without reliance on the votes in favour by the director or any connected person.

  10. Look to the courts to grant relief. Where other avenues have been exhausted in the context of proceedings brought against a director for negligence, default, breach of duty or breach of trust, the court may relieve the director from liability if it considers both that:

    • they have acted honestly and reasonably; and
    • considering all the circumstances of the case, they ought fairly to be excused.

    A director may also apply to the court for relief where they have reason to expect that a claim may be made against them.

Our London TCG practice reflects London’s role as one of the world’s leading financial markets and a centre for international commerce. Nothing inspires us more than helping tech companies develop novel strategies and push boundaries. Through our extensive client portfolio, deal volume, and relationships in the tech ecosystem, we provide commercial and legal insight to each company’s strategy. We work with tech companies on all aspects of their business plans, financing strategies, protecting intellectual assets, retaining talent, securing and monetising data, and advocating for innovation-friendly public policy.

If you would like more details on any of the issues above, please contact Jamie Moore.