BOARD OF DIRECTORS

What is Board of Directors?

A board of directors (BoD) is the governing body of a corporation or other organization, whose members are elected by shareholders (in the case of public companies) to set strategy, oversee management, and protect the interests of shareholders and stakeholders.

Essentials:

• – The board of directors of a public company is elected by shareholders.
• – The board makes key decisions on issues such as mergers and acquisitions, the issuance of dividends, and the hiring and firing of senior executives.
• – Board of directors candidates can be nominated by the company’s nominations committee or by outsiders seeking change.
• – Public companies must have a board of directors.

According to section 2(34) of the Companies Act, 2013, Director means a director appointed to the Board of a Company.

A director is assigned DIN (Director Identification Number) comprising eight digits, this unique identification number possesses lifelong validity.

Section 149 of the Companies Act states that every company’s board of directors must necessarily have a minimum of three directors if it is a public company. two directors if it is a private company and one director in a one person company.
The maximum number of members a company can assign as directors is fifteen. However, the company can pass a special resolution in a general meeting to allow for assigning more than fifteen members to the board of directors.
The maximum number of companies that an individual can become a director of, is 20 companies.

Why are they appointed?

Because company is an artificial person and cannot run on its own, so persons are needed to direct the company. All the directions/actions/decisions can’t be done by the shareholder who are the investors of the company because they are huge in number and everyone can’t take part in the management of the company, i.e., why we need directors to manage the company.

Company has divided its powers into 2 authorities:

1. Board of Directors
2. Shareholders

There are 2 types of Directors:

1. Executive: They are in the whole time employment of the company. Example – M.D. , etc.
2. Non-Executive: They are not in the whole time employment of the company. Example – ID , PTD.

Women Director Provision

If a company is listed or a public company with capital of 100 cr. or turnover of above 300 cr., then company need to appoint at least 1 woman director.
If company is newly incorporated then the woman director may be appointed within 6 months of incorporation.
The intermittent vacancy to be filled by the board in next Board Meeting or in next 3 months.

Duties of Directors(Section 166):

1. Subject to the provisions of the Act, A director shall act as per Article of Association.
2. He shall act in good faith – to promote the object of the company and for the benefit of member as a whole.
   in the best interest of the company, shareholders, the community, its employees and for the protection of employees.
3. He shall excercise his duties with due and reasonable care, skills, and diligence shall exercise independent judgement.
4. He shall not involve in a situation in which he may have direct or indirect interest that conflicts with the interest of company.
5. He shall not achieve or attempt to achieve any undue advantage for himself or his relative, partners or associates. and if found guilty, amount received shall be paid back to the company.
6. He shall not assign his office
7. If any provision of this section is breached then such director is liable to pay fine of 1,00,000 – 5,00,000 Rs.

Independent Director

Section 149(6) talks about independent director(ID). An ID in relation to a company means a director other than MD/WTD/ Nominee director. An independent director is a non-executive director who does not have any kind of relationship with the company that may affect the independence of his/her judgment. An independent director should not have been a partner or executive director of the auditors/lawyers/consultants of the company in preceding three years or should not hold 2% or more of shares of the company. In this article, we look at the process for appointment of an independent director in a company.

RELEVANT CASE LAWS

Percival v. Wright (1902) 2 Ch. 421

Facts: The directors of the company wanted to sell the business and didn’t tell anything to the shareholders about the same. According to the company’s official documents, it was allowed to sell its property, but selling the coal mines required a special resolution. Shares are prices low, and wanted to sell the entire business. To take advantage of this, the directors bought as many shares as possible before the sale became public, making a significant profit.
The company approached the a person, Holder, and he wanted to purchase the business and sells it to another person. He offered £12.1 for each share and later denied to purchase. The plaintiff sued, claiming breach of fiduciary duty, in that the shareholders should have been told of these negotiations.
Issue: Whether directors stood in fiduciary position to disclose the negotiation to the shareholders of the company?
Judgement: The House of Lords emphasized that directors hold a fiduciary position as trustees for individual shareholders, particularly during negotiations for the sale of a company. However, the court acknowledged that this fiduciary duty does not prevent directors from engaging in dealings with shareholders before discussions about the sale arise. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling. The House of Lords asserted that directors are not obligated to disclose unsuccessful negotiations to shareholder vendors. If the directors will disclose information about the company to the shareholders, it will be harmful for the company’s interest.
The House of Lords finally held that the directors are not in fiduciary relationship and not bound to disclose every information to each shareholder.

Burland v. Earle (Consolidated)(1900-3) All E.R. 1452

Facts: The case involved a dispute between shareholders of the British American Bank Note Company.
Some shareholders alleged that the company’s directors had acted improperly in a property transaction.
They claimed that the directors had purchased a property and then sold it to the company at an inflated price, benefiting themselves at the company’s expense.
Issue: Whether the shareholders had the right to bring a derivative action on behalf of the company to challenge the directors’ actions?
Whether the directors had acted improperly in the property transaction?
Judgement: The shareholders did not have the right to bring a derivative action in this case. The majority shareholder rule applied, meaning that if a majority of shareholders approved the transaction, the court would not interfere. The directors owed a fiduciary duty to the company as a whole, not to individual shareholders. The directors had not acted improperly in the property transaction. The price paid was fair, and there was no evidence of fraud or bad faith. Court said that ” There is no evidence whatever of any commission or mandate to Burland to purchase on behalf of the company, or that he was in any sense trustee for the company for the purchased property. It may be that he has an intention in his own mind to resell it to the company, but it was an intention which he was liberty to carry out or abandon at his own will.” He was under no obligation to give the company the benefit of his purchase.
Court held that directors are not liable to repay the profit to the plaintiff company.

Regal (Hastings), Ltd. v. Gulliver (1942) 1 All ER 378 : (1967) 2 A.C. 134 (H.L.)

Facts: Regal owned a cinema in Hastings, Sussex. They took out leases on two more, through a new subsidiary, to make the whole lot an attractive sale package. However, the landlord first wanted them to give personal guarantees. They did not want to do that. Instead the landlord said they could up share capital to £5,000. Regal itself put in £2,000, but could not afford more (though it could have got a loan). Four directors each put in £500, the Chairman, Mr Gulliver, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. They sold the business and made a profit of nearly £3 per share. But then the beneficiaries brought an action against the directors, saying that this profit was in breach of their fiduciary duty to the company. They had not fully obtained the consent from the shareholders.
Issue: Whether director breaches duty towards company?
Whether the director is liable for the profit?
Judgement: Court held that the directors were obligated to account for their profits to the company. The key principle emphasised that directors who, by virtue of their fiduciary position, make a profit are liable to account for that profit, irrespective of considerations such as fraud, absence of bona fides, or whether the property would have otherwise benefited the company. The directors’ duty to refrain from acquiring corporate opportunities for themselves does not end simply because they genuinely believe the company cannot take advantage of those opportunities. The duty remains stringent and is not dependent on considerations like the director’s intention or negligence.
The court held that directors owe fiduciary duty towards shareholders and can’t enter into transactions that conflict with the interest towards others. They are liable for the profit made on the resale of shares.

Industrial Development Consultants Ltd. v. Cooley (1972) 1 W.L.R. 443

Facts: Mr Cooley was an architect employed as managing director of Industrial Development Consultants Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative project pending, to design a depot in Letchworth. Mr. Cooley was told that the gas board did not want to contract with a firm, but directly with him. Mr. Cooley then told the board of IDC Group that he was unwell and requested he be allowed to resign from his job on early notice. They acquiesced and accepted his resignation. He then undertook the Letchworth design work for the gas board on his own account. Industrial Development Consultants found out and sued him for breach of his duty of loyalty.
Issue: Whether Mr. Cooley had breached his fiduciary duties as a director by taking advantage of a business opportunity that should have gone to IDC?
Judgement: Court held that as a director, he had a duty to act in the best interests of the company. By taking the client for his own benefit, he had put himself in a position where his personal interests conflicted with those of the company. The court said that Directors cannot obtain any profit from the company. The company’s information should not be disclosed to outsiders, as it is a breach of privacy. The profit made by them must be returned to the company.
The court held that Mr. Cooley had indeed breached his fiduciary duties.

PRESENT CASE

Q. 3/2020. All five directors, Mr. Mistry (Independent Director), and Mr. Harish (Legal Adviser) are liable to account for the profits of 15 Lakhs Rupees earned from the sale of the Rox shares. The case is directly supported by the principles established in Regal (Hastings) Ltd. v. Gulliver and Boardman v. Phipps, which require fiduciaries to avoid conflicts of interest, disclose opportunities to the company, and account for any personal profits derived from such opportunities. Hence, Merchandise is entitled to recover the full 15 Lakhs Rupees from the directors, Mr. Mistry, and Mr. Harish.