Businesses across the world are increasingly exposed to regulatory action, public criticism and litigation. Current challenges include evaluating and tackling climate change risks, the war in Ukraine, and the continuing effects of the Covid pandemic.
Very often the focus of conversations about boards’ duties is on a group’s main board or on the financial sponsors. Yet the bulk of the business typically sits in subsidiary and portfolio companies, so it is key for directors of these companies to understand their own roles and responsibilities.
Our guide for company directors provides an overview of the general legal responsibilities of directors in 25 jurisdictions. On this page we highlight a few key points, for all directors and international businesses to note, including the following.
General principles but local rules
Generally speaking, in all countries, directors are expected to carry out their duties by acting with care and loyalty towards their company. Local rules and regulations differ considerably on important points, though.
Group interests vs company interests?
A common question is whether a director of a company can act in the interests of the wider group, rather than considering the immediate interests of the director’s own company. A related question is whether the position can be clarified, for example, by providing in the constitution of a subsidiary for its directors to act in the best interests of the holding company.
Long-term sustainability vs short-term gain?
Another topical question, given that climate change forecasts extend over many years into the future and are inherently uncertain, is whether directors are entitled to take long-term considerations into account.
What directors need to know
Newly-appointed directors should make sure that they are clear as to what their duties are, especially when placed in positions outside their home jurisdiction. Established directors are also recommended to refresh their knowledge at regular intervals. Organisations, for their part, should make sure that appropriate training and guidance is available.
Questions about the responsibilities of the directors frequently arise in everyday operations or specific situations, such as cross-border M&A and international joint ventures. Directors need to understand the limits of their powers and any specific obligations, e.g. relating to possible conflicts of interest or situations of financial difficulty. Directors will also wish to understand how key decisions must be recorded, which liabilities they may incur and how these can be protected against, as well as the core administrative control and record-keeping functions which directors must carry out in the relevant jurisdiction. It may be a criminal offence to fail to do so.
New rules and a focus on transparency
Directors should bear in mind that their duties remain subject to legal change and interpretation. A number of countries have in the last few years modernised their company laws significantly. Others, such as Saudi Arabia, are still contemplating further significant reforms.
A global drive to tackle money-laundering and sources of terrorist finance also means that in many countries new transparency obligations are being introduced. These may restrict the use of nominee and corporate directors and/or require information about them to be made public.
Group level planning
Our guide for directors can also be used by international groups and financial sponsors for corporate planning and administration of typical subsidiary or portfolio companies. Our overviews explain typical management structures in each jurisdiction, along with specific requirements for the composition of the board, restrictions on persons who can act as directors and the formalities for appointment and removal of company officers. Information about the potential liability of directors and available indemnities, insurance and protections can also be used to assist with assessing and managing risk.
Golden rules – a reminder for all directors
Local rules will vary in their detail but the general common sense principles below are likely to be useful for all types of director:
- Act in the company’s best interests.
- Obey the company’s constitution and all applicable laws.
- Remember that the company’s property belongs to the company and not to the directors/shareholders.
- Be diligent, careful and well informed about the company’s affairs. If you have any special skills or experience, use them.
- Make sure the company keeps records of your decisions.
- Remember that you remain responsible for the work you delegate to others.
- Avoid situations where your interests conflict with those of the company and disclose potential conflicts quickly.
- Seek external advice where necessary, particularly if the company is in financial difficulty.
For further information, please contact:
Wilma Rix, Linklaters
wilma.rix@linklaters.com
