The High Court of England and Wales recently decided that a director of a company who disagrees with his or her fellow directors (dissenting director) in the governance of a company must always observe his fiduciary duties and not publicly engage in “freelance activity” or engage in “renegade actions” outside the board of directors which may hinder the management of the business of the company.
On 15 February 2019 judgment was handed down in the case of Stobart Group Limited v William Andrew Tinkler  EWHC 258 (Comm), (“Stobart Group Judgment“). Stobart Group Limited (“Stobart Group“) is an infrastructure services company registered in Guernsey whose securities are listed on the London Securities Exchange. Mr William Andrew Tinkler (“Tinkler“) was the founder and CEO of Stobart Group for some ten years. He was also one of the major shareholders. He later resigned as the CEO and became an executive director.
The relationship between Tinkler and the Chairman of Stobart Group board of directors, Mr Iain Ferguson (“Chairman“) deteriorated due to Tinkler’s unhappiness with his remuneration and the strategic direction of the company. This resulted in Tinkler campaigning for the removal of the Chairman. Among other Tinkler’s conducts, he did the following –
- writing a letter to the Stobart Group shareholders criticizing his fellow Stobart Group directors without any mandate from the Stobart Group board of directors;
- sending a letter to the Stobart Group shareholders and encouraging them not to re-elect the Chairman at the July 2018 annual general meeting; and
- forwarding to the Stobart Group employees the letter sent to the Stobart Group shareholders.
Tinkler was ultimately removed as a director of Stobart Group and the company pursued him in Court for breach of his fiduciary duties in that he initiated a public campaign against the Stobart Group board of directors (“briefing against the board“) and the contravention of his employment agreement.
Which laws were involved?
The Court acknowledged that although the company laws of Guernsey applied to the dispute, these were similar to the English common law fiduciary duties before the UK Companies Act, 2006 came into effect.
The Stobart Group Judgment necessitated the analysis of various fiduciary duties of directors. The focus of this note is on the duty of directors to exercise independent judgment. Section 173 of the UK Companies Act, 2006 explicitly provides that directors have a duty to exercise independent judgment.
The essence of the common law directors’ duty to exercise independent judgment is that a director, when exercising his or her duties, must objectively exercise his or her autonomous and unfettered mind and thinking on the issues and not meekly succumb to the views of his or her co-directors or other persons.
What did the judge say?
The judge agreed with Stobart Group that Tinkler breached, among others, his duty to exercise independent judgment. The judge said the following regarding the parameters of the exercise of independent judgment by directors –
- the duty to exercise independent judgment “…is one that operates upon each director in the context of him operating as a member of the board of directors“;
- to listen to the views of fellow directors and take account of them is part of a director’s duty to act in the best interest of a company;
- the obligation to exercise independent judgment “…comes with the office of director and does not carry with it some kind of entitlement or licence for an individual director to go off and do his own thing, independently of the board, in relation to matters that fall within the sphere of management of the company’s business… any discussion …with shareholders should either be in the presence of the rest of the board or with the prior approval of the board” [Emphasis added];
- the duty to exercise an independent mind does not “…carry with it any entitlement to speak or act as if he [a director] were not a member of the board without responsibilities to that collective decision-making body.” [Emphasis added];
- the existence of the duty to exercise independent judgment “does not justify renegade action being taken by an individual director in a manner inconsistent with proper management of the Company’s business by the Board“; [Emphasis added]
- “The individual director should therefore (as appropriate) raise, debate, reflect upon and then decide upon his own position on such matters at the level of the board, either as part of the majority or as a dissenting voice. Only by doing so will he facilitate his fellow directors’ compliance with their own duties to exercise an independent judgment and to act in the best interests of the company.” [Emphasis added]; and
- “The duty upon each director to exercise an independent judgment exists in order to support the board’s management of the company’s business in an efficient and competent manner. By invoking it to justify what might be, or border upon, freelance activity on his part, a director is likely to hinder rather than contribute to the board’s management of the business.” [Emphasis added]
In regard to the practical implications of the exercise of the duty to exercise independent judgment, the judge said the following –
- a dissenting director must first raise the issue of disagreement at the board meeting and “…subject to him reflecting upon the point that deferring to the wishes of the majority may be in the best interests of the company, he may ask for his continuing opposition to be minuted“;
- if a dissenting director “…feels that the question is so serious as to justify an open conflict with the rest of the board..” that director may raise matters in dispute at a general meeting of the company but only if such matters have been raised at the board level and thereafter raised with all shareholders or all shareholders in attendance at the general meeting. The matters may not be raised selectively with only some of the shareholders; and
- although “…the exercise of an independent mind and a dissenting voice against the wish of the majority need not necessarily lead to resignation even where the majority’s decision is a momentous one“, in instances where “…a dissenting director does feel sufficiently strongly about a proposed course of action to justify his resignation, having sought unsuccessfully to dissuade the majority from pursuing it, then by that action [resignation] he will have relieved himself of both the obligation and any notion of entitlement which the duty to exercise an independent mind supports.”
What does this mean for me?
Notwithstanding that the Stobart Judgment relates to the laws of Guernsey (a tax haven of less than 70 000 people), it will be highly persuasive in South Africa because it is a decision of the United Kingdom Court and there is no judgment in South Africa that has dealt with the duty to exercise independent judgment by a dissenting director.
The directors’ duty to exercise independent judgment is not unknown in South African law. However, the South African Companies Act, No. 71 of 2008 does not explicitly codify this duty as the UK Companies Act, 2006 does. However, this was not necessary because in South Africa the duty to exercise independent judgment is an inherent element of the duty of directors to act in good faith and the best interest of the company, which duty is codified in section 76(3) of the South African Companies Act, No. 71 of 2008.
The following are practical points that will be of assistance to South African directors –
- before dissenting from the views of the majority directors, a director must debate the issue at the meeting and deeply reflect on whether deferring to the views of the majority directors may be in the best interest of the company. If considered necessary, the relevant director must seek legal advice at the cost of the company;
- if, after raising the matter and debating it with the other directors, a director is not convinced that deferring to the views of the majority directors may be in the best interest of the company, the director must request that his opposition to the views of the majority directors and the reasons thereof be recorded by the Company Secretary in the minutes;
- if, notwithstanding the request that his or her opposition to the majority directors be recorded in the minutes, the director feels the matter is so serious as to justify an open conflict with the rest of the board, the director may raise the matter at the meeting of the shareholders if such director is also a shareholder of the company. Having regard to the Stobart Judgment, it may be prudent that the other directors are notified that the matter will be raised at the shareholders’ meeting. If a director is not a shareholder, raising the matter with the shareholders in his or her capacity as a director must be considered carefully to ensure that the director does not breach his or her other fiduciary duties in the process;
- if, notwithstanding all of the above, a director still feels strongly about his or her views, the director should consider resigning and therefore absolving himself or herself of the consequences of the cause of action preferred by the majority directors;
- a director must not publicise his or her opposition with the majority of the directors, with a select group of shareholders or the general public; and
- a director must at all times act with the necessary decorum and perceptive restraint and avoid any conduct that may result in him or her being seen as a renegade engaging in some freelance activity.