BLG´s Directors´ And Officers´ Liability Review News Digest, Summer 2007


Originally published in BLG's Directors' and Officers' Liability Review, Summer 2007

Companies Act 2006 - best practice guidelines published by the GC100

The GC100 have published best practice guidelines to assist companies in complying with s.172 of the new Companies Act. The guidelines arose out of the GC100's concern that s.172 of the Act (the requirement that a director exercises his duties in a way he considers would be most likely to promote the success of the company) may have the effect of increasing the administrative burden on directors and may expose directors to a greater risk of litigation.

The GC100 believe that directors should not be required to document their decision making processes in excessive detail when applying s.172 in the performance of their duties. In their guidelines, the GC100 suggest the following approach to decision making:

(i) Companies should ensure all directors are aware of their duties under the new Act by thoroughly briefing the current board, as well as new directors when they are appointed and ensuring that the terms of appointment and description of the role of any director refer to their duties.

(ii) Board minutes should not be used as the main medium for recording the extent to which each of the factors was discussed. Where a proposal is being formally put to the board, it should normally be supported by a background paper. It is recommended that the management responsible for preparing the paper ensure that each of the relevant factors, including those in s.172, are properly considered at the time the paper is being prepared and that the factors are included in the background paper if necessary. This way, each director will have had the chance to consider the issue in advance of the board meeting and there will be a clear written record of the factors addressed.

(iii) Where decisions are taken by the board in circumstances other than at a formal board meeting, or where decisions are taken informally by individual directors, as are the majority of day to day decisions, the GC100 state that it is for the company to decide the best approach to adopt. The GC100 stress that it will be inappropriate for a formal paper to be prepared in advance of making the majority of decisions and best practice should recognise that it should not be inferred from a lack of formal process or paper that factors have not been properly considered.

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