Directors once duly appointed in compliance with the requirements or by operation of law, become “officers” clothed with powers to act on behalf of a company and to perform duties as may be permitted (or restricted) by the Companies Act, 2019 (Act 992) and/or by the Constitution of the Company – and may become liable where they act beyond these powers granted and in breach of duties imposed.
It is practically impossible to provide directors with a “one fits all companies” possible “decisions list”, from which they may choose in the exercise of their powers and the performance of their duties. At best, Act 992 attempts to exclude some decisions directors cannot take without the approval of the shareholders of the company – the issuance of new or unissued shares or treasury shares, voluntary charitable contributions, borrowing more than the stated capital, and major transactions within the provisions of the law. Further, the Constitution of a company may where necessary add to this list of limitations on the exercise of the powers of directors.
To promote the dynamism of companies and allow directors as managers of going concerns room to respond appropriately to business demands, strategic planning and in order not to provide a straight-jacket approach to all issues thereby limiting the power to create unique responses to company management issues, Act 992 provides directors with an “omnibus” ground to consider in all their decision-making processes and where they are satisfied on this basis, they may proceed to act in any matter on behalf of a company except where expressly prohibited by Act 992 or the Constitution of the company. This “omnibus” decision-making consideration is that the decision(s) directors take must be “in the best interest of the company as a whole” to preserve the assets, further the business and to promote the purposes for which the company was incorporated. This “omnibus” consideration helps in establishing controls and imposes a standard of conduct and decision-making benchmark on directors.
In this article, I shall discuss the requirements and scope of this “omnibus” ground within the context of the Companies Act, 2019 (Act 992) and best practices.
Directors, Powers, and Duties
There is fair knowledge in company circles as to who directors are. They are appointed in satisfaction of statutory requirements and may in practice, be acting in consonance with their true powers and duties under the law – Act 992 and the Constitution of the Company.
Regardless of the type of directorship and how they are called, directors are supposed to be the brains of a company. They are managers and responsible for the administration of the business of the company; requiring serious consideration of who although qualified may be appointed as a director.
Apart from the performance of statutorily regulatory compliance duties under Act 992, directors perform key functions that determine the operational viability of companies such as business strategy – crafting mission, vision, and plans, entering into contracts (thereby creating liabilities) with 3rd parties in furtherance of the company’s objects and practically making all decisions regarding the continuous existence and death (winding up or liquidation) of a company.
In these many decision-making processes, directors may act collectively as a board or individually, where mandated by the board to do same on its behalf; except where limited by Act 992 or the Constitution of the company.
The enormous powers granted directors in decision-making regards all activities of a company could lead to insolvency or creation of liabilities and thereby demands the protection of other interests in the company – shareholders, employers, creditors, and the community against the abuse of such powers and position.
To ensure there is a fair and just assessment of the propriety of the decisions made by directors, a statutory benchmark or scorecard – the “omnibus” ground, has been provided to aid directors in the exercise of their powers regarding making decisions for a company in the performance of their duties.
What is the “omnibus” ground for Director(s)’ decision-making?
Generally, directors stand in a fiduciary relationship towards a company and are expected to observe the utmost good faith in their dealing with the company or on its behalf. The provisions of Act 992 in this regard imply that directors are not entirely prohibited from where necessary and in their professional capacities except as auditors from dealing on personal (or through the use of their firms) terms with the company but in compliance with Act 992.
In specific instances of acting on behalf of companies, directors are required at all times and in “their own belief”, to make decisions which are only “in the best interest of the company as a whole so as to preserve the assets, further the business, and promote the purposes for which the company was formed…”. The test in this regard is not one of any reasonable man’s belief in the decision as one which serves the “best interest” of the company but of a faithful, diligent, careful, and ordinary skillful director who given the same circumstances and having regards to the likely consequences of the long term effects of the decision, the impact on the operations of the company, community and environment, and the desirability of the company maintaining a reputation for high standards of business conduct. The standard test, therefore, is of a fellow director’s belief or where they acted collectively, their collective beliefs regarding the decision in question as one which serves the best interest of the company as a whole.
Further, in considering whether a particular transaction or course of action is in the best interests of the company as a whole, Act 992 requires a director to consider the interests of employees, shareholders of the company and where appointed by or as representative of a special class of members/employees/creditors give special but not exclusive consideration to the interest of that class.
Excluded in these “interests” considerations is the interest of a director. This highlights the fact that a decision that furthers or is underpinned by the interest of a director or collectively as a board cannot be one taken in the best interest of the company as a whole except within the exceptions permitted by law. To prevent the subjection of the best interest of a company to the interest of directors, Act 992 make provisions consistent with best practices to guide at all times, the supreme interest of companies in the decision-making processes of directors.
Provisions of Act 992 that safeguard the best interest of Companies
Broadly, Act 992 provides against conflict of duty and interest of directors as a way of safeguarding the best interest of companies in all decisions of directors. The general requirements of avoiding conflict of duty and interest by directors could be categorized into 4 main obligations on the directors: (Obligations, Bradley Berman, Anita T. Pinedo, and Michael D. Russo of Mayer Brown LLP concluded should be discharged by managers when they assessed the SEC’s “Regulation Best Interest” of the United States);
- Conflict of Interest Obligation
- Disclosure Obligation
- Care Obligation
- Compliance Obligation
Conflict of Interest Obligation
Act 992 provides a significant framework for prevention or dealing with conflict of interest issues. These requirements could be supplemented by a company’s internal policies and procedures for the conflict of interest audit, checks, and approval. In all these, directors must seek to prevent if possible, or mitigate the impact of conflict of interest on the operations of a company.
The real or the likelihood of directors’ conflict of interest must not be treated lightly. This could manifest in many ways including directors’ loyalty to appointing authority in return for compensations, shareholders’ favors, or continuous nomination and appointment among others.
Directors must discharge their duties in ways that prevent putting the interest of the company in conflict with their interest or duties owed to others. Although disclosures and the consent of a company could allow for the participation in transactions with such personal interest, directors must resist the temptations of the use of such options under the law.
Act 992 does not prohibit entirely directors’ dealings with a company. What it seeks to prevent is the engagement in such dealings or transactions without the appropriate disclosures and approval/consent of the company before/after the transactions. Act 992 requires prior/post, full and fair disclosure of all material facts including the nature and extent of the interest of the director and in line with the requirement of law before a company’s approval/consent can be secured.
Also, there is the requirement on directors to establish and maintain the Interests Register where all such disclosures by directors in real or likely conflict of interest transactions will be recorded. These disclosures are expected in all circumstances including interest in contracts, professional services among others involving a company.
The discharge of this obligation is important to ensure that decisions regarding transactions which although will promote directors’ interest are still done in compliance with some safeguards provided by law including the non-participation of the interested director in the final decision-making regarding the approval or otherwise of such decisions. Although in practice, one cannot ignore the influence of such disclosures on the exercise of independent judgment of other directors, it still serves the purposes of notices and increases scrutiny expectations on the part of the other directors.
The care obligation demands the exercise of due or reasonable diligence, care, and skill in the discharge of directors’ duties towards a company. It expects directors to understand the potential risks in the decisions they make especially where the interest of another director is up against the best interest of a company as a whole. Therefore, their skill and experience must guide their reasonable belief in the choices they make and the approval/consent they may give for director interest transactions.
It further requires the non-interested directors to attend the meeting called for the approval/consent for such interested transaction, participate fully and scrutinize based on what best serves the interest of a company, not a fellow director.
At all times, directors must take absolute care in ensuring their decisions based on their beliefs are reasonable and in the best interest of companies in all circumstances.
To a large extent, the compliance obligation is on directors. Directors are the managers of a company with a fiduciary duty to act in the utmost good faith towards it. This demands that they must comply with all provisions of law and the Constitution of the company regards their power and the exercise of their duties. They cannot “choose and pick” which rules they must comply with and where it serves their interest ignore the interest of the company – which is the reason for their appointment.
Therefore, all provisions of Act 992 requiring disclosures, the manner of securing consent/approval, the establishment, maintenance, and open for inspection of Interest Register among others must be strictly complied with and observed by directors.
The best way to honor the compliance obligation on directors is to in the first place avoid directors’ conflict of interest situations. Where this first and simple rule is observed, there will not be the need to comply with alternative rules.
The nature of companies – big or small and what object(s) they may be incorporated to advance makes it difficult to make a prescription of an “all possible decisions list” from which directors may make choices. The realities of company management demand that directors must be permitted to make decisions that respond in circumstances to protect the assets, further and promote business object(s). However, the discretion given to directors cannot be exercised without a standard measure (just and fair) of the propriety of such decisions. The Companies Act, 2019 (Act 992) provides a benchmark that directors must honor at all times that is, to act on their belief that their decisions are in the best interest of the company as a whole and to avoid conflict of interest and duty situations.
Directors should at all times adhere to this “omnibus” consideration and only seek waivers in necessary circumstances in line with the provisions of Act 992, the Constitution of the company, or any related company policies.
The writer is Richard Nunekpeku, a lawyer and reachable at email@example.com