Directors’ duties and complex international finance

 The following is an overview of the keynote presentation by Lord Millett, who presented at the INSOL Cayman Islands one day seminar, which took place at The Ritz-Carlton at the end of last year, looking at all the latest issues affecting the insolvency industry. Chris Sharpe, manager with Zolfo Cooper reports.
 
At a recent one day seminar for insolvency professionals, hosted by INSOL International in the Cayman Islands, delegates listened to Lord Millett, a former English Lord of Appeal, discuss the evolution of directors’ duties.  
The responsibilities of a board of directors to manage a company have developed significantly over time. 
 
Until the end of the 19th Century, it was assumed that a company’s strategy should be guided by its shareholders at a general meeting and that the board of directors was merely an agent of the company and subject to the control of the shareholders.
 
Directors’ duties were limited to a requirement to act honestly given their own experience and directors were not required to have any special qualifications or knowledge to accept an appointment.  Directors were neither required to attend board meetings or to display a level of competence or ability. The role of a director was principally to add integrity and credibility to a company to provide confidence to shareholders. Failure of a director was considered, by extension, to be a failure by the company for appointing incompetent directors.    
 
Slowly, during the latter years of the 19th Century and into the 20th Century, the duties and responsibilities of a company director began to increase, with a corresponding removal of management power from shareholders. Around the turn of the 20th Century, case law evolved to determine that directors should; act with due care given their own knowledge; should attend meetings when they are able to do so; and, should act honestly.  Directors became required to display a level of skill as well as a degree of care, however at this stage no specific skills were required and there remained no requirement for directors to closely review the role or actions of other directors, auditors or the company’s employees. As such there were few successful actions brought against directors in the first half of the twentieth century. 
 
In the later years of the 20th Century, the complexity, diversity and globalisation of business brought directors’ duties and responsibilities back under the spotlight. Directors become highly paid individuals and to adequately perform their role, directors needed the appropriate skills, qualifications and experience. Across various jurisdictions, case law evolved to reshape directors’ duties and by the 1980s it was widely accepted that directors should know their business and staff, where possible, attend all board meetings, monitor the company’s performance, be familiar with the financial accounts, review the company’s business, and, if necessary, employ and monitor experts and investigate facts that would be of concern to a reasonable person. It became necessary for a board to include a range of skills and experience. 
 
While directors’ responsibilities increased significantly during the 20th Century, law makers were conscious of the importance of maintaining an entrepreneurial spirit in boardrooms. As such, the role of a director has continued to hold a lower level of fiduciary duty than the role of a trustee, for example a director is not required to be correct, as long as the decision making process is appropriately documented.  A director remains encouraged to pursue commercial risks as long as due care and skill is displayed. 
 
The role of a director of a Cayman Islands incorporated hedge fund is of particular interest as many functions of a typical fund are outsourced to professional service providers. A Cayman director, whether employed directly, or through a professional services firm, is required to display an appropriate level of skill, knowledge and experience. In Cayman, any recourse against directors has to be brought by the company, rather than by its shareholders or creditors.  Cayman directors typically enjoy the comfort of being indemnified by the company however there remains much debate about the scope of these indemnities, which typically indemnify directors against all acts except for those arising from wilful default, gross negligence and fraud. 
 
While some argue that indemnity provisions provide excessive comfort for directors, others claim that they are an important factor in encouraging high quality directors to assume their positions and foster an entrepreneurial spirit. However that consideration, whilst important, should not be overrated.

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