Can / should someone who is not a director be invited to join a committee of the board?
13 December 2018
Even if a company’s articles of association permit a committee of the board of directors of a company to comprise or include persons who are not directors, is it sensible for such a committee to be appointed? Are there benefits? This article explores this question.
In the current statutory default articles for a private company limited by shares, the Model Articles, Article 3, provides:
“Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.”
In Article 5, they may delegate … “any of the powers which are conferred on them under the articles:
to such person or committee; …
(e) on such terms and conditions;
as they think fit.”
So the Model Articles permit the directors to appoint a committee that does not have any directors or includes persons who are not directors.
Compare that power to delegate to a committee with the corresponding power under the 1985 Table A. Under Regulation 72 of Table A:
“The directors may delegate any of their powers to any committee consisting [only] of one or more directors.”
It is common practice and understood that a board of directors will from time to time delegate to individuals who are not directors, certain of their powers, including the authority to enter into certain contracts on behalf of the company. A company employing a large number of managers below board level, and at different levels of management, will give those non-directors discretion to make decisions and bind the company, within particular designated authorities. The business of such companies would grind to a halt if such powers could not be delegated to persons below board level.
In theory the delegation by the board of certain of its powers to an individual should have the same considerations as the delegation to a number of individuals comprising a committee of the board. However, Commentators have expressed different considerations and raised some objections in relation to a committee of the board including persons who are not directors. We have set out some of those considerations / objections in the bullet points below.
We consider that those considerations and objections have been voiced in the context of circumstances where a board would appoint a committee for the purpose of making certain recommendations or decisions that would not be appropriate for persons below board level to make. For example, the UK Corporate Governance Code anticipates the appointment of a nominations committee, to make recommendations to the board for board appointments, and a remuneration committee, to oversee the design of remuneration packages for directors and senior management.
The following are some of the objections which a board should take into account before appointing a committee that includes non-directors:
- Non-directors do not have the statutory general duties to the company that directors have, such as the requirement to act in the way which is most likely to promote the success of the company for the benefit of its members as a whole and the requirement to exercise independent judgment. This would put the different members of the committee at different levels of legal responsibility.
- Non-directors do not have access to the same level of information about the company as directors, who in general can ask to see anything to enable them to discharge their duties as directors. Those who are not directors may be making decisions as committee members without having the same level of knowledge as the directors.
- Similarly, non-directors may not have access to certain confidential information, which is required for the business of the committee, and which the directors have access to.
- The non-directors may not be privy to wider discussions about overall strategies and plans for the business. The lack of such involvement may be a disadvantage for the business of the committee.
It may be that none of the above objections are relevant to what the committee is being required to do. Alternatively, most of the objections could be met by providing the non-directors with the necessary information or knowledge. There could be real benefits to the company in the board taking advantage of the flexible terms of the Model Articles. However the directors should consider if any of those objections are relevant when making its choice of committee members.
Whether you are a start-up setting out and looking to expand, an ambitious growth business preparing to float, or a multinational enterprise undertaking major acquisitions, complex corporate law issues span the entire lifecycle of any business.
We have a team of experts with extensive experience who can advise on a variety of corporate advisory issues that may concern all types of company – private, public, listed - such as:
Equity Capital Markets
We advise on the full range of equity capital markets transactions including IPOs and fundraisings, as well as advising listed businesses on their day-to-day corporate governance and compliance with applicable rules and regulations.
Growth, Venture & Private Equity
From first steps, through early, venture and growth capital and private equity investment, we regularly provide counsel to founders, companies and investors (including private wealth vehicles, funds and banks) at every stage of a company’s development.
Shareholder & Joint Venture Arrangements
Advising on and negotiating shareholders’ agreements – often a “must have” where there is more than one shareholder - is something we do on almost a daily basis, particularly for our owner-managed business clients.