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Encyclopedia Britannica - Main :: DIO-DRO |
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DIRECTORS , in company law, the agents by whom a trading or public company acts, the company itself being a legal abstraction and unable to do anything. As joint-stock companies have multiplied and their enterprise has extended, the position of directors has become one of increasing influence and importance. It is they who control the colossal funds now invested in trading companies, and who direct their policy (for shareholders are seldom more than dividend-drawers). Upon their uprightness, vigilance and sound judgment depends the welfare of the greater part of the trade of the country concerned. It is not to be wondered at that in view of this influence and independence of action the law courts have held directors to a strict standard of duty, and that the parliament of the United Kingdom has singled out directors from other agents for special
The first directors of a company are generally appointed by the articles of association. Their consent to act must now, under the Companies Act 1go8, be filed with the registrar of joint-stock companies. Directors other than the first are elected at the annual general meeting, a certain proportion of the acting directorsusually one-thirdretiring under the articles by rotation each year, and their places being filled up by election. A share qualification is nearly always required, on the well-recognized principle that a substantial stake in the undertaking is the best guarantee of fidelity to the company's interests. A director once appointed cannot be removed during his term of office by the shareholders, unless there is a special
It would give a very erroneous idea of the position and functions of directors to speak of themas is sometimes doneas trustees. They are only trustees in the sense that every agent is. They are " commercial men managing a trading concern for the benefit of themselves and the other shareholders." They have to carry on the company's business, to extend and consolidate it, and to do this they must have a free hand and a large discretion to deal with the exigencies of the commerical situation. This large discretion the law allows them so long as they keep within the limits set by the company's memorandum and articles. They are not to be held liable for mere errors of judgment, still less for being defrauded. That would make their position intolerable. All that the law requires of them is that they should be faithful to their duties as agents" diligent and honest," to use the words of Sir George Jesse], formerly master of the rolls. Thus in the matter of diligence
and his own interest
contract , but the onus is on the director if he would keep such a contract to show that the company assented to his makinga profit out of the contract, and for that purpose he must show that he made full and fair disclosure to the company of the nature and extent of his interest
A director must also bear in mindwhat is a fundamental. principle of company managementthat the funds of the company are entrusted to the directors for the objects of the company as defined by the company's memorandum of association and authorized by the general law, and that they must not be diverted from those objects or applied to purposes which are out- . side the objects of the company, ultra vices, as it is commonly called, or outside the powers of management given by the share-holders to the directors. This does not abridge the large discretion allowed to directors in carrying on the business of the company. The funds embarked in a trading. company are intended to be employed for the acquisition of gain, and risk
capital , or return capital to the shareholders, or spend money of the company in " rigging " the market, or in buying the company's shares or paying commission for underwriting the shares of the company except where such commission is authorized under acts of 1900 and 1907, incorporated in the Companies Act 1908. Directors who in these or any other ways misapply the funds of the company are guilty of what is technically known as " misfeasance " or breach of trust, and all who join in the misapplication are jointly and severally liable to replace the sums so misapplied. The remedy of the company for misfeasance, if the company is a going concern, is by action against the delinquent directors; but where a company is being wound up, the legislature has, under the Winding-up Act 189o, provided a summary mode of proceeding, by which the official receiver or liquidator, or any creditor or contributory of the company, may take out what is known as a misfeasance summons, to compel the delinquent director or officer to repay the misapplied moneys or make compensation. The departmental committee of the Board of Trade in its report (July igo6) recommended that the court should be given a discretionary power, analogous to that it already possesses in the case of trustees under the Judicial Trustees Act 1896, s. 3, to relieve a director (or a promoter) in certain cases from liability. This recommendation has been given effect to by s. 279 of the Companies Act 1908, which provides that, " If in any proceeding against a director of a company for negligence or breach of trust it appears to a court that the director is or may be liable in respect of the negligence or breach of trust, but has acted honestly and reasonably and ought fairly to be excused for the negligence or breach of trust, the court may relieve him either wholly or partly from his liability on such terms as the court may think proper."Directors who circulate a prospectus containing statements which they know to be false, with intent to induce any person to become a shareholder, may be prosecuted under 84 of the Larceny Act 1861.. They are also liable criminally for falsification of the company's books, and for this or any other criminal offence the court in winding up may, on the application of the liquidator, direct a prosecution. As to the liability of directors for statements or omissions in a prospectus see COMPANY.In managing the affairs of the company directors must meet together and act as a body
The court will not as a rule interfere with the discretion of directors honestly exercised in the management of the affairs of the company. The directors have prima facie the confidence of the shareholders, and it is not for the court to say that such confidence is misplaced. If the stockholders are dissatisfied with the management the remedy is in their own handsthey can call a meeting and elect a new board. Acompany's articles usually provide for the payment of a certain sum to each director for his services during the year. When this is the case it is an authority to the directors to pay themselves the amount of such remuneration. The remuneration, unless otherwise expressly provided, covers all expenses incidental to the directors' duties.. A director, for instance, cannot claim to be paid in addition to his fixed remuneration his travelling expenses for attending board meetings. When a company winds up, the directors' powers of management come to an end. Their agency is superseded in favour of that of the liquidator. (E. MA.) End of Article: DIRECTORS If you wish, you can link directly to this article.
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