Drafting a Shareholders Agreement: What are the duties of directors?

A shareholders agreement is a legal contract between the various shareholders of a company. The shareholders agreement sets out the rules for the operation of the company, and regulates the directors of the company. As the directors may not necessarily be shareholders, they may not have a direct investment in the company. As a result, it is extremely important that the shareholders agreement clearly defines the duties of each director so that the interests of all stakeholders are protected. A business lawyer is the best person to speak with to draft your Shareholders’ Agreement.

Directors are in a position of power and make many decisions regarding the day-to-day operation of the company. It is important that directors are well aware of their duties, so we have set out some of the more standard duties below:

• Representing the interests of the shareholders

A director of a company is usually nominated by a shareholder and appointed by the shareholders agreeing on his or her appointment as director. A director may represent the interests of the particular shareholder who nominated him or her and, in doing so, will not be breaching his or her duties as a director. However, a director is also required to act in the best interests of the company, and for a proper purpose.

• Acting with due care and diligence

Under the Corporations Act, a director is required to discharge all of his or her duties with the degree of care and diligence that a reasonable person would exercise if they were a director of the company in the same circumstances.

• Not using their position to gain advantage

As a director of a company, a director has access to the company’s confidential information. A director of the company must not, use his or her position to gain an advantage for himself or herself, or for anyone else.

• Disclosing conflicts of interest

If a director has a personal interest in a matter, which relates to the affairs of the company, the director is required to disclose this interest. The director is under a duty to provide notice of this conflict to the board, and the board may, if necessary, exclude the director from involvement in a matter in which the director has a conflict of interest.

Conclusion

Duties of directors, as mentioned above, are generally prescribed under the Corporations Act. However, it is best to have them outlined in a Shareholders’ Agreement, as not all directors are aware of their duties under the Corporations Act. Having it clearly set out in the shareholders agreement ensures that directors are aware of their duties and understand the level of care that is expected from them as directors of your company. For more information relating to the duties of directors in a company, contact LegalVision on 1300 544 755 to speak with an experienced business lawyer.