Fiduciary Duties and Non-Executive Directors

An earlier post had discussed a recent Australian judgment on the role and duties of a non-executive director, Australian Securities and Investment Commission v. MacDonald. More recently, according to a report on the Corporate Law and Governance blog, the Inner House of the Court of Session of Scotland has again commented on the role of non-executive directors. (The Court of Session is Scotland’s highest civil Court; an appeal lies directly to the Supreme Court of the United Kingdom [previously the House of Lords]). The case, Commonwealth Oil and Gas Co. Ltd. v. Baxter and Eurasia is available here.

In commenting on the Australian decision, I had noted in the previous post that “the Court seems to have imposed a duty of care on non-executive directors which cannot be satisfied simply by relying on information provided to them by others. What exactly is the content of this duty is a question not conclusively answered.”

Commonwealth Oil can be useful in clarifying the content of the duty – the Court held that the contents of duty were the same, whether the director was an executive director or not. Undoubtedly, the executive director may have specific executive functions in specific areas of business which have been delegated to him to perform. But this fact does not alter his status: “he is a director of the company as a whole, and his duties to the company are to manage the general affairs of the company and are not confined to the responsibilities arising from his executive function. A director’s fiduciary duty of loyalty is owed to the company as a whole; and the duty to avoid a conflict of interest must be related to the interests of the company as a whole… the fact that he was a non-executive director does not mean that he did not owe to the company the same fiduciary duties as its executive directors owed to it.”

This not an entirely novel proposition of law – for instance, a decision in Dorchester Finance v. Stebbing, [1989] BCLC 498, had also stated that there is no distinction in principle between executive and non-executive directors. The Scotland decision reaffirms this point. More importantly, perhaps, the Scotland decision contains an elaborate discussion of the important case-law on the fiduciary duties of directors more generally. On its facts, the case dealt with the no-conflict rule; a previous post which had discussed the strictness of the no-conflict rule and the corporate opportunity doctrine is available here.