Company directors are often required to execute documents or undertake acts in connection with a transaction or other events at short notice or at times when they are unavailable. It is therefore common for the board to delegate powers to act and signing authorities. There are also circumstances in which directors may wish to appoint an attorney to execute documents on their behalf.
Whether the board or a director can validly delegate a certain act will depend on the delegation provisions in the company’s articles of association, and on the type of role that the board or director is attempting to delegate. The type of acts to be considered can be divided into the following categories:
• Delegation by the board of directors.
• Delegation of a director’s responsibility as a director.
• Delegation of a director’s authority to bind the company.
• Delegation of acts to be undertaken in a director’s personal capacity.
Delegation by the board - A company’s board of directors has collective responsibility for managing the company, and the starting point is that decisions concerning the running of the company should be taken by board resolution.
However, a board may delegate aspects of its functions to a committee, or to an individual executive director, or to others if and to the extent that the company’s articles expressly authorise that delegation. The committee, director or other individual to whom the directors’ powers are delegated may also sub-delegate those powers to others if the articles permit them to do so. It is therefore important to review a company’s articles whenever a board, committee or director intends to delegate or sub-delegate any of the board’s powers, to ensure that any authority under the articles is broad enough to cover the delegation in question.
Any board resolution delegating authority to a committee or individual when that delegation is not permitted by the company’s articles may be held to be invalid.
Common delegation provisions - In practice, most companies adopt articles that provide the board with wide powers of delegation, including by power of attorney
For example, Article 5 of the model articles set out in The Companies (Model Articles) Regulations 2008 (SI 2008/3229) (Article 5) (model articles) for both private and public companies authorises the board of directors to delegate any of the powers conferred on it by the articles “to such person or committee; by such means (including by power of attorney); to such an extent; in relation to such matters or territories; and on such terms and conditions, as they think fit”. Any delegation under Article 5 may authorise further delegation of the directors’ powers by any person to whom they are delegated.
Limits on power of delegation - Certain acts require a specific power to delegate to be included in a company’s articles of association and will not be covered by a general power to delegate such as that set out in Article 5 or regulation 72. For example, an express power should be included in a company’s articles if the board wishes to delegate its powers to determine directors’ fees and remuneration.
In addition, certain acts, such as the authorisation of a director’s conflict of interest under section 175(4)(b) of the Companies Act 2006 (2006 Act), are required by statute to be taken by the full board, and may not be delegated to a committee of the board.
To the extent that there is no express delegation of specific powers, the power may nevertheless be considered to be implicitly held by a director as a result of his executive office.
Delegation of responsibility - Directors are unable to delegate their responsibility to act as a director because a director’s appointment is personal and can only be discharged by the person holding the office. A person who has an appointment of a personal nature cannot delegate the functions of the appointment to an attorney (e.g. a director).
An attorney may not sign a written board resolution on behalf of a director, because the resolution replaces a board meeting at which an attorney would not count in the quorum and would be ineligible to vote.
If the act in question does not require the involvement of all of the company’s directors, the board of directors could delegate the matter to a committee of directors or others who will be available at the relevant time. However, this is not an option if there is a specific statutory requirement for all directors to be involved in the act or decision.
Appointing alternate directors - Appointing an alternate director would be another option, although it is not a commonly used route in the UK. Before appointing an alternate director, the company’s articles of association should be reviewed to ensure that they expressly permit the appointment of alternate directors and the procedure in the articles must be followed. In the absence of these provisions in the articles, the company could amend the articles by special resolution to provide for this.
The model articles for public companies permit a director to appoint, as an alternate director, any other director or any other person approved by resolution of the directors to exercise that director’s powers and carry out that director’s responsibilities (Article 25). There is no power to appoint alternate directors in the model articles for private companies; however, private companies may include this power in their articles if they wish.
Unlike attorneys, alternate directors exercise the powers of a director in their own right, not as agent for the appointing director, and will incur personal responsibility for their actions and decisions.
Authority to bind the company - Directors may not appoint an attorney to sign a deed in their place when the deed is being signed on behalf of the company. A director is not authorised to delegate this power. Instead, the company must grant a power of attorney to the person signing the deed as attorney on its behalf, and the company must execute the power of attorney as a deed in accordance with section 44 of the 2006 Act.
Simple contracts may be executed on behalf of a company by a person acting under the company’s express or implied authority. This authority may be delegated to a person who is not a director by the board of directors by board resolution or by power of attorney granted by the company.
Acts in a personal capacity - Directors can delegate the power to do things in their personal capacity, and may appoint an attorney to execute documents to be signed in their personal capacity on their behalf.
Liability for delegated acts - Directors must always act in accordance with the statutory duties imposed on them under the 2006 Act. In particular, directors must exercise reasonable care, skill and diligence in their role (section 174) and promote the success of the company (section 172).
Where the board has properly delegated an act in accordance with the company’s articles, the general position is that this will not, of itself, result in a breach of a director’s duty to exercise reasonable care, skill and diligence. A proper degree of delegation is permissible and often necessary, and the reality of commercial and corporate life is that some degree of delegation and division of responsibility within a company is inevitable.
However, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated acts and no director may simply leave the management of the company’s affairs to his colleagues, or to other delegates, without committing a breach of duty. Any delegation made by the board must therefore be reasonable in scope, the board must be satisfied that the relevant person or committee is capable of carrying out the delegated matters, and the board must oversee the matters as appropriate.
What is reasonable for the directors of a company to delegate will depend to a large extent on the nature and size of the company’s business. For example, the board of a company carrying out a large amount of business is likely, out of necessity, to delegate more numerous, and more important, matters to committees and managers than a company conducting less business.
A director who is in breach of the duty to exercise reasonable care, skill and diligence is potentially liable to the company for damages. A breach of duty could also result in the termination of an executive director’s service contract or, on insolvency, potentially in the disqualification of the director under the Company Directors Disqualification Act 1986. To mitigate against the risk of a breach of duty in the context of delegation, where directors have delegated any of their powers in accordance with the company’s articles they should maintain an appropriate level of activity and involvement in the delegated acts. As part of their supervisory role, they should:
• Test and challenge assumptions and ask for verification of key information if there are any concerns as to its accuracy.
• Be satisfied as to the integrity of any information received and as to the company’s controls in respect of the delegated acts.
In summary, directors will not normally be in breach of their duty to exercise reasonable care, skill and diligence if they delegate their powers in accordance with the company’s articles of association and any applicable statutory requirements, provided that the delegation is reasonable, they monitor and supervise the delegated acts appropriately, and always act in accordance with their other statutory duties.
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