A company director is a corporate position (who may or may not be a founder or founding member of a company) appointed or chosen via ordinary employment, a resolution of a company’s management board, or by means of a company’s articles of association to either manage a company, oversee the running of the company, represent the interests of a member or majority shareholder of a company or provide a specialist service to a company by virtue of being a highly skilled & experienced member of a particular profession.
The director executes the strategy of the company decided at the board level. In contrast, the company secretary ensures that the said strategy is implemented in compliance with company and international law.
Who is a Company Director?
Section 244 of CAMA, 2004 defines directors as persons duly appointed by the company to direct and manage the business of the company. This definition is widely and commonly interpreted as meaning that a director is someone who is duly so appointed and functions as a director. This stems from the fact that 'directing and managing the business of the company is not the preserve of a 'director.'
We often use various metaphors to describe a director: a trustee, an agent, and an officer of the company. A director is said to occupy a fiduciary position in relation to his company, but it must be clarified that while it may be correct to regard a director as a trustee of the company's money and property (Section 283 of CAMA) he is not a trustee of any individual member of the company (Percival v. Wright (1902)); even though directors have a duty to and are expected by the shareholders to maximize profits and give them a reasonable return on their capital investment. A director is an agent of the company since he acts on behalf of the company in contracts and in other ways as a representative of the company.
A director may however hold salaried employment or an office in addition to his directorship, which may, for these purposes, make him an employee or servant, namely in a capacity as an executive director, e.g. technical director. He thereby plays a dual role in the company and would enjoy all the benefits of a member of staff. A non-executive director is a director on the board of a company without executive responsibilities.
In other words, he sits on the board but he is not at the same time an employee of the company. Non-executive directors are usually appointed based on experience and contacts which may be used by a company to further its business activities.
Appointment of a Company Director
When applying for the incorporation of a company, Section 35(2)(c) of CAMA requires that the first directors shall be appointed through a statement in the prescribed form. This refers to Form CAC7 which contains the particulars and signatures of the first directors. The responsibility for this appointment rests with the subscribers to the memorandum of association (Section 247 of CAMA, 2004).
The subsequent appointment of directors will come in the form of any or a combination of the following;
- Members of a company at the annual general meeting have the power to re-elect, reject and appoint new directors.
- Filling of casual vacancy: A casual vacancy is said to occur when it becomes difficult for the board to act because there is a shortfall in their number which makes quorum impossible. A casualty may also arise if, for example, a key executive director's position is vacated thereby making it difficult to meet over important matters of a company. Think of what will happen to a board if the finance and managing directors resign at the same time. Even if there is a quorum, the vacancies must be filled as a matter of preventing casualty. Where the company's articles of association are in line with the provisions of Section 249 of CAMA, the directors may fill a casual vacancy that might have arisen following the death, resignation, or retirement of a director. Such appointment must be ratified by the members at the annual general meeting immediately following the filling of the casual vacancy.
- In the event of the death of all the directors and shareholders of a company, any of the personal representatives shall be able to apply to the court for an order to convene a meeting of all the personal representatives of the shareholders entitled to attend and vote at an annual general meeting of the company to appoint new directors. Where the personal representatives fail to convene such a meeting, the creditors, if any, shall be able
to do so.
- Appointment by rotation: There would also be the appointment/ reappointment of a director in line with the provisions of Section 259 of the Act which provides inter alia:
1. At the first annual general meeting of a company, all directors are deemed to retire from office by rotation.
2. At every subsequent annual general meeting, a number equal to one-third of the number making up the board shall retire from office, but are eligible for reappointment.
3. The directors to retire each year shall be the ones who have been longest in office and where two or more directors were appointed on the same day, those to retire shall (unless they otherwise agree among themselves) be determined by lot.
Note that where two or more directors are to be re-elected at an annual general meeting, the re-election shall be done in turn unless the resolution to vote the retiring directors by a single resolution has first been moved and carried by all the shareholders present without any dissent (Section 261 of CAMA). This provision may however be waived in the case of a private company.
Procedures for appointment of a company director
Appointment of directors should be made strictly in accordance with the provisions of the company's articles of association and should follow the following procedure viz.:
- Check the articles of association to confirm the mode and the maximum number of directors.
- Refer appointment to the Nomination Committee if the company is listed.
- Obtain approval of the appointment at a board meeting or at a general meeting.
- Prepare a resolution for the appointment of directors).
- Obtain and fill Form CAC 7 with the particulars of all directors - both old and new.
- Obtain the signatures of ALL directors (old and new) on the form and together with the resolution, deliver it to the Corporate Affairs Commission within fourteen days.
- Enter particulars in the register of directors and secretary (Section 292); and in other relevant registers, such as the register of directors' interest in shares and debentures.
- Remind the director of the need for his qualification shares (if required by the articles).
- Request the director to make disclosures of any interest in shares and debentures of the company and also to give general notice of any interest in contracts.
- Notify third parties with whom the director shall have dealings, e.g. bankers.
- Supply the new director with the company memorandum and articles of association, the latest audited accounts, the board charter, and other relevant board and company guides.
- Conduct an induction exercise for the new directors).
As earlier mentioned, the formal appointment of a director shall be proposed at the annual general meeting of the company immediately after the appointment by the board. Where there is an expected election for more than one director, separate resolutions must be passed for each appointment, unless the general meeting first resolves (by a motion against which no single vote is given) to elect the directors by a single resolution (Section 261 of CAMA, 2004).
Who Can be Appointed a Company Director?
Generally, anybody aside from those disqualified by the law is capable of being appointed a director. The following categories of persons may not be appointed a director of a company:
- A minor - a person under the age of 18 years.
- A lunatic or person of unsound mind.
- A bankrupt or a person who has made any arrangement or composition with his creditor generally.
- A person disqualified under the law or the company's articles of association.
- A corporation other than its representative appointed to the board for a given term.
Types of Company Directors
There are quite a few different types of directors that can sit on a board. There are shadow directors, managing directors, and alternate directors.
Any person on whose instructions and directions the directors are accustomed to acting; being a shareholder or other individuals, but excluding professionals such as accountants, solicitors, and bankers, who are merely acting in their professional capacity (Section 245). Shadow directors are often unknown until a problem arises and it becomes necessary to identify individuals who have exercised dominant control over the affairs of the company. However, Section 245 requires that the disclosures made by directors under Section 275 include those of shadow directors.
He is a person appointed (strictly in accordance with the provisions of the articles) to act on behalf of and in place of a director. An alternate director may be one of the directors or a non-member of the board. His appointment must be approved by the board as a whole. He has equal responsibility as that of the principal, but he is not remunerated by the company although like the appointor he has the same rights at board meetings.
An alternate director shall cease to be an alternate if his appointor ceases to be a director; for example, by retirement, unless the appointor is reappointed.
Where the company articles permit or are in line with Section 268 of CAMA, the company can appoint a managing director from amongst the board members and such a director shall be entitled to such different remuneration as the board may deem fit. Such a director shall also be responsible for the day-to-day running of the company and shall have ostensible authority to bind the company in contracts.
What is the minimum required number of directors for companies in Nigeria?
A small company under Nigerian Law is required to have at least 1 director while a private company other than a small company is required to have at least 2 directors.
A Public Limited Liability Company (PLC) is required to have at least 3 independent directors who have not & whose relatives also have not within the preceding 2 years:-
– worked as an employee of the company;
– made or received more than 20 Million Naira from the company;
– owned (or currently own) more than 30% of the Equity/Share Capital stock of a company that made or received more than 20 Million Naira;
– acted as a partner, director, or officer of a partnership or company that made or received more than 20 Million Naira;
– been engaged directly or indirectly as an auditor of the company.
A company will be required to halt business operations if it goes below the required number of company directors required for its operation and cannot hire or appoint a replacement or new directors.
Vacation of the Office of a Director
The office of a director shall be deemed vacated in the following circumstances:
The office of a director is personal; therefore, death creates an automatic and immediate vacancy. The vacancy takes effect from the date of death of a director.
The office of a director is also deemed vacated if he resigns. The vacancy takes effect from the date the resignation reaches the company and when it is eventually accepted by the board. Note however that there is another position from experts and in the literature asserting that the vacation should take effect from the date stated on the letter of resignation.
Any director may be removed from office by ordinary resolution passed at a general meeting (Section 262). The existence of a service agreement does not prevent such removal but the director may recover damages for breach of contract. Special notice must be given to the company of a resolution for the removal of a director or for the appointment of a replacement for a removed director. On the receipt of the special notice, the company is expected to send a copy forthwith to the director concerned who has a right to have a written memorandum of reasonable length circulated to members, usually with the notice convening the meeting. The fact of the representation as being made by the director should be stated in the notice (Section 262 (3)(a)). The director may also attend and speak at the meeting when the resolution for his removal is under consideration.
The procedure prescribed by Section 262 requires that special notice shall be given to the company (at least twenty-eight days) before the meeting at which the resolution will be proposed and that the company should then give twenty-one days' notice to members of the particulars of the special notice.
In addition (or alternatively) a company may make provisions with regard to grounds for removing a director in its articles of association.
Section 257 of the Act provides that the following persons shall not hold the office of director:
1. an infant;
2. a lunatic or a person of unsound mind;
3. a person who has been declared insolvent
4. a person found guilty of fraud in connection with a company that has been wound up.
A company's articles may also make provisions for disqualifying a director for persistent absence from meetings of the board usually six consecutive board meetings without leave. In that regard, his absence shall accrue from the last meeting he attended, but absence is not an automatic ground for disqualification until the board passes a resolution to that effect. The position that absence for six consecutive months is a ground for disqualification needs to be nationalized. This is because there may lie no board meeting in more than six months except the company in question is regulated.
Actions to be taken on the vacation of office by a company director
- An entry should be made in the register of directors and secretaries, and in the register Of directors' interest in shares and debentures, to record that on a specific date a person ceased to be a director.
- notice (in the prescribed Form CAC 7) together with the relevant resolution should be filed at the Corporate Affairs Commission within fourteen days.
- If the company's letterhead shows the names of the directors (Section 278), the directors' names should be removed therefrom.
- If the company is listed, notice must be given to the Stock Exchange.
- If the director is a signatory or one of the signatories to the company's bank account, a notice of his vacation of office must be given to the bank to revoke his mandate.
- All accrued fees up to the date of vacation should be ascertained and paid to the director and the appropriate tax form should be supplied to him.
- Except where the director resigned, died, or has been disqualified under the CAMA; if he is also an employee of the company under a fixed service agreement, it may be necessary to negotiate a settlement of his claims for premature termination of his employment.
What Happens after the Death of a Company Director?
For a company, the death of a director has serious implications. Along with the effect on staff and customers of bereavement, a company director has responsibilities, and company affairs still need to be carried out after they have passed away.
While the actions that need to be taken following death will be dependent on the rules and requirements set out in the company’s articles of association, there are some general rules that apply.
Sole director: When a sole director dies and there are surviving shareholders or members, they can hold a shareholders meeting to appoint a new director.
Surviving directors: The remaining directors can continue to run the company (if the company’s articles of association allow this) and share out the responsibilities of the deceased officer.
Sole shareholder: If the deceased director is the only shareholder, and the company has been incorporated under the Companies Act 2006, the model articles of association allow the personal representatives of the deceased officer to appoint a new director.
The transfer of shares may be dependent on the deceased director’s will, or in accordance with a shareholders’ agreement or company articles if no will exists.
Company Directors' Service Contract
On whatever terms a director is employed, whether on a contract of employment (as an employee of the company) or as a non-executive director the terms of engagement are required to be set out in a distinctively identifiable document - service contract (Section 291).
Where the contract contains any term which imposes an obligation on the company not to terminate the contract before the expiration of five years, or which is renewed more than six months before its expiration, then the contract must be approved by the members in a general meeting. The memorandum setting out the proposed agreement, incorporating the terms of the contract must be made available for inspection by members of the company at the company's registered office address fifteen days before the meeting and at the meeting where it would be approved.
The service contract will usually make provisions for the following:
(2) Holiday and sick pay;
(3) Entitlement of directors;
(4) Definitions of his duties;
(5) Impositions on him for a limited period of time restraint against joining a competitor company.
Company Directors' Duties
The general duties of directors include:
(i) Duty to act within powers
The director must act in accordance with the provisions of the memorandum and arse of association, resolutions, decisions, and agreements of the company.
(ii) Duty to promote the success of the company
A director must promote the success of the company for the benefit of the members as a whole. The director must ensure that the business is properly managed, taking into account the interests of employees, suppliers, customers, and the community in which the company operates.
(iii) Duty to exercise independent judgment
A director is required to exercise independent judgment. Note, however, that a dire may be restricted by certain circumstances (especially when there is an agreement involving the company), from exercising his independent judgment.
(iv) Duty to exercise reasonable care, skill and diligence
A director must exercise reasonable care, skill, and diligence. He shall discharge the duties of his office honestly, in good faith, and in the best interests of the company, and shall exercise that degree of care, diligence, and skill which a reasonably prudent director would exercise in comparable circumstances. Failure to take reasonable care shall be a ground for an action in negligence and breach of duty.
(v) Duty to avoid conflict of interest
A director must avoid a situation where he may have a direct or indirect interest that may conflict with the interest of the company. Section 280 of CAMA provides that the personal interest of a director shall not clash with any of his duties. A director shall not in the course of managing the affairs of the company or in the utilization of the company property, make any secret profit.
A director shall be accountable to the company for a secret profit made by him or any unnecessary benefit derived by him contrary to the provisions of Section 280(2) of CAMA. Note that the duty to avoid conflict may not be breached if the matter has been authorized by the board of directors. The director who is involved in the subject matter of the conflict should not be counted as part of the quorum for the board meeting and should not vote on the matter.
(vi) Duty to declare an interest in a transaction or contract
It is the duty of a director who is in any way whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest in the contract at a meeting of the directors of the company.
It should be noted that remedies for breach of the director's duties include the imposition of fines, Images (especially for negligence), dismissal, etc.
(v) Annual accounts and auditors
In respect of each accounting reference period of the company, the directors must:
(a) prepare a balance sheet and profit and loss account (Section 334);
(b) lay the accounts so prepared for the period before the company in a general meeting.
(c) deliver to the registrar a copy of those accounts (Section 275 and Section 345(3)).
(vi) Fixing of Accounting Reference Period (ARP)
The accounting Reference Period refers to the twelve calendar months which make up a company's financial year. For example, a company's ARP may be chosen to commence on the 1st day of May and end on the 30th day of April. The Accounting Reference Period begins on the day after the end of the previous financial year and ends on the company's chosen reference date, the date to which the account is written, e.g. April 30. It shall be the responsibility of the directors to fix the company's Accounting Reference Period.
(vii) Appointment of first auditors
The first auditor of a company is appointed by the directors at any time before the company commences business to hold office until the conclusion of the first annual general meeting at which the accounts are considered (Section 357(5)).
If the directors fail to exercise their powers under the subsection, the company may, in a general meeting convened for that purpose, appoint the first auditors, following which the powers of the directors to do so shall cease. The directors may also appoint an auditor to fill a casual vacancy.
Powers of a Company Director
Collectively and in principle, the directors are responsible for directing and managing the company. The articles, the CAMA, or other legislation may confer specific powers on directors and in that regard, they are expected to exercise the powers. Some of such powers have been mentioned in relation to the duties of directors. Others include:
(i) Allotment of shares
Directors are authorized to allot shares. Shares may only be allotted upon the directives of the members in general meetings or in line with the provisions of the articles. In doing so, the directors are expected to act bona fide and in the interest of the company.
(il) Management of the company
It is within the powers of the directors to manage the company on behalf of the shareholders. This is part of the popular agency theory in corporate governance. In doing this, the directors may enter into contracts and bind the company but must act reasonably within the provisions of the articles of association, and in some cases, subject to ratification of members in general meetings. Directors are not agents of the shareholders for the purpose of this power. They are deemed to act for the company as a legal entity.
To that extent, in their dealings with the company, they do not have to be instructed by the members in carrying out their day-to-day activities.
(iii) Forfeiture of shares
It is within the powers, and in fact, duties of the directors to make calls on shares and in the event of non-receipt of amounts due, to follow the appropriate procedure to order a forfeiture of such shares.
Liabilities of Company Directors
Since directors manage the day-to-day affairs of the company, they naturally will incur certain liabilities for which they may individually and collectively be held responsible. Some of these liabilities arise out of violation of law or breach of contract with third parties. Liability may also arise as a result of a breach of fiduciary duties of individual directors. A few of these liabilities are listed below:
- Liability to pay penalty for persistent default in matters of compliance with the requirement of CAMA, the Investment and Securities Act, 2007, listing rules, etc.
- Liability to give an account of any secret profit made in dealings with or on behalf of the company.
- There can be criminal liability for the wrongful execution of company transactions. For example, running a business without a license when one is required or failing to renew an existing one.
- Liability for breach of contract with third parties in relation to transactions involving the company.
- A director is liable for the debt of a company if he knowingly continues trading six months after the number of members falls below two (Section 93 of CAMA).