Table of Contents

Introduction ...................................................................................................................................................... 2 Definition of fiduciary ..................................................................................................................................... 2 Breach of fiduciary -THE CADBURY NIGERIA SAGA Source: Businesstimes UK ................................... 3 Conflict of Interest- ASIEDU NKETIA SAGA .............................................................................................. 6 A DIRECTOR'S DUTIES IN TERMS OF THE COMPANIES ACT .......................................................... 11 DUTIES IN TERMS OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION ........................ 11 THE AUTHORITY OF DIRECTORS AND SHAREHOLDERS IN DECISION MAKING ...................... 11 DIRECTORS POWER TO BIND THE COMPANY .................................................................................. 12 TO WHOM DO DIRECTORS OWE FIDUCIARY DUTIES? .................................................................... 13 FIDUCIARY DUTIES and SHAREHOLDERS ........................................................................................... 14 FIDUCIARY DUTIES: Directors and Employees ........................................................................................ 14 DO DIRECTORS OWE FIDUCIARY DUTIES TO CREDITORS? ........................................................... 15 CIVIL LIABILITIES FOR BREACH OF DUTY ......................................................................................... 15 CONCLUSION .............................................................................................................................................. 15 LIST OF REFERENCES: .............................................................................................................................. 17

Introduction Section 203 (1) of the 1963 Companies Code Act 179 places fiduciary duty on a director of a company. It states A director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with it or on its behalf. However, no definition of fiduciary has been given in this Act. Definition of fiduciary The 7th edition of Osborns Concise Law Dictionary defines a fiduciary as The relationship of one person to another where the former is bound to exercise rights and powers in good faith for the benefit of the latter e.g. as between a trustee and beneficiary, the term fiduciary being derived from the Latin word fiduciarius meaning of trust There exists a relationship between shareholders and directors of a company, termed as an agency relationship. In this relationship the shareholders (the principal) hires the director (the agent) to represent the companys interests. The duties of an agent are to act in the interest of the company and not to abuse the trust to the detriment of the principal. In pursuance of these agency duties, the directors are fiduciaries and hold fiduciary duties to the company. In this fiduciary capacity, a director assumes two roles, as an "agent" acting on behalf of the company, and as a trustee who controls company assets for the benefit of the company. The fiduciary duties include full disclosure, not abusing or using information acquired to the detriment of the principal and accounting for all profits even including secret profits made. Section 203(2) of the Act adds that a director shall act at all times in what he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skilful director would act in the circumstances.

Breach of fiduciary -THE CADBURY NIGERIA SAGA Source: Businesstimes UK Hundreds of shareholders in Cadbury Schweppess Nigerian subsidiary have launched a classaction lawsuit over an accounting scandal that took the shine off the confectionery giants performance in 2006. Less than a month after Cadbury said that the UK salmonella scare and Nigerian accounting irregularities had hit full-year profits, more than 300 shareholders are suing the board of Cadbury Nigeria and its auditor for breach of duty. They are also suing for access to a review carried out by Pricewaterhouse-Coopers. The shareholders, joined by a Lagos-based stockbroking firm, Maxifund Investments and Securities, claim that they suffered a huge loss as a result of the overstatement of Cadbury Nigerias financial position and that the defendants failed to act in their interest. The case is believed to be the first of its kind in Nigeria, which is trying to shed its image of corruption to attract foreign investment. Corporate governance experts say that a successful outcome could also encourage greater shareholder activism in Africa and other emerging markets, where plaintiffs may be deterred by the cost of such lawsuits and the time they take to reach court. Cadbury said in December that it had discovered a significant and deliberate overstatement of Cadbury Nigeria results, which had existed over a number of years after increasing its stake in the business from 46.4 per cent to 50.02 per cent last February. The Nigerian chief executive of Cadbury, Bunmi Oni, who was named by PricewaterhouseCoopers as Nigerias most respected CEO in September 2006, and the finance director, Ayo Akadiri, were relieved of their positions. The Case: The case above is a perfect example of a breach of fiduciary both by the directors of a company and its auditors. Auditors are usually hired to resolve agency problems between a
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principal(shareholders)

and

an

agent

(management).

In

this

case

the

auditor

PricewaterhouseCoopers breached the trust of the shareholders by condoning with the CEO and finance director of Cadbury Nigeria to present false financial statements to the public over a number of years. Under section 208 of the companys code, the directors of Cadbury were expected to have acted professionally in accordance to the companys regulations and corporate laws. Under corporate law and governance a companys financials must reflect the true performance of the company. A doctoring of the companys financial under the watch of its directors and auditors are a total breach of directors and auditors fiduciary duty. The CEO Bunmi Onis management at Cadbury for years packaged itself as the best example of a professional establishment, its best practice, with strong ethical clout and rectitude. Unknowing to shareholders, it has been a ruse and a huge deception all along; the unsuspecting Nigerian public has been fooled and misled by Mr. Bunmi Oni and Mr. Ayo akadiri over the years. Sanctions that may be applied to the directors may be derived from the companys regulations as well as the 1963 Companies Code. Shareholders have every right to sue the board and the hired auditors for breach of trust. A successful outcome of the lawsuit could also encourage greater shareholder activism in Africa and other emerging markets, where plaintiffs may be deterred by the cost of such lawsuits and the time they take to reach court. To sustain fiduciary duty, fiduciaries in breach are to be relieved of their positions by shareholders. Fiduciary duty and Conflict of Interest (section 205) Conflicts of interest sometimes arise between a directors personal state of affairs and that of the company. In such a situation, a directors interests may never be preferred over that of the company he is entrusted to direct, and the code is explicit as to the course of action a director who has a conflict of interests must follow. A director who prefers his interests over that of a company may be liable to account to the company in respect of any profits he makes as a result of such a transaction and may be held liable if a loss results. Conflict of duty and interest must be avoided
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since they usually result in what is termed as agency cost between shareholders and directors. These costs may be direct or indirect and usually costs shareholders. Conflicts may also arise between the divergent interests of companies when directors sit on the boards of several companies and thus posing a problem to the individual who sits on the boards of both companies. More importantly, where a director is simultaneously a director of a holding company and its subsidiary, he owes separate and distinctive fiduciary duty to both entities as legal individuals in their own right. A director must guard against a conflict of interests developing in a situation where he is a director of both the holding company and a subsidiary. In the occurrence where conflicts arise and thwarts his efforts in discharging his duty to both companies properly, he should consider resigning from either or both boards. Citing the case of Arbedeen v Blaikie [1843-60] ALL ER 249 which puts a weight on conflict of interest. The case does not categorically state the fiduciary duty of the director but rather, duties with fiduciary character required to be exhibited by the director. In the case, the chairman of a railway company was also the managing partner of a firm which had entered into a contractual arrangement between itself and the railway company. At page 252 of the Report, Lord Cranworth said: the directors are a body to whom is delegated the duty of managing the general affairs of the company. A body corporate can only act by agents and it is of course the duty of those agents so to act at best to promote the interest of the corporation. Such an agent has duties to discharge of a fiduciary character towards his principal and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements which he has or can have a personal interest conflicting or which possibly may conflict with the interest of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. In other words Lord Cranworth was saying that all activities and management of a company must necessarily be conducted through human beings and for that matter entrusted to its directors who
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are the most significant. It however noted that though directors are given extensive powers to manage the affairs of a company, the general fiduciary duties that the directors owe to the company in exercising these powers are paramount to ensure a conflict- of- interest free situation where directors are not allowed to enter into engagements that have personal interests or which possibly may conflict with the interest of those whom they are bound to protect.

Conflict of Interest- ASIEDU NKETIA SAGA Conflict of interest allegations were made against The General Secretary of the National Democratic Congress, Johnson Asiedu Nketia over the construction of the Bui Dam project. Johnson Asiedu Nketia, who is also a member of the Board of the Bui Authority is said to be a major supplier of blocks used in the construction of the project. Johnson Asiedu Nketia had admitted selling the blocks towards the project but disputes that his action raises a conflict of interest circumstance. He strongly debates that his company sells blocks to all contractors in an around Bui and will be difficult to determine which contractor was buying the blocks specifically for the Bui Project. Making reference to Section 205(c) that a director shall not, without the consent of the company in accordance with section 206 of the companies code, place himself in a position in which his duty to the company conflicts or may conflict with his personal interest or his duties to other persons, and in particular without such consent a director shall not be interested in any contract (as with the subcontractors on the Bui project) or other transaction entered into by company except as provided under section 207 of the code.

In a related issue, a former Chief Executive Officer of the Bui Project, Fred Oware accused Asiedu Nketia of selling the blocks at a higher price which has consequently increased the total cost of the project. This Asiedu Nketia has not disputed but explained that the higher quality of blocks provided match the higher prices. Here, Section 203 of Act 179, says that a director stands in a fiduciary relationship towards the company and he is required to observe the utmost good faith
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towards the company in any transaction with it or on its behalf. So if in Asiedu Nketias opinion the quality of blocks supplied towards the project for which he is a director of the board, was questionable and posed seeming difficulties to the subcontractor on the project, then in acting in good faith Asiedu Nketia could suggest an alternative source of quality blocks that will meet the requirement of the project. However under Section 205 it is clear on the fact that in pursuance of fiduciary duties, a director shall not place himself in a position where his duty to the company will conflict with his personal interest or his duty to others. Since according to himself he was not under any contractual agreement to provide blocks for the project, Section 207 required a Disclosure of his intent to supply block from his company to the subcontractors, to the company at the earliest opportunity. However, it appears that Asiedu Nketia failed to disclose his intentions before entering into the transaction with the subcontractors, and therefore may be liable to account to the company in respect of any profits he makes as a result of the transaction or be held liable if through his dealings, the Bui project indeed has suffered a consequential increase in the total cost of the project. Another case citing the fiduciary duty of a director is the ASAFU ADJEI V. AGYEKUM, at page 397 per Osei Hwere J, making reference to section 203 of Act 179, he said the director stands in a fiduciary relationship towards the company and he is required to observe the utmost good faith towards the company in any transaction with it or on its behalf. In this case the, the director who was complaining set up a rival company. It was held that he was in breach of his fiduciary duty to the first company. It can further be explained that a Director shall not place himself in a position where his duty to the company will conflict with his personal interest or his duty to others. (Section 205). As indicated earlier the authority for this general proposition is ABERDEEN V. BLAIKIE . and ASAFU ADJEI V. AGYEKUM. A director is allowed to act in a professional way for the company in

which he is a director. Eg. A solicitor. It is only an Auditor who cannot be a Director of a company. In looking at the general proposition, section 205 deals with 3 main areas of conflict of duty and interest. These are covered by sections 205(a) (b) (c). Section 205(a). It says a director shall not use for his own advantage any money or property of the company or any confidential information or special knowledge obtained by him in his capacity as Director. Citing REGAL HASTINGS V. GULLIVER [[1942] 1 AER 378. In this case, a company had one cinema and wanted to acquire two others to be able to sell all three together. To purchase one of the other two properties, the vendor insisted that a certain amount be paid upfront and the company did not have the money. So the directors in good faith provided the money and in the process they made a profit. They paid one pound a share and subsequently sold the shares for 3 pounds 16p. The directors were acting in good faith. Subsequently when the new owners purchased the property they got to know that the directors in the previous company abused their company. The brought an action to recover the amount on the shares. It was held that the directors must pay back the profit they made to the company. On pages 391-392 Lord Macmillan established the ff: 1. What the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunity and special knowledge as directors. 2. What they did, resulted in a profit to themselves.

Again there are circumstances where conflict of duty and interest may not be used against a director, FRAMLINTON V. ANDERSON [1995] 1 BCLC . Here the defendants were fund
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managers of a company (A). Under the terms of their contract they were free to work for anybody with no restrictions when they left their employment. In the course of their employment they were offered employment by another company (B). As part of their contract they could leave the company with certain clients. Their old firm decided to sell their business to their new prospective employer (B), so they negotiated the terms under which the business will be sold to B. at the same time, the three employees were given some inducements to entice them to join the new employer (B). When company A got to know that the three employees had been given some shares and income from Company B, Company A asked the three to account for the amount of the shares and the income accruing thereon that they obtained from company B. The court held that they were not liable to account because there was no conflict of duty and interest and the contract they were given made it unnecessary to inform their old employers about the incentives given by the new employers. Under section 205 (b): A director shall not be interested in any company that competes with the company in respect of which he is a director except where the director is merely a shareholder or debenture holder in a public company. This means multiple directorship will not work here. Citing SCOTTISH WHOLESALE CO-OPERATIVE V. MAYER [1959] AC 324, This involved multiple and nominee directors. The judgment of Lord Denning @ 366: As soon as the interest of the two companies was in conflict, the nominee directors were placed in an impossible position. Again citing ASAFU ADJEI V. AGYEKUM. In this case the director who was complaining set up a rival company. It was held that he was in breach of his fiduciary duty to the first company. Section 205(c). This says directors shall not be interested in any business or transaction entered into by the company except as provided under section 207. Section 207 regulates the contract between the company and directors.
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Section 207 requires: Disclosure of interest to the company at the earliest opportunity by the director (section 207(2). Example, in the case of NEPTUNE V. FITZGERALD, this defines the standard of disclosure. This case involved a sole director. Yet it was held that the director should make a disclosure to himself of the nature of his interest. The disclosure should be a special event. The disclosure is recorded. According to section 207(4) the director must give general notice that he is a member of a firm that is in negotiations with the company. The important thing is that the contract in which the director is interested should not be entered into until the directors have passed a resolution approving it. Under section 207, the interested director should not vote and should not be counted for quorum. Directors need the consent of the company in a contract in which they are interested. The need is for consent and not for approval. The consent is defined in section 206. It says that consent can only be given after full disclosure of all material facts. The consent is given by members. Secondly the transaction must be specifically authorised by that consent. It must be mentioned, singled out or spelt out clearly. It must be agreed by all members entitled to attend and vote. Where it is at a general meeting, the affected director or his nominees shall not vote. Where it is section 205(a) (b) you need the consent of the members which would be valid only after full disclosure. Failure to fully disclose will entitle the members to rescission of the contract. Where a director prepares to engage in a rival company, where he uses information he acquires to do his business plan and tries to promote another company would he be in breach of section 205. If he tries to leave before he incorporates the new company, FRAMLINGTONS CASE says that if he leaves before he incorporates the company; the director will not be in breach of his fiduciary duty to his previous company.

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The mere fact that profit was made by a fiduciary e.g Director made it necessary that there should be disclosure and approval by the company. Under section 205, consent is needed.

A DIRECTOR'S DUTIES IN TERMS OF THE COMPANIES ACT In terms of the Companies act, directors have to comply with a number of obligations. DUTIES IN TERMS OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION The memorandum of association determines the scope of the companys objects and powers, while the article of association is a contract between members themselves and between members and the company. The articles therefore contain the internal rules by which a company is governed. The Companies Act provides a standard set of articles that many companies use as a basis but may amend to meet their specific needs. The memorandum and articles are integral to the company and directors should familiarise themselves with their contents since they invariably impose duties on directors. THE AUTHORITY OF DIRECTORS AND SHAREHOLDERS IN DECISION MAKING Shareholders preserve ultimate responsibility for the company and have the power to remove or not to re-appoint directors. Directors on the other hand are delegated the day-to-day running of the company who in turn appoint and supervise management. These decisions and management are handled by the board of directors of the company within the limits of legislation and the memorandum and articles. The board of directors may delegate certain powers to managers and at the same time impose appropriate restrictions and conditions which can be varied or revoked at any time. Directors have a duty to monitor management's performance and ensure that management work within their delegated power. In the absence of specific cause for suspicion, directors are generally entitled to
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trust management to perform their duties honestly and to accept and rely on the judgment, information and advice of management when reaching their own decisions. Directors should not lose sight of the fact, however, that they remain ultimately liable, both jointly as a board and individually, for the well being of the company. DIRECTORS POWER TO BIND THE COMPANY Powers and duties of directors are normally left undefined and this implies that directors possess all powers necessary to enable them to direct the affairs of the company. The articles of association may sometimes seek to limit these powers or to specify particular duties, in which event these limitations must be strictly complied with. When a director enters into transactions on behalf of the company which are beyond the powers conferred upon him, he may do so only by the articles, the Act and common law. Section 204 states the directors shall not without the consent of an ordinary resolution of the company exceed the powers conferred upon them by this code and the companys regulations or exercise such powers for a purpose different from that for which such powers are conferred notwithstanding that they may believe such exercise to be in the best interest of the company. In some circumstances where directors have acted beyond their powers as directors, the shareholders may subsequently ratify their action by special resolution. However, ratification is not possible where the action falls outside the object of the company as defined in the companys memorandum of association. Directors will be liable to the company for any financial losses incurred by it as a result of them having acted outside the scope of their authority. Any member of the company may institute action against any incumbent or previous director where the company has suffered damages due to a breach of trust or a wrongful act by that director.

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TO WHOM DO DIRECTORS OWE FIDUCIARY DUTIES? Section 203(2) of the Act says directors must act in the best interest of the COMPANY AS A WHOLE. This implies that directors owe duties to the company for which they act as agents. Section 203 (3) says, in the course of determining whether a particular transaction is in the best interest to the company the directors may have regard to the interests of the employees as well as the members and where they are appointed or where they represent a special class, they may give special but not exclusive consideration to the interests of that class. When it comes to fiduciary duties, they are owed individually by the separate directors. Each director is an agent and he owes fiduciary duties to the company. Directors owe their fiduciary duty to the company as a corporate being in its own right. Even if a director occupies his position on the board by virtue of another position he holds (for instance, where he is appointed by a major shareholder or is entitled to a seat on the board by virtue of an executive position in the company), a directors fiduciary duties rest upon him as an individual. They do not owe it to the members of the company individually, not even to a member who is a majority shareholder. Because directors owe fiduciary duties to the company they cannot bind the company unless authorised to do so. Directors duties are to act only within their powers. Directors who act outside their powers, bind the company to the transaction but may be held personally liable if a loss results. In other words the law says if one has been nominated by an institution to the board of directors, one may give special but not exclusive consideration to the interests of that institution. The fiduciary duty is not owed directly to creditors, employees or other stakeholders of a company. By virtue of disregard of his fiduciary duty to the company, there is a range of situations in which a director may be held personally liable to its stakeholders.

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FIDUCIARY DUTIES and SHAREHOLDERS By a general suggestion directors do not owe any fiduciary duties to shareholders. Citing the case of PERCIVAL V. WRIGHT [1902] 2 CH 421, Here Directors purchased shares from

shareholders without disclosing to the shareholders that the company was involved in take over negotiations which might affect the share price. In the DAWSON V. COATS. case, the directors initially agreed to recommend a bid to the shareholders. They also agreed that they will not entertain any rival bid. They subsequently entertained a rival bid from another party. When the first company sued the directors, the directors contended that they will have been in breach of their fiduciary duties to the shareholders of that company if they had not entertained the rival bid. Owing contractual duties to shareholders by director is very likely but not fiduciary duties. In the course of discharging their fiduciary duties to the company they have to take into account the interest of the shareholders. Directors are agents of the company and not the individual shareholders. Therefore they owe them no fiduciary duties even though they may owe them other duties. Directors have but only one master, which is the company. If they take upon themselves to advise the shareholders then they have a duty to advice in good faith.

FIDUCIARY DUTIES: Directors and Employees It is an established principle that directors do not owe fiduciary duties to employees. However, they may owe certain statutory duties to employees. However directors must have regard to the interests of the employees in order to create employee satisfaction and motivation. Under Section 203(3) it says In considering whether a particular transaction or course of action is in the best interest of the company as a whole a director may have regard to the interest of the EMPLOYEES, as well as the members of the company, and, when appointed by, or as representative of, a special
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class of members, employees or creditors may give special but not exclusive consideration to the interests of that class.

DO DIRECTORS OWE FIDUCIARY DUTIES TO CREDITORS? From the case, WEST MERCIA V. DODD [1988] BCLC 250. Where the company is solvent then generally a duty is owed by directors to the company. However directors do not owe fiduciary duties to creditors. In the WEST MERCIA CASE (SUPRA) it was held that where the company is insolvent the duty is owed to the creditors and not the company. CIVIL LIABILITIES FOR BREACH OF DUTY Under Section 209 of the code, if a director commits any breach of his duties under sections 203 to 205 of the code the liability falls on the director to compensate the company for any loss it suffers for the breach. Any profit made by the director as a result of the breach of such duties shall be accounted for to the company. Any contract or other transaction entered into between the director and the company in breach of such duties may be rescinded by the company. CONCLUSION It is important to note that trustees such as directors, auditiors, promoters, etc. and all other people in trust relationship are deemed to owe fiduciary duties to their beneficiaries. Section 203(4) uphold fiduciary duties of directors without compromise by this; that No provision whether contained in the regulations of a company, or in any contract, or in any resolution of a company shall relieve any director from the duty to act in accordance with this Section 203 or relieve him from any liability incurred as a result of any breach thereof .
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Therefore the adherence to the definitions of fiduciaries in the Case laws would help improve the general corporate governance by holding directors strictly to these standards and duties stated in the Companies codes.

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LIST OF REFERENCES:

The Sunday Times, BUSINESS Times online.co.uk Cadbury Nigeria Fraud 1963 Companies Code, Act 179, (Sections 203 - 208) My joy online- Ghana Media Asiedu Nketia Saga Grant Thornton publications, South Africa 7th edition of Osborns Concise Law Dictionary

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