Divided loyalties – representing a charity on a joint venture company board

United Kingdom
Trustees of many research charities will find "food for thought" in the recent Charity Commission papers "Charities and Research" and "Programme-Related Investment". They also highlight the growing trend of charities participating in joint ventures. Where these joint ventures involve setting up a joint venture company ("JVCo") to operate the joint venture; particular thought needs to be given to the position of the charity's officers or, indeed, employees who are to be appointed as directors of the JVCo.

The employee's initial enthusiasm about the prestige of being appointed to the Board of the JVCo may rapidly wane when suddenly faced with an ugly conflict between the JVCo's board and the trustees of the charity who pay his salary! The benefit of having the appointment on one's CV may not be worth being caught in the middle of a row. However, by considering the potential conflicts in advance and dealing with them in the documents setting up the JVCo - the charity's employee may be able to sleep more easily between JVCo board meetings.

By way of background, it's worth looking at the duties of a director. Directors' duties have been starkly highlighted in the recent publicity surrounding Equitable Life and Enron. Let's take the situation where the charity enters into a joint venture or other arrangement, under which a senior charity employee or a trustee becomes a director of the JVCo.

The role would normally be non-executive and, in addition to promoting to JVCo's business, the charity-appointed director would be expected to monitor the position generally for the charity and to represent the charity on the JVCo board.

The basic duties of directors

If things went wrong, in deciding whether the directors have behaved responsibly, the courts have set down some broad requirements. For example: the law expects directors to have the level of skill appropriate to the role they play in the management of the business. They are also expected to take their roles seriously and may be liable to the company (usually acting through the liquidator) if they do not act with due care.

When the director makes a decision he or she should believe that the decision will further the interests of the company. He or she must not make the company act for the benefit of somebody else. Directors must not put themselves in a position where because of some other interest he or she cannot freely make the decisions which are best for the company.

It is worth remembering that the law does not recognise any distinction between executive directors and non-executive directors in terms of the extent of their duties. The duties and obligations owed by a non-executive director are exactly the same as an executive director. That said, it has been established that the law recognises that not all directors perform the same duties. It would therefore not be reasonable to attribute to a non-executive director the sort of detailed knowledge of the company's business which would be obtained by an executive director.

It follows that, provided that a non-executive director performs the duties which he does in fact undertake, to a reasonable standard; and that it was reasonable for him to curtail his sphere of activity; and that he did not culpably close his eyes to malpractice of which he should reasonably have taken notice, he may avoid liability which would otherwise attach to executive directors.

However, as indicated above, the overall duties to which the non-executive director is subject are exactly the same as those of executive directors.

Representative Directors

The law does not recognise the concept of directors representing the interest of a particular shareholder, in this case, the charity.

It has been stated by a judge in a leading case that: "it is entirely foreign to the purpose for which...any board exists to contemplate a member of the board being representative of a particular group or a particular body". Any director becomes subject to the overriding and predominant duty to serve the interests of the board in preference, on every occasion upon which any conflict may rise, to the interests of the body which appointed him.

With this basic position, there can be no room for compromise. This can put the charity-appointed director in a wholly invidious position. He or she is required to disregard the interests of his appointor in favour of the interests of the company. However, there may well be situations when this is directly contrary to his appointor's interests.

Regrettably, law does not adequately protect the position of a director in this situation. Whilst it is clear that the director is not in breach of his duties by virtue of the potential of a conflict of interest in itself, there are many practical situations where a charity’s employee might indeed find himself on the horns of a dilemma.

Furthermore, it is likely to be the charity's employee who has the burden of proving that he (or she) was acting in good faith in the interests of the JVCo rather than those of the charity.

Practical Solutions

Because the law is so unhelpful, the only way that the conflict concerns can be mitigated is by taking a number of practical steps. For example: An obvious area where the charity's director could find himself in conflict between his duties to the charity and his duties to a JVCo is if there is an overlap between part of the charity's research activities and the JVCo's desire to exploit the research.

To reduce the scope for conflict issues to arise, agree the restrictions on what the charity and JVCo can do. However, in practice, it may well be difficult to ringfence the JVCo's operations completely. If there are obvious areas where there could be overlap, such as in relation to access to confidential research results, it is important that these are identified at the outset and that, if appropriate, "Chinese walls" are established.

As with most of the issues here, an awareness of the problem is critical - if the charity's director is acutely aware that he must not obtain any information about a particular part of the charity's business or have any involvement at all, then he should be able to reduce the chances of a conflict position arising.

Another way of addressing the issue at the outset - particularly if the director is also a charity trustee - is to provide in the contractual documentation for a waiver by the other joint venture partner of any claims the company itself might have against the charity's director as a result of the charity director passing information to the charity - or, more widely, by the charity director having regard to the interests of the charity and acting upon those interests.

While not without limitations, such a waiver is likely to form a useful first line of defence. As, in many joint ventures, the other parties concerned will also have nominee directors who will be equally keen to avoid putting themselves into conflict positions where they might find themselves being sued by the company, so they may well be willing to accept such provisions.

Directors' and officers' insurance

This is very commonly taken out by companies. Check whether the Articles of Association provide for an indemnity for directors in certain circumstances. The small print of the D & O policy should always be very carefully considered to check all the exclusions but insurance is an important protection for a director.

Another possibility is that the charity could negotiate a provision whereby all information to which it is contractually entitled under the shareholder arrangements should be provided to the charity itself or to a separate charity shareholder representative rather than to the charity's director.

Conclusion

The critical issue is that the charity director is aware of his responsibilities before the documentation to the JVCo is signed. He or she then needs to take account of their responsibilities in all dealings where there could be possible conflicts between the charity and the JVCo. In any particular situation, especially regarding disclosure of confidential information, the charity's director should take legal advice if there is any doubt.

(This article was first published by the Charity Times website: www.charitytimes.com.)

For further information, please contact Andrew Crawford at [email protected] or on +44 (0)20 7367 2867.