Corporate governance remains a top agenda item for all companies, especially those with shares held in public hands. As one of the main pillars of good corporate governance, boards are expected to have a suitable number of non-executive directors (“NEDs”), and with the right skills. Capital markets are increasingly active, despite our challenging COVID-19 existence, and there appears to be a promising pipeline of new issues and capital raising. We thought it would therefore be useful to highlight some of the key considerations in relation to the appointment of NEDs.
It is of paramount importance that NEDs are properly informed of the terms of their appointment and the standards expected of them, which should be achieved by a formal letter. It is crucial to ensure that a NED understands, and is satisfied that they can meet, the demands of their role. Below, we have summarised some of the key points to consider when documenting the terms of appointment.
1. How long for?
The process by which any new director, including a NED, can be appointed will be governed by the company’s articles of association. For example, although the board may be able to appoint a NED, this may need shareholder approval at the next annual general meeting.
The letter should confirm the initial term of the NED’s appointment, considering that the articles may require directors to retire by rotation and stand for re-election. The company’s articles may both limit how many consecutive terms a director may serve and state the permitted length of each term.
The letter should also make it clear how either the company or the NED may terminate the appointment early. The 2018 UK Corporate Governance Code recommends that the required notice period is no more than one year.
2. Role and duties
A NED is subject to the same general legal duties as an executive director. It is essential that a NED’s specific role within a company is clearly defined, and that they will have sufficient time to discharge their responsibilities. Points to consider include:
- Will the NED be required to serve on, or chair, any of the board’s committees?
- What is the NED’s anticipated time commitment, and what will that include (for example: scheduled meetings of the board and/or committees)? Will they be required to devote additional time to the company during particularly busy periods, such as takeovers or acquisitions?
- NEDs are generally expected to provide strategic guidance and scrutinise the performance of the executive directors. Will they be subject to any specific duties in this regard? If so, these should be identified in the letter.
3. Conflicts and outside interests
Many NEDs will have other roles and interests. Conflicts provisions in the appointment letter must be balanced carefully with the company’s articles. The letter should confirm how conflict situations will be approached.
For example, must the NED be absented from board discussions which present, or may present, a conflict of interest? Alternatively, can the NED attend the meeting and only be prevented from voting? The articles often give the chair authority to decide whether the subject of a board discussion or resolution relates to a conflict matter. Identifying potential conflicts at the outset can be very helpful.
4. Information and confidentiality
Is the NED being appointed to act as the nominee of a specific shareholder? If so, consider whether and how confidential information (including inside information) may be shared between the NED and that shareholder. For example, will the NED be permitted to disclose certain confidential information to the that shareholder so they can reasonably monitor their investment? In any case, the NED must comply with the requirements under both law and regulation on the disclosure of inside information.
It is important to obtain advice to ensure that these and other issues are properly addressed when appointing a NED. If you would like to discuss this, or any other matters, please contact Mark Tasker, Partner and Head of M&A and Corporate Finance ([email protected]) or Edward Slegg, Solicitor ([email protected]).
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of March 31, 2021.