DUTIES OF NOMINEE DIRECTORS TO AVOID CONFLICT OF INTEREST: NOMINATOR VS COMPANY

The question of the study is when a conflict arises between the director's duty to the nominator and the duty to the company, who is prevail? 

1.0 DEFINITION OF NOMINEE DIRECTOR 
     A nominee director is a person who is appointed to the board of directors of a company by a certain appointor. The appointor is usually a person with a large shareholding in the company and the nominee represents that appointor's interests. This frequently happens in joint venture companies individuals to sit as directors on its subsidiaries. It is common for a person who has acquired a substantial holding of shares in a company or for a financial institution which has lent a large amount to a company to seek to nominate one or more of the company's board members.

1.1 Types of Nominee Director 
     Where the nominee does not participate in the day-to-day running of the company, he is regarded as non-executive. In certain circumstances, also be regarded as independent. Where the nominee director is non-executive, he can avoid conflicts of interest simply by refraining from participating in a decision where the interests of the nominator and the company conflict.
     The executive nominee director is a common appointee where a joint venture company is involved. Therefore, the degree of extraneous commitment by a nominee director will vary according to the needs of his appointor. The nominee director may be obliged to supply information or use voting power at board meetings in the interest of the appointor. Besides that, a nominee director is fully clothed with all the rights, duties and obligations of a director. Thus, it gives rise to a dual duty owed by the nominee director, namely to the company as well as to his appointor. 

1.2 Role of Nominee Director 
     A nominee director is mainly appointed to act as a conduit for information and to represent the interest of the appointor on a board. In Levin v Clark, noted as follows:

          " It is not uncommon for a director to be appointed to a board of directors in order to represent an interest outside the company: a mortgagee or other trader or a particular shareholder. It may be in the interests of the company that there be upon its board of directors one who will represent these other interests and who will be acting solely in the interest of a third party and who may in that way be properly regarded as acting in the interest of the company as a  whole. To argue that a director particularly appointed for the purpose of representing the interest of a third party, cannot lawfully act solely in the interest of that third party, is in my view to apply the broad principle, governing the fiduciary duty of directors, to a particular situation, where the breadth of the fiduciary duty had been narrowed by agreement amongst the body of shareholders."

1.3 Approaches 
     There are two approaches taken by the court on this issue. It can be divided into two approaches (a) the strict or traditional approach (requiring directors to consider only the interests of the company and to avoid situations of actual or possible conflict or (b) the liberal or pragmatic approach (that the shareholders could adjust the duties of nominee directors). 

2.0 POSITION IN MALAYSIA 
     The term nominee director is not defined in Malaysian Companies Act 1965. Under section 4 of the Companies Act 1965 provides a broad definition of directors as including any person occupying the position of director of a corporation by whatever name called and include a person in accordance with whose directions or instructions the director of a corporation are accustomed to act and an alternate or substitute director. 
     In August 2006, Malaysian Corporate Law Reform Committee (CLRC) states that the phrase 'nominee director' has no legal definition, the term 'nominee director' is accepted as referring to an individual who 'independent of the method of their appointment, in the performance of their office, act in accordance with some understanding, arrangement or status which gives rise to an obligation to the nominator. The CLRC (2006) took the view that nominee directors must be held to a strict fiduciary duty to act in the best interests of the company.

      On 15 August 2007, a new s. 132(1E) now provides that a director appointed to represent the interests of a shareholder, employer or debenture holder “shall act in the best interest of the company” and in the event of conflict “shall not subordinate his duty to act in the best interest of the company to his duty to his nominator”.

      Thus, Malaysia has adopted a strict approach regarding the duties of nominee directors. An important aspect of the duty of nominee directors is that he is not entitled to sacrifice the interests of the company in favour of that of his principal. It follows the case of Scottish Co-Operative Wholesale Society v Meyer, where the interests of the appointors and the company do not coincide, a nominee director is bound to put the interests of the company ahead of the sectional interest he represents. 

     In Re Syed Ahmad Alsagoff, deceased, where Tan Ah Tah J decided that a nominee director is a trustee for his principal. In Raffles Hotel Ltd v L Rayner, Winslow J stated that: A company is entitled to the undivided loyalty of its directors. A director who is a nominee of someone else should be left free to exercise his best judgment in the interests of the company he serves and not in accordance with the directions of the patron.

      Another case is Industrial Concrete Products Bhd v Concrete Engineering Products Bhd, the court stated that…to act on the instructions of the principal to the detriment of the investee company is a breach of his fiduciary duty to that company. 

     In Mohd Shuaib Ishak v Celcom (M) Bhd, in the present case the directors of Celcom clearly owe duty to the company, Celcom and its shareholders. They owe a duty to act in Celcom's interests, to advise Celcom and its shareholders properly, and to present the facts and issue relating to the SPA and the MGO in a clear and understandable manner. They also owe a duty to act in the interest of shareholders and not to mislead them over the buyout and the ARSA. They should also have had the shareholder's interests at heart to enable them to obtain the best price for shares. 

     The fiduciary duty to act bona fide in the interests of the company as a whole requires the directors to act in the best interests of the shareholders as a collective group. However, difficulties arises in situations where a nominee director is appointed to represent the interests of particular persons (persons with a significant stake in the company will often appoint someone they trust onto the board to monitor its activities, ie Telekom in the present case). The purpose of appointing nominee directors is that they act as representatives and in the interest of their appointors rather than the members generally. 

     Cases reported in England and Malaysia has adopted a strict approach regarding the duties of nominee directors. In Scottish Co-Operative Wholesale Society v Meyer [1958] 3 All ER 66, Lord Denning held that where the interests of the appointors and the company do not coincide, a nominee director is bound to put the interests of the company ahead of the sectional interest he represents. In another case, Raffles Hotel Ltd v L Rayner [1965] 1 MLJ 60, Winslow J stated that: A company is entitled to the undivided loyalty of its directors. A director who is a nominee of someone else should be left free to exercise his best judgment in the interests of the company he serves and not in accordance with the directions of the patron. Therefore, in participating in the alleged conspiracy to enable Telekom to complete the MGO at RM2.75 per share instead of RM7, there is sufficient ground to belief that the directors of Celcom had breached all their duties to Celcom and its shareholders.

3.0 POSITION IN INDIA 
     This term of nominee director is not defined and does not even employ in company statutes. In commercial practice, persons may be nominated or elected to the Board of Directors as of right by an individual shareholder, a class of shareholders, or some other groups and so on.

     The concept of nominee directors has come into vogue because of the loan facilities provided by the financial institutions. Such institutions while granting loans to companies generally impose a condition as to the appointment of their representative(s) on the board s of the companies who avail loan from them. A nominee director is expected to safeguard the interests of the financial institutions, whose nominee he is. Besides that, the nominee directors appointment and function is governed by the respective Acts, and they are beyond the purview supervision of the shareholders.

     The statute only has definition of director given by the Companies Act 1956, under section 2 states that 'Director' includes any person occupying the position of the director, by whatever name called ". It further provides that any person in accordance with whose directions or instructions, the board of directors of a company is accustomed to act, shall deemed to be a director of the company which provides under section 303(1) of the Companies Act 1956.

      As per the company law, directors of the company occupy a fiduciary position. They are expected to work bona fide in the interest of the company and must not exercise their powers for any collateral reasons. A director must not place himself in a position where his duty to the company and his personal interests clash and he must not profit from his position as a director. This legal position is equally applicable to the nominee directors, whether appointed by the central government or by the financial institutions.

     The basic principle under company law in this regard is the same which applies to any other fiduciary, and Indian law in this regard largely continues to be guided by the principles of English law. While companies are deemed independent juristic persons distinct from its constituent members, companies are unable to act other than through its board of directors and other officers. Because of this dependence, directors are agents and trustees of the company by default and are in a position to exercise significant influence over the company-giving rise to a fiduciary duty towards the company. Thus, Indian law also follows the strict traditional rules under the case of Scottish Co-operative Wholesale Society Ltd v Meyer, requiring directors to consider only the interests of the company and to avoid situations of actual or possible conflict.

     In Aes Opgc Holding (Mauritius) v Orissa Power Generation, the main complaint of the petitioners in this petition is about the role and conduct of the nominee directors of a State Government, which has divested 49% shares in its wholly owned power generating company in favour of the petitioners as a part of power sector reforms, on the ground that such act and conduct of these directors are in breach of the fiduciary duties owed by them to the company and also oppressive to the minority shareholders. The court states that if a director of a company is placed in such a situation either he should recluse himself or he is duty bound to take the decision which would be in the interest of the company failing which he would be in breach of his fiduciary duties. It is more so in case of nominee directors when there is a clash of interest between the company and their nominators. 

     In Rolta India Ltd v. Venire Industries Ltd the act of the Board of Directors consisting of Government nominees directors is highly oppressive and in breach of their fiduciary duties. Whatever may the agreements between the shareholders, directors have to act in the interest of the company.

     Another case is M/s. Dale & Carrington Invt. (P) Ltd. & Another V P.K. Prathapan & Others, one thing is certain that the Directors act, on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company.

     In Associate Bank'S v State Bank Of India & Ors, even with regard to the Board of Directors of a subsidiary bank, the State Bank of India has contended that they have power to nominate five Directors. Out of them, the three non-official Directors who are nominated by the State Bank of India represent various areas of specialization such as agriculture, accountancy, small scale industry etc, with a view to ensure that the Board of Directors of the subsidiary banks is broad-based and is in a position to be really useful to the bank. A nominee Director does not cease to be independent and must act in the best interests of the subsidiary bank. The policies are laid down in consultation with the Reserve Bank of India and the Government of India. The State Bank of India, in turn, is also subject to similar control by the Reserve Bank of India and the Central Government.

     In Eih Limited & 5 Ors v Mashobra Resort Limited, the Division Bench of Bombay High Court has gone a step further to hold in Rolta India Ltd. case (supra) that an agreement among the shareholders cannot be construed to be a contract binding on the company even if it is treated as part of the Articles. This view appears to have based on the principle that the directors of a company being under fiduciary obligation to a company, have to act in the best interest of the company. Therefore, if the terms of either the Articles or the agreements among the shareholders containing terms which are prejudicial to the interest of the company, then the Board of Directors is not bound to comply with those terms. In the present case, some of the Articles specifically refer the terms of JVA or other agreements and as such recourse to that clause of the JVA or agreements could be made in so far as that Article is concerned. In case, there is inconsistency between the terms of the Articles and JVA/agreements, then the terms of that Article would prevail as long as they are not against the provisions of law or against the interest of the company. 

4.0 POSITION IN AUSTRALIA 
     The former chairman of the NCSC, Henry Bosch has said that nominee directors are common in Australia and there is good reason to think that some of them contributed in large measure to the damage done to Australian investors in the 1980s. Bosch added that there were far too many cases in which part of the wealth of public companies was siphoned off to other companies in which the controllers of the listed companies had a personal interest. 

      Such concerns have led to the preparation of a 1989 report dealing with nominee directors by the CSLRC. The CSLRC called for legislative clarification of the duties of nominee  directors and noted that in practice the principle that a nominee director should have loyalty to the company to whose board they have been appointed is widely disregarded in practice.
      The Australian legislation has no provision deals with the nominee directors. According to the Companies and Securities Law Review Committee, the term 'nominee director' signifies persons who, independently of their method of appointment, are expected to act as directors in accordance with some understanding or arrangement which creates an obligation or mutual expectation of loyalty to some person or persons other than the company as a whole.

     An earlier line of judicial authority suggests that nominee directors should consider the interest of the company rather than the interest of the nominator. In the case of In Bennetts v Board of Fire Commissioners of NSW, the court states that nominee director is not precluded from considering the special interests of the persons he represents as long as those interests do not conflict with those of the company as a whole.

     A somewhat more pragmatic approach has been taken in Levin v Clark, the plaintiff purchased a majority shareholding in a company and took a mortgage for purchase monies from the vendor. The articles of the company provided for the appointment of two governing directors. Individuals associated with the vendor purportedly occupied these positions, although there had been some irregularities in appointment. It was arranged that they would remain as directors but would not exercise their powers as governing directors unless the plaintiff defaulted under the mortgage. When the plaintiff defaulted under the mortgage the two directors attempted to exercise their powers as governing directors, and the plaintiff sought to restrain them on various grounds, one of which was that they had breached their fiduciary duty by acting in the interests of the mortgagee rather than the company as a whole. Jacobs J rejected this argument, saying:

          "It is not uncommon for a director to be appointed to a board of directors in   order to represent an interest outside the company - a mortgagor or other trader of a particular shareholder. It may be in the interests of the company that there be upon its board of directors one who will represent these other interests and who will be acting solely in the interests of such a third party and who may in that way be properly regarded    as acting in the interests of the company as a whole. To argue that a director particularly     appointed for the purpose of representing the interests of a third party, cannot lawfully act solely in the interests of that third party, is in my view to apply the broad principle, governing the fiduciary duty of directors".

      Another case is Re Broadcasting Station 2GB Pty Ltd, the court states that he general principle is that a nominee director is entitled to take into account the interest of his appointing shareholder as long as:- (1) He honestly believes those interests are consistent with the interests of the company as a whole, and (2) Such belief is not unreasonable. 

      In Molomby v Whitehead, a director was appointed to the ABC board to represent the staff of the broadcaster, the director sought access to various documents of the corporation without giving any reasons for such access but this access was refused. Beaumont J ordered that the director be given access to the documents as no conflict of interests had been established.

     Furthermore, in Whitehouse v Carlton Hotel Pty Ltd, the High Court took the view that the articles of association of a corporation could vary the burden of fiduciary duties which would normally be imposed upon a director. Following these above cases, New Zealand also adopted this approach in the case of Berlei Hestia (NZ) Ltd v Fernyhough “the right of a director to access to corporate records is necessary for him to perform his duties as a director. There is no evidence that the Australian directors intended to act in breach of their fiduciary towards the company”.

     Furthermore, the CSLRC has also concluded that legislation was needed to clarify the duties of nominee directors by indicating that: Action of any directors guided by an extraneous loyalty in certain circumstances will not constitute a breach of their duty. That provision should not purport to be exhaustive but should refer to the circumstances which, in the views that have been expressed by the courts, justify a director having regard to extraneous interests. 

CONCLUSION 
     Malaysian law has taken strict traditional approach which requires nominee directors to give undivided loyalty to the company where there is a conflict of interest situation. The breach of section 132 (1E) carries a both civil and criminal penalties and the practice of adjusting the fiduciary duties of directors is invalid. Thus, it was recommended that the legislation should recognize the special position of nominee directors in companies which were administered under shareholders' agreements. In addition, shareholders should be allowed to make their own arrangement in relation to the corporate structure provided that the interests of minority shareholders and other stakeholders are not prejudiced.

 

 

 

 

 

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