LEGAL OBLIGATION OF DIRECTORS

1. LEGAL OBLIGATION OF DIRECTORS Presented by John Rogito Chweya

2. DELIVERABLES After the presentations, the following questions should be answered. • Who is the Director and Board of Directors • The Legal obligation of directors • Basic role of the board of directors • What is the basic duties of the board and individual directors. When governing a company. • How do the board of directors balance the interest of shareholder, stakeholder on their social causes. • Responsibility of the board in hostile takeover offer • Purposes of indemnification of board of Directors.

3. INTRODUCTION • Board of directors is a group elected by the owners of a business entity who have decision making authority, voting authority and specific responsibilities which in each case is separate and distinct from the Authority and responsibilities of owners and manager of the business entity. • Directors are the members of a board of directors, directors must be individuals. Directors can be owners, managers, or any individual elected by the owners of the business entity. • Board of directors are sometimes compared to an advisory board or board of advisors. • Why appoint directors or board of directors.

4. LEGAL OBLIGATIONS FOR DIRECTORS • When individual manage their own business, they will act in their own self interest, making decisions to support the achievement of their shorter and long term goals thus no opportunity for a conflict of interest. • when an individual serves as a director of a business he or she represents the interest of the owner(fiduciary responsibility) and thus there is a potential of conflict of interest.4 • Effective representative requires  Integrity and Competency to make right decisions. • Corporations are run by board of directors and stakeholders

5. GOVERNANCE OF THE CORPORATION • Board of directors is responsible for the governance • The governing powers are articulated in the documents • Articles of Incorporation • The by-Laws and • Shareholders Agreements 

6. RESPONSIBILITIES OF SHAREHOLDERS The controllers of the affairs of the cooperation They elect the board of directors. They approve major transactions or decisions e.g. Merger, Dissolution, Sales of Assets

7. RESPONSIBILITIES OF BOARD OF DIRECTORS Hiring chief executive and other senior managers Evaluation of organisation performance Firing of the CEO Exercising oversight of CEO action Offer advise to major decisions Policy formulation.

8. DUTIES/RESPONSIBILITY OF DIRECTORS The legal obligations of directors are: The fiduciary duty The duty of loyalty and the duty of fair dealing. The duty of care The duty not to entrench The duty of supervision

9. THE FIDUCIARY DUTY • Monitor business activities with a view to enhancing corporate profit and shareholder gain. • act within the boundaries of the law. • take into account ethical consideration that are reasonably regarded as appropriate to the responsibility conduct of business • devote a reasonable amount of resources to public welfare humanitarian educational and philanthropic purposes. (Charity). •  challenge on fiduciary duty is the balancing responsibility to shareholder with interest in social causes

10. THE DUTY OF LOYALTY They commit allegiance to the enterprises and acknowledge that the best interest of the corporation and the shareholders must prevail over their interest. They should not use their corporate position to make a personal gain, profit or advantages. Duty of fair dealing is a component of loyalty i.e. requires all transactions with the corporation to be handled in a forthright and open manner which is fair to the interest of the corporative.

11. THE DUTY OF FAIR DEALING offer the corporate opportunity and make disclosure concerning the conflict of interest and the corporate opportunity. The corporate opportunity is not rejected The rejection of the opportunity is fair to the corporation. They are not suppose to advance their pecuniary interest by engaging in competition with the corporation Competition is authorized in advance or ratified following disclosure concerning the conflict of interest or disinterested shareholders.

12. DUTY OF CARE Act carefully with full common senses while carrying corporate duties. Perform their duties in good faith and in manners that he or she believes is to be the best interest of the corporation. Act in the best interests of the corporation and with the care reasonably expected of an ordinary prudent person. Need to be informed, make necessary inquiries, delegate functions and rely on other directors, employee experts and board committee.

13. THE DUTY NOT TO ENTRENCH • This is another fiduciary duty, a duty not to entrench. • There is opinion that if corporation is not performing well, change should be made in management and even the board if they are not addressing the issue in questions. • However, not every change will be to the interest of the organization and directors have responsibility to share the views. • Fulfilling the duty not to entrench depends more on following good business practices in evaluating the corporate performance and the performance of the management and the board than on complying with the law. • In order to avoid entrenchment, time limit is set for an individual can serve as director in corporation.

14. THE DUTY OF SUPERVISION Deals with the effectiveness with which directors exercise their oversight responsibilities. It addresses what directors should know about Operations of management. What they should do whenever a problem arises in the corporation The board must establish Policies of ethics Set standards for behaviors of directors and senior executives. Ensure internal controls Accurate reporting format on corporation operations. The most important task associated with the duty of supervision is the regular meeting of the board to discuss the performance of the organization. Thus directors must know what they need to know and insist that it be provided.

15. DEALING WITH HOSTILE TAKEOVER OFFERS This is another important and difficult responsibility since more often it ends up in litigation as a result of their very high visibility with the shareholder – see IMBO KAMITI FIRM. The boards may act to block hostile takeover bids for the corporation when after having considered carefully what is in the best interest of the corporation and shareholders, they make the judgment that the takeover may jeopardize the viability of the corporation that the impact on the groups other than the shareholders.

16. Standards determines if Directors have met their Responsibilities In the U.S.A. the states law has spelled out the duties and responsibilities of directors and establish the standards of the performance of directors that define their obligations. But due to skills information and judgment not possessed by courts and shareholders, more often even if shareholders point a figure to directors for further decision, the courts are reluctant to second guess such decision when they appear to have been made in good faith. Due to the above, the courts avoidance to be involved in corporate governance and decisions making lead to the business judgment rule development.

17. Standards CONT… • “Under the general business judgment rule, there is a presumption that in making a business decision, the directors of a corporation acted on an informed basis in good faith and in the honest belief that the action was in the best interest of the company” • The rule of judgment depends whether the stockholder can convince the court whether the directors failure to fulfill their duty or violated the duty of care or did not act in good faith or displayed disloyalty in their decision.

18. Interpretation of the duty of Care The duty of care requires a board of directors to act in good faith and make informed business decisions. The consequences of breaching the duty of care are severe because the business judgment rule does not apply and the board of directors must establish the entire fairness of its decision. Entire fairness means that the shareholders have been when all things are considered treated fairly, that the result is fair without regard to how the board arrived at its decision.

19. DUTY OF CARE COMMANDMENTS • The board is likely to have met its duty of care if it: • Engages experienced legal counsel to design and manage the governance process and maintain appropriate records of the proceedings. • Does not rush important decisions • Give members adequate prior notice of important business to be conducted. • Distribute major documents or position paper to board members well in advance of meeting. • Have one or more information meetings follow up with distribution of additional information in response to questions and convenes subsequent discussion and action meetings. • Provide board members with adequate information to make an informal decision including

20. DUTY OF CARE COMMANDMENTS CONT… Access to opinion of expert advisers Management analysis and recommendations. Identification of information on alternatives Fairness of opinion. Does not submit to the pressures of a domineering CEO or others.

21. THE DUTY OF LOYALTY IN PRACTICE • There are certain commandments that establish a list of required behaviors for conscientious board. If this directive is followed, problem with duty of loyalty are typically avoided: i.e. duty of loyalty includes. • An interested director must fully disclose any conflict of interest and the basis for it when the issue arises and in advance of related discussion and decision. • The interested directors must not unduly influence discussion of the transaction, may need to leave the discussion almost certainly should abstain from voting on the issue. • The proposed issue must be resolved by a majority of the disinterested directors.

22. Indemnification of Directors Its general practice for corporation to indemnify directors against liability for their legal actions i.e. the directors are not personally liable for any damage that may result from legal acts of the board to the extent that there are corporate assets to cover any awards to plaintiff. However, most organization purchases insurance cover for directors for any liability.

23. SUMMARY Directors, individually and a board of directors as a whole must act in accordance with legal standards spelled out by the state in which the business is incorporated. Further each director must have working knowledge and know when to seek expert advice during the period of discharging their duties.

24. END THANK YOU