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29 March 2024

Jersey Joint Ventures And Nominee Directors: A Deep Dive Into Pender v CGH

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Walkers

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Walkers is a leading international law firm which advises on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Ireland and Jersey. From our 10 offices, we provide legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers.
Jersey companies are widely used for setting up joint ventures, particularly in a private equity context – further information on why Jersey entities are popular for private equity structures...
Jersey Corporate/Commercial Law
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Jersey companies are widely used for setting up joint ventures, particularly in a private equity context – further information on why Jersey entities are popular for private equity structures can be found here . It is a common feature of the constitutional documents of a joint venture company in Jersey (and elsewhere) for shareholders to have the right to appoint a director, known as a nominee director. A nominee director bears the responsibility of balancing the interests of the appointing shareholder with the broader obligations owed to the company itself and this note will explore some of the key considerations that a nominee director should consider when acting in such a role.

Jersey's approach to corporate governance is based on the Companies (Jersey) Law 1991, a piece of legislation that mirrors the English Companies Act 1985. In practice this means that when there isn't a specific authority on a point of law in Jersey, the Royal Court in Jersey may have regard to any relevant English authorities.

This was the case in Pender v CGH (Jersey) Limited and Ors [2023]. Here, the Royal Court considered the concept of nominee directors and their directors duties in the context of an unfair prejudice claim brought under Article 141(1) of the Companies Law. The findings of the Royal Court on this point in Pender offer helpful clarification to nominee directors in the discharge of their role and specifically as to whom they owe their duties.

Directors' Duties

In Jersey, directors' duties arise under both the Companies Law and customary law. Under Article 74 of the Companies Law, directors are expected to act with honesty, good faith and in the company's best interests. They're also required to demonstrate the care, diligence, and skill expected of a reasonably prudent individual in comparable situations.

Article 75 of the Companies Law provides that a director must disclose to the company any direct or indirect interest that may conflict with the company's interests. This provision of the Companies Law may also be supplemented by extra terms in the company's articles of association.

As mentioned above, a director will also owe general duties to the company by virtue of Jersey customary law. We've set out below some of these duties and how such duties could give rise to some practical difficulty in joint venture arrangements:

  • Duty to act in good faith: A director will have a duty to act bona fide in the best interests of the company (as reflected in the provisions of Article 74(1)(a) of the Companies Law).

Potential practical difficulty in a joint venture context: A nominee director appointed by a shareholder must act in the best interests of the company as a whole (i.e. all its members not the self-interest of their appointing shareholder). The parties to a joint venture should therefore consider whether it's appropriate to allow a shareholder and/or their nominee director to vote where there is a clear conflict, whether certain conflicts may be authorised and the adjustments to quorum requirements which may need to be made where a shareholder or their nominee director aren't permitted to vote.

  • Duty to act for a proper purpose: A director must use their powers as director of a company for the purpose to which they have been given.

Potential practical difficulty in a joint venture context: As a baseline, the proper purpose of any given power given to a director will be informed by the need to act in the best interests of the company. There are any number of potential scenarios where a nominee director could be considered as acting 'improper'. Acting to protect a director's own position, to make matters difficult for a particular shareholder, or to influence the outcome of a general meeting are all common examples. A nominee director must be aware of this duty and that it still applies notwithstanding that any de facto conflict in the appointment of the nominee director in the first place has been approved.

  • Duty of confidentiality: All directors owe a duty of confidentiality to the company. There is a degree of overlap with this duty and the statutory duty to act in the best interests of the company and to avoid conflicts of interest.

Potential practical difficulty in a joint venture context: Even though a nominee director has been appointed by a particular shareholder, the nominee director should not, without the authority of the company, disclose to that shareholder any confidential information relating to the company which has been gained as a director of that company.

It is therefore usual for the constitutional documents of a joint venture company to prescribe what categories of information can be passed to that shareholder by its nominated director without that director breaching the confidentiality duty.

Pender Case – the Court's view of nominee directors

As set out above, a director will owe a fiduciary duty to the company to act in the best interests of that company and to take steps to avoid or manage conflicts of interest.

In the Pender case, the Royal Court considered the role of a nominee director and how such an appointment interacts with the duty to act in the best interests of the company and the duty to take steps to avoid or manage any conflicts of interest.

Unlike some jurisdictions, Jersey doesn't recognise the concept of a nominee director within its Companies Law, but in effect this is a director appointed by certain shareholders to represent their interests. As noted above the appointment rights are often built into the constitutional documents of the company (e.g. the holder of A Shares may appoint an A Director, the holder of B Shares may appoint a B Director, etc.).

The court reaffirmed that nominee directors, like all directors, owe their primary duty to the company. They must exercise independent judgement and prioritise the company's interests, even when faced with potential conflicts stemming from their appointment by a specific shareholder. The Royal Court was referred to the English case Re Southern Counties Fresh Foods Limited [2008] EWHC 2810 (Ch), which when considering similar competing interests held that:

  1. a nominee director will owe the same duties of the company as any other director;
  2. those duties of a nominee director are owed to the company alone;
  3. the company is entitled to expect the best independent judgement of a nominee director;
  4. however, those duties can be qualified in respect of a nominee director (just as they can be qualified in the case of any other director) and in particular, such duties (excluding the core duties of a director) can be qualified by the unanimous assent of all shareholders;
  5. as a matter of English law, it is doubtful whether it is possible to release a director from the general duty to act in the best interests of the company;
  6. even if it's possible to release a director from their duty to act in the best interests of the company, strong evidence would be needed to show that a director has been released from that duty. Ideally, that evidence would be by way of an express written agreement signed by all of the shareholders, with the onus sitting with those who claim that the general duty has been released. It would also be necessary to show the extent to which that duty had been released; and
  7. in principal, it is possible in specific areas of interests, for a director to be released from their fiduciary duty to give their best independent judgement to the company.

The Royal Court also noted that the Re Southern Counties decision went on to say that there would be an expectation that if a nominee director were permitted to negotiate an agreement on behalf of their appointee, they would then be precluded from both the discussions of the board relating to the negotiations and the subsequent voting on the issue.

The Royal Court concluded that given the decision in Re Southern Counties, a nominee director would not be absolved from their duty to act in the best interests of the company unless the nominee director had received the express written agreement of all shareholders.

Conclusions

The deliberations in the Pender case gives practical guidance for nominee directors navigating their roles within Jersey companies. While the overarching duty to act in the company's best interests remains inviolable, there's room for flexibility in specific instances, especially when explicit consent is given by all shareholders. This flexibility is particularly relevant in scenarios where a nominee director might otherwise face conflicts between their duties to the company and the interests of the appointing shareholder.

The case reinforces the importance of clear, comprehensive agreements that detail the scope and limitations of a nominee director's duties. If you need help with a similar scenario, our Investment Funds & Corporate team is on hand to help.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
29 March 2024

Jersey Joint Ventures And Nominee Directors: A Deep Dive Into Pender v CGH

Jersey Corporate/Commercial Law

Contributor

Walkers is a leading international law firm which advises on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Ireland and Jersey. From our 10 offices, we provide legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers.
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