Completing the deal where signatories are unavailable
There is potential for delay or even the loss of a deal where any signing party is unavailable to sign when a deal is scheduled to complete.
There is potential for delay or even the loss of a deal where any signing party is unavailable to sign when a deal is scheduled to complete. Holidays and other commitments mean that it is not always possible for deals to be arranged on a date where every signing party to the transaction is available; even when a date is set, illness or other circumstances can intervene.
Technology may help, as decisions can be taken by telephone or video conference and signed documents can be scanned and circulated. In practice, however, sometimes there is no substitute for a signatory who is physically present.
What are your options?
There are two solutions to the problem of an absent director, namely the appointment of:
- An alternate/substitute director; or
- An agent, by way of power of attorney
Unlike shareholders, who are entitled to vote in their own interests, appointment of a proxy is not an option for a director.
Considering these solutions in a little more detail:
If a company’s articles allow it to do so, a director may appoint an alternate/substitute director in place of an absent director. An alternate director enjoys the same power to bind the company as a regular director and so is able to step in for the absent director to sign any necessary documents to complete a deal.
An alternate director:
- Should be aware that (s)he has exactly the same duties as any other director and must act in accordance with their own judgement and in the best interests of the company. An alternate director who simply follows the directions of their appointor to the detriment of the company could find themselves in breach of duty and personally liable;
- May be present, and vote, at board meetings. As the other directors may feel uncomfortable discussing company business with an outsider, in practice it is often another director who is appointed as an alternate. The articles may dictate who may be appointed as an alternate director.
Where the alternate is another director, it is important to ensure that any board meeting is quorate, as a director who is also acting as an alternate director does not count as two people for quorum purposes. They do, on the other hand, have two votes on any decision.
The Model Articles for private limited companies under the 2006 Companies Act do not contain a provision relating to alternate directors. It is therefore necessary to check the company’s articles and amend as necessary. Any article providing the power to appoint an alternate director should clearly set out both the procedure for appointment and removal and the permitted scope of the role.
Payments to alternate directors should ideally be governed by the company’s articles. The Model Articles for public companies express that alternate directors may only be paid such element of the appointor’s salary as the appointor directs. The clear implication is that company should not be left out of pocket to cover a director’s absence. As noted above, there is no equivalent provision in the private company Model Articles. Whether or not the articles provide for remuneration of an alternate director, it will be up to the appointing director to negotiate a fee with his/her alternate, particularly if that alternate is not already a director.
Power of attorney
A director may in certain circumstances be entitled to grant a power of attorney to another individual to allow that person to sign a document or take certain actions on his/her behalf, where the grantee is fulfilling personal responsibilities of the director which attach to him by reason of his being a director. Whilst the board is often empowered to delegate responsibilities to a third party, it is not clear whether an individual director is similarly able to delegate his/her responsibilities. We would advise that the company’s articles should clarify the position.
There are several types of power of attorney, but all constitute the grantee as agent of the grantor. This means that the grantee acts in the name of the grantor, and the grantor will alone be liable for the actions of the grantee. There may be exceptions, for example where the third party dealing with the grantee knows of any limitation imposed by the power of attorney. It is important to tailor the terms of the power of attorney to clarify the relationship between the grantor and grantee, and each party may need to take legal advice accordingly. The safest course, for both parties, may be to allow the grantee only to sign for the grantor, following remote consultation prior to signing.
From the company’s perspective, it may wish to impose conditions in the articles on the granting of a power of attorney by directors. If the scope of the power exceeds mere execution, other directors may be concerned about sharing business decisions with a third party with whom they have not agreed to be associated.
There are advantages and disadvantages to both solutions.
With a power of attorney, the grantee does not have the same statutory duties as an alternate director, but (s)he still owes a contractual duty to the grantor of the power of attorney (to comply with its terms). Providing that the grantee acts strictly in accordance with the instructions of the grantor, they will have no liability.
With alternate directors, the benefit to the company is that they have discretion to act with their own judgement. If, between appointment of the alternate and completion of the deal, there is a fundamental change in the nature of the deal, the alternate director would be able to take any decisions necessary to progress. (The flip side is the risk that the appointor and his appointee may have taken different decisions.) An agent appointed by power of attorney would not be likely to have such discretion, especially where the terms of the power allow them to execute documents only.
We should not however lose sight of the ideal solution: tight transaction organisation to minimise the risk that signatories are absent.
If you are interested in finding out more about alternate directors and the duties that they may owe, powers of attorney or any other aspect of corporate law, please contact Robert Turnbull, a consultant in the Corporate department on 0161 214 0525 or by email firstname.lastname@example.org.