This is the second of a three-part series of articles looking at key aspects of the corporate governance framework under the Myanmar Companies Law 2017 – including looking at Australian case law on the application of directors duties (in part three). See part 1 here.
1. D&O duties – source in fiduciary duties
Why do we have directors’ duties?
The main function of directors’ duties is to ensure the loyalty of directors to the company. The existence of the duties is a recognition that the interests of directors may diverge from those of shareholders. The two main ways that interests of directors and shareholders may diverge are the following.
- Self-dealing transactions which benefit directors at the expense of the company. The duty of directors to act in the best interests of the company and the duty to avoid conflicts of interest are designed to regulate this situation.
- Where directors act with insufficient care or diligence in relation to the affairs of the company. The duties of care, skill and diligence are directed at this situation.
What is the original source of the concept of directors’ duties?
The power to control the management of a company, its property and affairs is typically vested by the company’s constitution and applicable companies law in the board of directors. With this power comes the opportunity for fraud and mismanagement. Anyone who entrusts their property or affairs to another person is at risk of suffering loss by the other person’s wrongdoing. The shareholders of companies are often especially vulnerable because they are frequently passive investors who do not follow the company’s progress on a day-to-day basis. Their vulnerability is more acute if they are numerous and not organized.
English common law (including as introduced to Myanmar during the British colonial period) has traditionally addressed the risks inherent where a person entrusts their property or affairs to another person through the concept of “fiduciaries” and “fiduciary duties”.
A fiduciary relationship arises under common law where A and B agree that A will act on behalf of, or for the benefit of, B in circumstances which give rise to a relationship of trust and confidence. A has some discretion or power which affects B’s interests and could be exercised to B’s detriment. B in turn relies on A for information, advice and/or responsible custodianship of B’s property or interests.
In this scenario, A is a fiduciary and is deemed under common law to owe fiduciary duties to B in respect of the fiduciary relationship.
In general, whether a relationship is fiduciary is a question of fact to be determined by a court based on the nature and context of the relationship and the obligations undertaken. However, certain categories of relationship are recognized as automatically being fiduciary relationships under common law.
One such category is the relationship of director and company. Directors will always be fiduciaries who owe duties of loyalty to the company, including duties to:
- Act in good faith in the best interests of the company.
- Act for proper corporate purposes.
- Give adequate consideration to corporate matters for decision.
- Avoid conflicts of interest.
These fiduciary duties have formed the basis of specific listed – or ‘codified’ – duties set out in companies law in most jurisdictions. The MCL contains a list of codified directors’ and officers’ duties in sections 165 to 172. The key duties set out in the MCL are taken (in English) almost word-for-word from Australian companies legislation.
However, it is important to understand the original source of these duties and the concept of fiduciary relationships as a further aspect of understanding the reason for, and purpose of, directors’ duties. Also, section 164 of the MCL states that the MCL duties do not limit any duties imposed on directors under any other applicable law. Fiduciary duties should apply under Myanmar common law. Therefore, while issues of the application and breach of directors’ duties will almost always be determined by reference to the codified MCL duties, it is still possible that common law fiduciary duties could be applied (if broader than, or otherwise different from, the MCL duties).
2. D&O duties – who is subject?
The definition of “director” under the MCL includes not only a person appointed to the position of director, but also a person who, while not appointed to the position of director:
- acts as if appointed in the position of director; or
- has wishes or provides instructions that the directors of the company are accustomed to acting in accordance with or who otherwise exercises, or controls the exercise of, powers that would be exercised by the board.
Any person who falls within this definition of director will be subject to the obligations on directors under the MCL, including directors’ duties.
The concept of persons who are not formally appointed as directors, but are treated as directors under law because of the actions they undertake or authorities they exercise in practice, is usually divided into two groupings:
- De facto directors: these include a person who:
- Has been appointed as a director but whose appointment is not valid (e.g. there was some defect in the appointment process; or their term as director has expired and they not been formally removed; or a person has resigned as director but keeps acting in that role).
- In effect acts as a director of the company although not formally appointed or referred to as a director. A court will assess this according to such factors as: whether the person is exercising top-level management functions; how the person is perceived by people dealing with the company; and the size and internal structure of the company.
- Shadow directors: these are persons who are not appointed as directors but in accordance with whose instructions and wishes the actual directors are accustomed to act.
- In relation to their acts and decisions made as directors, the directors must be accustomed to (i.e. usually or always will) follow the wishes or instructions of the shadow director.
- It is not necessary for a person to be giving instructions over the whole area of corporate activity for which the directors are responsible for that person to be a shadow director.
- A person will not be a shadow director only because the directors act on advice given by that person in the proper performance of his/her professional capacity or business relationship with the directors (e.g. external lawyers, investment bankers, auditors).
- Given the prevalence of ‘nominee’ relationships and structures in Myanmar, it is possible that Myanmar has a large number of ‘shadow directors’, all of whom are actually subject to directors’ duties despite not having formal appointments with the relevant companies.
The MCL defines an “officer” of a company as being a person who:
- makes, or participates in the making of, decisions that affect the whole, or a substantial part, of the business of the company; or
- has the capacity to significantly affect the company’s financial standing.
The definition of “officer” looks at the type of role that the person plays in the company. It does not require the person to be in substantially the same role or position as a director. Note that the definition includes makes “or participates in making” decisions that affect all or a substantial part of the company. A person therefore does not have to have sole responsibility for significant decisions to be an officer.
Company secretaries and chief financial officers will usually be officers because of the nature of their roles. Other ‘C-level executives’ will frequently be officers.
All directors – including ‘de facto directors’ and ‘shadow directors’ – and officers are subject to directors’ and officers’ duties under the MCL.