Bermuda: Guide For Directors And Officers Of Bermuda Companies (July 2012)

PREFACE

This Guide concerns itself with the responsibilities of directors and officers of Bermuda companies, as they relate to the company both under statute and at common law. It is divided into four parts:

1. Why Does a Company Need Directors?

2. Companies under Bermuda Law

3. The Role of Directors in a Bermuda Company

4. The Relationship between the Director and the Company

All references in this Guide to "dollars" or "$" are to Bermuda dollars. There is parity between the Bermuda dollar and the United States dollar.

It is recognised that this Guide will not completely answer the detailed questions that clients and their advisers may have. It is intended to provide a sketch of Bermuda's legal and regulatory environment in relation to the role of directors and officers of Bermuda companies. The Guide is, therefore, designed as a starting-point for a more detailed and comprehensive discussion of the issues.

Whilst we have made every effort to ensure the accuracy of the statements made herein, we accept no liability for any errors. In all cases expert legal advice from a qualified practitioner of Bermuda law should be obtained.

INTRODUCTION

All Bermuda companies must have at least one director and a Secretary. The directors manage the company and the secretary maintains the company's records and statutory registers. This Guide concerns itself with the responsibilities of directors and officers, as they relate to the company both under statute and at common law. The responsibility of directors for their companies must be understood in the broader context of what a company is as a matter of Bermuda law – and why directors are appointed to oversee its affairs.

1. WHY DOES A COMPANY NEED DIRECTORS?

A company acts through its agents, namely its directors and officers, and as a matter of Bermuda law will need to appoint at least one (1) person to serve a director and conduct the management of the company. A company is a creation of statute, and its formation and administration is governed by numerous statutory provisions, regulations and common law rules.

2. COMPANIES UNDER BERMUDA LAW

This section gives a general overview of the nature of a company in Bermuda, and the general matters surrounding its day-to-day administration. Later chapters examine in more detail the specific duties of directors in more complex situations.

What is a company in the eyes of the law?

Not all businesses are companies. The reasons for having a company can be complex, involving ownership of property, obtaining investment from a variety of sources, taxation or contractual relationships, and allocation of risk. Many businesses function satisfactorily as sole traders or partnerships.

The key point to recognise is that a company is a separate entity – a legal person in its own right, quite separate from those who own it (the members, usually shareholders) and those who run it (the directors). Many problems – and court cases – arise from people failing to recognise the difference between business people and the companies with which they are involved.

As a separate legal person, a company can itself:

• own property;
• employ people;
• enter into contracts;
• be bought and sold
• sue in the courts; and
• be sued.

What kinds of companies are there?

Public Companies v. Private Companies

In Bermuda, there is no difference between public and private companies and any company may offer to sell its shares to the public provided it prepares a prospectus in accordance with the Companies Act 1981 as amended from time to time (the "Companies Act"). A company may be quoted on the Bermuda Stock Exchange, but does not have to be.

Limited Liability v. Unlimited Liability

A company may have limited liability for its members. The effect of this is that, if the company is unable to pay its debts and is put into liquidation, the members will not be required to contribute more than they have actually paid or agreed to pay towards settling its debts.

A company may be limited by shares or by guarantee (a commitment to contribute a given sum if the company is wound up). Companies offering shares to the public usually offer shares with limited liability, but there is nothing in principle to prevent the offering of shares having un-limited liabilities.

A limited company must usually have a name ending in Limited or Ltd., although companies established for charitable or other socially useful purposes and which are not run for the financial benefit of the members may claim exemption from this requirement.

While most companies have limited liability, it is possible to set up an unlimited liability company. This would not have "Limited" at the end of its name. If an unlimited company were unable to pay its creditors out of its own assets, the members of the company would be liable for the full amount of any debt.

Whether "public" or private, limited liability or unlimited, there is no longer a minimum authorised share capital requirement for a Bermuda company, other than for insurance companies which have separate capitalisation requirements under their governing legislation. It is possible to set up a company with only one member.

Who can be a director?

Previously only individuals were permitted to serve as directors of a company. Recently, the concept of corporate directors has been adopted. The Companies Act 1981 now provides for individuals, companies, partnerships and other associations of persons whether incorporated or unincorporated to be appointed as directors of Bermuda companies.

This change provides greater flexibility to the law and practice of convening meetings whilst also expanding the categories of those eligible to form part of the composition of the board of directors. Individuals may retire, resign or otherwise take leave from office, whilst corporate directors allow companies to circumvent such interferences to business continuity.

Appleby Directors I (Bermuda) Ltd. and Appleby Directors II (Bermuda) Ltd. can provide corporate directorships to clients in certain circumstances.

It is generally up to the members to appoint as directors, to act on their behalf, persons whom they believe will run the company well. However, they cannot appoint:

• an undischarged bankrupt (except with leave of the court); or
• persons under the age of 16.

Who can be an officer?

It is up to the directors to ensure that a person has appropriate knowledge and experience to act as an officer of the company. The Companies Act defines "officer" so as to include directors and the secretary.

Officers

The company is required to have a secretary who need not be (and usually is not) a director. The company may also have such other officers, who may or may not be directors, as provided for in the company's bye-laws. It is customary (but no longer required) to appoint officers with the titles of president and vice-president or chairman and vice-chairman.

Nationality

Except for occasional restrictions imposed by the government on the activities of certain foreign nationals, a director or officer can be of any nationality and can live anywhere in the world. However, a Bermuda company must have at least one Bermuda-resident statutory officer, and if there are no Bermuda resident directors then at least the Secretary or an additional officer known as the "Resident Representative" must be ordinarily resident in Bermuda.

Shareholdings

Directors and other officers generally are not required to own shares in the companies which they manage, although there is nothing to prevent them from doing so (provided always that, as with all non-Bermudian shareholders of Bermuda companies, they have been vetted and approved as shareholders by the Bermuda Monetary Authority). In some cases, the company's own bye-laws may require the directors to hold shares.

Ceasing to act

Directors and officers may retire at the end of their appointment, they may resign, be removed or be disqualified. They may die or in the case of a corporate director cease to carry on or transact business. If any of these things happen, it is important to deal with the situation properly. Where a vacancy occurs during the board's term of office, then so long as a quorum remains in office (and unless the company's bye-laws otherwise provide), the vacancy can be filled by resolution of the remaining directors. If, however, the vacancy results in an inquorate board, the vacancy must be filled by a resolution passed at a general meeting of shareholders (or by a unanimous written resolution of the shareholders).

The cessation of a director's appointment, however it occurs, must be recorded in the register of directors and officers.

The company's bye-laws will normally provide that all directors will retire at each annual general meeting ("AGM"). Those retiring will normally be able to stand for re-election. Alternatively, the bye-laws may provide for a rotating or staggered board of directors, whose constituent members retire at different intervals.

Chairman

As stated above, it is customary for a Bermuda company to have a president and a vice-president or a chairman and a deputy chairman. The president or chairman would ordinarily serve as the chairman of board meetings.

Whether the most senior officer of a company is known as the chairman or the president, no specific legal duties, rights or powers attach to the title other than those that the bye-laws may ordinarily provide.

The chairman or president is also generally responsible for chairing shareholders' meetings. It is not uncommon for the chairman to have a casting vote in the event of a voting deadlock, both at directors' and shareholders' meetings; but the approach to this issue embodied in the standard bye-laws developed by Appleby is for the chairman not to have a casting vote, and instead for any proposed resolution not gaining a majority of votes to fail.

The registered office

Every company must have a registered office, which is the address to which any formal communications may be sent.

The company may change its registered office at any time but must notify the Registrar of such change.

The registered office must be a physical location – not just a post office box – as people have the right to visit the office to inspect certain registers and other documents. They should also be able to deliver documents there by hand.

The registered office can be anywhere in Bermuda. It may be the company's business premises, a private address, a lawyer's or an accountant's office. What is important is that documents kept there are available for inspection and that mail sent there receives attention. This will include reminders and annual return forms from the Registrar of Companies.

If annual returns or the payment of annual government fees become overdue and subsequent letters from the Registrar are ignored, this could lead to the company being struck off the register and dissolved on the basis that it appears not to be carrying on business or otherwise in operation.

If the company were to be struck off, the company would cease to exist and, subject to the rules on bona vacantia, its assets would pass to the Crown. It could only be restored following a court order. After 20 years, the company can no longer be revived.

Correspondence

A company's business stationery need not show the names of its directors. There is also no requirement to show the name of a secretary. The full name of the company, including the word "Limited" or "Ltd." if applicable, must also be shown in legible characters in all business letters of the company and in all notices and other official publications of the company, and in all bills of exchange, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by or on behalf of the company, and in all bills of parcels, invoices, receipts and letters of credit of the company.

Keeping registers and other documents

The directors and secretary should ensure that the registers of the following are established and kept up-to-date:

• the company's members (shareholders);
• its debenture holders (if any); and
• the directors and officers.

Minutes must be kept of all meetings of the board and of committees of the board (e.g. any audit committee, executive committee, remuneration committee, etc.), as well as of all general meetings of shareholders. Minute books for all general meetings should be available for inspection by members free of charge.

The company must also keep books of account and other financial records for the company at its registered office.

Both minutes and financial statements must be preserved at the registered office for at least 6 years from the date when they were first required.

Register of Members

Every Bermuda company must keep a register of its members (shareholders). The register of members must state the names and addresses of the members, and the number of shares held by each member. If shares are numbered, then the numbers must be recorded, together with the amount paid up on each share.

Register of Debenture-holders

It is implicit in the transfer provisions of sections 48 – 50 of the Companies Act that the company should keep a register of its debenture-holders, so that transfers of debentures may be properly made, and so that notices required by the Act to be given or financial statements required to be supplied may conveniently so be done.

Register of Directors and Officers

Every Bermuda company must keep at its registered office a register of its directors and officers stating each director or other officer's full name and address.

Other directorships

Anybody is entitled to know who the directors of a particular company are. Bermuda law does not provide, however, for them to know whether a director holds, or has recently held, directorships of other companies.

Annual returns

The company must send to the Registrar of Companies an annual return of its assessable share capital and a statement as to whether it is a local or exempted company.

The first annual return must be made up to a date not more than 12 months after incorporation. Further returns should be at intervals of not more than 12 months. A fee is payable on each occasion.

Winding-up

If the shareholders come to the conclusion that they no longer need their company, and there is not a buyer for it, they should consider putting it into voluntary liquidation. If the company is solvent but there are insufficient funds to warrant pursuing the winding-up process, it is possible simply to allow the company to be struck off the Register of Companies, as contemplated in Section 261 of the Companies Act. However, as companies which have been struck off may be re-instated at any time within a period up to 20 years, it is recommended that companies be properly wound-up.

3. THE ROLE OF DIRECTORS IN A BERMUDA COMPANY

Role of Directors

In general, the directors are delegated the duty of managing the affairs of the company. The affairs of the company are managed by not less than one director. As the company has no physical existence, the directors are the agents through whom the company primarily acts. As agents, directors incur no personal liability on contracts made by them on behalf of the company which fall within the scope of their authority. If a director acts in excess of the powers under the memorandum of association or bye-laws he may be personally liable for breach of warranty of authority. Where his actions are only in excess of the powers conferred by the bye-laws, the shareholders in general meeting may ratify his actions.

Apart from the specific powers and duties of directors which may be included in the bye-laws of a company, together with the various rules for appointing and removing directors, the general law describes a broad range of responsibilities which define the role which a director plays in relation to his company.

The directors are responsible for the management of the company. While their powers can be restricted by the company's bye-laws they can, in most cases, do anything that the company can do and must therefore be responsible in the use of their powers. Since the directors can act as and for the company, they must ensure that the company does everything that it is obliged to do by law as summarised in Section 2, and that the decisions they make are in the best interests of the company.

In this context, the interests of the company are those of the shareholders as a whole. These may not be the same as the interests of customers, employees, individual shareholders or the directors themselves.

Except insofar as powers may be delegated to a committee of directors or to a managing or executive director, the directors act collectively as a board. Individual directors do not have the authority to commit the company unless authorised to do so by the board.

Legal Responsibilities of Directors: Directors' Duties

There is no statutory prescription in Bermuda setting out all of the duties of directors of Bermuda companies. Generally, a company's memorandum of association and bye-laws will delimit and describe the powers and duties of the board and of the company's other officers. These provisions, together with the Companies Act and relevant case-law, describe the scope of the directors' powers. Thus, if the directors act outside the company's memorandum of association, they are acting "ultra vires", and if they act outside the scope of their powers, they do so without authority; and in each case are answerable to the company itself. In this regard, the function of the statutory law is to supplement the memorandum of association and bye-laws relating to a director's powers and to deal with areas where the company's constitution may be silent.

The Companies Act contains numerous provisions relating to the duties of directors and in some instances prescribes penalties for breach of such duties. The Act makes no distinction between executive and non-executive directors: non-executive directors are directors for all purposes of the Act. Further, the definition of "director" in the Companies Act includes "any person occupying the position of director by whatever name called".

Section 97 (1) of the Companies Act imposes the following core duties on directors:

"97 (1) Every officer of a company in exercising his powers and discharging his duties shall —

(a) act honestly and in good faith with a view to the best interests of the company; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances."

Section 97 (1)(a) of the Companies Act formulates a codification of directors' fiduciary duties and section 97(1)(b) formulates a codification of directors' duties of skill and care. The Bermuda courts will have regard to English common law authorities when considering cases involving directors' fiduciary duties or directors' duties of skill and care.

Who owes the duties?

Every officer of the company (apart from any "Resident Representative", whose statutory duties are owed chiefly to the Registrar of Companies rather than to the company itself) owes the duties set out in section 97 of the Companies Act. The company's officers include its directors and company secretary. (By contrast, any "Resident Representative" is an officer of the company, for statutory purposes, only to the extent of having to be included in the Register of Directors and Officers.) The company may also appoint other officers who need not be directors and who shall be appointed and hold office in accordance with the provisions of its bye-laws.

It is not clear whether employees who are not directors, but hold the title, for example, of "vice-president," other than expressly appointed in accordance with the bye-laws, are officers for the purposes of section 97. The better view is that employee vice-presidents do not fall within the ambit of section 97. As a practical matter, however, the employment relationship with the company and its employee vice-presidents creates similar duties.

The Companies Act includes in the definition of director "an alternate director and any person occupying the position of director by whatever named called." The latter category is intended to cover de facto directors. De facto directors are persons who act as directors without having been properly appointed as directors.

To Whom are these Duties Owed?

As a general rule the duties of a director are owed to the company as a whole and not to the individual shareholders. When a company is solvent the directors' duties include having regard to the interests of the general body of shareholders. However, where a company is insolvent, or in danger of becoming insolvent, the directors must have consideration for the interests of the company's creditors.

In a particular transaction a director, expressly or by his conduct, may constitute himself as an agent for one or more of the shareholders and he may thereby be subject to a duty to the shareholder(s) concerned. Such duty may arise in circumstances where the directors advise shareholders on the suitability of a takeover bid.

Difficulties may arise where a director is appointed by a special class of shareholder pursuant to the bye-laws or shareholders agreement. While the intention may be that such director represents the interests of the appointees, he is, however, nevertheless bound to exercise his judgment in the interests of the company as a whole. Further, in the case of a single controlling shareholder, it is not always the case that the interests of the company will coincide with the interests of that shareholder.

A director should not fetter his discretion by agreeing to exercise his discretion in accordance with the directions of some other person, and must always act in his judgment in the best interest of the company.

Fiduciary Duties

Each director of a Bermuda company has certain fiduciary duties, owed to the company, which he must exercise in good faith for the benefit of the company as a whole. In so doing, he must use his powers for the purposes for which they are intended, and fulfil the duties of his office honestly.

His fiduciary duty has four aspects:

i) A duty to act in good faith in what the director considers is the best interests of the company and not for any collateral purpose.

ii) A duty to exercise powers for a proper purpose. In the context of a Bermuda company a "proper purpose" means a purpose which advances the interests of the company itself as a separate body corporate, as distinct from its shareholders.

iii) Avoid conflicts of interest with the company, which is to say that a director should not put himself in a position in which his duties to the company and his personal interests may conflict. Unless the conflict is fully disclosed, any contract entered into by the company and a third party in which a director has an interest may be voidable at the instance of the company, and any profit made recoverable by the company.

iv) Secret profits – unless the bye-laws specifically provide, a director may not make a personal profit from any opportunities arising out of his directorship, even if he is acting honestly and for the good of the company. Any profit made in such circumstances must be paid over to the company.

A major problem in the enforcement of directors' duties is the necessity to overcome the rule in Foss v. Harbottle. Essentially, a breach of a director's duties of care and skill will be a harm done to the company itself and in respect of which the company itself should sue. If the company were to decide not to proceed then a shareholder can only bring an action on behalf of the company if he can bring himself within one of the exceptions to the rule such as "fraud on the minority".

Duty of Skill and Care

A director of a Bermuda company must exercise whatever skill he possesses with reasonable care. This duty has three aspects:

i) Degree of Skill – The standard required from the director is that of a person of his particular knowledge and experience. His performance will be judged by the way he applies any skills which he actually has.

ii) Attention to the business – A director should attend to the affairs of the company diligently. Unless he is an executive director, he is not expected to devote all of his time and attention to the management of the company, or to be an expert in its field of business, but in performing his duties, he must display the "reasonable care...[that] an ordinary man may be expected to take in the same circumstances on his own behalf".

iii) Reliance on others – A director is not liable for the acts of co-directors or company officers solely by virtue of being a director. Rather, a director may rely in good faith on executives who have been appointed specifically for the purpose of attending to the detail of management. However, directors cannot absolve themselves entirely of their responsibility by delegation to others.

Delegation of Directors' Duties

Directors are, to some extent, entitled to delegate their powers of management to professionals and to their fellow directors. Section 97 (5A) of the Companies Act exonerates directors from liability if they rely in good faith upon:

"(a) financial statements of the company represented to him by another officer of the company; or

(b) a report of an attorney, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him."

Directors are also entitled to trust their fellow directors unless there are grounds for suspicion. As the Bermuda Court of Appeal has held, "A director is not the watchdog of another director. A duty of care could only arise if one director had reason to suspect that his fellow director was acting dishonestly."

Exoneration and Indemnity

Separately from the exculpatory provision of section 97(5A) referred to above, section 98 of the Companies Act permits a company to exempt and indemnify its directors and officers from liability in the following terms:

"98 (1) Subject to subsection (2), a company may in its bye-laws or in any contract or arrangement between the company and any officer, or any person employed by the company as auditor, exempt such officer or person from, or indemnify him in respect of, any loss arising or liability attaching to him by virtue of any rule of law in respect of any negligence, default, breach of any duty or breach of trust of which the officer or person may be guilty in relation to the company or any subsidiary thereof.

(2) Any provision, whether contained in the bye-laws of a company or in any contract or arrangement between the company and any officer, or any person employed by the company as auditor, exempting such officer or person from, or indemnifying him against any liability which by virtue of any rule of law would otherwise attach to him in respect of any fraud or dishonesty of which he may be guilty in relation to the company shall be void..."

Section 98(2) of the Companies Act was amended in 1996 to raise the "threshold" in respect of bye-law indemnity provisions that are deemed to be void from wilful default to fraud or dishonesty. Prior to the 1996 Companies Act amendment bye-law provisions which sought to indemnify directors and officers for acts of wilful default were deemed void. Since 1996 a company, if it wishes, may indemnify its directors for acts of wilful default. Many bye-law indemnity provisions retain the threshold of "wilful default". Wilful default occurs when a director knows that he is committing and intends to commit a breach of his duty or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty.

In order to make a finding of dishonesty it must be established "that the defendant's conduct was dishonest by ordinary standards of reasonable and honest people and he himself realised that by those standards his conduct was dishonest." The determination of whether a bye-law indemnity is effective in any given situation entails a factual and legal analysis of the claim made against the director and an interpretation of the bye-law to see whether the claim falls within the ambit of indemnity.

The Bermuda Court of Appeal has established that the onus is on a company or its liquidator to plead and prove at trial a case of wilful default or dishonesty in order to overcome the obstacle imposed by a byelaw indemnity.

Other Statutory Duties of Directors

The general principles governing a director's conduct set out above are augmented by a range of specific duties imposed by statute, namely the Companies Act. Some of these duties are imposed not on the directors in their own right, but on the company. However, since the directors are responsible for the performance of the statutory duties imposed on the company, it is they who must ensure that the company does everything that is required of it. Other duties are imposed directly on directors themselves, generally taking the form either of the restriction of a particular activity or a requirement to disclose it, or both.

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