Can a company use its powers as a shareholder to appoint directors to the board of a rival business and potentially influence how it is run?

We’ve just seen Ecotricity try to appoint two non-executive directors to the board of rival energy supplier Good Energy (GOOD:AIM). Retailer Sports Direct (SDL) tried to do the same a few years ago with Findel (FDL).

Ecotricity has built up a 25.3% stake in Good Energy and recently sought to appoint chief executive Dale Vince and a colleague to its board.

Good Energy said such an appointment would present ‘significant conflicts of interest’ that wouldn’t be in the best interests of its shareholders and customers.

Although Ecotricity subsequently pulled its request, such actions raise a number of interesting company law issues with regards to director duties and conflicts of interest.

As a matter of basic company law there is absolutely nothing wrong with what Ecotricity was trying to do.

If you own more than 5% of a company you can propose a shareholders’ resolution to appoint a board member and if the resolution receives approval from a majority of eligible voters it will pass.

Most private companies have shareholder-appointed directors – whether in the context of owner managed business or in a joint venture.

Even in a public company context, where the need for market credibility drives the requirement for companies to adhere to corporate governance codes requiring board independence, there are many high profile examples of shareholder-appointed directors.

Indeed, the UK Corporate Governance Code requires only companies within the FTSE 350 to fill their board with a majority of independent directors.

While the legal path to appointment is relatively easy, the same cannot be said for how such a representative would need to conduct themselves following appointment to ensure they do not breach any complex statutory and common law rules to which they will be subject.

For example, the Companies Act 2006 requires directors to, among other things, ‘exercise independent judgment’ and ‘avoid conflicts of interests’ as well as being bound by duties of confidentiality.

To avoid breaching these obligations the appointed directors would need to ensure they seek to enhance the interests of the shareholder body as a whole rather than pushing any specific agendas which may be beneficial to their appointing shareholder.

By staying off the board and sacrificing the ability to obtain influence in the short term, Ecotricity has avoided any potential restrictions to buy further shares which may have existed if its appointed board member had become privy to non-market price sensitive information.

By Andrew Hart, a corporate lawyer at international law firm Bryan Cave LLP

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