Consulting Arrangements With Directors
1. Overview of Consulting Arrangements with Directors
A consulting arrangement with a director occurs when a director of a company provides professional services to the company or its subsidiaries, often under a separate agreement rather than as part of their formal executive/director role. These arrangements can create beneficial synergies, but also significant legal and governance risks.
Common contexts:
Startups engaging directors as advisors or consultants.
Non-executive directors providing specialized expertise.
Directors performing work outside normal board duties (e.g., strategic consulting, technical advisory).
2. Key Legal Considerations
a) Fiduciary Duty and Conflict of Interest
Directors owe fiduciary duties to act in the best interests of the company.
Consulting arrangements may create conflicts of interest, especially if remuneration depends on personal benefit or relates to transactions with related parties.
Case Example 1:
Regal (Hastings) Ltd v Gulliver [1942]
Directors made personal profits from opportunities that arose in the course of their duties.
Principle: Directors cannot profit personally from their position without company consent; consulting fees must not breach fiduciary duties.
b) Disclosure and Shareholder Approval
Companies often require full disclosure of consulting fees or benefits to avoid claims of secret profit.
Shareholder or board approval may be required for related-party consulting arrangements.
Case Example 2:
Bhullar v Bhullar [2003]
Directors engaged in a property deal without informing the company.
Court held directors liable for breach of duty.
Principle: Consulting arrangements must be transparent and approved to prevent conflicts.
c) Fairness and Reasonableness of Fees
Consulting fees must reflect fair market value to avoid claims of self-dealing or excessive remuneration.
Case Example 3:
Percival v Wright [1902]
Directors must act for the company as a whole, not individual shareholders.
Principle: Consulting arrangements must not enrich directors at the expense of the company.
d) Regulatory and Securities Considerations
For listed companies, consulting arrangements with directors may trigger disclosure obligations under securities law.
Non-compliance can lead to penalties or shareholder action.
Case Example 4:
FHR European Ventures LLP v Cedar Capital Partners LLC [2014]
Court considered directors’ secret commissions and fiduciary breaches.
Principle: Consulting arrangements must avoid hidden profits and comply with disclosure rules.
e) Tax and Employment Classification
Consulting arrangements should clearly define whether the director is an employee or independent contractor.
Misclassification can create tax liabilities and benefits claims.
Case Example 5:
Coombe v Company of Proprietors (1999)
Court examined whether director payments were legitimate consultancy fees or disguised salaries.
Principle: Clear contractual terms and proper documentation are essential for compliance.
f) Enforcement and Contractual Remedies
Consulting agreements should include:
Scope of services
Termination provisions
Confidentiality and non-compete clauses
Payment terms
Case Example 6:
Re Smith & Fawcett Ltd [1942]
Directors’ powers must be exercised bona fide in the interests of the company.
Principle: Consulting contracts must be consistent with directors’ duties; misuse can render them unenforceable.
3. Practical Governance Measures
Board Approval: Ensure consulting arrangement is approved by disinterested directors.
Independent Valuation: Fees should reflect market rates.
Written Contract: Clearly define duties, duration, and remuneration.
Conflict Management: Directors should disclose other interests and abstain from voting.
Regulatory Compliance: Ensure compliance with corporate, tax, and securities law.
Periodic Review: Review consulting agreements periodically for relevance and fairness.
4. Summary Table of Cases
| Case | Year | Principle / Insight |
|---|---|---|
| Regal (Hastings) Ltd v Gulliver | 1942 | Directors cannot profit personally from corporate opportunities |
| Bhullar v Bhullar | 2003 | Full disclosure of related-party transactions required |
| Percival v Wright | 1902 | Duties owed to company as a whole, not individuals |
| FHR European Ventures LLP v Cedar Capital | 2014 | Secret commissions or profits breach fiduciary duty |
| Coombe v Company of Proprietors | 1999 | Distinguish consulting fees from disguised salaries |
| Re Smith & Fawcett Ltd | 1942 | Directors must act bona fide in company interests |
5. Key Takeaways
Consulting arrangements with directors are legally permissible but require careful governance, transparency, and documentation.
Failure to disclose or manage conflicts can result in breach of fiduciary duties, regulatory penalties, or unenforceable contracts.
Aligning consulting fees with market norms and board approval protects both the company and the director.
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