Company’s confusion over the term ‘director’ proves costly

The term director is often applied to people running a company even though they aren’t officially listed as directors.

This can lead to confusion because genuine directors have specific duties in law which do not necessarily apply to employees acting in a managerial role.

It is possible for managers to be seen as de facto directors – that is, they effectively become directors with all the associated duties because they exercise certain levels of control.

However, this concept is not always understood and can lead to costly errors, as illustrated in a recent case before the High Court.

The case involved a dispute over the ownership of a patent. A group of leading employees at a company applied for the patent for a new product they had invented. However, the patent was listed in the name of a third party following negotiations about how future development should be funded.

The company later took action claiming it should own the patent. It argued that as the leaders of the project, the employees, were de facto directors and so had a legal duty to act in the company’s best interests.

They had breached that duty to protect their company when they allowed the patent to be registered to a third party.

The court, however, ruled against the company.

In giving his decision the judge said that there was no single test by which a de facto director could be defined, but there were a number of relevant factors such as whether he was acting on an equal footing with the true directors in guiding the company’s affairs, and whether the company gave him the title of director.

In this case, the employees could not be considered as de facto directors as they had never been presented as such by themselves or others.

They were simply employees running a project for their employer. During negotiations about the patent, the corporate governance of the company was at all times within the sole control of the actual directors.

Accordingly, the employees were never de facto directors and so could not have been in breach of the duties owed by a director.

Please contact Mark Pelopida if you would like more information about the issues raised in this article or any aspect of company law.