To deed or not to deed

Fiona Shand explains the importance of redrafting directors’ deeds of indemnity for incoming board members.

The director community is well aware when offering their services to companies that their position is often precarious and exposed. As a result, directors have begun to pay more regard to the most fundamental of protections offered to the director, after the company’s constitution, being the directors’ deed of indemnity, access and insurance (deed of indemnity) and their service agreement.

Often directors are excited by a new board opportunity and fail to review the documents underpinning their relationship with the company. By doing so, they miss an early opportunity to bring real value to the board and the company.

Proper due diligence requires directors to consider their fit for the company and the company’s fit for them and includes the assurance that mutual expectations will be met, if not exceeded.  Too often, due diligence ceases when a director has confirmed  his or her consent to act for the company and fails to extend into consideration of the practical effects of the engagement documents. Reviewing these documents can provide as many insights into the likely success of the prospective directorship as meeting with other board members and the c-suite.

The Corporations Act through the business judgment rule and the delegation and reliance defences, requires directors to understand their duties, inform themselves and make an independent assessment if circumstances indicate the need for inquiry. If a company during the courtship period is not prepared to engage with an incoming director on the director’s expectation through an iterative process, this may be the portent of future interactions.

Many directors join boards, sign service agreements and deeds of indemnity on the false assumption that prior directors have considered the practical implications and effects of the documents. Not infrequently, deeds of indemnity and service agreements are written to favour the company rather than balancing the individual director’s interests against those of the company.

Further, these documents may not have been periodically reviewed and updated in accordance with current developments such as the expansion of regulator’s inquiry powers and developments in directors’ and officers’ (D&O) insurance or the law. By no means an exhaustive list, some of the common shortcomings in deeds of indemnity currently in circulation are:

Director’s personal records

Many companies require directors to abandon their packs after board meetings or following the adoption of the previous minutes. 

However, it is the current practice of many directors to make notations separate from, or on board papers, and wish to retain those records (subject to the obligation of confidentiality). Where the company has adopted a destruction policy, this does not allow directors to retain their notes. 

This can be vexing for many directors who wish to retain their notes particularly where issues are canvassed over a number of meetings. 
Many company documents do not address the instance of electronic delivery of board packs where the company is able to remotely delete documents, including directors’ notations, from cloud servers.

Destruction of records

Deeds of indemnity often require a director to “destroy” all records at the end of their term.  Destruction in these circumstances may deprive a director of essential notes if proceedings are subsequently issued.
In many instances, practical compliance with “destruction” of records requires a director to destroy physical computer equipment, given that deleted documents can be recovered through forensic processes.

Payments under the company indemnity

Many deeds state that the company may make a decision to pay under the director’s indemnity “in its absolute discretion” rather than imposing the obligation of reasonableness upon the company.

Recognising the practices and powers of regulatory authorities

Increasingly, regulators have and will continue to use their broad coercive powers against directors. These powers require a director to maintain utmost secrecy surrounding any notice and investigation where notification to the company and/or its insurer without the regulator’s permission is a breach of law.  Deeds must recognise this legal obligation balanced against maintaining the indemnity proffered by the company and compliance with the terms of the D&O insurance.

Entitlement to a copy of the D&O policy wording

Every director, as an insured under the D&O policy, is entitled to receive a copy of the wording. Directors are required to comply with the terms of any insurance and compliance may be difficult, if not impossible, without knowledge of the exact terms. 
Directors should not be restricted to mere inspection of the policy at the company’s registered office, provided that directors maintain the obligation of confidentiality surrounding the fact and terms of that insurance. Directors should also be aware of the terms and extent of coverage to ensure adequate protections upon their exit, for example, the availability of run-off cover.

Access to documentation

The majority of service agreements promise that the company will provide directors with access to information which the director reasonably requires to perform their duties. 

Conversely, many deeds of indemnity restrict a director’s access to the legislative regime for access. The Corporations Act provides that a director may seek access to documents solely for the purposes of a legal proceeding either contemplated or commenced.  This right does not extend to accessing documents which the director believes are necessary to discharge their director’s duties. 

Where the company has promised through the service agreement to provide the director access to information, which the director reasonably requires to perform their duties, this promise should be mirrored in the deed of indemnity not merely restricted to access under the Corporations Act. 

Incorporation of board and company policies

Often directors sign documentation including references to board or company policies without sighting the policies concerned.

The term

In recent years, service agreements have included a provision that a director agrees to resign if advised by the chair that they have lost the confidence of the board, or where the board has determined that it will not endorse their re-election. This clause is the modern version of the old practice where the chair required an incoming director to hand over an undated resignation letter to be retained by the chair into the future.
Without prior notification to the shareholders, this practice could amount to a fraud on the shareholders who retain the right to elect directors. 

Directors should not consider it unusual or extraordinary to seek explanations or request amendments to deeds of indemnity or service agreements. Directors should not assume that other directors preceding them have considered the practical implications of these documents. 
Initially, many incoming directors are uncomfortable in raising issues as “the new kid”, however they are often pleasantly surprised when their amendments are adopted after due consideration by the company and the other directors.

As directors we offer our reputation, experience and expertise to companies through accepting board positions. 
Where opportunities are offered directors should understand the practical effect and obligations which directorship imposes, including understanding the protections available to them. 
We must ensure that we are the right director on the right board through open communication as this is the best protection for directors, the company and ultimately its stakeholders.

Top Considerations for Deeds of Indemnity and Service Agreements

1. Are the deed, service agreement and company policies consistent with the law, current directorial practice and your expectations as a director?
2. Do the documents reflect your practice in relation to retention of records and note-taking?
3. Has the company offered opportunities for you to discuss and understand the practice effect of company policies and insurance coverage?
4. Is the company prepared to discuss and consider your suggestions in an open and transparent manner?