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Farrer & Co | Governance in Group Structures for Trustees

Corporate governance has never been more important or topical. Recent high profile corporate failures have been attributed, in part at least, to a failure of corporate governance at senior level, with the result of insolvent companies and a loss of employment. The UK Government has recently decided to require large private companies to comply with governance reporting requirements that previously only applied to listed companies.

The need for governance is equally applicable to international private corporate structures. As such, good governance needs to be at the heart of a trustee’s role in ensuring that structures under their control have governance measures in place and are properly run, in order to demonstrate governance and to mitigate risks.

Governance must be fit-for-purpose and reflect the nature and requirements of the corporate structure. There are no specific governance codes directly attributable to international private structures but there are several different governance standards which might be used to draw inspiration from and to act as a benchmark for the fundamentals of good governance.

If necessary, trustees as the ultimate shareholder should use their overarching power as a shareholder to ensure that the relevant structures and systems are in place to address governance issues.

In many ways, good governance is not necessarily complicated, and the following are, perhaps, the key principles for trustees. As with sport, a team that does the basics well, has the best chance of success!

  • Ensure that there is an effective board in place. This normally requires a spread of capabilities and personalities at board level, dependent on the size, complexity and role of the company. For example, a company which owns significant real estate assets should have on its board at least one person versed in property in the relevant market. The facts will vary in each case; a group company may need a less balanced board if the key commercial decisions are made elsewhere in the structure.

  • Managing conflicts is key. Where individuals hold positions in several companies, they need to be clear about their respective roles. This is often referred to as the individual being clear which hat they are wearing at the relevant time. Classic conflicts are between an individual’s role as a director of a group company and their role as an employee or director of the ultimate trustee or as a director of another group company.

  • Conflicts must be fully disclosed and approved in accordance with the requirements of all relevant jurisdictions.

  • Whilst the ultimate shareholder may look at a group as one entity under its control, corporates must act individually. Therefore, even though a company is a subsidiary company within a larger group of companies, and may properly take that into account, the board of that company must act in the best interests of that company in making their decisions and should not blindly follow other group companies. 

  • Clearly several different laws may apply to companies in several jurisdictions. In some respects, these will be broadly similar but in others they may differ widely. It is important for both the directors and for others running the structures to ensure that there is a clear understanding of the duties and obligations in each jurisdiction and that they are properly complied with. To the extent that a similar approach can be taken across a number of jurisdictions - because very similar principles and rules apply - then all the better but a blind eye should not be turned to potential differences in different jurisdictions. Issues such as tax, company law compliance and insolvency rules are key areas of risk.

  • Directors owe duties to the company of which they are a director. These duties will differ depending on the jurisdiction in which the company is incorporated but, as a rule, directors must act in the best interests of the company. If they breach these duties, they may be personally liable to the company. There is therefore a personal risk mitigation element to good governance. 

  • When entering into contracts, a director must be clear which company he is contracting on behalf of, as otherwise there is a risk of personal liability. 

  • Trustees and directors will also want to have access to good quality information in order for them to make regular decisions and act, quickly if necessary, in the event of a crisis. In more complex group structures it is important to have in place structure charts showing not only the group companies but also, where relevant, where they are subject to third-party obligations (such as bank lending).

  • Record keeping is essential. Agendas of board meetings, board minutes and supporting documents will be the best evidence that good governance and proper decision-making has been adhered to. It may be tempting for directors of companies to shortcut the process on the basis that the same or similar matters have been considered by other companies within the group but this may well not be sufficient. The easiest way of criticising governance is to show that the form of decision making process was deficient.

  • Reputation management is a key aspect of international structures. Public disclosure, whether or not accurate, can be very damaging and a plan needs to be put in place, and properly communicated at all levels in a group structure, so that there is a clear and consistent approach to any crisis. 

  • Directors’ and officers’ insurance policies are also helpful to mitigate risk.

Top tips:

1. Review board composition regularly to ensure a balanced and engaged board.

2. All conflicts should be fully disclosed and properly managed.

3. Understand the impact of the legal requirements of all relevant jurisdictions.

4. Put in place a reputation management plan to respond to a threat to the reputation of the structure.

5. Ensure consistent record keeping across all structures.

6. Consider appropriate insurance.

If you require further information about anything covered in this briefing note, please contact Anthony Turner, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2019

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