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PrimeLaw>Hong Kong Company Law (2nd Edition)>Chapter 5 Role of Directors>5.1 Appointment of Directors

5.1 Appointment of Directors

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Directors are the persons chosen by members to undertake the management of the company's affairs, subject to their ultimate supervision by the members acting
collectively through a general meeting. The first directors of a company are those named in the incorporation form submitted to the Registrar (Sections 453(2) & 454(2)).
The appointment of initial directors is subject to the written consent of the appointees (Section 74). Normally, a public company and a company limited by guarantee
must have at least two directors (Section 453(1) & (2)), but in the case of a private company, only one director is required (Section 454(1)).

Where a private company has only one member and that member is the sole director of the company, the company may in general meeting, notwithstanding anything
in its articles, nominate a person (other than a body corporate) who has attained the age of 18 years (Section 459(1)) as a reserve director of the company to act in the
place of the sole director in the event of his/her death.

Where the company nominates a reserve director, it has to send to the Registrar particulars of the nomination (Section 455).

Where a company is: (a) a public company; (b) a private company that is a member of a group of companies of which a listed company is a member; and (c) a company
limited by guarantee, a body corporate must not be appointed a director of the company (Section 456(1) & (2)). Any such appointment made in contravention is void
(Section 456(3)). Where a private company other than a private company that is a member of a group of companies of which a listed company is a member, the
company must have at least one director who is a natural person (Section 457(1) & (2)).

If any company fails to appoint its director(s), i.e. at least one director for a private company and at least two directors for a public company or a company limited by
guarantee, or fails to have at least one director who is a natural person under Section 457(1) & (2), the Registrar may direct the company to appoint a director or
directors in compliance with respective requirement (Section 458(1)). The direction must specify: (a) the statutory requirement of which the company appears to be in
contravention; (b) the period within which the company must comply with the direction; and (c) that a failure to comply with the direction is an offence. The period must
not be less than one month or more than 3 months after the date on which the direction is given (Section 458(2) & (3)). If a company fails to comply with a direction
under this section, the company, and every responsible person of the company, commit an offence, and each is liable to a fine at level 6 and, in the case of a continuing
offence, to a further fine of $2,000 for each day during which the offence continues (Section 458(6)).

Members appoint subsequent directors and decide on how many directors there should be by ordinary resolution (Model articles, 23(1)(a)), usually at the company's
AGM.

Where a company is a public company or a company limited by guarantee, no motion for the appointment of two or more persons as directors by a single resolution
can be made, unless the resolution that such an appointment can be so made has first been passed at the meeting without any vote against it (Section 460(1) & (2)). A
resolution moved in contravention of this requirement is void, whether or not its being so moved was objected to at the time (Section 460(3)).

For a public company adopting Model Articles, the first directors of a public company should all retire at the first AGM and then retire in one-third at subsequent AGMs
(Model Articles for public companies limited by shares, articles 23-25; Model Articles for private companies limited by shares, articles 22-23).

The board may also appoint directors up to the maximum number allowed in the articles but the appointee must retire at the next AGM (Model Articles for public
companies limited by shares, article 23(1)(b) & (2)-(4); Model Articles for private companies limited by shares, articles 22(1)(b) & (2)-(4)). Records of appointments and
retirements must be kept in a register and details must also be sent to the Registrar within 15 days after the relevant event (Section 645(1)).

Interestingly, the law does not provide any specific qualifications for being appointed as a director, though the articles of a company may specify these. For example, the
articles may require that the director owns a number of shares in the company, is a family member or is of a certain age or nationality.

De facto and de jure Directors

A de jure director is a person who has been validly appointed as a director (in accordance with the articles), whereas a de facto director is a person who acts as a director
but has not been validly appointed.

Identifying whether a person is a de facto director is not always easy. Historically, de facto directors were directors who (i) were appointed as directors, but their
appointment was defective, or (ii) their appointment came to an end, but they continued to act as director. The courts have now acknowledged that the term de facto
director can also apply to a person who was never appointed as director (Re Lo-Line Electric Motors Ltd [1988] Ch 477 (Ch)). Over the years, the courts have stated that in
order to be a de facto director, the person must:

- exercise real influence (otherwise than as a professional adviser) in the corporate governance of the company (Re Kaytech International plc [1999] BCC 390 (CA));

- undertake functions which could properly be discharged only by a director (Re Hydrodam (Corby) Ltd [1994] BCC 161 (Ch));

- participate directing the affairs of the company and act on an equal footing with the de jure directors (Secretary of State for Trade and Industry v Hollier [2006] EWHC
1804 (Ch)).

Shadow Directors

A shadow director is defined in Section 2 of the Companies Ordinance, which provides that, a shadow director, in relation to a body corporate, means a person in
accordance with whose directions or instructions (excluding advice given in a professional capacity) the directors, or a majority of the directors, of the body corporate
are accustomed to act.

In Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), the court stated that a person will not be a shadow director if the other directors do not act on their
instructions. The court also stated that it must be shown that a “governing majority of the board” was accustomed to acting on their instructions, and not merely a

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minority of the directors. In Secretary of State for Trade and Industry v Deverell [2001] Ch 340 (CA), Morritt LJ stated that the influence exerted by the purported shadow
director need not cover the whole scope of the company's activities. He also stated that a person can openly be a shadow director and need not be shown to have
“lurked in the shadows”. As the directors must be “accustomed” to acting on the shadow director's instructions, it follows that a person will not be a shadow
director the first time such instructions are acted upon (Re Unisoft Group Ltd (No 3) [1994] BCC 766 (Ch)).

Executive and Non-executive Directors

The Companies Ordinance does not distinguish between executive directors and non-executive directors (NEDs), although both fall within Section 2. An executive
director is usually a full-time employee of the company and will be involved in the day-to-day management of the company. A NED is not usually an employee of the
company, is part-time (usually around one to two days per month), and their managerial role is much more limited. The NEDs have an additional role, namely to
“scrutinise and hold to account the performance of management and individual directors against agreed performance objectives” (UK Corporate Governance Code,
Provision 13).

Alternate Directors

A director may be temporarily unable to act as a director (due to illness, for example). In such a case, it may be desirable to appoint someone else to act on that director's
behalf, with such a person being known as an “alternate director” The Companies Ordinance does not empower a director to appoint an alternate, so a director will
only have such a power if it is provided for in the company's articles. The model articles provide that a director (known as “the appointer”) may appoint another
director, or any other person approved by a resolution of the directors, to exercise the appointer's powers and carry out the appointer's responsibilities. The articles will
set out what the alternate director can and cannot do, and the circumstances under which his appointment will be terminated.

Nominee Directors

Someone with an interest in the company (such as a major shareholder or creditor) might wish to safeguard that interest by having a say on the board. One way to do
this is by negotiating with the company to obtain the ability to appoint a director. This power of appointment will usually be placed in the company's articles, but could
also be set out in a shareholders’ agreement. Such a director is known as a “nominee director”. A nominee's duty is to the company, not the person who appointed
him (Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 (HL)).

Specific board roles

A director may be appointed to a specific board role. This appointment will affect the tasks undertaken by the director and his or her authority to act on behalf of the
company. The model articles provide that the director may ‘undertake any services for the company that the directors decide’. It is common (especially in larger
companies) for the board to appoint a director to act as managing director (MD) and/or chairperson. A director can be appointed as MD only if the articles so allow. The
role and powers of a MD are a matter for the company's articles (which may delegate certain powers to the MD) and the MD's service contract. Outside of this, a MD
does not acquire any additional powers simply by virtue of being appointed as MD (Mitchell & Hobbs (UK) Ltd v Mill [1996] 2 BCLC 102 (QB)).

A company may appoint a chairperson if the articles so provide, with article 13(1) of the model articles for private companies stating that the directors may appoint a
director to chair their meetings. The role of the chair is not set out in statute, but Appendix 14 of the Listing Rules, the Corporate Governance Code provides that:

- the chairman should ensure that all directors are properly briefed on issues arising at board meetings.

- the chairman should be responsible for ensuring that directors receive, in a timely manner, adequate information, which must be accurate, clear, complete and reliable.

- one of the important roles of the chairman is to provide leadership for the board. The chairman should ensure that the board works effectively and performs its
responsibilities and that all key and appropriate issues are discussed by it in a timely manner. The chairman should be primarily responsible for drawing up and
approving the agenda for each board meeting.

- the chairman should take into account, where appropriate, any matters proposed by the other directors for inclusion in the agenda. The chairman may delegate this
responsibility to a designated director or the company secretary.

- the chairman should take primary responsibility for ensuring that good corporate governance practices and procedures are established.

- the chairman should encourage all directors to make a full and active contribution to the board's affairs and take the lead to ensure that it acts in the best interests of
the issuer. The chairman should encourage directors with different views to voice their concerns, allow sufficient time for discussion of issues and ensure that board
decisions fairly reflect board consensus.

- the chairman should at least annually hold meetings with the independent non-executive directors without the presence of other directors.

- the chairman should ensure that appropriate steps are taken to provide effective communication with shareholders and that their views are communicated to the
board as a whole.

- the chairman should promote a culture of openness and debate by facilitating the effective contribution of non-executive directors in particular and ensuring
constructive relations between executive and non-executive directors. (Rules C.2.2 – 2.9)

In practice, the MD/ CEO and the chairperson occupy positions of power within the company and, to avoid too much power being concentrated in one person, Part 2,
Rule C.2.1 of the Corporate Governance Code recommends that the roles of MD/ CEO and chairperson should not be exercised by the same person. The division of
responsibilities between the chairman and the chief executive should be clearly established and set out in writing.

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