For this answer plan, we’ll be looking at Question 3 from Chapter 5.

Gatto Ltd, a property development company, has four directors: Honey, Cherry, Florentine and Victoria. Honey and Cherry are the children of the original founder of the business, Madeleine, who is now retired. Honey and Cherry promised Madeleine, who has a passion for local environmental issues, they would never take any action that affects the wildlife reserve based on nearly Maryland Meadow.

In 2015 the board decided that the company should pursue new developments in the local area and asked Victoria to investigate possible new development sites. She identified two possible options: (1) Holly Wood, a brownfield site (previously developed land), and (2) Berry Park, a greenfield site (undeveloped land) situated on the edge of Maryland Meadow. Holly Wood required decontamination prior to development and so offered lower profits than development at Berry Park, but development at Berry Park would inevitably have a negative impact on the wildlife reserve.  At board discussions, Honey and Cherry refused to consider Berry Park because of their promise to Madeleine, and Victoria went along with their preference. Florentine was not present at the discussions: since last year when she became director of another company (Torta Ltd), also in the construction industry, she has rarely attended Gatto Ltd’s board meetings.

Decontamination of the Holly Wood site has proved very expensive and Gatto Ltd is set to lose money on the development.  Advise Gatto Ltd.

Answer

Identify the issues

When approaching a question like this, the first step is to be clear about what is going on, who you are advising, and what they are complaining about, or want to achieve.

In this question there is one principal event – the investment decision taken by the board – but several issues arising in relation to the directors’ actions in that regard. Before starting to think about those issues specifically, check who you are advising. You are told it is the company – this is important as it indicates this is not a question about shareholder action. So you can focus on what the directors have been doing (or not doing) and what this means for the company, without worrying about things like the proper claimant rule. What is the company complaining about? It believes the directors’ decisions have caused it to lose money, by making the wrong investment choice. So it is asking you whether in making that choice any director has done anything legally wrong that might give it a remedy against that director.

This process of identifying the complaint doesn’t all have to be written down, and is quicker than I’ve just made it seem. But it is important because you are now in a strong position to identify the specific issues and relevant law.

Relevant law

The broad area of law is therefore clearly directors’ duties. And there are a number of duties that can potentially apply in this scenario, to different individuals.  Looking at the problem indicates that the key duties are going to be: conflict of interest; promoting the success of the company; care, skill and diligence; and independent judgment. But importantly we can see that they are not all relevant on the facts to all the directors at all times.

How to deal with this? Well you could explain this is about directors’ duties and proceed to set out all the potentially relevant law. That would show a lot of your knowledge – and would be quite easy to do if you’ve revised hard and can remember lots about directors’ duties. But the trouble with that approach is that it would take a lot of time, it would be descriptive, and would not leave you much time to show off your ability to apply the law. You might also end up discussing some duties that aren’t really relevant, or focusing your time on duties that are less important on the facts, and you might find it difficult later to pinpoint clearly which duties are relevant to which director and why.

So much better is to introduce the topic briefly, but then to discuss the relevant law and apply it in relation to specific individuals and actions. This way you deal with both the relevant law, and the application clearly – and all directed to the facts.

Apply the law

The essay can therefore be structured most effectively not by separating out all the relevant law and all the application, nor even by separating out different duties, but by separating out the particular actions that are of potential legal significance. That means you can more clearly identify the issue, explain the relevant law and apply it to whichever director or directors it relates to (rather than just generally).

So the scenario gives us lots of things to consider, and we can see that different duties come to the fore in relation to different aspects of the decision: (i) Honey and Cherry’s earlier promise pushes us towards the independent judgment duty; (ii) the factors the directors took, didn’t take, or may have taken into consideration takes us to the duty to promote the success of the company; (iii) Florentine’s failure to attend looks like a breach of the duty of care, skill and diligence; and (iv) Florentine’s role with another company may give rise to a conflict of interest. For each point you can establish the relevant law, and apply it explicitly to the facts.

Remember that when applying the law, you also need to think about the consequence of what you have decided. Is there a breach at all? If so, what does that mean for the company? Look at the applicable remedies, whether there is anything preventing action, and whether there are any ways the directors might escape liability.

Conclude

Your conclusion can be short if you have tied up the issues effectively as you dealt with them. It should already be clear whether you think each director is in breach (and of which duty or duties and in relation to what facts) and what the company could do about this. You can conclude by evaluating the strength of the company’s case based on your earlier discussion, and could raise practical points (such as removing directors) if appropriate.