Here’s some good reading for nominees. The excerpt is from a publication from a law firm; it is for informational purposes only and is not a legal memo or opinion. I note that not everything is applicable to the ENS Foundation but you will get the gist. I’m happy to clarify any points, as long as you understand that I am not giving legal advice. People serve as directors all the time without incident, so you should not be dissuaded, and the expectations are not onerous. I, myself, served on the Board of Directors of a not-for-profit. Also note, most of the decision making has already been given to the DAO. I encourage you to do your own research.
Common law duties and liabilities
Under the common law, directors owe fiduciary duties and a duty to exercise skill and care.
A director must act in good faith in the director’s dealings with or on behalf of the company and exercise the powers and fulfil the duties of the director’s office honestly. A director’s fiduciary duties include the following aspects:
• a duty to act in good faith in what the director considers are the best interests of the company;
• a duty to exercise powers in the company’s interests and only for the purpose or purposes for which they are given;
• a duty to avoid any conflict of interest (whether actual or potential) between the director’s duty to the
company and the director’s personal interests or a duty owed to a third party;
• a duty not to improperly fetter the exercise of the director’s future discretion; and
• a duty not to misuse the company’s property (including any confidential information and trade secrets).
Duty to exercise skill and care
When a director is acting in the company’s interests, the director is expected to exercise appropriate skill and care. The relevant threshold is that of:
A reasonable diligent person having both – (a) the general knowledge, skill and experience that may
reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.
This duty has two aspects:
• a duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable the director to properly discharge his duties; and
• a duty to attend diligently to the affairs of the company.
Whilst directors are entitled (subject to a company’s articles of association) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of that power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.
If a director breaches his fiduciary duties or duties of skill and care, he may be personally liable to the company for damages.
Other instances of personal liability
A director may be personally liable under the common law for offences of negligent misstatement and deceit.
Where a director has been negligent in making a statement, the director may be liable under a claim for damages brought by a plaintiff who has suffered loss through acting in reliance on that statement. In connection with funds, each director should read the offering document as it progresses to final proof. Each director should consider every material statement of fact or of opinion contained in such offering document and be satisfied, prior to publication of the document, that:
• the director is not aware of anything which would cause the director to doubt the accuracy of any
statement in the document; and
• each statement has been the subject of sufficient verification by appropriate and competent people to
afford the director reasonable grounds to believe that it is true and not misleading.
If a director has made a false statement, either with knowledge of its falsity or being reckless as to whether it is true or false, the director could be liable for damages to a person (including, but not limited to a shareholder or investor) thereby deceived. The measure of damages in an action for deceit is the actual damage suffered by the plaintiff, including consequential loss and it is not limited to damages which are reasonably foreseeable as a result of the deceit.
Statutory obligations and liabilities
The general principles governing a director’s conduct set out above are enhanced by a range of specific duties imposed by statute.
The Companies Act
The Companies Act places certain duties upon the directors of Cayman Islands exempted companies, some of which are sanctioned by criminal penalties. Many of these duties are specifically imposed upon the directors.
The Companies Act does not make any distinction between executive and non-executive directors.
Where a company is in breach of certain statutory obligations, any officer or director of the company who knowingly and wilfully authorised or permitted the breach will also be liable to a penalty. The key statutory provisions that are sanctioned in this way include:
• Distributions out of share premium account: No distribution or dividend may be paid to members out of the share premium account unless immediately thereafter the company is able to pay its debts as they fall due in the ordinary course of business. A company and any director who knowingly and wilfully authorises or permits a breach is guilty of an offence and liable on summary conviction to a fine of US$18,000 and to imprisonment for five years.
• Redemption and purchase of shares: A payment out of capital by a company for the redemption or
purchase of its own shares is not lawful unless immediately thereafter, the company shall be able to pay its debts as they fall due in the ordinary course of business. A company and any director who knowingly and wilfully authorises or permits a breach is guilty of an offence and liable on summary conviction to a fine of US$18,000 and to imprisonment for five years.