In this article I am keen to consider whether alternate directors can be a useful tool for succession planning.
At the risk of over simplifying, I believe that the short answer is no: alternate directors are not a useful tool for succession planning. This is because an alternate director probably loses their powers when the appointing director loses capacity or dies. In circumstances when people want to use alternate directors, I think that a better option typically is to use the less well known option of “successor directors.”
What are alternate directors?
Broadly, an alternate director is someone who acts as a director in the place of another director of that company. More specifically, the position is generally as set out in s 201K of the Corporations Act 2001 (Cth) (for completeness I note that this is a replaceable rule so there is no guarantee that this applies to every company):
1. With the other directors’ approval, a director may appoint an alternate to exercise some or all of the director’s powers for a specified period
2. If the appointing director requests the company to give the alternate notice of directors’ meetings, the company must do so
3. When an alternate exercises the director’s powers, the exercise of the powers is just as effective as if the powers were exercised by the director
4. The appointing director may terminate the alternate’s appointment at any time.
It is possible to use alternate directors in the SMSF context, and the ATO discuss this in some detail in self-managed superannuation fund ruling SMSFR 2010/2.
How might people seek to use alternate directors for succession planning?
Often people seek to use alternate directors for succession planning as follows. A person is a director of a company. (I’ll call that person the “appointing director”.) The appointing director wants to ensure that upon his or her death, or loss of capacity, another person is able to act in their director role. Accordingly, the appointing director appoints that other person as their alternate director.
Where might a problem arise?
Recall the above words from s 201K(1): “…a director may appoint an alternate to exercise some or all of the director’s powers for a specified period”.
This raises the questions of what happens when the appointing director loses their powers. Can an appointing director give a power that he or she no longer have? The simple answer (which I believe is the generally correct answer for most companies) is no. This is relevant because under pretty much every constitution I have ever read there is a provision that broadly says a person ceases to be a director upon loss of capacity. More specifically, it is very common to see a provision that says almost verbatim something like:
… the office of Director becomes vacant if the Director: (a) … becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under the law relating to mental health …
There are often equivalent express provisions confirming that directorship ceases upon death.
Accordingly, when the appointing director most needs an alternate director to act for succession planning reasons (ie, upon the loss of capacity or death of the appointing director), the appointing director will cease as a director and thus no longer has any power to give.
In short, I believe the typically correct position is that an alternate director automatically loses their powers (ie, ceases as a director) when the appointing director loses capacity or dies. This is why I believe that alternate directors are generally not a useful tool for succession planning.
(However, I acknowledge that I can’t be too definitive about the above. Despite research, I can’t cite any case law or legislation expressly supporting me. However, I also don’t think there is any case law or legislation refuting me. Accordingly, I believe the position I’ve adopted above is the most conservative and therefore best practice.)
What is a successor director?
The concept of successor directors does not exist under legislation or general law. Rather, a successor director is a concept that will only exist if a company’s constitution expressly provides for it. Broadly, it is where the constitution says that if a director so nominates another person, that other person becomes a director of the company when the nominating director loses capacity or dies. (Naturally, this is subject to the other person consenting to becoming a director and satisfying all of the other usual requirements such as not being bankrupt.)
Accordingly, I believe the concept of a director successor is far better at achieving the succession planning goals that people often are trying to achieve with alternate directors
The main practical draw back of successor directors is simply that not many people know about them. Also, few constitutions allow for them and thus often in order to implement
them a constitution update is first needed.
I believe that alternate directors are not a good tool for succession planning because the alternate director probably automatically ceases as a director when the appointing director loses capacity or dies. Instead, I believe using a successor director in that circumstance is far better.
However, watch out to ensure that the constitution of the relevant company allows for successor directors.
Case studyTrent and Logan are business partners and are in the same SMSF together (the SMSF has bought the real estate where their business is run). Trent wants to ensure that upon his death or loss of capacity his legal personal representative – which in this case study is his wife – automatically has a role in the running of the SMSF, which has a corporate trustee. Trent notes that even if his wife gets control of the shares in the corporate trustee, since Trent only owns 50 per cent of the shares, Trent’s wife would not have a majority and so could not vote herself in as a director. Luckily, the constitution of the SMSF’s trustee allows for successor directors. Accordingly, Trent nominates his wife as his successor director. Now, his wife has a right to be appointed as a director upon Trent’s loss of capacity or death. |
