Musk’s Twitter takeover

It’s been a big couple of weeks for Twitter. First, Elon Musk was offered a position on the Twitter board a day after acquiring stock worth more than $3 billion (a 9.2% shareholding), on the condition he would not be allowed to acquire more than 14.9% of Twitter's stock until his term ends in 2024. Musk then turned down the position on the day his appointment was to have been made official. Now, he has bought the whole company.

When considering Musk’s appointment to the board, Twitter CEO Parag Agrawal wrote to staff that "we announced recently that Elon would be appointed to the board contingent on a background check and formal acceptance." Agrawal stated that he and the board “had many discussions about Elon Musk joining the board, and with him directly. We were excited to collaborate and clear about the risks. We also believed that having Elon as a fiduciary of the company where he, like all board members, had to act in the best interests of the company and all our shareholders, was the best path forward. The board offered him a seat”.

After Musk turned down the directorship, Agrawal then commented that "I believe this is for the best. We have and will always value input from our shareholders whether they are on our board or not. Elon is our biggest shareholder and we will remain open to his input."

After turning down the board role, Musk promptly made a bid to purchase all the shares in Twitter for USD$43 billion.

What if Elon Musk was considering take up a board appointment in New Zealand rather than in the US? In this article, we review guidance the Four Pillars of Best Practice Governance  provides boards and directors in New Zealand.

The New Zealand framework – director’s duties and due diligence before offering and accepting board roles.

One of the key director’s duties in New Zealand (for companies and incorporated societies) is to act in the best interests of the organisation, not the shareholders or members.

Further, directors must comply with the Companies Act 1993 and the constitution of the company if there is one. Under the Act directors owe general duties to companies, including:

• the duty to act in good faith and in what they believe to be the best interests of the company (section 131)
• the duty of care (section 137).

It’s important to note that the recently enacted Incorporated Societies Act 2022 provides very similar duties for officers of Incorporated Societies.

The duty to act in good faith and the best interests of the company

A director’s fundamental or first duty is to ensure that:

• you act in good faith; and
• in what you believe to be the best interests of the company.

Fundamentally, this means steering clear of potentially conflicting situations and avoiding acts that would promote your own interests at the expense of the company. 

Duty of care

Directors, in exercising powers or performing duties, must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances, taking into account (without limitation):

• the nature of the company
• the nature of the decision
• the position of the director and the nature of the responsibilities undertaken by them.

This is an objective test, the benchmark being the reasonable director in the same circumstances. It also recognises that there is no one-size-fits-all approach when it comes to company governance and that directors’ roles and responsibilities can vary significantly.

Directors must take an active interest in the company, and gain a sound understanding and knowledge of its operations. They should not rely on other directors to inform them.

Liability

The consequences of directors breaching their duties can be significant. Directors should be aware that their liability is not precluded by the limited liability company structure. At a personal level, directors may:

• in extreme cases face criminal sanctions, including in some cases imprisonment
• face civil proceedings culminating in potentially substantial pecuniary penalties and/or compensation awards, and legal costs
• be disqualified from being a director or taking part in the management of a company
• lose professional standing and reputation.

The company’s value may also be impacted and there may be other commercial ramifications and increased scrutiny from stakeholders if directors breach their duties.

See more on liability in Chapter 4.2.4 of the Four Pillars of Best Practice Governance. 

Factors to consider before taking up a board appointment.

Chapter 2.6.1 of the Four Pillars provides guidance on the steps a director should take before accepting appointment to a board role. Each individual should assess their own personal suitability for a board appointment, and they should also undertake thorough due diligence of the organisation to determine whether the appointment is appropriate. They must be prepared to fully commit to the role.

The organisation should also complete its own due diligence on any potential new director prior to offering them a board role.

For the individual, the decision to join the board depends on investigation and analysis of two basic questions:

• Whether you are personally and professionally suitable for the position?
• Whether the company is suitable for you?

Also see Chapter 2.6.2: Personal Suitability for further guidance on the essential due diligence checks individuals should complete before deciding on whether to accept the board position. We also provide a useful Board Appointment Checklist for further guidance on self-assessing your suitability for a board role.   

What if Elon Musk had been operating in New Zealand?

Had Elon Musk been considering taking up a board appointment in New Zealand, guidance in the Four Pillars of Governance Best Practice would have reinforced upon him that his fundamental obligation as a NZ company director is to act in good faith and what he believed to be in the best interests of the company, not the interest of one or more shareholders. And also, when exercising powers or performing duties as a director, his duty of care would be to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances.