Termination Requirements Around the Globe
In the realm of global employment, the concept of termination payments can be a complex and often surprising issue for U.S.-based employers. Unlike in the United States, where the at-will employment doctrine generally allows employers to dismiss employees at any time with or without cause (as long as the reason is not unlawful), many countries have stringent laws that mandate significant benefits and entitlements upon termination of employment.
Before setting up shop in a new country, employers may want to examine the intricacies of these statutory payments and understand how best to navigate the challenges they present.
Quick Hits
U.S. at-will employment is not common internationally; other countries require valid reasons and advance notice for termination.
Statutory severance pay is mandatory in many countries, calculated based on length of service and salary, and non-negotiable.
Additional benefits include accrued but unused vacation, pro-rata thirteenth-month salary, earned bonuses, and seniority premiums.
Good cause termination requires specific procedures and evidence, making it challenging to avoid severance payments.
Employers may want to understand local laws, plan financially, and accrue liabilities to manage employment termination costs effectively.
At-Will Employment vs. International Norms
In the United States, at-will employment generally allows employers to dismiss an employee for almost any reason (or no reason at all) as long as the reason is not illegal. This concept, however, is foreign to most other countries. Internationally, employers must often provide a valid reason for employment termination or face substantial financial penalties. These penalties can include statutory severance pay and other mandatory benefits.
Statutory Severance Pay: A Misunderstood Term
One of the most misunderstood aspects of international termination payments is statutory severance pay. Unlike in the United States, where severance is typically associated with layoffs or reductions in force, statutory severance pay is a mandatory payment in many countries, generally when there is no “good cause” to terminate the employment relationship. Basically, the termination payment is a penalty for employers that are terminating the employment relationship that the employee expected would continue indefinitely. This payment is often calculated based on the employee’s length of service and salary, and it is enshrined in labor codes, making it non-negotiable. Note that some countries impose caps on severance payments. For example, in China, the cap is based on the city-specific minimum wage, while in the United Arab Emirates (UAE), the end-of-service gratuity has no salary cap but cannot exceed a total of two years’ pay.
Additional Benefits and Entitlements
Beyond having to provide a notice period (or payment in lieu as allowed by certain countries) and severance pay, employees in many countries are entitled to other benefits upon termination of employment, regardless of the reason for their departure. These benefits can include:
Accrued but Unused Vacation: In many jurisdictions, employers must pay for any accrued but unused vacation days. This can be a significant financial burden, especially in countries where vacation days can carry over for several years.
Thirteenth-Month Salary: Many countries require employers to pay a thirteenth-month salary or Christmas bonus. Upon termination of employment, employees are often entitled to a pro-rata portion of this payment.
Earned Bonuses: In some countries, employees are entitled to bonuses they have earned, even if they are no longer employed at the time of payment and regardless of any language included in the bonus plan.
Seniority Premium: This payment compensates employees for their loyalty and length of service. It is separate from severance pay and is due even if the employee resigns.
The Challenge of Demonstrating Good Cause
Generally, one of the ways employers can avoid paying notice periods and severance is to terminate employment for good cause. Demonstrating that good cause exists, however, can be a complex and lengthy process in many countries. Poor performance is not generally considered a valid reason to terminate employment. Rather, employers must prove that the employee behaved in a way that is prohibited under the relevant labor code, such as fraud, theft, and gross misconduct. Employers must follow specific procedures, including conducting hearings, collecting evidence, and issuing decisions within strict timeframes. Failure to adhere to these procedures can lead to a wrongful termination claim, potentially resulting in legal liability for the employer to pay damages to the separated employee, and in some cases, reinstatement.
Preparing for Termination Costs
To avoid being caught off guard by termination payments, U.S. employers may want to consider the following steps:
Understanding Local Employment Laws: Before setting up operations in a new country, employers may want to seek a summary of the local employment laws, including termination payment obligations—for employees, independent contractors, and contingent workers employed through an employer of record (EOR).
Planning Financially: Employers may want to consider setting aside funds to cover potential termination costs. The total balance in such a fund could include the cost per employee per year, including not only base salary but also social security contributions and additional benefits and payments. Being prepared will allow employers to make business decisions regarding employment relationships that are not bound by finances.
Accruing Liabilities: In some jurisdictions, employers are required to accrue liabilities for mandatory entitlements. Being aware of these obligations can help employers manage their financial responsibilities effectively.
Conclusion
Navigating the complexities of termination payments for international workforces requires a thorough understanding of local employment laws and careful financial planning. By being proactive and informed, U.S. employers can avoid surprises and ensure compliance with international labor regulations.
FHA Overhauls Appraisal Rules: Three Appraisal Policy Related Mortgagee Letters Rescinded
On March 19, 2025, the Federal Housing Administration (FHA) issued Mortgagee Letter (ML) 2025-08 titled “Rescinding Multiple Appraisal Policy Related Mortgagee Letters.” As the title suggests, FHA rescinded three mortgagee letters relating to Appraisal Fair Housing Compliance and Appraisal Review and Reconsideration. While this is a major change in how appraisals will be handled under FHA guidelines, these policy shifts reflect the FHA’s ongoing efforts to streamline policies and reduce regulatory and financial burden.
Two of the three rescinded mortgagee letters (ML 2024-07 and ML 2024-16) were issued just last year and related to the implementation of new Appraisal Review and Reconsideration of Value (ROV) guidelines established by the FHA. Specifically, ML 2024-07 enhanced FHA’s policy on standards for appraisal reviews, and provided specific requirements related to borrower-initiated ROV requests. Notably, FHA emphasized that a mortgagee’s appraisal review process must include protocols for addressing potential appraisal bias or appraisal discrimination, including by allowing borrowers to request a ROV, request a general correction, explanation, or substantiation, or obtain a second appraisal. In light of operational challenges with implementing ML 2024-07, ML 2024-16 extended the implementation date for the new appraisal review and ROV guidelines from September 2, 2024, to October 31, 2024.
ML 2021-27, titled “Appraisal Fair Housing Compliance and Updated General Appraiser Requirements,” is the third rescinded mortgagee letter. According to FHA, ML 2021-27 clarified existing FHA requirements for appraisers and mortgagees relating to compliance with fair housing laws. In rescinding ML 2021-27, FHA notes that subsequent amendments to the Uniform Standards of Professional Appraisal Practice (USPAP) resolved the concerns that 2021-27 was intended to address.
Overall, the FHA’s decision to rescind these three appraisal related mortgagee letters reflects its broader goal of reducing regulatory and financial burdens within the mortgage process. Lenders, appraisers, and mortgagees should stay informed and adapt their policies to align with the evolving landscape.
The policy changes established in ML 2025-08 will be incorporated into the FHA Single Family Housing Policy Handbook (Handbook 4000.1). The provisions of this ML are effective immediately.
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The Digital Chamber Publishes US Blockchain Roadmap
The Digital Chamber (TDC), a trade association focused on advancing blockchain adoption and regulatory clarity, has unveiled its U.S. Blockchain Roadmap, a plan aimed at enhancing America’s leadership in blockchain technology. The roadmap emphasizes blockchain’s potential in reshaping financial systems, global trade, and digital infrastructure. It argues that blockchain development could impact the United States’ economic growth, financial sovereignty, and technological competitiveness.
The roadmap outlines several priority areas and policy recommendations. These include integrating digital assets into the nation’s financial infrastructure, protecting decentralized networks, and establishing clear regulatory frameworks. It also examines Bitcoin mining’s potential role in strengthening U.S. energy security and recommends modernizing the banking system to adapt to the evolving digital economy. Additionally, the roadmap explores blockchain’s potential applications in government operations and fiscal oversight.
Corporate Debtors and Transactions at an Undervalue–Lessons From the UK Supreme Court: El-Husseini and Another v Invest Bank Psc
The UK Supreme Court’s recent decision in El-Husseini and another v Invest Bank PSC [2025] UKSC 4 has clarified the circumstances in which section 423 of the Insolvency Act 1986 (the Act) provides protection against attempts by debtors to “defeat their creditors and make themselves judgment-proof”. This is a critical decision for insolvency practitioners, any corporate or fund which is involved in distressed deals and beyond to acquirers who were not aware they were dealing in distressed assets. It is potentially good news for the former, improving or fine-tuning weapons deployed for the benefit of creditors. It is potentially awkward news for the latter, who may have to look rather more broadly at insolvency issues when acquiring assets not only from distressed vendors but potentially also from vendors with distressed owners.
The case concerned an individual debtor, Mr Ahmad El-Husseini, but the decision has ramifications for corporate debtors. It confirms a broad interpretation of “transactions at an undervalue” applicable to section 423 (transactions defrauding creditors) of the Act and gives clear guidance that this interpretation applies to section 238 (transactions at an undervalue) of the Act, such that the assets which are the subject of the transaction do not need to be legally or beneficially owned by the debtor to be subject to these provisions. Instead, they can catch transactions in which a debtor agrees to procure a company which they own to transfer an asset at an undervalue.
Section 423 and Section 238 of the ACT
Section 423 of the Act (which applies to both individuals and corporates, whether or not they are or later become insolvent) is engaged where a party enters into a transaction at an undervalue for the purpose of putting assets beyond the reach of creditors or otherwise prejudicing their interests.
Section 238 of the Act (which applies to companies in administration or liquidation) is engaged where a company enters a transaction at an undervalue within two years of the onset of insolvency and the company was insolvent at the time of the transaction or became insolvent as a result of the transaction.
If a claim pursuant to section 423 or 238 of the Act is successful, the court has the power to restore the position as if the transaction had not been entered into.
The Facts in El-Husseini and Another V Invest Bank PSC
Seeking to enforce a United Arab Emirates (UAE) judgement in the sum of approximately £20 million, Invest Bank PSC (the Bank) identified valuable assets linked to Mr El-Husseini. In its judgment, the Supreme Court proceeded on the basis that Mr El-Husseini was the beneficial owner of a Jersey company which owned a valuable central London property. Further, that Mr El-Husseini had arranged with one of his sons that he would cause the Jersey company to transfer the property to the son for no consideration. As a result, the value of Mr El-Husseini’s shares in the Jersey company was reduced and the Bank’s ability to enforce the UAE judgement was prejudiced. The Bank brought claims under section 423 of the Act.
Defining A “Transaction” Falling Within Section 423 and the Ramifications For Section 238
The fundamental issue for the Supreme Court was whether, as asserted by the Bank, section 423 of the Act could apply to a transaction where the relevant assets were not legally or beneficially owned by the debtor but instead by a company owned or controlled by the debtor.
The Supreme Court ruled in the Bank’s favour, including on grounds that:
The plain language of section 423 strongly supports the conclusion that the provision contains no requirement that a transaction must involve a disposal of property belonging to the debtor personally.
A restrictive interpretation of “transaction” such that it was limited to transactions directly involving property owned by the debtor would undermine the purpose of section 423.
It was appropriate to rely on the purpose of section 423 to construe a provision which was common to section 423, 238 and 339 (which provides a remedy in the case of transactions at an undervalue where the debtor has subsequently been declared bankrupt) of the Act. These sections share a common purpose: to set aside or provide other redress when transactions at an undervalue have prejudiced creditors. The Supreme Court considered it impossible to think of circumstances in which a “transaction” was held to be within section 423 when it would not fall within section 238 and 339 of the Act. In any event, there was no reason as a matter of policy or purpose why a transfer by a company owned by an insolvent company or individual should not fall within those sections.
Thus, not only does the judgment confirm the broad interpretation of “transactions at an undervalue” applicable to section 423, but it also gives clear guidance that this interpretation applies equally to section 238.
Key Takeaways
Debtors cannot hide behind corporate structures – The ruling confirms that a corporate structure does not shield debtors who procure the transfer at an undervalue of assets belonging to companies owned by them to evade their obligations to creditors.
Stronger protections for creditors – Creditors will welcome the decision, which makes it harder for debtors to circumvent enforcement.
Greater clarity – The judgment provides clear guidance that the broad interpretation of “transactions at an undervalue” applicable to claims under section 423 of the Act can be relied upon for the purposes of claims under section 238.
SEC Marketing Rule Update: New Staff FAQs on Performance Presentations
On March 19th, Staff from the Securities and Exchange Commission (SEC) issued much needed (and anticipated) relief in the form of two new frequently asked questions (FAQs) related to rule 206(4)-1 under the Investment Advisers Act of 1940 (the Marketing Rule).
Key Takeaways
The Staff’s “open door” policy, in which it invites comments from industry participants on their top-of-mind concerns and regulatory “sticking points,” is underway.
Don’t skip the footnotes! The FAQs provide useful additional context. For example:
gross and net performance of the total portfolio do not need to be presented on the same page to meet the “prominent” requirement – in some cases, presenting this information prior to the extracted performance and/or portfolio characteristic may be sufficient;
while the FAQ provides some examples of typical portfolio characteristics or risk metrics (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analysis, Sharpe Ratio, Sortino Ratio), the Staff provides in a footnote other examples which in its view, would not be covered by the FAQ (e.g., total return, time-weighted return, return on investment, internal rate of return, multiple of invested capital, or total value to paid in capital); and
with regard to portfolio characteristics and risk metrics, the Staff is not opining on whether any such characteristics or metrics constitute “performance” under the Marketing Rule (and thus would be subject to all other aspects of the Marketing Rule).
Note that the FAQs primarily address a narrow aspect of the Marketing Rule – specifically, rule 206(4)-1(d)(1), which requires that any presentation of gross “performance” also present net performance – it does not alter other obligations when presenting “performance” or the more general obligations under the general prohibitions (rule 206(4)-1(a)) or section 206 antifraud provisions.
The Issues
The first FAQ addresses a widely-know “pain point” for investment advisers when seeking to include in marketing materials individual portfolio positions (or groups of positions from within a portfolio), which falls within the definition of “extracted performance” under the Marketing Rule and must therefore be presented on a net basis. Doing so has been challenging for advisers because such fees are typically charged at the portfolio level. This presents the adviser with a difficult decision:
developing an allocation approach that at best, serves a regulatory purpose but no business purpose and, at worst, may result in misleading investors; or
deciding not to present the information despite believing that the information is meaningful to clients and potential clients.
The second FAQ presents a different but related challenge for advisers: determining if a portfolio characteristic or risk metric falls within the meaning of “performance” (which is not defined in the Marketing Rule) and, therefore, must also be presented on a net basis. Such a result similarly restrains an adviser’s ability to present meaningful information about an adviser’s strategy and risk management processes because those metrics often do not lend themselves to net-of-fee presentation (as required under the Marketing Rule).
What the FAQs Permit
The Staff has set forth a “safe harbor” where it essentially offers a no-action position for an adviser who includes in an advertisement either “extracted performance” (which would include presenting case studies or lists of individual investments) or characteristics of a portfolio or investment, in both cases on a gross basis only, if:
the extracted performance and/or portfolio characteristic is clearly identified as being calculated “gross” (or without the deduction of fees and expenses);
the extracted performance and/or portfolio characteristic is accompanied by a presentation of the total portfolio’s gross and net performance;
the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance and/or portfolio characteristic; and
the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance and/or portfolio characteristic is calculated.
CTA UPDATE: FinCEN Issues Interim Final Rule Exempting Domestic Companies and US Beneficial Owners From Reporting Requirements
Go-To Guide:
Domestic companies and their beneficial owners are now exempt from the requirement to file beneficial ownership information (BOI) reports, or to update or correct previously filed BOI reports.
Foreign reporting companies that do not qualify for an exemption must report BOI by April 25, 2025, but need not report their U.S. beneficial owners.
The Financial Crimes Enforcement Network (FinCEN) is soliciting public comments on the interim final rule and intends to issue a final rule later this year.
On March 21, 2025, FinCEN issued an interim final rule narrowing the scope of the CTA’s BOI Reporting Rule (Reporting Rule) to foreign reporting companies and foreign beneficial owners. This change follows a series of shifts in the status of the CTA since Dec. 3, 2024,1 when a Texas district court in Texas Top Cop Shop, Inc. v. Bondi preliminarily enjoined the CTA and the Reporting Rule on a nationwide basis.
Going forward, entities formed in the United States (regardless of when) are categorically exempt from CTA reporting requirements and do not have to report BOI to FinCEN, nor update or correct any BOI that may previously have been reported to FinCEN.
Foreign reporting companies (i.e., entities formed in a foreign country that are registered to do business in the United States) that do not qualify for an exemption must file their BOI reports by no later than April 25, 2025. Newly registered foreign reporting companies will have 30 days from their registration in the United States to comply with BOI reporting requirements.
Notably, foreign reporting companies need not report the BOI of any beneficial owners who are U.S. persons (including U.S. persons who are beneficial owners of foreign pooled investment vehicles by virtue of their substantial control). U.S. beneficial owners are likewise exempt from having to report their BOI with respect to foreign reporting companies in which they hold interests.
The Interim Final Rule does not exempt reporting of U.S. persons who serve as company applicants for foreign reporting companies.2
The Interim Final Rule significantly reduces the number of entities subject to BOI reporting. FinCEN now estimates approximately 12,000 reporting companies must comply with the CTA and its implementing regulations—down from the 32.6 million projected under the previous rule.
Looking Ahead
FinCEN is accepting comments on the Interim Final Rule until May 27, 2025. A final rule is expected to be issued later this year. The Interim Final Rule, with its narrower scope of reporting requirements, will be in effect in the meantime.
Foreign reporting companies should prepare to comply with the CTA and the Reporting Rule, as amended by the Interim Final Rule. Interested parties may also consider submitting written comments to FinCEN by the May 27, 2025, deadline. Additionally, all companies should stay updated on FinCEN announcements, including with respect to the final rule.
It remains to be seen whether the Interim Final Rule will be the subject of any legal challenges. In the appeal pending in the Texas Top Cop Shop challenge, the Fifth Circuit has asked for supplemental briefing on whether the dispute remains live in light of the Interim Final Rule.
For additional information regarding the CTA and its reporting requirements, visit GT’s CTA Task Force page.
1 On Dec. 3, 2024, the CTA and its Reporting Rule were preliminarily enjoined on a nationwide basis, approximately four weeks ahead of a key Jan. 1, 2025, deadline. FinCEN appealed that ruling, and on Dec. 23, 2024, a motions panel of the U.S. Court of Appeal for the Fifth Circuit stayed the injunction, allowing the CTA to go back into effect. Three days later, on Dec. 26, 2024, a merits panel of the Fifth Circuit vacated the motion panel’s stay, effectively reinstating the nationwide preliminary injunction against the CTA and Reporting Rule. On Dec. 31, 2024, the government filed an emergency application with the U.S. Supreme Court to stay that preliminary injunction. On Jan. 23, 2025, the Supreme Court granted that application (SCOTUS Order), staying the nationwide preliminary injunction in Texas Top Cop Shop, Inc. v. Bondi. See McHenry v. Texas Top Cop Shop, Inc., 145 S. Ct. (2025). Then, notwithstanding the SCOTUS Order staying the injunction in Texas Top Cop Shop, on Jan. 24, 2025, FinCEN confirmed that reporting companies were not required to file BOI Reports with FinCEN due to the separate nationwide relief entered in Smith v. U.S. Department of the Treasury (and while the order in Smith remained in effect). No. 6:24-CV-336-JDK, 2025 WL 41924 (E.D. Tex. Jan. 7, 2025). On Feb. 5, 2025, the government appealed the ruling in Smith to the U.S. Court of Appeals for the Fifth Circuit and asked the District Court to stay relief pending that appeal. On Feb. 18, 2025, the District Court in Smith granted a stay of its preliminary injunction pending appeal, thereby reinstating BOI reporting requirements once again. In response, on Feb. 19, 2025, FinCEN announced that the new filing deadline to file an initial, updated, and/or corrected BOI report was generally March 21, 2025. On March 2, the U.S. Department of the Treasury issued a press release announcing that it will not enforce any penalties or fines under the CTA against U.S. citizens, domestic reporting companies, or their beneficial owners under the current Reporting Rule or after the forthcoming rule changes take effect.
2 A company applicant, in this context, would be (a) the person who directly files the document that registers the company in a U.S. state; and (b) if more than one person is involved with the document’s filing, the person who is primarily responsible for directing or controlling the filing.
(UK) The Issue With Hybrid Insolvency Claims Rumbles On
Should a claim be struck out where the applicant has failed to comply with the procedural requirements relating to “hybrid” claims? In the recent case of Park Regis Birmingham LLP [2025] EWHC 139 (ch), the High Court held that it would be disproportionate to strike out the claim on that basis.
Hybrid Claims
Hybrid claims are those that include claims under the insolvency legislation (e.g. “transaction avoidance” claims), as well as company claims (e.g. unlawful dividends or sums owing under a director’s loan account). Previously, it was common practice for such claims to be issued as a single insolvency act application, rather than as a Part 7 claim.
Since the Manolete Partners plc v Hayward and Barrett Holdings case in 2021, applicants have been required to issue these claims separately, with the insolvency claims being issued as an insolvency application, and the company claims being issued as a separate Part 7 claim. The applicant can then issue an application to request that the separate proceedings are managed together e.g. at a single trial. This has meant that the costs of issuing such claims have increased, as the issue fee for a Part 7 claim can be up to £10,000, whereas the issue fee for an insolvency application is £308.
Facts
In the Park Regis case, the applicants had incorrectly issued a hybrid claim as a single insolvency application, without issuing the separate Part 7 claim for the company claims. However, when issuing the application, the applicant’s lawyers had informed the Court that the issue fee for the application would be £10,000, as the claim was a hybrid claim, and therefore the £10,000 fee was paid.
The respondents applied to strike the claim out, on the basis that the applicant had failed to comply with the Hayward and Barrett Holdings case and argued that the applicant’s approach constituted an abuse of process.
The judge held that the applicant had failed to comply with the procedural requirements regarding hybrid claims. However, in exercising her discretion about whether to strike out the claim, the judge held that striking out the claim would be too severe a penalty for that failure. The judge therefore exercised her discretion (under CPR 3.10) to waive the procedural defect and allowed the claim to proceed as if it had been properly issued.
Commentary
While the judge in this case declined to strike out the claim, the judge was clear that the applicant’s attempt to issue the claim by way of a single insolvency application, but paying the higher Part 7 issue fee, was procedurally incorrect. Had this approach been endorsed it would have made issuing such applications more straightforward for practitioners, but the judge noted the absolute requirement for separate proceedings.
We understand that this decision has been appealed – so watch this space for further comment. In the interim practitioners should continue to apply the Hayward and Barrett Holdings approach and issue two sets of proceedings to avoid the risk of a claim being struck out. Although the procedural defect was waived in this case, the power to do that is a discretionary one!
The Insolvency Service in the First Review of the Insolvency Rules has reported that they are considering whether an amendment to the Rules is required to address the Hayward and Barrett Holdings case which would hopefully see a return to previous practice – one set of proceedings with one court fee. But to date there has been no indication from the Insolvency Service when (if) they will progress that and unless further clarity is provided on appeal it seems the sensible approach for practitioners is to follow Hayward when pursuing a claim.
Board of Directors 101: Roles, Responsibilities, and Best Practices
Serving on a board of directors is a pivotal role in corporate governance, demanding a clear understanding of legal and financial responsibilities. This article delves into the core functions of a board, the fiduciary duties of its members, and the distinctions between fiduciary and advisory boards.
Understanding the Board of Directors
A board of directors serves as a corporation’s governing body, representing shareholders and overseeing the organization’s management. Jonathan Friedland, a corporate partner with Much Shelist PC, notes that the board’s primary functions include providing strategic direction, ensuring legal compliance, and upholding ethical standards.
Boards are typically composed of:
Inside Directors: Individuals who are part of the company’s management, such as executives or major shareholders.
Outside Directors: Independent members who are not involved in daily operations, offering unbiased perspectives.
In public companies, boards are mandated by law and must adhere to stringent compliance and financial disclosure requirements. Private companies, while not always legally required to have a board, often establish one to benefit from external expertise and governance.
The Purpose and Responsibilities of the Board
Allan Grafman highlights that an effective board transcends mere oversight; it actively shapes the company’s trajectory.
Key responsibilities include:
Strategic Oversight: Guiding long-term planning and ensuring alignment with the company’s mission.
CEO Supervision: Appointing, evaluating, and, if necessary, replacing the Chief Executive Officer.
Succession Planning: Preparing for future leadership transitions to maintain organizational stability.
Legal and Ethical Compliance: Ensuring adherence to laws and ethical standards to mitigate risks.
For public companies, these duties are underscored by regulations such as the Sarbanes-Oxley Act, which mandates accurate financial reporting and internal controls. Private companies, though subject to fewer regulations, must still navigate complex governance landscapes, balancing the interests of various stakeholders.
Fiduciary Duties of Board Members
Board members are bound by fiduciary duties, which are legal obligations to act in the best interests of the corporation and its shareholders.
These duties encompass:
Duty of Care: Directors must make informed decisions with the diligence that a reasonably prudent person would exercise in similar circumstances. This involves staying informed about the company’s operations and relevant market conditions.
Duty of Loyalty: Directors are required to prioritize the corporation’s interests above personal gains, avoiding conflicts of interest. This means refraining from engaging in activities that could harm the company or benefit them at the company’s expense.
The Business Judgment Rule offers directors protection, presuming that decisions are made in good faith and with due care. However, this presumption can be challenged if there is evidence of gross negligence or self-dealing. In such cases, courts may apply the Entire Fairness Doctrine, requiring directors to prove that their actions were entirely fair to the corporation and its shareholders.
Fiduciary vs. Advisory Boards
David Spitulnik notes that fiduciary and advisory boards are distinct in role and authority.
Fiduciary and advisory boards differ in the following key ways:
Fiduciary Boards
Legal Obligation: Hold legal responsibilities and are accountable to shareholders.
Decision-Making Authority: Empowered to make binding decisions, including hiring and firing executives.
Regulatory Compliance: Must adhere to corporate governance laws and regulations.
Advisory Boards
Non-Binding Guidance: Offer strategic advice without the authority to make final decisions.
Flexibility: Provide insights on specific issues, such as market expansion or product development.
No Legal Liability: Generally not subject to the same legal obligations as fiduciary boards.
For private companies, advisory boards can be useful in providing expertise and mentorship without the formalities and liabilities associated with fiduciary boards.
Qualities of Effective Board Members
Alex Sharpe emphasizes that board members should have the requisite skills.
Exceptional board members will possess a combination of attributes:
Financial Acumen: A strong grasp of financial statements and the ability to assess the company’s fiscal health.
Strategic Vision: The capacity to think long-term and guide the company toward sustainable growth.
Integrity: Upholding ethical standards and fostering a culture of transparency.
Industry Expertise: Deep knowledge of the sector to provide relevant insights.
Effective Communication: The ability to articulate ideas clearly and listen actively to diverse perspectives.
Spitulnik adds that meticulous preparation, such as reviewing materials in advance and taking detailed notes during meetings, enhances a director’s effectiveness and demonstrates commitment.
Compensating Board Members
Compensation for board members varies based on the company’s size, industry, and resources. While some private companies may not offer monetary compensation, providing equity stakes or other incentives can attract and retain talented directors. Companies with revenues under $20 million often have informal advisory boards with minimal compensation, whereas larger companies may offer more substantial remuneration packages.
Common Challenges in Board Governance
Even well-structured boards can encounter pitfalls. Allan Grafman and Jonathan Friedland identify several common challenges:
Role Ambiguity: Unclear definitions of responsibilities can lead to overlaps or gaps in governance.
Inefficient Meetings: Poorly organized meetings can result in unproductive discussions and delays in decision-making. Ensuring a well-structured agenda and sticking to key priorities can improve efficiency.
Lack of Strategic Focus: Boards that concentrate solely on compliance and operational oversight may fail to provide long-term strategic guidance. A balanced approach is necessary to foster both accountability and growth.
Weak Team Dynamics: A dysfunctional board can hinder progress. Differences in opinion are natural, but a lack of mutual respect or collaboration can create gridlock. Establishing clear governance policies and encouraging open dialogue are essential.
Outdated Board Composition: The business environment is constantly evolving. Boards that fail to bring in fresh perspectives or adapt to industry shifts risk becoming ineffective. Periodic board evaluations and diversity initiatives can enhance governance.
Legal and Financial Risks Facing Boards
Board members must navigate various legal and financial risks. Failing to uphold fiduciary duties can lead to lawsuits, regulatory scrutiny, and financial losses. Understanding these risks is crucial to effective governance.
Director and Officer (D&O) Liability
Board members can be held personally liable for decisions that result in financial harm to the company or its shareholders, though the Business Judgment Rule is commonly a powerful shield. To further mitigate this risk, many companies purchase Directors and Officers (D&O) insurance, which protects individuals from personal financial losses due to lawsuits or claims against them in their capacity as board members. A director can also purchase a personal policy as additional protection.
However, D&O insurance policies do not cover fraud, criminal acts, or intentional misconduct. Board members must remain vigilant in their decision-making to avoid legal exposure.
Financial Oversight and Accountability
Strong financial governance is a cornerstone of board responsibilities. Directors must ensure accurate financial reporting, prevent fraudulent activities, and comply with regulatory requirements, though many that apply to public companies do not apply to privately owned companies.
Failing to meet these obligations can lead to SEC investigations, shareholder lawsuits, and reputational damage. Adopting internal controls, conducting regular financial audits, and requiring management accountability are essential practices for boards to prevent financial mismanagement.
Bankruptcy and Restructuring Considerations
If a company becomes financially distressed, board members must navigate complex restructuring decisions, including whether to file for Chapter 11 bankruptcy. This raises the oft-cited and equally oft-misunderstood ‘zone of insolvency.’ EDITORS’ NOTE: Read What To Do When Your Company May Be Insolvent for more information about this.
David Spitulnik explains that delaying restructuring efforts or failing to act prudently can expose board members to liability. Seeking expert legal and financial guidance is crucial when a company faces distress. Directors in financial distress must prioritize maximizing value for all stakeholders.
Best Practices for Effective Board Governance
Strong boards do more than fulfill legal requirements — they drive long-term value. Implementing best practices can significantly enhance a board’s effectiveness.
Regular Board Evaluations
Evaluating board performance through annual assessments helps identify areas for improvement.
Effective evaluations should consider:
Board composition and expertise
Meeting efficiency and decision-making processes
Director engagement and contributions
Clear Governance Policies
Establishing bylaws, conflict-of-interest policies, and codes of conduct ensures that board members adhere to best practices. Transparency in governance fosters trust among shareholders and stakeholders.
Ongoing Education and Development
Staying informed about changes in laws, financial regulations, and industry trends is essential for directors. Continuous education, such as attending governance training programs or legal briefings, ensures that board members remain effective in their roles.
Active Shareholder Engagement
For public companies, engaging with shareholders proactively helps build confidence and alignment between the board and investors. Boards that listen to shareholder concerns and maintain open communication reduce the risk of activist investor disruptions.
Conclusion
Serving on a board of directors carries significant legal, financial, and strategic responsibilities. Board members must navigate fiduciary duties, compliance requirements, financial oversight, and governance challenges while ensuring the company’s long-term success.
The best boards don’t just react to problems they anticipate them. Directors who stay informed, exercise sound judgment, and uphold ethical standards can make a lasting impact on their organizations.
Understanding these principles is essential for professionals considering board service or advising boards. A well-run board is not just a legal necessity — it is a strategic asset that drives corporate success.
To learn more about this topic view Board Of Directors Boot Camp / Roles & Responsibilities: a Primer. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested in reading other articles about the roles, structures, and duties of a board of directors.
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US Treasury Issues Interim Final Rule That Removes the Requirement for US Companies and US Persons To Report Beneficial Ownership Information to Fincen Under the Corporate Transparency Act
The Financial Crimes Enforcement Network (FinCEN) announced on March 21, 2025, that FinCEN had issued its Interim Final Rule that provides that FinCEN will not require US companies and US persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA).
In the Interim Final Rule, FinCEN revised the definition of “reporting company” in its implementing regulations to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any US State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office (formerly known as “foreign reporting companies”). FinCEN also exempts entities previously known as “domestic reporting companies” from BOI reporting requirements.
Thus, through this Interim Final Rule, all entities created in the United States — including those previously known as “domestic reporting companies” — and their beneficial owners will be exempt from the requirement to report BOI to FinCEN. Foreign entities that meet the new definition of a “reporting company” and do not qualify for an exemption from the reporting requirements must report their BOI to FinCEN under new deadlines, to be determined following receipt of comments from the public and publication in the Federal Register. These foreign entities, however, will not be required to report any US persons as beneficial owners, and US persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.
The Interim Final Rule will be effective immediately. In accordance with the Congressional Review Act, FinCEN has determined that “FinCEN for good cause finds that providing public notice or allowing for public comment before this Interim Final Rule takes effect is impracticable, unnecessary, and contrary to the public interest.”
The Interim Final Rule may be reviewed here.
While the March 21st, 2025, Interim Final Rule eliminates the CTA’s reporting requirements for “domestic reporting companies” and US persons, FinCEN could conceivably reverse or further revise such modifications with limited or no prior notice or comment. While this is not anticipated at this time under the current administration, companies and practitioners should continue to monitor CTA developments. The CTA also remains subject to various legal challenges.
For more information, click here.
Alexander Lovrine contributed to this post.
What Next for Diversity and Inclusion Initiatives in Financial Services? (UK)
As was widely reported in the press, the FCA and Prudential Regulation Authority both recently issued announcements (FCA announcement / PRA announcement), the contents of which are variously being reported as “a retreat from efforts to help under-represented groups” (as per the Guardian) and, by contrast, a welcome “response to criticism that [the proposed new rules on D&I] would add an onerous reporting burden for firms and create overlap with government proposals to legislate in this area” (as per the Financial Times).
So is the FCA abandoning its D&I efforts, reducing the heat under them, or simply aligning its efforts with Prime Minister Starmer’s aims of reducing regulatory burdens and boosting economic growth?
Of course, the proof of the pudding is in the eye of the beholder, or something like that (please excuse the potentially messy mixed metaphor), so to assist in sorting fact from fiction, here is our high-level summary of what has been announced and what it means, probably.
Joint FCA and PRA update on D&I – proposed changes not going ahead
In 2023 the PRA and FCA each published a consultation paper entitled, respectively, “D&I in PRA-regulated firms” and “D&I in the financial sector – working together to drive change”. The proposals within the papers were largely aligned but did diverge in some respects. Their stated aim was to “drive change” by linking D&I to a firm’s overall strategy, ensuring that strategy is embedded in the firm’s day-to-day operations and culture, requiring firms to gather extensive D&I data to inform improvement, and developing an understanding of “what good looks like” across the sector. These proposals were fairly complicated and imposed some potentially very onerous requirements (see our Roadmap published at the time here for a reminder: D&I in the Financial Sector Roadmap).
At that stage, it looked very likely that the rule changes would go ahead – it was very much a “when”, not an “if”. Soon thereafter, however, the House of Commons Treasury Committee Report on “Sexism in the City” on 5 March 2024 pushed back on the extensive data gathering and reporting requirements under the regulators’ proposals.
“We welcome the focus of the PRA and FCA on diversity and inclusion in financial services, and agree they have a role to play. We have concerns, however, about their proposals to require firms to implement strategies, collect and report data and set targets. These requirements would be costly for firms to implement and have unclear benefits, while not capturing the many smaller firms that we have heard have some of the worst cultures and levels of diversity. We are also concerned that the requirements would be treated by many firms as another ‘tick-box’ compliance exercise, rather than necessarily driving the much-needed cultural change. Instead, we recommend that all financial services firms, particularly private businesses, hedge funds and other smaller firms, sign up to the voluntary Women in Finance Charter. We recommend that the regulators drop their plans for extensive data reporting and target setting. In our view, a lack of diversity is a problem that the market itself should be able to solve without such extensive regulatory intervention. Boards and senior leadership of firms should take greater responsibility for improving diversity and inclusion given that it should lead to a competitive advantage in the development of talent. Firms that perform best on diversity and inclusion and have the best cultures should be able to benefit from the clear business advantages this provides, leaving those that perform badly in these areas to suffer the consequences for their reduced competitiveness and profitability.”
In short, whilst the Treasury Committee was very much in favour of increased D&I in financial services, it did not believe that extensive reporting of data and target setting was the way to achieve that.
Since then, there has been a significant political sea-change in the UK with the new Labour government holding a significant mandate to make sweeping legislative changes, many of which deal with D&I. As such, it is perhaps not surprising that the regulators have reconsidered their positions and the FCA and PRA have now confirmed that “in light of the broad range of feedback received, expected legislative developments and to avoid additional burdens on firms at this time, the FCA and PRA have no plans to take this work further”.
Our view: Undoubtedly, the proposals made by the FCA and PRA would have placed a significant regulatory burden on financial services firms. The announcements made refer expressly to the pushback from Treasury Committee, but equally both reiterate that D&I within regulated firms can “deliver improved internal governance, decision making and risk management”, i.e their position is that they are not turning their back on D&I, just on the onerous reporting requirements. In terms of those “expected legislative developments” (as per the FCA and PRA’s statements), Labour has indeed announced various proposals in this regard, including ethnicity and disability pay gap reporting (see here for a recap: Labours New Employment Rights Bill – Key Changes UK). There is arguably some sense in waiting until that legislation is passed before moving forward (if at all) with any specific new rules for the financial services sector. That said, as some of the press coverage notes, this does come amidst a wave of D&I rollbacks in the US. There had been speculation about what impact those rollbacks might have in other jurisdictions. While this decision from the PRA and FCA does not seem to be a direct result of the situation in the US, it does undoubtedly add to the overall geopolitical picture, where the perceived value of D&I initiatives is increasingly scrutinised.
The proposed new Non-Financial Misconduct (NFM) rules remain on the agenda, but are given some more thought
Another aspect of D&I high on the FCA’s agenda in recent years has been NFM, following trenchant criticism from regulated firms and professional advisers. Specifically, the FCA has taken flak for its new rhetoric on bullying and discrimination being noticeably at odds with the types of NFM about which it took most enforcement action in the past (this was largely confined to serious criminal activity and dishonesty). That mismatch, combined with a lack of a clear definition or guidance or obvious understanding of the nuances of either bullying or harassment at law, has made it difficult for firms to know the relevance of NFM to their fitness and propriety assessments and when giving regulatory references in any particular set of circumstances.
However, the FCA has committed to fixing this issue and the consultation paper referred to above (“D&I in the financial sector – working together to drive change”) included a very lengthy explanation of how NFM should be defined and when it would be relevant to fitness and propriety (see Appendix 1 to the consultation paper).
Towards the end of last year, the FCA suggested that it was prioritising proposals to tackle NFM and that final rules on its definition and relevance would be published early in 2025. However, while the FCA has confirmed that tackling NFM remains a priority, it has now stated that it “is important that [the] approach is proportionate and aligned with planned legislation. The legislative landscape has also changed since [it] consulted”. The commitment to provide detail on next steps is now only “by the end of June”.
Our view: It seems very likely that the NFM proposals will proceed in some form. The loss of regulatory face if they do not would be too great. However, we note the reference to the importance of the approach being “proportionate” and “aligned with planned legislation”. Labour’s new Employment Rights Bill includes various proposed changes to the rules on harassment which might be relevant to NFM. For example, it is proposed that the new mandatory duty to take reasonable steps to prevent sexual harassment in the workplace (which came into force only in October) will be amended to require employers to take “all” reasonable steps. Labour have also proposed the re-introduction of a new statutory obligation also to take such steps to prevent harassment of employees by third parties. In addition, workers who report sexual harassment will qualify for whistleblowing protection. The view might conveniently be taken that the new law is broad enough to minimise the need for much more work on the position of D&I within NFM.
Most of the ERB is not expected to come into force until 2026 and we note that the commitment made by the FCA is not to provide the new rules by this June, but merely an update on next steps – so while we can expect some further clarity at that time, it is unlikely to be the final answer. It is to be hoped, though not particularly expected, that any revised guidance floated at that time would sufficiently reflect those nuances and allow employers to make proportionate calls on the impact of certain behaviours on regulatory fitness and propriety based on the actual facts of the situation, not its legal definition.
So-called “naming and shaming” changes not going ahead
More briefly, there had been a proposal to increase the circumstances in which investigations into firms were publicised as part of a drive to increase enforcement transparency – however, considerable concerns were expressed and so these plans have been abandoned. The FCA will stick to publicising investigations in exceptional circumstances only, as is currently the case.
Our view: The proposal to “name and shame” investigated firms was subject to widespread criticism from the industry, including concerns about the impact on consumer confidence and various other unintended consequences. In consumers’ eyes, being “named and shamed” would clearly imply the company to be guilty until proven innocent, except that even being found innocent would not remove the stigma of the original publication. For many, this will be seen as a victory. However, we note that the final policy will be published by the end of June and so it remains to be seen exactly how the “exceptional circumstances” provision for publicising investigations will be defined.
Commissions Are ‘Wages’ Under the New Jersey Wage Payment Law, New Jersey Supreme Court Rules
On March 17, 2025, the Supreme Court of New Jersey held that “commissions” must be considered “wages” under the New Jersey Wage Payment Law (WPL) and cannot be excluded as “supplementary incentives” because they are tied to the “labor or services” of employees.
Quick Hits
New Jersey Supreme Court Ruling on Commissions as Wages: On March 17, 2025, the Supreme Court of New Jersey ruled that commissions must be considered “wages” under the New Jersey Wage Payment Law (WPL) and cannot be excluded as “supplementary incentives” since they are tied to the labor or services of employees.
Case Background and Court’s Decision: In Musker v. Suuchi, Inc., the court determined that commissions earned by a sales representative for selling PPE during the COVID-19 pandemic were “wages” under the WPL, and rejected the argument that these commissions were “supplementary incentives” because they were tied to her labor or services.
Implications for Employers: The ruling clarifies that commissions are always considered “wages” under the WPL, regardless of whether they are for new or temporary products.
Background
In Musker v. Suuchi, Inc. the plaintiff, Rosalyn Musker, a sales representative, earned a salary plus commissions pursuant to an individualized sales commission plan (SCP) to sell software subscriptions. In March 2020, Suuchi, Inc., began to also sell personal protective equipment (PPE) because of the rise of COVID-19. Musker ultimately completed PPE sales that generated approximately $35 million in gross revenue for Suuchi. The parties disagreed regarding the amount of commissions owed to Musker pursuant to the SCP for her PPE sales and further disagreed as to whether such payment constituted “wages” or “supplementary incentives” under the WPL.
Musker then filed suit against Suuchi claiming it violated the WPL by withholding from her payment of commissions for her PPE sales. Suuchi, on the other hand, argued that Musker’s WPL claim should be dismissed because the commissions for the PPE sales in this instance would be considered “supplementary incentives” and not “wages” under the WPL. Specifically, Suuchi argued that because PPE was a new product and not its primary business, Musker’s commissions for her PPE sales should be considered “supplementary incentives” under the WPL.
Both the Superior Court of New Jersey and the New Jersey Appellate Division denied Musker’s WPL claim, concluding that because her sale of PPE went “above and beyond her sales performance, and the [PPE] commissions are calculated independently of her regular wage,” such commissions did not constitute “wages” under the WPL.
The Supreme Court of New Jersey disagreed and held that Musker’s commissions for the sale of PPE could not be excluded from the definition of “wages” as a “supplementary incentive.”
Commissions Are Wages and Cannot be Excluded as Supplementary Incentives
The supreme court pointed out that the WPL defines the term “wages” as “the direct monetary compensation for labor or services rendered by an employee, where the amount is determined on a time, task, piece, or commission basis excluding any form of supplementary incentives and bonuses which are calculated independently of regular wages and paid in addition thereto.” (Emphases in the original.) Unfortunately, however, the WPL does not define what constitutes a “supplementary incentive.”
In reviewing the WPL’s definition of “wages,” the Supreme Court of New Jersey concluded that a “supplementary incentive” is compensation that “motivates employees to do something above and beyond their ‘labor or services.’” The court opined that the “primary question addressing whether compensation is a ‘supplementary incentive’ is not whether the compensation only has the capacity to [incentivize work or provide services], but rather whether the compensation incentives employees to do something beyond their ‘labor or services.’”
In so concluding, the court clarified that a “commission” can never be a “supplementary incentive” because “supplementary incentives,” unlike “commissions,” are not payment for employees’ labor or services. To illustrate this point, the court provided several examples of “supplementary incentives” which it determined are not tied to employee’s “labor or services” and therefore would not constitute “wages” under the WPL, including: working out of a particular office location, meeting a certain attendance benchmark, or referring prospective employees to open positions.
Accordingly, the court held that Musker’s commissions from her PPE sales were not “supplementary incentives” because those sales necessarily resulted from her “labor or services.” Accordingly, the court held that those commissions would be considered “wages” under the WPL. Further, the court rejected Suuchi’s argument that because PPE was a new product for the company and it only temporarily sold such product, the sale of PPE therefore fell outside the regular “labor or services” an employee provides. Rather, as a result of the COVID-19 pandemic, selling PPE became part of Musker’s job and thus, commissions for selling PPE became owed to her as “wages” pursuant to the WPL.
Key Takeaways
The Supreme Court of New Jersey has clarified that commissions can never be “supplementary incentives” and excluded from the definition of “wages” under the WPL. Commissions are “wages” pursuant to the WPL, regardless of whether they are based on sales of new products or products temporarily marketed by their employers. Commissions are tied to employees’ “labor or services” and, as a result, are not “supplementary incentives.” Furthermore, the penalties under the WPL include liquidated damages of up to 200 percent of the wages recovered, as well as attorneys’ fees for successful claimants. Employers may want to keep in mind that all commissions are owed to employees to ensure compliance with the WPL to avoid exposure to significant financial penalties.
No Ifs or Buts: Supreme Court Holds the Line on Unauthorized Profits
In Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, the Supreme Court had the task of deciding whether a change was needed to the law on equitable obligations and liabilities of fiduciaries.
The duty under the microscope was the so-called “profit rule”, i.e. that a fiduciary must account to his principal for any profit derived from or made out of the fiduciary relationship, save where the principal has provided his informed consent to the fiduciary retaining that profit. Such profit has long been treated in equity as held on constructive trust for the principal from the moment it is made.
In Rukhadze, the Court re-examined whether it needed to apply a common law “but for” causation test before granting an account of profits in such circumstances. Was the Court required to ask whether the fiduciary would have made the profit but for its breach, for example because the principal would have consented to it or because the fiduciary could have terminated the relationship before he gained the opportunity and would have made the same profit anyway?
To state the relevant facts briefly, the case centred around asset recovery services provided to the family of deceased Georgian businessman Arkadi Patarkatsishvili (“Badri”). Those services were initially carried out by “SCPI”, a company in which the individual appellants held senior roles and were fiduciaries. When the appellants left SCPI, they continued to provide the services to Badri’s family and received fees for doing so. The respondents (SCPI’s successors) claimed that the appellants were in breach of duty by, inter alia, taking for themselves SCPI’s business opportunity, and sued the appellants for an account of profits represented by the payments made to the appellants by the family. At first instance, the appellants were held to be in breach of fiduciary duty and ordered to make an account of profits, in the amount of the payments made by the family less 25% as an equitable allowance for the appellants’ work and skill in providing the services. The Court of Appeal dismissed the appellants’ appeal.
Before the Supreme Court, the appellants argued that applying “what if” counterfactuals with a “but for” common law causation test would provide more clarity, predictability, common sense and justice to this area of equity and avoid harsh results.
However, in a majority verdict, the Court declined to allow the appeal, holding that there is no requirement for a “but for” causation test, with Lord Briggs summarising at [36]:
The question is not, would the profit have been made even if there had been no antecedent breach of fiduciary duty, but did the profit owe its existence to a significant extent to the application by the fiduciary of property, information or some other advantage which he enjoyed as a result of his fiduciary position, or from some activity undertaken while he remained a fiduciary which the conflict duty required him to avoid altogether. For that purpose the court looks closely at the facts, i.e. what actually did happen, but does not concern itself with what might have happened in a hypothetical “but for” situation which did not in fact occur.
Therefore, the duty to account to a principal applies to all fiduciaries and is not merely a remedy; rather it is a duty that arises at the moment the profit is gained.
In its reasoning, the Court considered that there are in-built limitations to the application of the profit rule, namely that there must be a sufficient link between the fiduciary relationship and the profit gained. While the duty to account does not depend on any prior breach, where the profit follows on from a breach of the conflict duty, the sufficient link required will usually be established and “the accountability for the resulting profit will usually follow”. [42] Further, the Court was content that any possible injustices or harsh results would be better alleviated by its discretion to grant an equitable allowance, as the trial judge had ordered in this case, rather than an application of a broad “but-for” test.
Arguments put forward by the appellants that the increasing number of fiduciary relationships in the business world supports a relaxation of the deterrent role of the current law were not persuasive and in fact tended to underline that the duty of single-minded loyalty owed by a fiduciary should be very carefully protected.
Application to Sport
As in the wider business world, there are an ever-increasing number of fiduciaries in sport, including sports agents, whether the traditional “on-field” agents or those working in “off-field” commercial settings; directors and partners in sports clubs, governing bodies and other entities; and trustees in charitable trusts, foundations and investment structures.
Rukhadze will serve as a reminder from the highest court in the land to all sports fiduciaries of the significant obligations and liabilities they owe to their principal in that role. The consequences of breach are severe.
Sports agents have long recognised this fact. In the landmark Court of Appeal case in Imageview Management Ltd v Jack [2009] EWCA Civ 63, which considered a secret profit of £3,000 made by a football agent in assisting his football player principal’s club to obtain a work permit for him, the Court ordered both an account of the profit made and forfeiture of all remuneration received by the agent from the player. While forfeiture of remuneration was not considered on the facts in Rukhadze, until we have a Supreme Court judgment offering further clarity in this area, all fiduciaries remain mindful that this draconian remedy will be ordered by courts and tribunals in appropriate cases.
As Rukhadze confirms, it is prudent for fiduciaries to seek and obtain the informed consent of their principal if they wish to retain profits earned. Likewise, when fiduciaries wish to act for both sides in a transaction (as is common with on-field sports agents), informed consent should be obtained from each principal to avoid a breach of the fiduciary’s duty to avoid conflicts of interest. If not, fiduciaries may find that only a quantum meruit allowance remains on the table where it is held to be fair and equitable to recompense the skill and effort used in the transaction. As per Rukhadze, such an equitable allowance may only represent a fraction of the profit gained.