India: company law reform moves a step closer - Companies Bill 2008 approved by Cabinet

In 2005 the Irani Report, on the reform of India's company law, was published. Legislation to replace the Companies Act 1956 has been expected for some time. Its introduction has moved a step closer: today it was announced that the Companies Bill 2008 has been approved by the Union Cabinet and will be introduced in Parliament in October. 

The Government's announcement contains an overview of the purpose of the Bill: to provide the principles for the internal governance of companies and a framework for their regulation, administered by Central Government, but with a much greater role for shareholders.  Specific proposals include:

• The introduction of a new entity, the "one-person company".
  
• The abolition of shares with differential voting rights.
  
• Provision for the duties and liabilities of directors, with every company to have at least one director resident in India.
  
• At least one third of board directors to be independent [it's not yet clear to which companies this rule will apply; the Irani Committee proposed that is should apply to public listed companies and those taking deposits from the public]. 
  
• Insider trading by directors to be recognised as a criminal offence.
  
• Auditors' rights and duties to be explained.
  
• Class action suits by shareholder associations to be permitted.
  

USA: California: directors' duties and corporate social responsibility

Section 309 of the California Corporations Code provides that a director must act in good faith, in the manner in which he/she believes to be in the best interests of the corporation and its shareholders. A proposal to amend Section 309 is currently before the California State Legislature. Assembly Bill 2944 , introduced by Assemblyman Mark Leno, will provide that in acting in the best interests of the corporation, the director may consider:

(1) The long-term and the short-term interests of the corporation and its shareholders.

(2) The effects that the corporation’s actions may have in the short term or in the long term upon any of the following: 

• The prospects for potential growth, development, productivity, and profitability of the corporation.
  
• The economy of the state and the nation.
  
• The corporation’s employees, suppliers, customers, and creditors.
  
• Community and societal considerations.
  
• The environment. 
  

The draft Bill makes clear that the introduction of the above provision will not impose on the director any legal or equitable duties, obligations of liabilities, or create any right or cause of action against the director. According to Assemblyman Leno, the Bill "would promote socially responsible corporate conduct by authorizing boards of directors to consider the interest of the full community, the environment and employees, along with the interest of shareholders, when making official decisions on behalf of the corporation".  There has, quite predictably, been opposition. For example, the Corporations Committee of the Business Law Section of the State Bar of California has argued that the Bill would undermine director accountability to shareholders without effectively promoting interests of non-shareholder stakeholders.

Notes:

[1] Progress of the Bill can be monitored here and for an overview of the legislative process in California, click here. 

[2] Bill 2944 does not go as far as the UK Companies Act (2006) which, in Section 172, requires the director to act:

in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company".

UK: directors' liability for the company's debts - a tax deductible expense?

In small, private companies it is not unusual for directors to guarantee company debts.  In A Guarantor v HMRC Commissioners [2008] UKSPC 00703 a company's directors guaranteed the company debts and did so as a condition of a factoring agreement which the company had entered at a time of financial difficulty. One director (hereafter 'the taxpayer') resigned from office but nevertheless became liable under the guarantee. He argued that his liability was a tax deductible expense. HMRC disagreed and the taxpayer appealed: the appeal was heard in July by Special Commissioner Colin Bishopp. 

The general rule concerning the deductibility of employees' expenses is found in Section 336(1) of the Income Tax (Earnings and Pensions) Act (2003), which provides that a deduction is permitted if:

(a) the employee is obliged to incur and pay it as holder of the employment, and

(b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

The taxpayer argued that conditions (a) and (b) were satisfied because he had a duty to maintain the company's solvency and, given that the company had exhausted all other possible sources of finance, his liability was incurred wholly and necessarily in the course of his employment. Special Commissioner Bishopp rejected the taxpayer's claim, agreeing with the majority of arguments advanced on behalf of HMRC including the fact that liability arose after the taxpayer's employment had ended (and was not, therefore, incurred in the performance of the employment). The Special Commissioner did, however, observe (at para. [12]): "Mr Smith's argument [on behalf of HMRC] that the payment is disqualified for relief because not every company director is obliged to give a personal guarantee for the company's debts may well overstate the position" (para. [12]). 

UK: GC100 guidance on directors' duties

The GC100 - the Association for the General Counsel and Company Secretaries of FTSE 100 companies - has published further guidance on directors' duties under the Companies Act (2006), focusing on the provisions of the Act coming into force on 1 October 2008.

For further information see the following documents (all in MS Word format): Checklist for company secretaries | Briefing note on conflicts of interest | Questionnaire designed to identify conflicts of interest | Earlier guidance paper (January 2008) |

UK: England and Wales: unfair prejudice and directors' fiduciary duties

Interim post: Allegations concerning breaches of directors' fiduciary duties are often considered in the context of the unfair prejudice remedy (Section 994 of the Companies Act (2006), formerly Section 459 of the Companies Act (1985)). The recent High Court decision O'Donnell v Shanahan [2008] EWHC 1973 (Ch) provides a good example but the case is of particular interest because of the discussion of fiduciary duties. For example, the trial judge observes (at para. [212]):

Whilst the authorities make clear that, if a breach of the no conflict rule (and also the no-profit rule) is made out, it does not matter if the company (or trust or partnership) could not of itself have proceeded with the transaction, it does appear to me permissible to take into account when determining the scope of the directors' duties and in deciding whether 'there is a real sensible possibility of conflict' the inherent likelihood in fact of the company extending its existing scope of business into areas of business which might give rise to a conflict".

Notes:

[1] The judgment is not yet available on BAILII although it is available on Lawtel (for subscribers). The trial judge relied heavily upon the first instance decision Wilkinson v West Cost Capital & Ors [2005] EWHC 3009 (Ch). Update (28 August 2008): the decision is now available on BAILII - click here.

[2] The Companies Act (2006) has codified directors' fiduciary duties: see Part 10, Chapter 2 (and remember that the provisions within this Part have different implementation dates).  The O'Donnell case was concerned with the common law duties on which these codified duties are based. 

UK: England and Wales: derivative claims under the Companies Act (2006)

The High Court gave judgment today in Stainer v Lee & Ors [2010] EWHC 1539 (Ch). Although only a first instance decision, it is nevertheless important because of the guidance it provides on the operation of the new statutory regime governing derivative claims under Chapter 1, Part 11, of the Companies Act (2006). There have been only a handful of reported cases so far and Stainer is of interest because permission to continue a derivative action was granted, subject to various conditions including one relating to costs. Two points of immediate interest are:

[1] Section 263 sets out the matters which the judge must consider in deciding whether to grant permission. In this regard, the trial judge observed (at para. [29]):

I consider that section 263(3) and (4) do not prescribe a particular standard of proof that has to be satisfied but rather require consideration of a range of factors to reach an overall view. In particular, under section 263(3)(b), as regards the hypothetical director acting in accordance with the section 172 duty, if the case seems very strong, it may be appropriate to continue it even if the likely level of recovery is not so large, since such a claim stands a good chance of provoking an early settlement or may indeed qualify for summary judgment. On the other hand, it may be in the interests of the Company to continue even a less strong case if the amount of potential recovery is very large".

[2] With regard to the claimant's costs, the trial judge observed (at para. [56]):

The Applicant seeks an indemnity for his costs, relying on Wallersteiner v Moir (No 2) [1975] 1 QB 373. I think that is clear authority that a shareholder who receives the sanction of the court to proceed with a derivative action should normally be indemnified as to his reasonable costs by the company for the benefit of which the action would accrue. But where the amount of likely recovery is presently uncertain, there is concern that his costs could become disproportionate. Accordingly, I place a ceiling on the costs for which I grant an indemnity for the future ...".

UK: Scotland: unfair prejudice, implied terms and the affairs of the company

An interesting judgment was handed down yesterday by Lord Glennie in Scotland's Court of Session (Outer House). The case - Gowanbrae Properties Ltd., a petition of [2008] CSOH 106 - concerned a petition presented under Section 994 of the Companies Act (2006) (the unfair prejudice remedy, formerly Section 459 of the Companies Act (1985)). The case deserves attention because of Lord Glennie's comments on the width of the remedy and also because it provides a good illustration of the difficulties associated with determining whether prejudice has been suffered by a shareholder qua shareholder.

The petitioner held redeemable preference shares in the company. At the time that the preference shares were created, the company's articles were amended to provide for the redemption of the preference shares on a specified date: the day on which a certificate of practical completion was issued in respect of the development of a property owned by the company. The company's board decided not to proceed with the development of the property. The petitioner claimed that this prevented the redeeming of its shares and that this amounted to the conduct of the company's affairs in a manner unfairly prejudicial to its interests.

In order to bring their claim within Section 994, the petitioner argued that the directors' decision ended the basis on which the parties had entered into association; it was thus unfair, the petitioner argued, for it to be bound to continue as a shareholder in the company. Lord Glennie rejected this argument and the argument that a term should be implied requiring the company to achieve practical completion. His Lordship dismissed the petition and in the course of his judgment observed (at para. [20]):

If there is no obligation on the Company in terms of the implied term contended for by the petitioner, it must follow that the Company is free to make commercial decisions in its own interests. The directors owe a fiduciary duty to the Company and complaints can be made against them if, in breach of that duty, they have regard to extraneous matters, such as a desire to benefit some other company. The court will not lightly infer from surrounding circumstances the existence of an understanding to which the Company should be held in equity and which would prevent it from making decisions in its best interests..."

Lord Glennie also made the following interesting observations with regard to the petitioner's claim and the court's jurisdiction under Section 994 (at para. [22]):

The essence of that jurisdiction [Section 994] is that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner as a member of the company. The petitioner's claim, as was stressed repeatedly in argument, is based on the fact that it had an accrued right to payment ... It seems to me to be arguable that the prejudice which the petitioner has suffered, if it be prejudice, is as a seller of shares rather than as a member of the company. In response to this argument, I was referred on behalf of the petitioner to the case of Gamlestaden Fastigheter AB v Baltic Partners Limited [2007] 4 All ER 164. In that case a shareholder claimed under the Jersey equivalent of section 459 on the basis that he was a creditor, and would not have advanced sums to the company but for having been a shareholder. This, it was argued, illustrated the width of the jurisdiction. Those facts are, of course, the reverse of the present circumstances ..."

Note: For an earlier decision of Lord Glennie considering Section 994, see: West Coast Capital (Lios) Ltd. [2008] CSOH 72.

USA: Delaware - Supreme Court opinion in CA Inc v AFSCME

The Delaware Supreme Court has given its opinion in CA Inc. v AFSCME Employees Pension Plan (No. 329, 2008). The opinion has been keenly anticipated because of the issues it raises about the management of companies and the role of the directors and shareholders.  AFSCME, a stockholder in CA Inc. ("the company"), submitted a bylaw for inclusion in the company's proxy materials for its 2008 annual stockholder meeting. The bylaw, if accepted, would require the board of directors to reimburse a stockholder (or group of stockholders) the reasonable expenses incurred in nominating one or more candidates in a contested election of the board of directors. 

The company's board decided to exclude the proposed bylaw from the proxy materials. The SEC was informed and a request was made for a "no action" letter (one indicating that enforcement action would not be taken against the company for its exclusion of the proposed bylaw). The company argued that the proposed bylaw was not a proper subject for a stockholder action and if implemented would breach Delaware General Corporation Law (DGCL). The AFSCME obtained legal advice taking the opposition position. The SEC decided to ask the Delaware Supreme Court for its opinion - the first time it has done so under new clarification rules in the Delaware Constitution (Article IV, §11(8), about which see here) - and posed two questions.

The first question was whether the AFSCME proposal was a proper subject for action by shareholders under Delaware law. The court held that it was and observed:

The shareholders of a Delaware corporation have the right “to participate in selecting the contestants” for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action".

The second question for the court was whether the AFSCME Proposal, if adopted, would cause the company to violate any Delaware law to which it was subject. The court held that it would. In reaching this decision, the court considered the proposed bylaw in the abstract and stated that it had to consider:

... any possible circumstance under which a board of directors might be required to act. Under at least one such hypothetical, the board of directors would breach their fiduciary duties if they complied with the Bylaw. Accordingly, we conclude that the Bylaw, as drafted, would violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders".

Unsurprisingly commentators have been quick to describe the decision as a further example of the director-centric nature of Delaware law but the court's opinion is rather more nuanced than this description suggests.  For further discussion see:

Harvard Corporate Governance blog | Wall Street Journal article | Professor Bainbridge's blog | Risk & Governance Blog | Delaware Corporate and Commercial Litigation Blog (with links to other blog posts) | 

UK: Hector Sants calls for directors' duties reform

Hector Sants, the chief executive of the Financial Services Authority, today delivered a thought provoking speech - available here - titled Do regulators have a role to play in judging culture and ethics? Whilst careful to note that he was offering his personal views, his comments are noteworthy because of the influential position he will occupy, under the new financial regulatory structure, as the chief executive of the prudential regulator and deputy governor of the Bank of England. Of particular interest are his thoughts on the scope of directors' duties:

I would thus strongly advocate intervention in the UK through changing the Companies Act framework for directors, for example. The current requirement [in Section 172 of the Companies Act (2006)] is for directors is to promote the success of the company. This is often interpreted in terms of shareholder value. Whilst this does include the need to have regard to, for example, the impact on the community, I do not believe that is sufficient. There must be a stronger and more explicit obligation to wider society. There must be clear recognition of the need for institutions to contribute to the common good".

UK: England and Wales: directors' liability for inaction

The High Court has today given judgment in Lexi Holdings v Luqman & Anor [2008] EWHC 1639 (Ch). The case concerned allegations of breach of duty made against several directors. It was argued that the inaction of these directors - including their failure to disclose to the board information known to them - had caused the losses resulting from the misappropriation of the company's assets by the managing director. The trial judge (Briggs J.) rejected this argument because causation could not be established but he nevertheless made some interesting points with regard to directors' duties.  In evaluating the claims Briggs J. considered the duties of directors (under the law before the codification of directors' duties in the Companies Act (2006)) and held that that the standard of care expected of directors is assessed using a dual objective/subject test. In this regard, Briggs J. observed (paras. [37] and [38]):

The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has. To that analysis may be added the principle, established for example in Re City Equitable Fire Insurance Company Limited [1925] Ch 407 that, because of the essentially fiduciary nature of the office, a director is expected to apply to the management and custodianship of the company's property that same degree of care as she might reasonably be expected to apply in the management and custodianship of her own property".

Briggs J. then proceeded to consider the proper course of action for a director resigning from his/her position in circumstances where he/she is concerned about the conduct of the other directors.  The comments of Briggs J. in this regard are of particular interest because he recognised that resignation alone may not be a sufficient response (at para. [39]):

The fiduciary nature of the office also affects the question whether, and if so when, resignation may be an appropriate response by a director to circumstances coming to her attention. Prima facie a director who no longer wishes to perform her duties, or who finds it impossible to do so, may properly resign; see Re Galeforce Pleating Co Ltd [1999] 2 BCLC 704, at 716 c-d. But a director who wishes to retire may nonetheless be required to take steps to deal before departure with a pressing matter calling for attention, or to put her continuing colleagues on the board in possession of information known to her relevant to the matter in question, so as to enable them to deal with it. Exceptionally, a director may upon departure be obliged to put relevant information in the hands of the company's shareholders or other stakeholders, if not satisfied that continuing colleagues on the board have the inclination or the ability to deal with a matter of concern".

UK: Companies House - appeals against late filing penalties

The Companies House adjudicator, Dame Elizabeth Neville DBE QPM, has published her first report (for the period 1 August 2007 - 31 March 2008). One of the roles of the adjudicator is to hear appeals against late filing penalties imposed by Companies House (and upheld, internally, by the Senior Appeals Manager). In this regard, the following extracts from Dame Elizabeth's report are of interest (paras. 2.8 and 2.16):

There were seven cases where directors experienced some serious problem which delayed the submission of the accounts. These included bereavement, and illness. However, in none of these cases was the individual a sole director. All directors have equal responsibility to ensure that accounts are submitted on time. Where one director has primary responsibility for submitting accounts and some catastrophe overwhelms him or her, other directors must be prepared to step into the breach. It is apparent that some directors are that in name only, and are either unable or unwilling to act when it becomes necessary. 

I upheld one appeal. In this case, property developers had been the directors of a property management company. They had managed it so badly that Companies House had dissolved it. The residents of the property development were obliged to apply for the company to be reinstated because of restrictive covenants on their properties, incurring the late filing penalties of the previous directors. Whilst supporting the policy of Companies House that outstanding late filing penalties must stand when a dissolved company is reinstated, notwithstanding a change of directors, I considered the circumstances of this case to be exceptional as the residents had no choice but to reinstate the company, had been ill treated by the property developer, and had already incurred considerable expense".

Notes: 

[1] The directors' duty to file accounts with the registrar of companies is imposed by Section 441 of the Companies Act (2006). Note also Part 35 - "The Registrar of Companies" - of the Act. 

[2] In July 2008, Companies House published revised guidance on late filing penalty appeals: see here. 

[3] All limited companies in England, Wales and Scotland are registered at Companies House, an executive agency of the Department for Business, Enterprise and Regulatory Reform. There are over 2,000,000 registered companies. There is a Registrar for England and Wales and another for Scotland. For information about incorporating a company, see here. 

UK: culture and corporate governance - recommendations from the Future of Banking Commission

The Future of Banking Commission published its report yesterday: see here (pdf). This sets out wide ranging recommendations concerning the regulation of banks. Chapter 4 - titled "Culture and Corporate Governance" - contains recommendations under the following headings: boards and directors, remuneration, accounting and auditing, shareholder oversight, credit rating agencies and the adoption of a code of conduct for banking. Some of the specific recommendations include:

• The duties of directors under the Companies Act (2006) should require them to consider the effect of the company's activities on the stability of the financial system as a whole.
• Fundamental questions should be asked about the purpose of the audit.
• Auditors should be asked to attest that banks' accounts represent a "true, fair and comprehensive statement" of the affairs of the company.
• The Stewardship Code for Institutional Investors should be mandatory for those fund managers which own bank shares.
• Non-executive directors should be charged with particular tasks and particular areas where their "challenge" is expected.

Canada: mergers, acquisitions and the role of directors

At the end of June, Canada's Competition Policy Review Panel published a report titled "Compete to Win". The report makes many recommendations and of particular interest are those concerning company directors. In a section titled "Strengthening the Role of Directors in Mergers and Acquisitions" (pp. 76-77) the Panel concluded:

the new global context in which mergers and acquisitions (M&As) occur requires that Canada update its regulatory framework to place the directors of Canadian companies on the same footing as their counterparts at Delaware companies".

The Panel recommended:

• Securities commissions should repeal National Policy 62-202 (Defensive Tactics).
• Securities commissions should cease to regulate conduct by boards in relation to shareholders rights plans (“poison pills”).
• Substantive oversight of directors’ duties in mergers and acquisitions matters should be provided by the courts.
• The Ontario Securities Commission should provide leadership to the Canadian Securities Administrators in making the above changes, and initiate action if collective action is not taken before the end of 2008.

For further information see:
Review website | Terms of reference | Report | Review research reports | Earlier consultation paper | Ontario Securities Commission | Canadian Securities Administrators | 

UK: England and Wales: the Companies Act (2006): the statutory derivative action

In Franbar Holdings Ltd v Patel and others [2008] EWHC 1534 (Ch), the High Court considered the operation of the statutory derivative action introduced by Part 11 of the Companies Act (2006). This is one of the first reported cases concerning the operation of the statutory derivative action. Although not a full trial of the various claims, Franbar is nevertheless important because it provides (a) clarification regarding ratification and (b) insights concerning the relationship between the new statutory derivative action and the unfair prejudice remedy in Section 994.

In Franbar the trial judge (Mr William Trower QC, sitting as a Deputy Judge of the High Court) had before him several applications including a petition under Section 994 of the Companies Act (2006) and an application to continue a derivative action.  Section 261(1) of the 2006 Act requires a member bringing a derivative action to seek the court's permission to continue the action. Section 263 sets out the circumstances in which permission should be given and, in subsection 2, provides that permission must be refused if the court is satisfied:

(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or
(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or
(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission— (i) was authorised by the company before it occurred, or (ii) has been ratified by the company since it occurred.

The judge did not consider head (b) because the allegations concerned past conduct.  With regard to head (a) - referring to the duty imposed on company directors - the trial judge identified several factors  which the hypothetical director would take into account including:

• The prospects of success
  
• The disruption which would result if the proceedings continued
  
• The cost of the proceedings
  
• Any damage to the company's reputation and business if the action failed

With regard to head (c) - authorisation or ratification - the trial judge considered Section 239 which governs ratification by the shareholders of a director's acts. Section 239 provides that a resolution proposed at a meeting will only be passed if the necessary majority is obtained excluding the votes of the director (if a shareholder) and any shareholder connected with him (on the latter, see Section 252). It was argued that Section 239 had replaced the principle that directors' acts cannot be ratified where they constitute a fraud on the minority and the wrongdoers are in control of the company. 

The trial judge rejected this argument, relying upon Section 239(7) which provides that the framework for ratification in Section 239 "does not affect any other enactment or rule of law imposing additional requirements for valid ratification or any rule of law as to acts that are incapable of being ratified by the company". In the judge's opinion (at para. [45]):

...the [following] words of Sir Richard Baggalay ... in North-West Transportation v Beatty (1887) 12 App Cas 589, 594, describing the circumstances in which a company cannot ratify breaches of duty by its directors, remain good law:

"... provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it"

It follows that, where the question of ratification arises in the context of an application to continue a derivative claim, the question which the court must still ask itself is whether the ratification has the effect that the claimant is being improperly prevented from bringing the claim on behalf of the company ... That may still be the case where the new connected person provisions are not satisfied, but there is still actual wrongdoer control pursuant to which there has been a diversion of assets to persons associated with the wrongdoer, albeit not connected in the sense for which provision is made by section 239(4)". 

The judge also considered Section 263(3), which specifies several factors to be considered when determining whether permission should be given, including factor (f): "whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company". The trial judge observed that where an act or omission gives rise to a claim for unfair prejudice (under Section 994) against a member and a claim for breach of duty against a director, Section 263(3)(f) is engaged. He also held that the adequacy of the remedy in (f) was a relevant consideration.  

The trial judge's decision was that permission should not be given for the derivative action to proceed. Although he found that there was substance in some of the complaints made, further work was needed to establish a clear claim of breach of duty.  For this reason it was open to a hypothetical director to decline to proceed with the derivative action. The judge also attached significant weight to the fact that the shareholder bringing the derivative action would be able to gain what it wanted through its separate Section 994 petition and shareholder action. 

Notes:

[a] The Franbar judgment has not yet appeared on BAILII although it is available on Lawtel (for subscribers only). A summary has, however, been provided here by the ICLR as part of its free WLR(D) service. This summary - which focuses on the issues surrounding ratification - will be removed if, as is likely, Franbar is reported in one of the ICLR series of law reports. Update (22 September 2008): the judgment is now available on BAILII - click here.

[b] Separate sections of the 2006 Act deal with derivative proceedings in Scotland: see Part 11, Chapter 2.

Europe: Commission publishes European Private Company (SPE) proposals

The European Commission has published its proposals for the European Private Company Statute. The European Private Company - or SPE, after its latin name Societas Privata Europaea - will be a new European legal form designed for small and medium sized enterprises. The Statute, which will take the form of a Regulation, will contain a set of uniform company law rules applicable to SPEs across the Member States, including such matters as shareholder rights and creditor protection. 

With regard to capital protection, the proposal departs from the view that a high minimum level of capital is required to protect creditors. The minimum capital requirement is €1. This reflects the position that it should be easy to from a SPE.

The proposal, in Article 18, provides shareholders with an exit right where the SPE's activities cause them serious harm as a result of several actions including a substantial change in the activities of the SPE or the non payment of a dividend for at least 3 years in circumstances where the SPE's financial position would have permitted such a distribution. 

The proposal makes clear that directors' duties are owed to the SPE and Article 31 provides that "[a] director shall have a duty to act in the best interests of the SPE. He shall act with

the care and skill that can reasonably be required in the conduct of the business".

The proposed SPE Regulation will only come into force after unanimous adoption by the Council of Ministers and the approval of the European Parliament. If this happens, the Commission intends that the Regulation will come into force on 1 July 2010.  

Choose a link for further information: 

Commission press release | Citizens' summary | Frequently asked questions | Regulation proposal | Impact assessment | Earlier publications |

UK: OFGEM, electricity companies and directors' conflicts of interests

The UK's Observer newspaper has reported that the electricity regulator - OFGEM - is investigating the conflicts of interest faced by directors. According to the news report, OFGEM:

...is concerned that directors of leveraged utilities firms are also directors of parent companies, creating a potential conflict of interest. John Reynolds, of independent investment bank Reynolds Partners, who has researched the subject, says: 'Conflicted directors are pulled in two directions: they must ensure that the operating company provides a proper service to customers; and they must make certain that the holding company services its debts'. Ofgem director Steve Smith says: 'We are aware of the issue and are looking at it within the wider context of a review into the way utilities are run'. "

NB: English company law does not grant a corporate group a legal identity separate from those of the individual group companies. Each company has its own separate legal personality and it is to these individual companies that directors owe their legal duties.

Ireland: directors' duties and corporate groups

Ireland's court of final appeal - the Supreme Court - delivered its judgment in Mitek Holdings Ltd & The Companies Acts [2010] IESC 31 last week. The Supreme Court unanimously upheld an order restricting two individuals from acting as company directors for a period of five years. The order was made by the High Court in May 2005 on the application of the liquidator of five companies in liquidation, following the judgment Grace (Liquidator) v. Kachkar & Ors [2005] IEHC 63, under Section 150(1) of the Companies Act (1990).

In upholding the restriction order, the Supreme Court considered directors' duties, the increased expectations placed on non-executive directors and the conflicts that can arise in corporate groups. With regard to directors' duties, the famous propositions in Re City Equitable Fire Insurance Ltd. [1925] Ch 407 - including the statement that directors' responsibilities were of an intermittent nature - were described by the court as reflecting "the more relaxed standards of business in another age" (para. [73]).

The court made clear that where a company is part of a group, its directors must consider and act in the interests of each company. With regard to "group policy" in such structures, the court stated (para. [89]):

It may indeed be normal and permissible, within a group of companies, to take account of group policy. That does not mean that the property of one company can simply be transferred, at the behest of the parent, to another company in the group. That would be to ignore entirely the separate existence of each company".

With regard to non-executive directors, the court stated:

... non-executive directors of companies must be increasingly conscious in the times we live in that they cannot be mere ciphers or purveyors of votes at the whim of management. There was a time when even such a distinguished text as Gower (The Principles of Modern Company Law 3rd Ed. Stevens, London 1969 page 549) could state: 'public opinion has come to recognise that directorships are little more than sinecures, requiring, at the most, attendance at occasional board meetings.' The Act of 1990 itself evinces public concern that directorships involve real responsibility and that persons who do not conform at least to some generally acceptable minimum standards either should not, in the public interest, be permitted or should be restricted in regard to future holding of directorships".

Canada: BCE, takeovers and directors' duties - Supreme Court reserves judgment

A panel of seven judges sitting in Canada's Supreme Court today heard argument in the appeal from the Quebec Court of Appeal's decision in BCE inc. (Arrangement relatif à), 2008 QCCA 935. Those hoping (optimistically) for judgment to be given quickly at the end of the hearing will be disappointed: judgment has been reserved (see this Reuters report and this report in the Financial Times). Some of the questions asked by the judges have been noted here. For background information, see this earlier post.

India: voluntary corporate governance and social responsibility guidelines published

The Ministry of Corporate Affairs has, for the first time, published voluntary corporate governance guidelines: see here (pdf). Based on 'comply or explain', the guidelines are directed at public companies and are divided into six sections: the board of directors; responsibilities of the board; audit committee of the board; auditors; secretarial audit; and whistle blowing. 

The Ministry has also published voluntary corporate social responsibility guidelines: see here (pdf). 

Canada: directors' duties during a takeover

The Quebec Court of Appeal has delivered an important and controversial opinion concerning the duties of directors during a takeover. In BCE inc. (Arrangement relatif à), 2008 QCCA 935 (available in PDF here) the court unanimously rejected the position adopted by the board of a target company (in reliance on the famous Revlon case from Delaware: 506 A. 2d 173, Del. Sup. Ct. 1986) that its overriding duty was to maximise shareholder value and obtain the highest value for the shareholders.  The court held:

It is clear from the principles enunciated by the Supreme Court in Peoples [Department Stores Inc. (Trustee of) v. Wisethat 2004 SCC 68] that at no time do the directors have an overriding duty to act only in the best interests of the shareholders and to ignore the adverse effect on the interests of the debentureholders" (para. [99], emphasis in the original).

In Canada, the directors of a corporation have a more extensive duty. This more extensive duty embodied in the statutory duty of care encompasses, depending on the circumstances of the case, giving consideration to the interests of all stakeholders, which, in this case includes the debentureholders. They must have regard, inter alia, to the reasonable expectations of the debentureholders, and those may be more extensive than merely respecting their contractual legal rights" (para. [107]).

BCE, the target company, has begun appeal proceedings: the Canadian Supreme Court will hear the motion to appeal on June 17. For further background information see here.

NB: For further discussion of Revlon, see: Kraakman, R. and Black, B., "Delaware's Takeover Law: The Uncertain Search for Hidden Value", (2002) 95 Northwestern University Law Review, 521-566, available on SSRN here.