UK: Pre-Emption Group issues revised Statement of Principles

The UK Pre-Emption Group has updated its Statement of Principles. The purpose of the Principles is to provide guidance to companies and investors on those factors to take into account when considering whether to disapply pre-emption rights. The revised Principles, available here, contain the following changes:

• Clarification that convertible instruments are covered by the Principles.
  
• Acknowledgement that shareholders would not normally have concerns if there was no dilution of value as a result of the proposed issue.
  
• A recommendation that companies should not seek an authorization for more than a maximum of 15 months.

Further background information is available in this press release and in this monitoring report.

UK: ABI publishes rights issue discussion paper

The Association of British Insurers has published a discussion paper titled "Rights Issues and Capital Raising". This makes suggestions for improving the capital raising process whilst respecting shareholders' pre-emption rights. Further information is available in this brief letter and longer article from the UK's Financial Times newspaper. The consultation paper has been published against the background of the Government's review of the rights issue regime: see this earlier post.

UK: rights issue fees inquiry launched by ISC

The Institutional Shareholders' Committee has announced the start of its rights issue fees inquiry: see here.

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: Government reviews - raising equity and rights issues

The Government has today announced the formation of a working party to review the efficiency of the UK's capital raising process. The party will be chaired by the FSA chief executive Hector Sants and Economic Secretary to HM Treasury Kitty Ussher and will be considering whether changes are need to UK company law, market practices or regulatory requirements in order to make the raising of equity capital more efficient and orderly. The relationship between this new working party and the recently formed Rights Issue Review Group is not entirely clear, although both groups are chaired by Sants and Ussher. 

We have been here before (albeit under different market conditions). In 2005, Paul Myners CBE produced a report for the Government in which he considered the impact of pre-emption rights on companies' ability to raise new capital and proposed changes to the current regime.  It is not clear whether Myners' proposals were seriously considered by the Government.  Mr. Myners has, however, commented on the current debate in a recent article in the UK's Daily Telegraph newspaper - see here - which begins: 

The principle of pre-emption has been a cornerstone of capital raising under UK company law for nearly 200 years. Shareholders need to know that they are protected from any unwelcome dilution in value or control of their investments. But public companies also need to be able to raise new equity cheaply and efficiently when it is required. Are the two now in conflict?

The UK's concept of pre-emption is one of the things which differentiates the UK equity market from many other jurisdictions, including the US. It is a source of strength, not weakness. But the outdated, complex, and lengthy processes of rights issues are seeing this approach to capital raising placed under attack, particularly from US investment banks".

For further information see:

HM Treasury press release | Paul Myners' article | Paul Myners' 2005 report |

Europe: McCreevy on the regulation of credit rating agencies

Further information concerning the shape of the European Commission's proposals for the regulation of credit rating agencies was provided by Internal Market Commissioner McCreevy in a speech titled "Regulation and Supervision after the Credit Crunch" delivered in Dublin on July 4. McCreevy stated:

There is the issue of the need to review the role and use of credit ratings. CRAs significantly contributed to the market turmoil by greatly underestimating the credit risk of structured credit products. I requested the advice of the Committee of European Securities Regulators (CESR) and the European Securities Markets Expert Group (ESME) on the various aspects of CRAs' activity and their role in the financial markets.

The IOSCO Code of Conduct to which the rating agencies signed up has not produced the desired effects. I am certainly not persuaded that the appropriate response lies in strengthening the voluntary framework established by the IOSCO code. International convergence is desirable if it can be achieved – but per se, this is not enough. And let me make it clear, I do not believe that Europe should be in the passenger seat on this issue. We need to drive things forward and set the pace.

While some of the additional steps that the main rating agencies have announced are welcome, they are insufficient. This is one of many reasons why I have concluded that a regulatory solution at European level is now necessary to deal with some of the core issues.

It is my intention to propose in October a registration and external oversight regime for rating agencies, whereby European regulators will supervise the policies and procedures followed by the CRAs. Reforms to the corporate and internal governance of rating agencies will form a part as well. I will also try to strengthen competition by encouraging entry into the market by new players. The European Securities Markets Expert Group stressed the importance not just of governance of rating agencies, but also the importance of having an appropriate corporate culture as well.

In the proposals I will bring forward on credit rating agencies, I also want to ensure that supervisors who will have responsibility for oversight will have at their disposal sufficient resources and expertise to keep up with financial innovation and to challenge the CRAs in the right areas, on the right issues, at the right time".

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.

Ireland: whistle blowing and Irish company law

Ireland's Office of the Director of Corporate Enforcement (ODCE) has published a discussion paper in which it proposes a whistle-blowing provision for inclusion in the new Companies Consolidated Bill. The ODCE states that its proposal "is balanced and limited in that it promotes international best practice in corporate governance while mitigating some of the difficulties which could arise with a broad whistle-blowing provision". 

The Company Law Review Group has shown little enthusiasm for the ODCE's proposals and the issue is now being considered by the Department of Enterprise Trade and Employment. The ODCE has nevertheless decided to publish its discussion paper for wider comment. In support of its proposals, the ODCE cites Principle IV.E. of the OECD Principles of Corporate Governance (2004) which provides:

Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this"

For further information see:

ODCE statement | ODCE discussion paper | ODCE discussion paper summary | Company Law Review Group | OECD Principles of Corporate Governance | 

Australia: shareholder engagement and participation

On June 23, Australia's Parliamentary Joint Committee on Corporations and Financial Services published a report titled Better shareholders – Better company: Shareholder engagement and participation in Australia. The Committee considered several issues including the barriers to effective engagement by shareholders in the governance of companies, the engagement of institutional shareholders and the selection of directors. The report makes many recommendations including:

• ASIC should establish best practice guidelines for company annual general meetings and for clear and concise company reporting.
• The government should investigate an alternative regulatory framework for small incorporated companies and not-for-profit organisations.
• The government should investigate the most appropriate regulatory framework for ensuring that stock lenders retain the voting rights attached to the lent shares.
• The government should amend the Corporations Act to exclude shareholder directors from voting on their own remuneration packages either directly or by directing proxies

The Australian Government has welcomed the report: see here.

UK: the FSA flexes its muscles - part 1 - rights issues and short selling

The UK's Financial Services Authority believes that in the current market conditions there is increased potential for market abuse through the short-selling of shares during rights issues. Such is the FSA's concern that new disclosure rules will come into force this Friday. These require the disclosure of short positions (0.25% or more) in shares admitted to trading on prescribed markets where a rights issue is taking place. FAQs concerning these rules have been published here. The rules have caused much disquiet, as reported here, not least because they were introduced without consultation.

USA: McCain supports mandatory say on (CEO) pay

Corporate governance issues continue to feature in the race for the presidency of the United States of America. Republican Senator John McCain has joined the debate concerning executive pay in a speech delivered yesterday at the NFIB & eBay 2008 National Small Business Summit held in Washington, D.C. Senator McCain observed:

In times of hardship and distress, we should be more vigilant than ever in holding corporate abuses to account, as in the case of the housing market. Americans are right to be offended when the extravagant salaries and severance deals of CEO's -- in some cases, the very same CEO's who helped to bring on these market troubles -- bear no relation to the success of the company or the wishes of shareholders. Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while the offenders themselves are packed off with another forty - or fifty million for the road. If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders"

UK: survey of FTSE100 companies: environmental, social and governance issues

Ethical Investment Research Services has published a report titled FTSE100 snapshot: Trends in ESG performance, which explores the progress FTSE100 companies have made on environmental, social and governance (ESG) issues over the past 5 years. The report states that "FTSE 100 companies are making good progress on ESG issues, however a small minority of companies continue to demonstrate poor performance" and highlights the following findings (to quote directly from the report):

[1] Greatest improvements have been seen in environmental policy development, as well as human rights and supply chain management

[2] Progress has been slower in areas such as environmental disclosure, equal opportunities and board diversity

[3] Responsible investment, has and will continue to be, a key driver for improved corporate social responsibility

[4] Other drivers for improved performance include increased regulation, continued shareholder and stakeholder pressure or a recognition that proactive management of ESG issues can lead to competitive advantage

[5] The future trend is for continued improvement in management response and a widening of scope as ESG issues are increasingly viewed as business critical risk issues

The report is available here and a press release is available here.

Europe: freedom of establishment and the 'life and death' of companies

Yesterday, Advocate General Poiares Maduro gave his opinion in Cartesio Oktató és Szolgáltató Bt. (Case C-210/06). The case concerned a limited partnership (Cartesio) which wanted to move its headquarters from Hungary to Italy. Hungarian law prevented Cartesio transferring its headquarters to another Member State whilst retaining its status as a partnership governed by Hungarian law. The only way for Cartesio to transfer its operational headquarters was by dissolving its business in Hungary and reestablishing in Italy. Does this amount to a restriction on freedom of establishment under Articles 43 and 48 of the EC Treaty?

The Advocate General held that the Hungarian legislation, which applied to partnerships and companies, breached Articles 43 and 48 of the EC Treaty. Articles 43 and 48, in his opinion, precluded rules which make it impossible for a company or partnership formed under the national law of a Member State to transfer its operational headquarters to another Member State. In this regard, and after considering recent case law of the Court, the Advocate General observed:

... it is impossible, in my view, to argue on the basis of the current state of Community law that Member States enjoy an absolute freedom to determine the ‘life and death’ of companies constituted under their domestic law, irrespective of the consequences for the freedom of establishment. Otherwise, Member States would have carte blanche to impose a ‘death sentence’ on a company constituted under its laws just because it had decided to exercise the freedom of establishment".

The Advocate General nevertheless recognised that restrictions of the kind in the Hungarian law could be justified on grounds of general public interest including the prevention of fraudulent conduct or the protection of the interests of creditors, minority shareholders, employees or the tax authorities. The Hungarian law did not, however, contain any grounds of justification.

NB:

[1] The Advocate General's opinion is not binding on the Court but in the majority of cases such opinions are followed.

[2] In 2004 the European Commission consulted on a proposed Directive (the 14th Company Law Directive) on the right of limited companies to transfer their registered office from one Member State to another. However, in December 2007 the Internal Market Commissioner Charlie McCreevy decided that legislative action was not required (see here). In the impact assessment it was explained why:

Since the practical effect of the existing legislation on cross-border mobility (i.e. the cross-border merger directive) is not yet known and that the issue of the transfer of the registered office might be clarified by the Court of Justice in the near future, the assessment concludes that it might be more appropriate to wait until the impacts of those developments can be fully assessed and the need and scope for any EU action better defined"

UK: FSA report to HM Treasury on the implementation of the recommendations of the Rights Issue Review Group

The Financial Services Authority has published its report to HM Treasury on the implementation of the recommendations of the Rights Issue Review Group: see here (pdf). The report notes:

The RIRG report’s two key recommendations were to shorten the minimum rights issue subscription period from three to roughly two weeks and to increase the allotment ceiling from one-third to two-thirds. The implementation of these recommendations has created a significantly better environment for rights issues from that when the RIRG report was published.

The RIRG report made a number of other recommendations relating to the duration of rights issues and to underwriting and short selling. These are also addressed in this paper as are the three RIRG recommendations concerning conditional rights issues, compensatory open offers and accelerated pre-emptive issues. The latter three topics have been the subject of a series of meetings with market participants in 2009. We originally thought they would have been the basis of a consultative paper, either a discussion paper or a consultation paper, depending on our findings. However, we have now concluded that a consultative paper is not needed ..."

Scotland: Directors' duties and unfair prejudice

The Court of Session has, today, declined to grant West Coast Capital (WCC) an interim interdict (injunction) which would have prevented Dobbies plc from proceeding with a rights issue.  WCC, a minority shareholder in Dobbies, presented a petition under Section 994 of the Companies Act (2006), alleging that the Dobbies directors (several of whom were officers or directors of Tesco plc and had been appointed last year when Tesco became a majority shareholder) had exercised their powers in Tesco's interests to the prejudice of the other shareholders and had failed to act fairly between Tesco and the other shareholders.  

Lord Glennie was not satisified that WCC had an arguable case.  His opinion is available here and it is important for several reasons:

[1] There is discussion of Section 171 and Section 172 of the Companies Act (2006).  Section 172 imposes a duty on company directors to promote the success of the company for the benefit of the shareholders as a whole.  In doing so, directors are required to have regard to various factors, including the impact of the company's operations on the community and the environment and the need to act fairly as between members of the company.  In Lord Glennie's view, Section 172 does "little more than set out the pre-existing law on the subject" (para. [21]).  Some may question that interpretation because Section 172 sets out, for the first time in companies legislation, certain factors that directors are required to consider. 

[2] There is the clear recognition that breaches of directors' duties can be unfairly prejudicial.  This point remains controversial.  Lord Glennie nevertheless observes: "... it is important to have in mind that fairness and unfairness (in the context of assessing whether conduct is "unfairly prejudicial") are not abstract concepts. They are used in the context of a commercial relationship, where the parties' rights and expectations are governed by contract, namely the articles of association, and, possibly, by other agreements or understandings, as well as by the fiduciary duties which directors owe to the company" (para. [19]).

The case has attracted widespread attention in the media because of the parties involved. See, e.g., The Scotsman, The Guardian and The Times.

Postscript (21 May 2008): The Guardian has reported that West Coast Capital has agreed to accept an offer from Tesco of £12 per share.

UK: Building societies and corporate governance

The Financial Services Authority's Chief Executive, Hector Sants, delivered a speech titled "The future of financial regulation" on 7 May at the Building Societies Association Conference. During his speech, Mr Sants identified areas of weakness in the governance of some building societies:

"I would like to finish with a few words about corporate governance. There are three reasons for doing this. Firstly, we have seen inadequate review, assessment and challenge of proposed new initiatives. As I have already highlighted, we have particularly found this around the liquidity and funding issues with which societies have been confronted. Some societies have been very slow to appreciate the nature and scale of the market turbulence or react prudently.

Secondly, if a building society is to survive, prosper, and bring real benefits to its members, it must have a good quality board. A board, together with the senior management team, has to lead their society through these challenging, competitive and more complex times.

And thirdly, because, as you will be aware, we have maintained the guidance that says that building societies should have regard to the Combined Code when establishing and reviewing their own corporate governance arrangements. To this point may I highlight two matters that are set out in the Combined Code: That the board should undertake a "formal and rigorous" annual evaluation of individual directors and that non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives.

I would ask you to consider whether this is a process which is well established at your society; and, in particular, is it "formal and rigorous". Do your Boards act on the results of the evaluation? In most cases there may only be behavioural changes to make. But in exceptional cases this might mean going further and questioning whether the person is still right for the role. Most societies do evaluate their executive directors, and many have processes that could be regarded as clearly demonstrating best practice, but in some cases we have seen this does not involve a structured process with, for example, agreed objectives and performance criteria against which the assessment is made. Such processes look neither "formal" nor "rigorous".

I would now like to say a few words about succession planning. This is, I am afraid, another area where we believe improvements should be made. I am sure you will agree it is vitally important for the long term health of a society that it has management depth and a credible management development and succession planning process. I am afraid that we do not believe that the practice in this area is always at the level we would expect.

Such deficiencies can carry considerable risk for a society, not least of which is the risk of stagnation and lack of focus which can result from a lengthy transitional period. May I thus use this opportunity to remind boards and non-executives in particular of their responsibilities in this area. This will be a theme we shall be returning to in the future.

In conclusion on governance, I would just like to underline the importance of boards focussing on what we say in the Building Society Regulatory Guide, namely “Society boards and management have a special responsibility to protect the interests of their members through the highest standards of corporate governance.” Public companies have the added pressure of institutional shareholders you are not subject to this additional scrutiny and thus must be extra diligent. I am sure you are all aware of this point, but I feel it bears repeating".

US: New York: The derivative action and LLCs

In 1994, New York State introduced a new legal form: the Limited Liability Company (LLC). The LLC is, to quote directly from the Guide produced by New York State's Division of Corporations:

"...an unincorporated business organization of one or more persons who have limited liability for the contractual obligations and other liabilities of the business. The Limited Liability Company Law governs the formation and operation of an LLC. An LLC may organize for any lawful business purpose or purposes. The LLC is a hybrid form that combines corporation-style limited liability with partnership-style flexibility. The flexible management structure allows owners to shape the LLC to meet the needs of the business. The owners of an LLC are "members" rather than shareholders or partners. A member may be an individual, a corporation, a partnership, another limited liability company, or any other legal entity".

The question before the New York State Court of Appeals in Tzolis v. Wolff, N.Y. Slip Op. No. 01260 (N.Y. February 14, 2008) was whether members of a LLC could bring a derivative action. The Limited Liability Company Law is silent on this issue. The majority in Tzolis held that a member could bring such an action, referring to early English and American cases; Smith J. observed (pp. 5-6):

"...we continue to heed the realization that influenced Chancellor Walworth in 1832 [in Robinson v Smith (3 Paige Ch 222)], and Lord Hardwicke ninety years earlier: When fiduciaries are faithless to their trust, the victims must not be left wholly without a remedy. As Lord Hardwicke put it, to 'determine that frauds of this kind are out of the reach of courts of law or equity' would lead to 'an intolerable grievance' (Charitable Corp. v Sutton, 2 Atk at 406 [(1742) 26 ER 642]). To hold that there is no remedy when corporate fiduciaries use corporate assets to enrich themselves was unacceptable in 1742 and in 1832, and it is still unacceptable today. Derivative suits are not the only possible remedy, but they are the one that has been recognized for most of two centuries, and to abolish them in the LLC context would be a radical step".

However, in a powerful dissent, Read J. observed (p. 20):

"The enacting (not a subsequent) Legislature considered and explicitly rejected language authorizing the very result that plaintiffs have successfully sought from the judiciary in this case. Fourteen years after the fact the majority has unwound the legislative bargain. The proponents of derivative rights for LLC members -- who were unable to muster a majority in the Senate -- have now obtained from the courts what they were unable to achieve democratically. Thanks to judicial fiat, LLC members now enjoy the right to bring a derivative suit. And because created by the courts, this right is unfettered by the prudential safeguards against abuse that the Legislature has adopted when opting to authorize this remedy in other contexts"

Germany: Shareholder Activism + VW Law

A couple of items concerning Germany:

(a) In October 2007, the European Court of Justice held - in Commission of the European Communities v Federal Republic of Germany (Case C-112/05) - that Germany had failed to fulfil its obligations under the EC Treaty by maintaining in force provisions of the so-called "VW Law" under which, inter alia, shareholder voting rights in Volkswagen were capped at 20% and the Federal State and Land of Lower Saxony each had the right to appoint two representatives to the supervisory board. Earlier this month it was reported that EU Commissioner Charlie McCreevey had written to Germany's justice minister because of his concerns over the manner in which Germany proposes to comply with the ECJ decision. McCreevey is reported to have written:

"I am informed that your services are of the view that it is sufficient to eliminate two of the special requirements of the law - mandatory [state] representation on the board and the voting cap - and not the third [the 20% blocking minority] in order to comply with the ruling of the court. ... All three provisions, including the 20% blocking minority ... need to be abolished in order to implement the ruling correctly."

(b) The March 19th issue of The Economist contains an article titled "Raising their voices", which provides an example of successful shareholder activism at TUI.

Postscript (5 June 2008): Today the European Commission began infringement proceedings against Germany for its failure to comply with the ECJ's opinion. See here for further information.

Europe: Internal Market Commissioner's speech on corporate governance

On 6 December, European Internal Market Commissioner McCreevy was at Westminster, delivering a speech to the All Party Parliamentary Corporate Governance Group. Some interesting points from Commissioner McCreevy include:

"My recent decision not to propose any EU measure on one-share-one-vote does not mean that I do not believe in one-share-one-vote any more. I continue to believe it is in the best interest of companies and their investors. However, I do not believe that EU action would be useful or fruitful".

"We are looking into the issue of whether we need a recommendation on Shareholders' rights to accompany the recently approved Shareholders' Rights Directive. We are also having a close look at the proper application of existing rules. One of the areas we are looking at in this context is the "acting in concert" rules in the Takeover Directive. I am concerned that some Member States are giving far too wide a reading on this concept, thereby preventing legitimate collaboration between shareholders".

The speech is available here.

A week or so after Commissioner McCreevy's speech, the European Commission published an impact assessment on the proportionality between capital and control in listed companies, which explores the arguments for and against legislation within this area. This is available here.

US Supreme Court rules on third party liability towards company investors

On January 25, the American Supreme Court delivered its decision in Stoneridge Investment Partners LLC v Scientific-Atlanta Inc. et al., described by the UK's Financial Times as "the most important securities case in more than a decade". The issues and the finding of the majority (5 to 3) of the Court are well described in Justice Kennedy's opening remarks:

"We consider the reach of the private right of action the Court has found implied in §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. §78j(b), and SEC Rule 10b–5, 17 CFR §240.10b–5 (2007). In this suit investors alleged losses after purchasing common stock. They sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors’ company to mislead its auditor and issue a misleading financial statement affecting the stock price. We conclude the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations. We affirm the judgment of the Court of Appeals."

The decision is available here.

For further discussion, click here and here.