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.
  

UK: England and Wales: relieving directors from liability in respect of unlawfully paid dividends

In HMRC Commissioners v Holland (Ch.D., Deputy Judge Cawson QC, 24 June 2008) the judge had before him applications under Section 212 of the Insolvency Act (1986) relating to 42 separate companies. One of the questions considered was whether a director could be relieved from liability under Section 727 of the Companies Act (1985) in respect of the payment of unlawful dividends. In this regard, Deputy Judge Cawson QC observed:

"The headnote to Re Loquitur [Ltd., IRC v Richmond [2005] 2 BCLC 442] suggests that the case decides that there is no jurisdiction to grant relief under Section 727 CA 1985 where, as a result of directors failing to exercise proper skill and care a dividend is paid that renders the company insolvent or potentially insolvent. However, I consider  that this reads too much into Etherton J's judgment ... Whilst the Court will, necessarily, be most reluctant to grant relief under Section 727 when an officer/shareholder has benefited at the expense of the creditors by reason of the payment of the dividend, I consider that the Court does retain a discretion to relieve at least when, as in the present case, the director has not directly benefited from the payment of the dividend" (para. [224])

Notes: 

[1] The decision is not yet available on BAILII but a copy of the transcript is available on the Lawtel subscription service (the Lawtel staff have not yet prepared a summary). Update (29 Sept 2008): the decision is now on BAILII - click here. 

[2] The provision in Section 727 of the Companies Act (1985) permitting the court to grant relief is found in Section 1157 of the Companies Act (2006), which comes into force on 1 October 2008.

South Africa: company law reform - the Companies Bill and shareholders' pre-emption rights

It has been reported that Hermes, the UK based fund manager, has criticised the provisions concerning pre-emption rights in the Companies Bill.  Hermes' concerns relate to Section 39 which provides that public company shareholders will only have pre-emption rights if this has been explicitly provided for in the company's memorandum of incorporation. Click here for further information. 

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".

Singapore: restrictions on the transfer of shares

Where shareholders in a listed company agree not to sell, assign or dispose of their shares for a given period of time, does this agreement prevent them from using their shares as security? It does not according to Pacrim Investments Pte Ltd v Tan Mui Keow Claire [2008] SGCA 16, a decision of the Court of Appeal in Singapore.

The court's decision is noteworthy because the facts concerned a listed company (restrictions on the transfer of shares are more common in closely held companies) and also because it provides a good example of the approach taken by courts in many jurisdictions when interpreting provisions which purport to limit the transferability of shares. 

The court stated, with reference to the late Robert Pennington's textbook on English company law, that "[the] freedom of a shareholder to deal with his shares should generally be given a broad, rather than narrow, interpretation" and cited with approval the following principle enunciated by Lord Greene MR in the English case Greenhalgh v Mallard [1943] 2 All ER 234 at 237:

Questions of construction of this kind are always difficult, but in the case of the restriction of transfer of shares I think it is right for the court to remember that a share, being personal property, is prima facie transferable, although the conditions of the transfer are to be found in the terms laid down in the articles. If the right of transfer, which is inherent in property of this kind, is to be taken away or cut down, it seems to me that it should be done by language of sufficient clarity to make it apparent that that was the intention".

In the view of the Singapore Court of Appeal, there was no reason why this principle should not apply to agreements between the company and its shareholders made outside of the company's memorandum and articles of association.

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. 

Directors' liability discharge proposals - report published

Manifest, in conjunction with Morley Fund Management, has published a report titled "Directors' liability discharge proposals: the implications for shareholders". The report, to quote directly from it: 

.... addresses what for many investors has been a largely obscure issue, namely proposals to discharge directors of liabilities that routinely appear on shareholder meetings’ agendas in many European markets. We look at 13 European markets that have resolutions of this type – Austria, Belgium, Denmark, Finland, France, Germany, Greece, Luxembourg, the Netherlands, Portugal, Spain, Sweden and Switzerland; their legal basis and practical implications for shareholders in the voting context".

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.

New Zealand: corporate governance reporting - Securities Commission review

The New Zealand Securities Commission has published its latest review of corporate governance reporting: see here. The review considered disclosure by 68 companies and found that many needed to improve disclosure concerning ethical standards, directors' remuneration, risk management, and shareholder and stakeholder relations. The overall findings are available here.

UK: takeover regulation review - IoD response

The Institute of Directors has today published its submission to the Takeover Panel's review of certain aspects of takeover regulation (about which see here, pdf). In its submission, available here (pdf), the IoD argues that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company. The IoD explains its position as follows:

The IoD believes that a market for corporate control is a valid component of an effective corporate governance system. The threat of hostile takeover can provide a source of discipline for severely underperforming companies and their management. However, takeovers are difficult to implement successfully. Many takeovers do not result in a combined enterprise that is stronger that the sum of its parts. A number of academic studies have shown that contested takeovers, on average, destroy value for the shareholders of the acquiring firm [Cosh and Hughes (2008), Martynova and Renneboog (2008) and Tuch and O'Sullivan (2007)]. Widespread use of takeovers may also encourage a short-termist management approach, both amongst acquisitive companies and companies under threat of takeover. As a result, we view hostile takeovers as a governance mechanism of last resort. The presence of an effective board (containing a high proportion of independent, knowledgeable and challenging non-executive directors) and an ongoing process of engagement between boards and shareholders should be regarded as the main means of ensuring the success of the company over the longer term.

When significant takeover bids do occur, the final say on the commercial viability of the transaction should be a matter for shareholders. Furthermore, for such an important (and potentially risky) corporate event, it is important to ensure that the shareholders on both sides of the transaction are fully supportive of such a step. The Takeover Code provides a fair and transparent mechanism through which to solicit the support of offeree (i.e. target company) shareholders during a hostile takeover bid. However, there is currently no guarantee that a takeover transaction has the support of the offeror (acquiring company) shareholders. The UK model of corporate governance is based on the principle of shareholder monitoring and oversight of corporate activity. In our view, it is consistent with this approach to require that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company".

UK: annual election of directors

Today's Financial Times newspaper reports, in an article titled Investors oppose annual board vote available here, that Hermes, Railpen and the Universities Superannuation Scheme have "written to 700 companies to encourage them to ignore new guidelines [in the UK Corporate Governance Code] that require the annual re-election of board members".

USA: the proxy voting system - SEC invites public comment

The Securities and Exchange Commission has published a paper inviting comment on the US proxy system: see here (pdf). The paper raises three broad questions:

• Should steps be taken to enhance the accuracy, transparency, and efficiency of the voting process?
• Should the SEC's rules be revised to improve shareholder communications and encourage greater shareholder participation?
• Is voting power aligned with economic interest and do the current disclosure requirements provide investors with sufficient information about this issue?

Further background information, including a short factsheet about the proxy system, is available here.

Netherlands: the re ASMI case and Dutch corporate law

The Netherlands Supreme Court gave judgment last week in re ASMI. An excellent summary, in English, is available on The Defining Tension blog: see here. The case raised important questions concerning, amongst other things, the relationship between the shareholders and the management board as well as the role of the supervisory board.

Europe: bankers' bonuses and remuneration at listed companies

Yesterday's vote by the European Parliament on new rules governing bankers' bonuses - about which see here and here - has attracted a great deal of coverage in the media. Less attention has focussed on another resolution supported by MEPs yesterday regarding remuneration in listed companies, described in the relevant press release as follows:

.... in a non-legislative resolution drafted by Saïd El Khadraoui (S&D, BE), Parliament calls for remuneration policy principles to be extended to cover all companies listed on stock exchanges. It proposes that listed companies be required to explain their remuneration policies if their directors' pay is deemed not to follow certain principles aimed at removing incentives to take excessive risk or to take decisions based on short-term considerations. The resolution also proposes that shareholders be given greater control over the directors of a listed company.

Finally, 'golden parachutes' handed to directors in cases of early termination should be limited to the equivalent of two years of the fixed component of the director's pay and severance pay should be banned in cases of non-performance or early departure, says the resolution, which was adopted by 594 votes to 24 with 35 abstentions".

Japan: shareholder meetings

The majority of listed companies in Japan hold their annual general meeting in the last week of June. This concentration of meetings was described by the Asian Corporate Governance Association, in its 2008 white paper (here, pdf), as being a "major obstruction to the exercise of shareholder rights and good corporate governance, and is unnecessary".

The annual general meeting period remains concentrated although the proportion of meetings held on the same day has fallen in recent years. Yesterday was nevertheless a popular day: 40% of companies listed on First Section of the Tokyo Stock Exchange held their AGM (see here).

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: BERR annual report published

The UK Government department responsible for company law - BERR, or the Department for Business, Enterprise and Regulatory Reform - has published its annual report. Click here to view the entire report (be warned: it contains 267 pages) or here to view separate sections. For those interested in the Government's perception of its role in corporate governance there are some interesting insights. For example, the report notes (on page 55) that one of BERR's roles is to "create fair and flexible labour markets and to ensure that confident and informed shareholders and consumers drive markets".

Australia: derivative actions - who bears the costs?

In a report published in 2006 - available here (pdf) - Prof Ian Ramsay and Benjamin Saunders provided an empirical analysis of the statutory derivation action introduced in Australia by Part 2F.1A of the Corporations Act (2001). The authors noted that "[n]either the statutory provisions, nor the approach of the courts, provide any certainty of litigation funding. The analysis of the cases indicates that courts have been cautious in relation to the issue of costs" (p. 38).

Against this background, a Federal Court decision - Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570 - is of particular interest. At issue was whether a company should be required to meet a shareholder's costs in bringing a derivative action under Part 2F.1A of the Corporations Act (2001). The trial judge, Finkelstein J., held that it should and stated that he was unable to see why the approach taken in Sub Rosa Holdings Pty Ltd v Salsa Sudada Production Pty Ltd [2006] NSWSC 916 - in which, at [49], it was stated that it was "common place for a person given permission to pursue a claim on behalf of a company to be required, in the first instance, to bear the burden of costs" - had been adopted. Finkelstein J. observed (paras. [9] - [11]):

The purpose of permitting a person to bring an action in the name of the company is to prevent conduct which involves some element of harm. In most cases the wrongdoer will be in control of the company. That will be the reason the company itself is not bringing the action. The purpose of the exceptions outlined in Foss v Harbottle [1843] ER 478, as well as the purpose of Part 2F.1A, is to increase the likelihood that someone brings a claim which the company ought to have commenced. In those circumstances, I can think of no good reason why the company should not bear the costs. Put another way, the principle adopted by Marks J [under the old law, in Farrow v Registrar of Building Societies [1991] 2 VR 589: if the shareholder's action “is bona fide to protect the [company] and the [company] will receive the benefit of success, there is no good reason why the expenses should be met out of the private resources of [the] shareholders”] should continue to apply under the statute.

This is not to suggest that a costs order will be made in all cases ... If a costs order is made and at any later time it turns out the claim is unmeritorious, the costs order can be recalled".

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.