I have reproduced the article in full below, with permission from The Financial Times.

Resigned to losing director

Q. I run an advertising business and, 18 months ago, we appointed a non-executive director to advise on our growth. We appointed her on good faith as we have known her for a long time and regard her as a friend. However, it has come to my attention that she is also advising a rival company and we are very concerned about this. Can you advise on the best course of action?

A. The duties of the non-executive director in this case are now codified within the Companies Act 2006. Under section 172 of the Act, there is an obligation on the part of the director to promote the success of the company. That section also states that a director must act in a way that he or she considers to be in good faith.

The director is obliged to consider the likely consequences of any decision made by her in the long term, in so far as it may affect the business.

By section 174, there is an obligation on the director to exercise reasonable care, skill and diligence and, by section 175, to avoid a conflict of interest. So, by advising a competitor in the sector, the director clearly has a conflict of interest – and thereby risks being in breach sections 172, 174 and 175 of the Act.

Consequently, your board should consider asking the non-executive director to resign from her position to avoid being in breach of her statutory duties as described above.

If she refuses, the board will have to consider terminating the arrangement.

Michael Delaney is a partner and head of employment at Matthew Arnold & Baldwin, a law firm.

If you would like further advice on this issue, or anything else employment-related, please contact me at michael.delaney@mablaw.com.

Section 44 of the Companies Act 2006, which came into force on 6 April 2008, sets out the rules by which a company may execute a deed.

A company may validly execute a deed in one of the following ways:

1. by affixing its company seal (observing any formalities for use of its common seal as set out in its articles of association);
2. by the signature of two directors of the company;
3. by the signature of a director of the company and the company secretary (if, in the case of a private company, a company secretary is appointed);
4. by the signature of a director of the company in the presence of witness who attests the signature; or
5. by appointing a person, either generally or in respect of specified matters, as its attorney to execute deeds or other documents on its behalf.

A company need not have a common seal and even if the company does have a common seal it can use any of the other methods set out above which will have the same effect as if the deed was executed under the common seal. A company may also validly execute any other document using the methods set out above but when executing any type of document a company should always have regard to any specific signing provisions contained in its articles of association.

In the recent case, of Roger Williams & Others v Redcard Ltd & Others [2011] EWCA Civ 466, the Court of Appeal found themselves considering the execution formalities set out in the Companies Act. Within the agreement in question “Seller” was defined as including Redcard Ltd, who was selling its freehold interest in a building under the agreement, and two individuals, who were selling their leasehold interests in that building under the agreement, (let us call them the “Leasehold Sellers”). The Leasehold Sellers were also authorised signatories of Redcard Ltd. There were various signatures under the words “SIGNED…SELLER” including the signatures of the two Leasehold Sellers.

The question that the Court of Appeal had to consider was whether the agreement, which did not bear separate signatures stated to be “for and on behalf of” Redcard Ltd, was validly executed by the company. The Court of Appeal found that it was. It was not critical that the words “by or on behalf of” the company did not accompany the signatures of the Leasehold Sellers. In the circumstances, it was sufficient that Redcard Ltd was included in the definition of “Seller” and that the Leasehold Sellers’ signatures appeared at the end of the agreement under the words “SIGNED…SELLERS”. However, perhaps the real lesson to be learnt from this ruling can be found in Lord Justice Mummery’s conclusion where he added that it may just be worth stating the obvious:

“expensive and long drawn-out litigation about the execution of a document by a company can be avoided by taking more care over compliance with the formalities at the time of execution by, for example, adding words that expressly state the capacity in which an individual is signing a document to which a company is a party.”

If you require any advice on how to execute a document on behalf of a company or the wording to be used when doing so please contact a member of our corporate team.

Hedgehog previously had two directors, FH and another. Due to contentious previous court proceedings between the directors, in which certain orders were made against FH, FH had resigned his position as a director of Hedgehog, leaving the other director as sole director.

Another company had brought a patent infringement claim against the golfing device developed by Hedgehog. A consultant of Hedgehog gave evidence to the High Court that FH had made threats in relation to proposals FH had made to Hedgehog, such that if the proposals were not accepted he would not only stop assisting Hedgehog in its defence of the patent infringement claim, but he would actually offer his services to the other company’s patent attorneys.

The consultant also gave evidence that FH had threatened to publicly announce the limitations of Hedgehog’s registered patent, allowing competitors to take advantage of its shortcomings.

The High Court ruled that it was appropriate to grant Hedgehog a perpetual injunction to prevent FH from disclosing confidential information without Hedgehog’s consent. The High Court ruled that FH’s previous conduct showed that he had intended to damage Hedgehog’s business by releasing information that would prejudice the business, and that he had also intended to reveal information that could put him in breach of the previous orders that had been made against him in the contentious proceedings with Hedgehog’s director.

The Government announced in August 2010 that it had asked Lord Davies of Abersoch to develop a strategy to address concerns that there are too few women on the boards of UK listed companies. The “Women on Boards” report has now been published.

Recommendations

The report does not propose statutory quotas as a way to incease female board representation but instead makes several “business-led” recommendations such as:

- the target percentage representation of women on the boards of FTSE 100 companies should be 25%;

- a voluntary code of conduct should be drawn up by headhunting firms to address gender diversity for the boards of FTSE 350 companies;

- disclosure requirements for quoted companies should be introduced (so that a quoted company must disclose the proportion of women on its board, the number of women in senior executive positions and its total number of women employees);

- a deadline of September 2011 should apply to FTSE 350 companies to announce their targets for female board representation; and

- companies should advertise their non-executive positions from time to time to encourage a wider range of applications.

If these recommendations do not result in a significant increase in female board representation for UK listed companies, the Government may yet introduce statutory quotas.

The Bribery Act is expected to have a huge impact on the way an organisation controls its internal affairs, as it will be responsible for any corrupt action by its employees unless it can show that it had in place adequate procedures and policies to prevent those actions.

The Bribery Act places the responsibility for compliance with the organisation rather than providing a tick-box system to ensure compliance. As part of the new law, the Government needed to produce guidance to help organisations to make the correct decisions.

The initial guidance was produced by the last government, but was widely criticised, by bodies such as the Law Society, for not being clear enough. Once the new guidance has been published, the MoJ have said that there will be a three month notice period before the Bribery Act comes into force.

It remains to be seen whether the Supreme Court accepts Safeway’s application, although if it takes into account the unanimous decision of the Court of Appeal, it is unlikely to do so. If the Supreme Court does choose to review the case, directors and employees of an organisation will again be at risk of being ruled to be liable for breaches of competition law by that organisation.

The Government issued a review on this topic in December 2010. More than 2,600 responses to the review have been received. Meetings have also been held with a number of interested groups which have generated suggestions such as trial periods on company boards and widening the talent pool by allowing recruitment from the services sector. Lord Davies is heading the review and will make his recommendations to the Government this February.

The CBI has responded to the Government’s review by stating that the UK Corporate Governance Code should require listed companies to report on diversity on a “comply or explain” basis. This would force listed companies to set internal targets and, if such targets are not met, provide a report setting out the reasons why. Companies would be able to take their particular circumstances into account when setting the targets so that, for example, a media company with lots of female employees would set higher targets than an engineering company with few female employees. A similar scheme due to be introduced in Australia next year has reportedly already caused an increase in the number of female board appointments. It will be interesting to see if any changes introduced in the UK have a similar effect.

BAE Systems plc (BAE) and the Serious Fraud Office (SFO) reached a settlement agreement in February 2010 as regards BAE’s alleged corruption in the procurement by BAE of a contract with the government of Tanzania. The settlement with the SFO was the result of co-ordinated action with the US Department of Justice.

Since the settlement with the SFO, some court cases have questioned the ability of the SFO to conclude settlements. Judges in two such cases stated that the courts could not be bound by such settlements and the SFO may only suggest a sentencing range, rather than specific sentences. The outcome of the BAE court case has therefore been eagerly anticipated.

Decision

BAE was sentenced on 21 December 2010 after pleading guilty to failing to keep adequate accounting records contrary to the Companies Act 1985.  The guilty plea formed part of the settlement which BAE had reached with the SFO. The judge stated that although he was not bound by the settlement, he accepted the basis of the plea itself.

Comment

The case will be of interest to companies considering self-reporting to the SFO for corruption. It also has a particular relevance given that the Bribery Act 2010 is due to come into force in April of this year.

How can we help you?

We can provide your business with a one hour bespoke training session to explain the implications of the Bribery Act 2010. The wording of the new Act is very wide so it may well affect the way in which your business operates. We can also suggest practical steps to reduce the risk of prosecution.

If you would like more information on the Bribery Act 2010 then please contact Emma Cameron at emma.cameron@mablaw.com

PwC’s annual non-executive director report, which covers the majority of FTSE 350 companies, found that non-executive directors at FTSE 100 companies spent 24 days on company board work in 2010 (compared with just 20 in 2009), with more than half of those surveyed expecting this figure to increase again in 2011.

The increased time demands have been put down to a number of reasons: tougher regulatory requirements for companies, the recession, and even the need to attend occasional board meetings overseas. There is a real risk that if this time burden continues, the role may become less viable in the future, particularly as 45 per cent of non-executive respondents believe that the fees they charge are too low for the work they do (and the time spent doing it.) That said, 63 per cent of respondents also said that the role has actually become more attractive due to its challenging and rewarding nature.

The question that comes out of this report is: can the role of non-executive director be successfully combined with the demands of a full-time job?

The study also found that:

1. For companies, a candidate’s experience and personality are the most important selection criterion when appointing non-executive directors;

2. For candidates who are considering a non-executive position, the quality of a company’s executive directors is the most important factor. This is followed by the quality of the company’s existing non-executive directors, the financial strength of the company, the company’s business strategy, the time commitment required, and the firm’s reputation. Interestingly, fees are the least important consideration (even though 45 per cent of non-executive directors feel they are significantly underpaid);

3. The average pay for a non-executive director in the FTSE 100 is £57,000;

4. Across all non-executive roles, female representation is only 5 per cent in FTSE 100 companies and 8 per cent in FTSE 250 companies; and

5. Only 21 per cent of FTSE 100 companies and 6 per cent of FTSE 250 companies evaluate the performance of their non-executive directors. Also, only one third of FTSE 350 companies have externally facilitated board evaluations every three years, as laid out in Provision B.6.2 of the UK Corporate Governance Code.

The Office of Fair Trading (OFT) launched an investigation in January 2005 into allegations of collusion between producers of dairy products and supermarkets in relation to retail pricing. In September 2007 the OFT informed a number of businesses, including Tesco, Sainsbury, Asda, Morrisons and Safeway (which was bought by Morrisons in 2004), that the OFT had found evidence of their involvement in collusion that infringed Chapter I of the Competition Act 1998. Chapter I of the Competition Act 1998 prohibits an agreement, decision or concerted practice between undertakings which may affect trade in the UK (or part of the UK) and has as its object or effect the restriction, prevention or distortion of competition within the UK.

The OFT reached early resolution agreements with many of those accused, under which those businesses admitted that they had been involved in collusion, accepted liability and any fine imposed by the OFT, and agreed to assist the OFT in the continued investigation. Under the early resolution agreement, Safeway agreed to pay a fine of more than £10 million, which had been reduced from £16 million under the terms of the agreement.

A number of companies within the Safeway ‘group’ filed proceedings in order to recover damages from former directors and other former employees, and hoped to obtain an indemnity against the costs of the OFT investigation and fine. Safeway argued that those former employees had breached their contracts of employment, had breached fiduciary duties they owed to Safeway, and had been negligent.

The defendants applied to the court for a summary judgment or to have the claim struck out on the grounds that, firstly, the claim went against the principle of ‘ex turpi causa – that a claimant cannot pursue an action if it arises in connection with the claimant’s own wrongdoing, and a court will not assist a claimant seeking to recover a benefit from that wrongdoing – and, secondly, that the claim went against the Competition Act 1998 and accompanying competition regime.

The High Court ruled that the case should proceed to trial on the grounds that Safeway had a real prospect of defeating any defence brought by the defendants based on the ‘ex turpi causa’ principle as Safeway’s liability was arguably not personal, primary or direct, and it was possible that the defendants had been the ‘directing mind and will’ of Safeway at the time of the breach. The High Court also ruled that moving the fine from Safeway to the former employees at fault was consistent with the competition law regime under the Competition Act 1998. The High Court therefore ruled that the case should proceed to trial for a more thorough consideration of the facts. The defendants appealed the ruling.

The Court of Appeal ruled in December 2010 that the appeal should be allowed, and that the defendants were entitled to summary judgment such that Safeway’s claims were struck out. In a unanimous verdict, the Court of Appeal ruled that the ‘ex turpi causa’ principle did apply, such that Safeway could not recover the amount of the fine due to the OFT from its former employees alleged to be at fault for the breach of competition law. The Court of Appeal ruled that Safeway’s liability was personal and could not be passed to its employees, and that the aim of the Competition Act 1998 is to protect consumers, and the general public, from distorting trade practices, which would be undermined if a company could then pass on any liability to individual employees.

The High Court had arguably put directors at risk of huge financial liabilities if their companies infringed competition law. However, the ruling of the Court of Appeal ensured that directors are no longer at personal risk under competition law, and clearly states that the competition law regime imposed by the Competition Act 1998 places liability on companies themselves, and that such liability must remain personal to those companies and not passed on to employees past or present, even if those employees were at fault for the infringement.

The full text of the ruling can be found here.

The articles of association of a company (articles) govern its constitution and often contain provisions relating to the transfer of shares. If a company has directors or employees who own shares, the share transfer provisions may contain “good leaver” and “bad leaver” provisions. Such provisions have the effect that, if a director or employee ceases to work for the company, his shares are automatically offered for sale to the other shareholders. If the director or employee leaves for a “good reason”, he receives “fair value” for his shares and if he leaves for a “bad reason”, he receives nominal value for his shares.

The case

A company removed a director (D) and invoked the automatic “good leaver” share transfer provisions in its articles. These provisions stated that D was entitled to the “fair value” of his shares, to be determined by a third party accountant. D nominated three potential accountancy firms and the company selected one of those firms. D then refused to sign the accountancy firm’s letter of engagement, demanding that the company first disclose various documents and taking issue with certain parts of the accountancy firm’s letter of engagement.

The Court of Appeal decided in D’s favour, stating that the agreement to appoint an accountancy firm under the articles had to be a tri-partite agreement between the company, D and the accountancy firm.

The company then brought further proceedings on various grounds, including that:

(a) it was necessary to imply a term into the articles that the accountancy firm’s terms of engagement would be binding on the parties unless otherwise unreasonable;

(b) it was necessary to imply a term into the articles that D was obliged to co-operate with the engagement of an accountancy firm by not unreasonably withholding his consent to an appointment; and

(c) the wording in the articles relating to the appointment of the accountancy firm had broken down and the court should substitute its own wording in order to determine the fair value of D’s shareholding.

Decision

It was decided that:

(1) generally, articles are to be construed in the context of their commercial purpose and in the light of their full text;

(2) the articles in question did not state that the accountancy firm could be appointed on the basis of a unilateral agreement with the company;

(3) having regard to the legal principle that “a contract should better function than perish”, it had to be implied into the articles that D could not unreasonably withhold his consent to the appointment of the accountancy firm. Consequently, D’s actions in withholding consent were unreasonable; and

(4) despite the wording in the articles relating to the appointment of an accountancy firm having broken down, it was not a case that would require the court to step in and take control of the valuation process.

Comment

This case highlights the importance for companies to put in place articles which contain carefully worded share transfer provisions.

Cream Holdings Ltd v Davenport [2010] EWHC 3096 (Ch)

The guidance addresses matters such as: 

1. the constitutional role of shareholders;
2. the collective responsibility of the board and functionality of an advisory board;
3. the size, composition, efficiency, skills and duties of the board of directors;
4. equal treatment of members and effective communication between the board and shareholders;
5. the balance of family governance and corporate governance;
6. the division of responsibilities between board and management;
7. nomination, remuneration and audit committees;
8. appraisals of the board and individual directors; and
9. annual reports to shareholders and other stakeholders.

 The guidance can be viewed via the following link:

http://www.ecoda.org/docs/Corp%20Gov%20Guidance%20and%20Principles%20for%20Unlisted%20Companies%20in%20the%20UK_Final.pdf

• whether there is a problem with short-termism in the UK’s equity markets and if action is needed to encourage investors to take a long term view;
• should the shareholders of a company have a greater degree of control over directors’ remuneration; and
• do boards understand the long-term implications of takeovers and do they communicate such implications effectively?

The first is aimed specifically at SMEs (small and medium sized enterprises) setting out step-by-step guides to stay in line with competition law. The second is aimed at directors of all companies, outlining the level of knowledge and understanding directors need to have of competition law.

With businesses liable to be fined up to 10% of their turnover and with directors at risk of disqualification should their companies breach competition law, the guidance is likely to be welcomed.

A link to the two sets of guidance can be found here:  http://www.oft.gov.uk/OFTwork/consultations/current/achieving-compliance/  and   http://www.oft.gov.uk/OFTwork/consultations/current/company-directors/.

Registered name

A company’s registered name must appear on all forms of business correspondence and documentation including:

• business letters, notices and other official publications;
• business emails;
• order forms;
• cheques purporting to be signed by or on behalf of the company;
• orders for money, goods or services purporting to be signed by or on behalf of the company;
• invoices and other demands for payment;
• receipts and letters of credit; and
• its websites.

In addition, a company must display its registered name at: its registered office; any location at which it keeps its records available for inspection; and any location at which it carries on business.

Additional information

Additional information is required to be displayed on all business letters and order forms (whether in hard copy, electronic or any other form) and on all websites of the company including:

• the part of the United Kingdom in which the company is registered;
• the company’s registered number;
• the address of the company’s registered office;
• if a company is exempt from the requirement to use “limited” in its name, the fact that it is a limited company;
• if the company is a community interest company which is not a public company, the fact that it is a limited company;
• if it is an investment company, the fact that it is this type of company;
• if it is a company which has chosen to display its share capital, it must refer to the amount of paid up share capital; and
• if the letter includes the name of a director of the company (other than in the text or as a signatory), the name of every director of that company.

If a company is supplying goods or services through a website then its VAT registration number should also appear on its website. HMRC has its own requirements as to the information to be included on a VAT invoice.

Failure to comply with the information requirements constitutes a criminal offence and the company and its officers who are in default are liable to a fine.

If you have any questions about what information your company needs to disclose, please contact a member of the Corporate Team at Matthew Arnold & Baldwin LLP.

The Association of Investment Companies (AIC) has recently published guidance for directors of investment companies to help investment company boards obtain the most appropriate D&O policy. Whilst aimed at investment companies, the guidance highlights principles that directors of other types of company may find useful.

Key points of the guidance worth noting include:

• The board of directors should always remain responsible for arranging their own D&O policies so that they are aware of what is and what is not covered. This is particularly important when subsidiary companies are involved under a group company structure.
• If the board is made responsible for putting in place the D&O cover this will help to ensure that all directors on the board are aware of what losses can and cannot be claimed against.
• Directors should receive advice on the D&O policy before making a claim as inaccurate reporting may lead to insufficient recoveries under the policy.
• Any new directors should be provided with a copy of the D&O policy.
• Consideration should be given as to what effect a merger or acquisition may have on the D&O policy.

If you would like further information on D&O policies, or to see the AIC’s guide in full, please do not hesitate to contact Emma Cameron, or another member of the corporate team at Matthew Arnold & Baldwin LLP.

The Financial Reporting Council (FRC) commissioned the ICSA to review and update the Good Practice Suggestions from the Higgs Report that relate to non-executive directors. A previous ICSA consultation, in March 2010, revealed that there was overwhelming support for new guidance to help boards to understand and implement the Combined Code (now called the UK Corporate Governance Code). Consequently, on 29 July 2010, the ICSA published a new consultation paper on improving board effectiveness, which includes draft guidance to assist boards in implementing the Principles in Sections A (Leadership) and B (Effectiveness) of the Code.

This draft guidance makes a number of amendments to Higgs’ guidance, most notably by placing a greater emphasis on the role of the chair in creating an effective board. However, it also contains sections on several areas/issues that were not covered by Higgs’ guidance, including:

1. Role of the board. The board is expected to set the company’s values and standards, and ensure that it meets its obligations to shareholders and others;

2. Role of the senior independent director. He or she should be more prominent when the board is undergoing a period of stress, in order to maintain board and company stability;

3. Role of executive directors. The CEO should improve the standards of discussion in the boardroom, whilst executive directors should represent the owners of the business and encourage non-executives to probe proposals as an essential part of good governance;

4. Role of the company secretary. The company secretary should add value, particularly in relation to induction and development, and advise the board of any changes which could be made to governance procedures in order to improve the governance of the company;

5. Decision-making. The Board should provide clear policies and look at how good decision-making can best be facilitated;

6. Board composition. Companies should consider internal appointments for executive director posts, and prospective directors should conduct sufficient due diligence to ensure that they fully understand the company before joining its board;

7. Establishing and maintaining directors’ skills. The chair, new director and company secretary should work together to devise an effective induction programme and directors’ development programme; and

8. Communicating with shareholders and other stakeholders. The annual report and accounts should be regarded as the most important communication between the company and its shareholders, and should be used to clearly set out the company’s governance arrangements.

The consultation closes on 14 October 2010, and the ICSA will then submit the completed draft guidance to the FRC in November 2010, so that the FRC can publish the final guidance by the end of 2010.  Although the UK Corporate Governance Code applies to companies with a premium listing of equity shares, the principles and ethics underlying the Code should be followed by a much wider class of company, given the duties and responsibilities to which all directors are subject. Take, for example, the fast growing private limited company which is attracting external funding and which is working towards a listing. Behaviour in line with the Code will make transformation smoother and its absence could even jeopardise pre-listing funding, as reputation is crucial to any legitimate funder associated with a company.

Those companies registered before 1 October 2008 were given a period of time in which to appoint a natural director. The length of the grace period depended on when the company was incorporated. Most companies were required to appoint or re-appoint a natural director by 1 October 2008. Only companies incorporated before 8 November 2006 (the date on which the Companies Act 2006 received Royal Assent), which had a least one corporate director on that date and had not appointed any natural directors, were given until 1 October 2010 to make the appointment.

A company found to be in default of this rule may be subject to penalties for failure to comply. As the final deadline looms, companies that have not yet complied with the legislation, should now urgent take steps to do so to avoid being in default.

After an extensive consultation process, the Financial Reporting Council (FRC) has published the new UK Corporate Governance Code (Code).  The Code applies to all companies with a premium listing of equity shares, whether incorporated in the UK or elsewhere. These companies should include a statement in their annual financial reports indicating how they apply the principles of the Code.

Directors’ remuneration

The changes in the Code relating to directors’ remuneration include:

• Non-executive directors were previously prohibited from receiving options in case such options risked their independence. This prohibition now covers “other performance-related elements” of remuneration.
• Companies now have to consider using provisions that allow them to clawback remuneration from directors in exceptional circumstances of misstatement or misconduct.
• The Code now specifically states that remuneration and incentives should be compatible with risk policies and systems.
• The performance-related elements of executive directors’ remuneration should promote the long-term success of the company. 

Directors’ re-election

The issue which was most fiercely debated during the consultation process related to the re-election of directors. The compromise is to introduce annual re-elections for directors but to apply this requirement only to FTSE 350 companies, meaning that smaller premium-listed companies need not hold annual elections. The concern remains that annual re-elections will lead to short-termism which seems at odds with the Code’s emphasis on long-term success.

Conclusion

The amended Code is not ground-breaking but introduces some interesting changes. It may therefore be an appropriate time for remuneration committees to review their remuneration policies and ensure they comply with the Code.

A derivative action is an action brought by a shareholder on behalf of the company. Owing to the complexity of the previous law, very few derivative actions succeeded. When the Companies Act 2006 (2006 Act) came into force, it introduced a wider range of circumstances in which such actions could be brought. A derivative action is now expressly available for a breach of duty by a director, even if the director has not benefited personally from the breach. Furthermore, it is no longer necessary for the shareholder to show that the director(s) who carried out the wrongdoing control the majority of the company’s shares.

Initially, some legal commentators were concerned that activist shareholders would bring such actions simply to disrupt the affairs of the company or make life difficult for its directors.  I initially considered some of the early cases on this new derivative action in January 2010 and concluded that any concerns that activist shareholders would be allowed to use the action frivolously seemed to be unfounded. This was due to the strict application by the courts of the tests set out in the 2006 Act which need to be satisfied before permission to continue a derivative action will be granted.

Since January 2010, permission to continue a derivative claim has been granted in Kiani v Cooper [2010] B.C.C. 463.

Facts of the case

A shareholder (X) sought permission to continue a derivative claim against another director and shareholder (Y) for breach of fiduciary duty.  The court considered various tests as set out in the relevant part of the 2006 Act and decided that, in the circumstances, X was acting in good faith in bringing the derivative action. The court also took the view that a director acting in accordance with his statutory duties to promote the success of the company would decide to pursue the claim, at least to the point of disclosure in the court proceedings.  The court therefore held that X had made out a case for breach of fiduciary duty by Y to the relevant standard and allowed the derivative claim to be continued to the point of disclosure.

Comment

This case demonstrates that it is possible for a shareholder to succeed in a claim for permission to continue a derivative action. However, the fact that the court only granted permission to the point of disclosure indicates that the courts will still apply a strict interpretation to the tests set out in the 2006 Act.

1. Tackle ‘red tape’

Before the election, both the Conservatives and Liberal Democrats promised to tackle red tape, including imposing a “one-in-one-out rule” for new regulations. This rule will now be implemented. They have also agreed to scrap the culture of “tick-box regulation” enforcement and will introduce “sunset clauses” (a Liberal Democrat policy), so that rules will expire if they are not reviewed. Finally, the Government will scrap the “gold-plating” of European legislation (i.e the transposition of EU legislation, which goes beyond what is required by that legislation.)

2. Businesses

The Government aims to encourage new start-ups by reducing the number of forms needed to register a new business, so that Britain becomes the fastest place in the world to start a business (Conservative policy). It will also end the ban on social tenants starting businesses in their own homes (Conservative policy.)

3. Takeovers

The Government “will review the range of factors that can be considered by regulators when takeovers are proposed.” There are currently no further details. The Conservatives’ manifesto did not explicitly deal with takeovers, but the Liberal Democrats promised to ensure that the takeover rules restored a public interest test, so that a broader range of factors, other than competition, would be considered by regulators when takeovers are proposed.

4. Operating and Financial Reviews

The Government will reinstate Operating and Financial Reviews “to ensure that directors’ social and environmental duties have to be covered in company reporting, and investigate further ways of improving corporate accountability and transparency.” (Liberal Democrat policy). These Reviews were originally proposed, but then dropped, by the Labour Party in 2006.

It is currently early days for the Government, and their recently-published ‘Coalition Agreement’ will be implemented over the next five years. Many of the proposals lack sufficient detail at the moment, but this will surely become clearer over time. The emergency budget, which will be heard on 22 June, will be a starting point. From a small business perspective, look out for the capital gains tax changes.

A “de facto director” is a person who acts as if he is a director of a company and is treated as such by the company’s board but has not in fact been validly appointed. A de facto director is subject to the usual directors’ duties and can be the subject of actions against directors such as a “misfeasance” action under section 212 of the Insolvency Act 1986 (IA 1986) requiring the de facto director to repay, restore or account for any money or other property of the company which he has misapplied or retained or to contribute a sum to the company’s assets by way of compensation. 

Facts of the case

Person X was a human director of Company Y. Company Y was the corporate director of Company Z. Company Z allegedly underpaid tax to an extent which resulted in the unlawful distribution of dividends to its shareholders.

HMRC issued proceedings under section 212 of IA 1986 against Person X, claiming that because he was a human director of Company Y, he could also be regarded as a de facto director of Company Z and had therefore breached his directors’ duties and was guilty of misfeasance in respect of Company Z.

Decision

The Court of Appeal held that Person X was not a de facto director of Company Z as he had not done anything more than to act as a human director of Company Y. That was not, of itself, sufficient to make him a de facto director of Company Z. There was no evidence that Person X had himself acted as a director of Company Z.

The Court of Appeal stated that there is no basis in law or principle to hold that a human director, who causes a corporate director to exercise active control over a subject company, automatically becomes a de facto director of the subject company.

Comment

The case gives useful guidance on the circumstances in which a person will be found to be, or not to be, a de facto director. Such a finding can have important consequences, particularly as regards an insolvent company.

The case also reiterates the importance of a company properly appointing its directors so that there can be no doubt as to who is on its board.

Holland v HM Revenue & Customs; Re Paycheck Services 3 Ltd [2010] B.C.C. 104

• the size and composition of the board should reflect the scale and complexity of the company’s activities;
• the board should meet regularly to discharge its duties, and be supplied in a timely fashion with appropriate documentation;
• all directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge; and
• family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance.

Adherence to the principles is entirely voluntary but ecoDa hopes that the principles will provide a foundation upon which individual member states can develop country-specific principles. As regards UK companies, any such voluntary principles would be in addition to the usual statutory duties which already automatically apply to all directors and are now contained in the new Companies Act 2006.

The Bill has had its second reading in the Commons and goes into its committee stage tomorrow. It looks likely to receive Royal assent before the General Election (probably 6 May 2010).

Peter Mandelson (the Business Secretary) has since proposed various reforms to takeover laws including:

• raising the voting threshold required to approve a hostile bid
• denying short-term shareholders such as hedge funds the right to vote during a bid period
• giving bidders less time to formally commit to their offer (“put up or shut up”) so as to reduce the length of time a takeover bid takes to complete
• requiring bidders to set out publicly how they intend to finance their bids over the long term and how they intend to make cost savings

The proposals have, however, received a mixed response. Some commentators are in favour of protecting companies from hostile bids but others would prefer takeover laws to remain the same so as to allow a company’s shareholders (rather than its board of directors) to determine the outcome of a takeover bid.

The Companies Act 2006 (2006 Act) came fully into force on 1 October 2009. The Act aimed to simplify company law procedures, particularly for smaller companies. The 2006 Act does not require companies to amend their articles of association (Articles) but in order to take advantage of the simplified procedures, any company which was incorporated before 1 October 2009 (Existing Company) may wish to do so. For the purpose of this note we have focused on private limited companies, as it is this type of company which can benefit the most from the new deregulatory regime.

What amendments can be made?

Company secretary

• As from 1 October 2008, the requirement for private limited companies to have a company secretary has been abolished. In the past many smaller companies which were effectively a “one-man” business struggled to find someone to act as the company secretary and typically a wife or accountant would take up the role.  Such persons may now wish to resign as company secretary. However, an Existing Company should ensure that its Articles are amended so as to remove any references to a requirement for it to have a company secretary. Please note that the directors need to ensure that someone still performs the tasks previously performed by the company secretary (such as filing forms at Companies House).

 Objects

• Under the former Companies Acts, a company had to act within a specific list of powers (or “objects”) set out in its memorandum of association (Memorandum). These objects could limit, for example, a company’s ability to borrow money or grant security. Under the 2006 Act the objects are deemed to form part of a company’s articles but, as part of the adoption of new Articles, they can be removed. The benefit of doing this is that the company has unlimited objects and, for example, can enter into loan or security documents without the need for the directors or bank to scrutinise the Memorandum or Articles.

 Authorised share capital

• Before 1 October 2009, all companies had an “authorised share capital” which was effectively a limit on the total number of shares which could be issued without seeking further approval from the shareholders. Under the 2006 Act, companies do not need to have an authorised share capital but any references to this concept in an Existing Company’s Articles or Memorandum will need to be removed if the company is to benefit from this deregulatory measure.

 Allotment of shares

• The directors of private limited companies with only one class of shares can now allot shares of the same class without obtaining shareholder approval, subject to any restrictions in the Articles. Directors of an Existing Company should therefore check the Articles to ensure that there are no such restrictions.

Change of name

• Previously, a company could only change its name if the holders of 75% per cent or more of its issued shares passed a change of name resolution. Under the 2006 Act, a company is still able to change its name in this way but it can also set out in its Articles other methods for changing its name, for example, by way of a board meeting (thereby avoiding the need for shareholder approval).

What about companies incorporated after 1 October 2009?

Companies which are incorporated after 1 October 2009 should adopt articles of association upon incorporation which allow them to take full advantage of whichever aspects of the deregulatory regime are relevant.  For some companies this will simply mean using the new “Model Articles” which apply by default under the 2006 Act in the absence of the adoption of specific Articles.

Summary

Existing Companies should consider amending their Articles so as to streamline certain decision making and administrational procedures.  The extent to which such amendments are appropriate will vary from company to company and specific advice should be sought in each case.

It is probably quicker (and cheaper) for an Existing Company to make any amendments by adopting an entirely new set of Articles rather than making the changes piecemeal as and when a specific issue arises.

It is therefore no surprise that the most recent review of the Code by the Financial Reporting Council, previously scheduled for 2010, was brought forward as a result of the meltdown in the financial world.  It is now in its consultation period until 5 March 2010 and is likely to apply to accounting periods subsequent to 28 June next year.

The review of the Code, to be renamed “The UK Corporate Governance Code” to make its raison d’être clear to all, was conducted in close co-operation with Sir David Walker who was commissioned by the Government to review governance of financial institutions in the wake of the crisis.  Indeed, the changes proposed by the FRC broadly reflect those proposed under Walker.  Unlike the Walker review though, the Code is non-sector specific and does not include some of the politically motivated, headline-grabbing recommendations such as disclosure of high earners’ remuneration. 

All listed companies will need to monitor the consultation process closely as to the likely changes to the Code’s Main Principles, given the requirement on them to “comply or explain”.  Proposed new additions to those Main Principles include:

• the chairman being responsible for leadership of the Board and for ensuring its effectiveness;
• a “fit for purpose” obligation on the composition of boards to enable them to discharge duties and responsibilities effectively;
• an obligation on non-executive directors to constructively challenge and help develop proposals on strategy; and
• directors being required to allocate sufficient time to perform their responsibilities effectively.

Quite apart from the comply or explain rule, added strength is given to these principles by what is clearly the favoured media sound bite applied to the publishing of the FRC’s report – “annual re election”.  It remains to be seen whether that will ultimately apply to just the chairman or to the whole board, be annual or some longer period or be triggered by some shareholder dissatisfaction (Walker recommends that if 75% of shareholders disagree with the remuneration report, the chairman of that committee must be put up for re-election).

There is a move away from what has been an over-emphasis on independence at the expense of seeking the appropriate balance of skills, experience, independence and knowledge.

The importance of commitment is emphasised in the FRC’s report and this is the main driver for the requirement on directors to allocate sufficient time to their duties.  It picks up on the proposal of Walker to impose minimum time requirements, recognizes that this is too specific for the broad spectrum of companies covered by the Code but embraces the “spirit of Sir David’s recommendation” using the general principle.

The FRC state very clearly that they are aiming to redress the balance of the Code to put an emphasis on behaviour rather than process.  It is acknowledged that companies have been focusing on the latter, leading to the erosion of one of the practical cornerstones of the style of the Code – less prescription, more spirit and an ability to react to best practice.

The FRC and Walker recommendations provide a timely reminder of the need for best practice in corporate governance in the UK.

The claimant (Invertec) and the first defendant (De Mol Holding BV (DMH)) entered into a sale and purchase agreement for the sale by DMH to Invertec of all of the issued shares in Volante Public Transportation Interior Systems Limited (Volante).

After the sale, Invertec had to inject cash into Volante to pay outstanding debts (including debts owed to suppliers and HM Revenue & Customs). Invertec claimed that it had been induced to purchase Volante by a number of representations made by DMH and its director as regards Volante’s solvency, management accounts, corporation tax liabilities and a customer contract. These representations had been given both during the course of negotiations and as warranties in the sale and purchase agreement. Invertec alleged that DMH had given the representations fraudulently and breached the warranties in the agreement.

As is normal in private company sales, DMH had provided Invertec with a disclosure letter setting out details of matters which were inconsistent with the terms of the warranties so as to protect DMH from being sued by Invertec as regards any such disclosed matters.

Decision

The High Court found that DMH had given the representations fraudulently and breached the warranties in the sale and purchase agreement.  However, Invertec did not succeed with its claim that a fraudulent misrepresentation was made as regards the customer contract because DMH had disclosed that the contract was loss-making in the disclosure letter.

The High Court also found that the fraudulent misrepresentations had largely been made by DMH’s director on behalf of DMH. The director was therefore personally liable for the fraudulent misrepresentations.

Comment

The case is a reminder of the importance of a seller making detailed and accurate disclosures in its disclosure letter.

It also shows that if a claimant purchaser can discharge the burden of proving that a defendant had no honest belief in representations it made, any director who made such representations can be found personally liable.

Invertec Ltd v De Mol Holding BV & Anor [2009] EWHC 2471 (Ch)

The ex-directors and employees applied to have the case thrown out on the basis that it was not possible for an employer to bring a competition law case against their directors or employees, and also that it would offend a legal principle by which someone who does something unlawful (ie Safeway) could not sue another person (ie the staff) for the consequences of that unlawful action. The High Court has thrown out the ex-directors’ and employees’ application, and ruled that Safeway had a ‘real prospect of success’ at trial.  

Paul Gershlick, a Partner a Matthew Arnold & Baldwin LLP and editor of www.Upload-IT.com, comments: ‘This case does not mean that Safeway has won. However, it means that Safeway has a real chance of succeeding at the main trial. Safeway’s claim is more than just frivolous.’

The Association of British Insurers (ABI) is the trade association for the UK’s insurance industry.  The ABI has around 400 companies in its membership.  ABI member companies account for almost 15 per cent of investments in the UK stock market.  The ABI therefore acts as a voice for many of the UK stock market’s largest investors.

The ABI’s role in corporate governance

The ABI provides information and guidance on corporate governance issues to investors and listed companies in which those investors invest.  As part of its drive to promote best practice in corporate governance, the ABI’s publications include guidelines on executive remuneration.  The recent position paper does not replace the current guidelines but aims to highlight those elements of the guidelines that are of particular relevance at the moment given today’s economic climate.

The new position paper

Comments made by the ABI in the position paper include:

• Concerns over the retention of directors are not sufficient grounds on their own to justify increases to directors’ remuneration, nor is a company’s increased market capitalisation
• If a remuneration committee contemplates using a “material use of discretion”, the company’s shareholders should be consulted on this decision
• Companies should not incur additional costs in the implementation of tax efficient remuneration structures. This is of particular note given the increase in income tax for the UK’s highest earners with effect from 6 April 2010
• If a company experiences an exceptional negative event, bonus payments to its directors should be discouraged. Any bonus payments which are made in such circumstances need to be carefully justified
• Any awards which depend upon performance should be justified by the company’s underlying performance and not only by its performance relative to a comparator group

 Comment

The position paper will be of interest not only to listed companies but to all companies who wish to take steps to address concerns which may have been raised by their shareholders about the remuneration paid to directors.

A derivative action is an action brought by a shareholder on behalf of the company. Owing to the complexity of the previous law, very few derivative actions succeeded. When the Companies Act 2006 (“the 2006 Act”) came into force, it introduced a wider range of circumstances in which such actions could be brought. A derivative action is now expressly available for a breach of duty by a director, even if the director has not benefited personally from the breach. Furthermore, it is no longer necessary for the shareholder to show that the director(s) who carried out the wrongdoing control the majority of the company’s shares. 

Initially, some legal commentators were concerned that activist shareholders would bring such actions simply to disrupt the affairs of the company or make life difficult for its directors. This was despite the 2006 Act containing some procedural hurdles which must be overcome before a shareholder can bring a claim for a derivative action. Recently there have been some cases which consider such hurdles.

Recent cases

In Franbar Holdings Ltd v Patel and ors [2008] EWHC 1534 (Ch) the judge refused an application for permission to continue a derivative action partly on the basis of one hurdle, which requires the court to be satisfied that a director acting in accordance with his duty to promote the success of the company would seek to continue the claim. The judge identified several factors which the hypothetical director would take into account which included: the prospects of success of the claim; any damage to the company’s reputation and business in the event of the action failing; and the cost of the proceedings. The judge considered that in the circumstances it was not possible to conclude that such a director would continue the claim. The failure to overcome just one hurdle was sufficient for the judge to refuse permission. Another key reason for the refusal was the ability for the shareholder to seek a different remedy under the 2006 Act on the basis of what is known as “unfair prejudice”.

In Stimpson & Ors v Southern Landlords Association [2009] EWHC 2072 (Ch) permission to continue a derivative action was again refused. The judge gave a long list of reasons to support his view that a hypothetical director would not seek to continue the action. The judge also stated that if even he was wrong on that specific point, his refusal could be justified on other grounds.

In Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch) the judge emphasised the importance for the derivative action to be based on an act or omission involving negligence, default or breach of duty by a director. As the directors had followed the advice of eminent professionals, the judge considered that they had not been negligent or breached their duties.

Summary

It appears that the courts will interpret the 2006 Act strictly when determining whether the new derivative action can be used. Therefore, for the moment at least, any concerns that activist shareholders will be allowed to use the action frivolously seem to be unfounded.