Welcome!

To all those reading this I am David Gibbs; I am a Lecturer in Company and Commercial Law at the University of Hertfordshire.

I created this blog as a general out-let of ideas for my research, as well as keeping those interested up-to-date on my research and general interests.

I completed my PhD thesis at the University of East Anglia in 2014. The thesis was recommended for the award of PhD with no corrections. My external examiner was Prof. Simon Deakin (Cambridge) and internal examiner was Prof. Morten Hviid.
My PhD research centred on directors' duties and company law. The thesis was titled 'Non-Executive Self-Interest: Fiduciary Duties and Corporate Governance'. It was a doctrinal and empirical study on whether self-interest was suitably controlled amongst non-executive directors.

My supervisors were Prof. Mathias Siems, Prof. Duncan Sheehan, Dr. Sara Connolly and Dr. Rob Heywood

All opinions of any existing or future blogpost are my own. They do not necessarily represent the views of any of my associated institutions.


Wednesday, 10 September 2014

The Apple Watch and the Director's Fiduciary Duty of Loyalty



Some of you may wonder what the unveiling of the Apple Watch and the fiduciary duty of directors have in common. Well, it goes to the heart of the problem of many analyses that seek to identify the scope of a director's fiduciary duty of loyalty to its company. Academic commentators and the judiciary alike often attempt to define loyalty on the basis of the interests of the company. Two decisions in the Court of Appeal and High Court have done exactly that in recent years with differing degrees of effect. In Re Allied Business & Financial Consultants Ltd [2009] EWCA Civ 751 Rimer LJ held the director has an unlimited fiduciary capacity because the duty is not circumscribed by the company's constitution. Equally, in JD Wetherspoons plc v Van de Berg & Co Ltd [2009] EWHC 639, the judge held that there would be no breach of duty where a director of a company employed by JD Wetherspoons to find suitable land to build public houses diverted opportunities to purchase land to another company since the company diverted to was not competing. Both approaches are inconsistent with fiduciary law. The Apple watch demonstrates the problem with such analyses. How do we know if companies are 'competing'? What does 'competing' even mean? A wide approach says all companies are competing. But this is not to the point. The law has always been clear in respect of fiduciary jurisdiction that it is not the company's interests that circumscribe the duty but it is those interests the fiduciary takes responsibility for that does. Following the approach taken in JD Wetherspoons, there would be the danger of allowing a director to advance the argument that Apple does not make watches, therefore any opportunity to do so may be legitimately diverted away from Apple to another company. The opposite problem happens from the reasoning in Re Allied Business. The director may have limited responsibility within a company yet is required to suspend self-interest where opportunities present themselves that are of interest to the company, yet they never took responsibility for them. Anyone arguing that the court could look at company documents to see what the company is doing with the creation of wearable technology is missing the point but also that it will be met with resistance because information of that nature is quite clearly sensitive.

It is a relief that in JD Wetherspoons the director eventually passed the lease hold on to Barracuda who could be said to be competing with JD Wetherspoons. Also, in Re Allied Business the opportunity fell within the scope of those interests the director undertook responsibility for. Thus, the conclusions were right in the end but for the wrong reasons. 

Monday, 8 September 2014

Derivative Claims: Where are we Part III

After an initial surge of derivative claims after the introduction of the new statutory procedure, the cases have calmed seemingly more focused on whether the specific facts themselves should allow cases to continue rather than any substantive comments on the law itself. Some inferences may be drawn from the discretion by academic commentators and lawyers to ascertain when a claim would or would not be allowed but it seems observations from the court as to the operation of the procedure itself has dwindled. My Part I and Part II posts on 'where are we?' can be found here and here respectively.

In 2014 there have been two claims heard, one of which was an appeal to the Court of Appeal, the first to be considered at this level. The initial hearing in the High Court was Re Singh Brothers Contractors (North West) Ltd [2013] EWHC 2138 (Singh EWHC) and appealed as Singh v Singh [2014] EWCA Civ 103 (Singh EWCA). The second case to be heard this year was Abouraya v Sigmund [2014] EWHC 277. This case was considered under the old common law rules rather than the statute but a brief consideration is worthwhile. Unsurprisingly both cases were denied permission to continue. An updated table appears below of all cases now to be considered under the new procedure - Thus Abouraya does not appear in the table.

Of note from these cases: In Singh EWCA, the court made reference to the availability of another remedy. Hughes v Weiss [2012] EWHC 2636 was cited at [23] that in claims of this nature, the purchase of shares was not required and thus a derivative claim would be more appropriate. However, the court dismissed this as a reason to permit a claim to proceed since the remedy for a section 994 petition gives wide discretion to the court to rectify the position of the claimant if the petition is made out. Thus, it seems to clarify the decision in Hughes, where a claim was allowed even though another remedy was available because the nature of that remedy was not appropriate for what was being complained of. However, in Singh, the s.994 remedy could be adapted and order a purchase of shares, using court discretion, to rectify the position. This may raise questions in some circles as to allowing shareholders to obtain a purchasing order through a section 994 petition when the initial claim was based on a corporate wrong. It may be seen as a luxury afforded to shareholders but not creditors.

In Abouraya the primary consideration for denying permission to continue was that the claimant was trying to use his position as shareholder of a parent company to advance his position as creditor of a wholly owned subsidiary. The court said that to do so would be to grant a remedy not available to other creditors, see at [59]-[60]. This seems to reflect a position taken in Cinematic Finance Ltd v Ryder [2010] EWHC 3387 that a court will not allow a derivative claim to be used to side-step other rules or advance your position vis-a-vis creditor.

As well as these two company cases the derivative claim discretion was also considered in respect of a partnership, Partners of Henderson PFI Secondary Fund LLP v Henderson PFI Secondary Fund LLP [2012] EWHC 3259. In this case it was held that whilst the merits of a claim may be considered but no threshold needs to be met, the judge held that merits play little part in the courts discretion unless they favour one side clearly, see at [37]. This offers weight to my own argument that the courts need to find one solid reason to dismiss a claim they will tend to do so and that if the legal merits of a claim are weak they are unlikely to grant permission, albeit, as stated in Stainer v Lee [2010] EWHC 1539, it is not impossible. Reference here was again made to Hughes v Weiss that the availability of another remedy is 'plainly a factor to be taken into account when deciding whether there are special circumstances' at [39].

From these cases both Henderson and Abouraya had issues relating to conflicts of interests. However, Singh did not and is now 2 of 15 cases not to concern such a breach of duty.

With this new decision to give a breakdown of statistics of cases considered under part 11:
Refused/permitted
Claims permitted: 33.3%
Claims refused: 66.7% - this figure includes Fanmailuk.com Ltd v Cooper [2008] EWHC 2198 - case was adjourned rather than refused
N = 15

Breakdown: x% - refused claims only; (x%) all claims
Claims refused for no prima facie case: 0% - NB: Re Seven Holdings Ltd [2011] EWHC 1893 - court would have refused for no prima facie case if the procedure had been followed
Claims refused for mandatory bar: 44% (28%)
Claims refused at court's discretion: 56% (36%)
N = 9 (14) - Fanmailuk.com not included


Case Name
Dismissed For/Allowed
Significant Circumstances Considered
Bamford
Dismissed at court’s discretion
Wrongdoer control
Cinematic Finance
Dismissed at court’s discretion
Majority bringing derivative claim; wrongdoer control; side-stepping insolvency rules
FanmailUK
Case adjourned
Case adjourned
Franbar
Dismissed at court’s discretion
Strength of legal claims; ratification; alternative remedy
Hughes
Permission granted
Strength of legal claims; ratification; alternative remedy
Iesini
Mandatory Bar
Weak legal claims
Kleanthous
Dismissed at court’s discretion
Independent review of whether litigation was beneficial; strength of legal claims; alternative remedy; and benefit would be small
Kiani
Permission granted
Failure of defendant to produce any evidence to the contrary; alternative remedy
Mission Capital
Dismissed at court’s discretion
Alternative remedy; little weight to a claim for wrongful dismissal of a director
Parry
Permission granted
Strength of legal claims; ratification; good faith; alternative remedy
Phillips
Permission granted
Alternative remedy; matter of urgency case was brought to recover sums taken from the company without good reason
Seven Holdings
Mandatory Bar
Claims did not relate to a breach of duty, care, negligence or default
Singh
Mandatory Bar
No director would continue the claim if acting in accordance with s.172; fides of the claimant in question; s.994 more appropriate
Stainer
Permission granted
Strong grounds that there had been a breach of duty; strength of legal claims; disinterested shareholders deceived in to approving the loan
Stimpson
Mandatory Bar
The impact an action would have on the interests of the employees; claim of little value compared to cost of claim; legal claims were not realistically arguable

 

 

Monday, 1 September 2014

WINIR Symposium Abstract Accepted

I have recently had my abstract accepted to present my research paper at next year's World Interdisciplinary Network for Institutional Research (WINIR) Symposium taking place 22nd-24th April 2015 in Lugano Switzerland. My abstract is posted below. I will be presenting some of my research findings from my empirical study in to self-interest amongst non-executive directors. Its aim is to serve as a rebuttal of sorts to cool claims that greater involvement from non-executive directors will lead to better governance.

Abstract:

The governance of a company in England consists of a single board of directors comprising executives and non-executives. Executives run the company on a day-to-day basis, whilst non-executives oversee and participate in monitoring and strategy. Legal rules and corporate governance structures often focus on how the interests of the executives can be aligned with the interests of the company. Research also considers how effective these are. However, seldom is the focus on potential self-interest amongst non-executive directors. Their role has increased, as has their remuneration, creating greater opportunity for non-executives to use their position for self-interested means. Multiple appointments are common amongst non-executives and are a central feature of the corporate governance landscape. Yet they may also be a form of perquisite consumption, taken for the personal benefit of the non-executive or used advantageously to benefit one firm over another. Using multiple appointments as a proxy for self-interest this quantitative study investigates the governance mechanisms that may be used to control self-interest and the effect that these appointments may have on the governance of the firm. Using data collected from FTSE 100 companies at firm level over a five-year period 2006-2010, the study focuses on aspects such as remuneration, equity and agency problems as possible influences on the taking of multiple appointments. The study reveals that increased fees result in a greater amount of external appointments, as does a concentration of agency problems. The study also reveals that whilst equity may reduce external appointments it may be an insufficient control on self-interest. The impact of the study shows that propositions for greater non-executive involvement to enhance governance in the firm needs to be balanced against the current lack of controls on self-interest. Without such considerations greater involvement may not have the intended consequences.  

Friday, 22 August 2014

Fiduciary Maxims: Some proposals

There is a concerted effort to organise fiduciary law in to a set of coherent rules. With this in mind I thought I would list some general maxims or principles in respect of fiduciaries. Some are more well-known than others but all, I believe, are of general accuracy albeit require some fine tuning with the wording. I give a very brief description next to each one This may be of use to new students to the concept as well as those more experienced. However, this is a very rough guide and some maxims may be refined or combined, nor is it meant to be exhaustive, so comments and/or additional maxims welcome.

1) Loyalty is the defining characteristic of a fiduciary - Therefore loyalty makes someone a fiduciary

2) Loyalty is an obligation owed when specific facts present themselves - Linking with above, calling someone a fiduciary is in some senses redundant. You must look for specific facts to identify the individual as a fiduciary

3) Anyone can be classed as a fiduciary if those facts present themselves - Since loyalty is owed on specific facts it is possible for anyone in any relationship that involves control over another's interests to owe the duty, similar to a duty of care. e.g. a director may owe fiduciary duties to the company, but also to an individual that the company is dealing with, if the director is shown to have undertaken the duty of loyalty to that third party

4) Loyalty is owed when you agree to advance the interests of another to the exclusion of your own or others; or when collaborative partners agree to combine resources to achieve a specific collaborative goal, both to the exclusion of their own personal interests - Loyalty requires the suspension of self-interest. Therefore it is only when you agree to do so will the duty be owed.

5) Where you are responsible for another's interests, there is a presumption you will be loyal to them - Since you are acting to assist another loyalty must be presumed unless 6 evidences otherwise.

6) Express or implied terms of the undertaking evidence whether the fiduciary undertook to behave in such a way - Whilst you may agree to be responsible for another's interests, this does not always mean loyalty will be owed if the terms of the agreement evidence that you did not agree to be loyal. For example, a term stating that 'best efforts' would be applied would be inconsistent with the duty being owed. Commercial/contractual arrangements therefore are not normally fiduciary.

7) Loyalty operates to regulate self-interest - A fiduciary who is incompetent is not disloyal. Where one agrees to advance another's interest, the concern is that they will use that control to advance their own. This is a concern since where an individual is personally interested in their undertaking to the principal, they may not perform that undertaking to the best of their ability, if at all.

8) A breach of loyalty is in respect of conflicts of interest, self-dealing and/or bribes and secret commissions - These acts all relate to situations where there is a risk one might have acted to advance their own interests. Best interests, duty of care etc. are not fiduciary in nature but are generally owed by those classified as such

9) Strict liability is imposed for breaches of loyalty - Courts cannot assess if someone was actually disloyal. Therefore liability is strict. The only consideration is whether there was a conflict, was there self-dealing, was a bribe accepted. Good faith, ability to take the asset, ownership or beneficial interest etc. over the asset are all irrelevancies.

10) A breach of loyalty is when personal or other interests are placed above the principal's - Self-interest must be suspended in the performance of the undertaking

11) Once it is established the duty is owed, the onus is on the fiduciary to prove they were not disloyal - If the onus was on the principal, who is in the weaker position, this in itself may evidence disloyalty. Once you are shown to owe the duty because you are responsible for their interests it is for the fiduciary to show they were not disloyal.

12) Only the principal can determine what it is interested in - A fiduciary cannot determine the interests of a principal in an attempt to avoid liability for disloyalty. Attempts by the fiduciary are not to the point. The point is whether there was a risk of disloyalty in respect of their undertaking.

13) There is only a breach if duty/undertaking conflicts with principal's interests - you cannot expect loyalty in respect of interests the fiduciary did not take responsibility for.

14) The duty/undertaking is determined by looking at the contract and agreement as a whole - Whilst the contract may identify the interests the individual took responsibility for, the courts will look at the whole agreement between the parties. This is particularly important where there is no written or verbal contract to consider.

15) Any benefit derived from the undertaking is rightly that of the principal - Linking in with above on strict liability, the fiduciary is acting for the principal. Therefore any benefit derived from that undertaking is rightly that of the principal. Again, arguments of good faith, ownership, whether the benefit was intended for the principal are all irrelevancies. For example, accepting a bribe. If not for the fiduciary's act the principal has missed the opportunity to obtain a higher or lower price, depending on the scenario, than if it had done it itself.

16) Where no benefit is derived the fiduciary is liable to compensate the principal - Fiduciaries do not always derive a benefit from being disloyal. Therefore they may claim compensation but this is subject to limiting principles for remedies such as causation.

17) Any benefit obtained by a third party in respect of the fiduciary's breach is subject to limiting remedial principles - This is perhaps a much more uncertain principle as to what can be recovered from a third party. A lot depends on whether they knew the benefit received was from a breach of fiduciary duty. Even if they did know, questions of limiting remedial principles are not well answered in the courts as to what the third party would be liable for. 

Monday, 28 July 2014

WINIR Call for Papers

The World Interdisciplinary Network for Institutional Researchers has a call for papers open, due to close this Thursday 31st July. The call for papers can be found here. The Symposium is due to take place 22nd-24th April 2015 at Universita della Svizzera Italiana (USI), Lugano, Switzerland.  

Wednesday, 16 July 2014

Law Commission Consultation on Fiduciary Duties of Investment Intermediaries: A brief comment

Following on from my previous post I thought it worthwhile to note a few comments/thoughts I had on the Commission's Report on Fiduciary Duties of Investment Intermediaries.

On the whole the report gives a largely accurate portrayal of the law and is a helpful document. There are a few points that I would raise. The main point surrounds what is actually meant by contract first in determining the application of fiduciary duties.

The first point is between 3.33-3.40 in the report on duty-duty conflicts and modifying fiduciary duties. Certainly the position is correct that a fiduciary acting for two principals must obtain authorisation to do so. However, as I pointed out in my response and the Report accepts, this is not the end of the matter as the fiduciary must still comply with their other duties.

With modifying fiduciary duties at 3.37-3.40 the Report adopts a contract first approach, relying strongly on a privy council decision in Kelly v Cooper [1991] AC 205 and other Commenwealth decisions. It would perhaps have been worthwhile to assert English authorities for this proposition. Particularly since Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 has received positive judicial treatment as has Kelly v Cooper. The proposition from these cases is that contract will shape the fiduciary relationship and the duties will accommodate themselves to the contract. Fiduciary duties cannot be superimposed to alter the contract. The conclusion reached was that where a term is included in the contract, whether express or implied, that allows a fiduciary to act for multiple principals then they are free to do so. In Kelly v Cooper this was in the context of estate agents as fiduciary.

These points, however, lack detail. There are issues not addressed. It is often stated to reason by analogy in the context of fiduciary duties is dangerous and it has recently been approved that implying such terms that allow an estate agent to act for multiple principals is not automatically applicable to other types of fiduciary. See Northampton v Richard Andrew Cowling [2014] EWHC 30 (QB) at [185]. Is the report arguing that such a term is implied in to investment intermediary contracts? If so, does it apply to all types of investment intermediaries? Also, approving through an implied term to allow a fiduciary to act for multiple principals, does this always mean the principal would be prevented from claiming a conflict of interest? There perhaps needs to be a bit more clarity on how duties may be modified by contract in distinguishing between approving conflicts and attempts to stop their application all together. There is a lot more consideration needed to reconcile Professor Kay's view that contract cannot override fiduciary duties and the Reports position that they can. (see 10.48-10.49 of the Report)

There remains the issue of when fiduciary duties arise. Discussed at 3.23 the Report gives acceptance to Edelman's view that the 'greater degree of trust, vulnerability, power and confidence reposed in the fiduciary, the more likely a reasonable person would have such an expectation' [to loyalty]. The Report at 3.24 sees this as a useful way to determine when the relationship arises. Unfortunately, it lacks precision and certainty. How much trust must be placed in one person until they are reasonably entitled to loyalty. This may lead to arbitrary court discretion without true consideration of why loyalty is imposed on an individual. This may have severe consequences either way since someone who owes loyalty must suspend self-interest. Without going in to detail myself here, the issue is not one of a sliding scale based on reasonableness but a binary approach to loyalty. The question that needs to be answered is did you or did you not undertake responsibility for the other person's interests at the expense of your own and anyone else's interests. I do not think, based on this alone, investment intermediaries are any better off in knowing if they owe fiduciary duties. However, chapter 10 of the Report does provide some more detailed insight but at 10.20 of the Report, for example, there is mention that it is possible fiduciary duties might be owed based on legitimate expectations in regards to actuaries. The use of the words 'possible' and 'might' emphasise the uncertainty such a test brings.

The next issue is the content of fiduciary duties from 3.25 (see also 10.43-10.47). The Report notes that not all fiduciaries owe the same fiduciary duties and some relationships may give rise to more onerous duties. However, the very next paragraph states that the distinguishing duty of a fiduciary is loyalty. This appears to be a stark contradiction. How can you owe different duties if the one duty is loyalty? How can you be more loyal than another fiduciary? You can't be a bit loyal. If loyalty is more onerous or different duties are owed in different circumstances the Report does not give one example to support this. If you are in a fiduciary relationship you are subject to the fully expanse of fiduciary jurisdiction. The confusion is mainly based on the notion that it is not fiduciaries owe different duties but they do not owe them in the same circumstances.

My final thought is that if fiduciary duties can be restricted by terms of a contract then this gives considerable power to the stronger party. This may lead to significant abuse and certainly more consideration is needed on this point. 

Tuesday, 1 July 2014

Fiduciary duties of investment intermediaries: Commission Report published

Today, the Law Commission published its report after consultation on fiduciary duties of investment intermediaries. The four documents published today as well as previous documents leading to the report can be found here