To all those reading this I am David Gibbs; I am a Lecturer in Law at the University of East Anglia.

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.
ORCID 0000-0002-6596-8536

Wednesday, 19 November 2014

SSAHRI Research Conference

As part of my research grant I have been asked to produce a poster about my research. I will be presenting it next Wednesday at Hertfordshire College Lane for anyone in the vicinity. I focused on the variable of remuneration from the study given the limited room to try and explain every variable and point from the study in a single poster.

Tuesday, 30 September 2014

Research Development Conference

Last Friday I went to and presented at the University of Hertfordshire's Research Development Conference. I gave a presentation on 'My three tips on using social media in research'. For those interested my presentation can be found here and my notes can be found here.

My three tips were to: 1) have a strategy; 2) have an audience/niche; and 3) have rules. These three tips are mainly aimed at allowing someone new to social media to use it to enhance their research by reaching a wider audience but they are by no means the definitive way to use social media as a researcher.

Tuesday, 23 September 2014

WINIR Symposium: Accepted Papers List Published

The World International Network for Institutional Researchers (WINIR) has published its list of accepted papers to its website. For my paper that I will be presenting on non-executive directors, the abstract can be found here. There is also a preliminary programme for the three day event. There will be between 80-100 papers presented as well as keynote speakers from Simon Deakin (Cambridge); Colin Mayer (Oxford); Ugo Pagano (Siena); and Philip Pettit (Princeton). 

Friday, 19 September 2014

I'm on Linkedin!

As well as being able to follow me on Twitter (@Gibbs_Law) you can now be a connection too on my Linkedin profile. To connect to my profile follow the link here

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:
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
Dismissed at court’s discretion
Wrongdoer control
Cinematic Finance
Dismissed at court’s discretion
Majority bringing derivative claim; wrongdoer control; side-stepping insolvency rules
Case adjourned
Case adjourned
Dismissed at court’s discretion
Strength of legal claims; ratification; alternative remedy
Permission granted
Strength of legal claims; ratification; alternative remedy
Mandatory Bar
Weak legal claims
Dismissed at court’s discretion
Independent review of whether litigation was beneficial; strength of legal claims; alternative remedy; and benefit would be small
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
Permission granted
Strength of legal claims; ratification; good faith; alternative remedy
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
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
Permission granted
Strong grounds that there had been a breach of duty; strength of legal claims; disinterested shareholders deceived in to approving the loan
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.


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

Friday, 20 June 2014

Leeds Conference on Accountability in Corporate Governance and Financial Institutions

Yesterday I attended a conference at the University of Leeds on Accountability in Corporate Governance and Financial Institutions. See here for the programme. The talks were very interesting and engaging with strong focus on what is meant by accountability and making people, mainly directors but also mention to owners, managers and creditors, accountable. 

Friday, 6 June 2014

Corporate Directors: The current law and reform

For those who are regular readers you may remember earlier posts about corporate directors and the definition of a director see herehere, and here. This was in response to the Supreme Court's decision in Revenue and Customs Commissioners v Holland [2010] UKSC 51 as to whether an individual who controlled a corporate director (i.e. a legal incorporated company acting as a director of another company) was a de facto director of the company which the corporate director sat on. The majority answered in the negative meaning the individual was not liable to contribute to the funds upon insolvency. I disagreed with Watts' case comment in the Law Quarterly Review that the decision failed to furnish a rationale as I argued that Watts looked to find a ratio based on a question the court was not faced with. Watts sought to find a ratio as to whether Holland was a de facto director but the question faced by the court was whether the concept of de facto directorship could be extended to cover individuals who controlled corporate directors.

The negative answer the courts gave this question left a question unanswered, that whilst the court was right to not extend the principle, it effectively allows those who control corporate directors to commit unlawful acts and incur no liability because everything was done in the name of the company. Here one does have to accept that we treat a company as a separate legal entity for genuine reasons and its personality does need to be protected to allow people to run companies without fear of incurring personal liability.

Vince Cable's recent proposals on further restrictions on the use of corporate directors and keeping a register of shareholders, see here also (the discussion paper can be found here) lead nicely to a review of the current law and its suitability in holding people to account.

Therefore I am currently looking at whether the law offers suitable avenues of recourse against those who use corporate directors for an unlawful means and consider the practical consequences of changing the law to only allow natural persons to act as directors as well as consequences of proposals for reform in the paper. Current means of holding an individual liable that will be considered include: knowing assistance, de facto and shadow directorship, section 155 of the Companies Act 2006 and agency. 

Wednesday, 30 April 2014

Learning and Teaching Institute Conference 2014

Tomorrow is the Annual Learning and Teaching Conference 2014 held at the University of Hertfordshire. It is organised by the Learning and Teaching Institute at the University. The conference brochure can be viewed here. I will be presenting a poster on student engagement with feedback to help form some initial ideas on the significant ways students engage with feedback.

Tuesday, 22 April 2014

Successful Defence

So my greatest fears were not realised. I successfully defended my thesis with no corrections over the Easter break and will graduate in the Summer. The thesis was examined by Prof. Simon Deakin as external and Prof. Morten Hviid as internal. The big question now is what next? Whatever, happens you will be sure to read about it here!

Monday, 31 March 2014

Newcastle PGR Conference

This week (3rd and 4th) I shall be attending and presenting at Newcastle University Law School for their annual PGR Conference on 'The challenges for legal thought in contemporary society'. I will be presenting what is a development from my PhD on fiduciary duties of directors to identify the scope of the duty. This will detail when the director is required to be loyal to the company's interests by identifying the purpose and function of imposing loyalty on a director. The conference programme can be found here.

Thursday, 20 March 2014

Eckerle & Ors v Wickeder Westfalenstahl GmbH [2013] EWHC 68

The decision in Eckerle is of some significance to company law. It concerned the ability of a beneficiary in an investment chain being able to enforce rights within the company as a member within the definition of the Companies Act 2006, s. 112. The decision reached by Norris J caused him to remark that he had not reached 'a particularly comfortable conclusion, but reaching any other conclusion would involve an impermissible form of judicial legislation'. This has lead to debate about the role of investment intermediaries and their legal obligations with recent discussion on how if at all the law should be reformed to allow the ultimate beneficiary in an investment chain to exercise rights against issuers of securities.

Here I will give a brief summary of the case and discussion.

Facts and judgment
DNick Holding plc, registered in England but operated in Germany, was owned by Wickeder GmbH who acquired 75.005% of the company's shares (albeit through an intermediary, the significance of which is detailed below) giving it enough control to pass a special resolution (75%), which is required to make certain changes within the company.

The board of DNick proposed to cancel its shares and re-register as a private limited company (Ltd) for a public limited company (plc). This caused a drop in value of DNick's shares. A meeting was called and a special resolution was passed to re-register with Wickeder using its 75.005% ownership to secure it. The meeting was attended by shareholders (or their proxies) representing 83.71% of the vote.

Eckerle and Ors were claimed (claimed being the operative word) to be minority shareholders owning 6% of the issued shares. They commenced proceedings against Wickeder under section 98 of the Companies Act 2006 to have the resolution cancelled on the basis that they had standing to do so.

The Act under section 97 provides a company may re-register as a private company provided the conditions are met in this section and no application under section 98 has been made to cancel the resolution to re-register. Section 98 itself provides who may make such an application for cancellation and this includes: (a) the holders of not less in the aggregate than 5% in nominal value of the company's issued share capital; (b) ...; (c) ...; but (2) not by a person consented to or voted in favour of the resolution. Under subsection (3) the court may then make an order either cancelling or confirming the resolution.

Wickeder sought to strike this claim out, inter alia (see para [11]), on the basis there was no reasonable grounds on which the claim could be brought; or alternatively for summary judgment. The decision focused on the considerations set out for summary judgment and the dispute about the construction of the provisions in section 98 (see para [12]).

The key/common facts were laid out in para [14]. An important fact to note was that according to the share register DNick only had two registered shareholders who held the 5,671,318 issued ordinary shares. Dr Platt (CEO of Wickeder) held 1 share and the Bank of New York Depository (nominees) Ltd (BNY) the remainder. BNY acted as a depository of the issued shares, holding those shares on trust for account holders with Clearstream according to the account holder's respective holdings in Clearstream Interests (CI). Clearsteam was the settlement division of Desutsche Borse. Through Desutsche Borse trades on the relevant exchange between Clearstream account holders are transacted electronically. These account holders could not be individuals and could only be banks or financial institutions. What was traded on Desutsche Borse was the underlying ownership rights in DNick shares the CIs but not shares in DNick themselves. The trades were between Clearstream account holders, concluded on behalf of the customers of those account holders, who could be described as the end investor or ultimate beneficiary. Thus Eckerle and Ors plead to have 7.2% in the nominal value of the issued share capital but, in truth, they only have the ultimate economic interest in those securities which amounts to a specified percentage of the shares held by BNY on trust for Clearstream account holders whose customers Eckerle and Ors are.

As you can see, the claimants were far removed from the being the owners of the shares and simply held the economic interest in those securities. BNY held the shares, who held them on trust for Clearstream account holders whose customers the claimants are. They were 3 times removed in summary. This means when dividends are paid they are paid to BNY. Although the Articles did allow direct payment to Clearstream account holders who would ultimately account to its customers.

According to the facts set out at para [14] the company's articles provided that 'each person who is a CI holder at the relevant CI record date' can either direct the registered holder of the share how to exercise the vote attaching to the underlying share or to appoint a proxy to do so (who might be the end investor).

Thus it became important to identify who was the CI holder as it would give them the right to direct a vote or appoint a proxy. A CI holder was interpreted, according to the Articles, to mean 'the holder of [an interest in the shares in the capital of the company traded and settled through Clearsteam]'. They are then identified by the electronic register of CI holders. The only interests traded and settled through Clearstream are the interests of Clearstram account holders which were the banks and/or financial institutions. Only they fitted this description and so the right to appoint or direct would fall to them, not the account holders' customers. The Articles under Article 10 continued that DNick did not recognise beneficial interests and made clear they would not recognise any right except an absolute right to the 'entirety thereof in the registered holder'.

All of this ultimately lead to an initial observation that there is potentially a 'serious loophole in the protection afforded to minority shareholders'.

It was submitted for the claimants that, essentially section 98 should be interpreted widely and construe the provision as to who were holders as those who were shareholders in all but name and not simply those registered as holding the shares. At para [15] it was argued that: (1) section 98 should be construed with regard to the deliberate use of the terms 'holder' and 'person' instead of member; (2) alternatively the provision in section 145 should be approach purposively to enable the claimants to exercise rights otherwise vested in a member to enable that person to protect the economic value of their shares; (3) alternatively the common treatment of the holder of the ultimate economic interest as if he were a shareholder should mean in the present case that the prospects of the claimants showing that they were entitled to the relief they claimed cannot be dismissed as fanciful (required to allow the claim to proceed under the Civil Procedure Rules)

The first point was addressed that member or shareholder is one and only one (para [18]) citing at para [17] National Westminster Bank plc v Inland Revenue Commissioners [1995] 1 A.C. 119, 126. Therefore the claim that the term 'holder' should be interpreted widely was seen as needing an extremely strong reason to do so so as to depart from the orthodox understanding. Norris J continued at para [19] that the whole basis of the 2006 Act proceeds on the this basis as to the definition of a member, which is found in section 112 and concluded that the person who is registered as a member is rightfully deemed the holder of said shares. Thus, the definition does not include the person holding the ultimate economic interest. Norris J, at para [20] did not believe the specific use of the term 'holder' in section 98 should mean the court should look to the holder of the economic interest on the basis the other two subsections in section 98 referred to 'member'. He continued that under section 98 the court can only adjourn to have the shares purchased from the dissenting members. Therefore no relief could be granted to the holder of the ultimate economic interest.

Norris J continued in his reasoning that section 260 makes provisions in respect of rights directly enforceable by non-members, under section 260(5)(c) which states a member includes a person who is not a member but has been transferred shares in the company or has had them transmitted by operation of law. It was stated in Enviroco Ltd v Farstad Supply [2011] UKSC 16 at [37]-[38] that the term member is defined by section 112 and is a fundamental principle of company law and can only be departed from where expression provision allows it. Without such a principle company law would be unworkable.

Therefore section 98 does not apply to anyone expect those who are on the register.

However, Norris J continued to express reasons why summary judgment would not be given in favour of the claimants. He cites the Explanatory Notes for the 2006 Act at paragraph 210 and notes nobody believes on a true construction that section 98 extends to anybody beyond those members on the register.

Norris J further adds that the provisions in the Articles did not protect the claimants. These only provided that account holders i.e. Clearstream account holders (the banks or financial institutions) could direct BNY on how to vote or require BNY to appoint the account holder as proxy. Therefore the account holders could direct BNY as a member how to exercise its votes. As a result no rights are conferred upon the customers of the account holders under the articles.

To continue Norris J cites section 145 that provides anything required or authorised to be done by or in relation to the member shall be done or may instead be done by or in relation to the nominated person... as if he were a member of the company. This generally allows the nominated person to act is if they were a member of the company. However, section 145(4) adds that the section, nor does the Articles, 'confer rights enforceable against the company by anyone other than the member'. Norris J states at para [26] that these provisions were introduced due to investors increasingly holding their shares through intermediaries. Norris J elaborates at para [26], citing Hannigan, that company law 'demands a mechanism whereby the indirect investor can engage with, and be recognised, by the company'. But Hannigan admits such a mechanism, whilst ideal, would, in practice, be difficult. Hannigan, as cited by Norris J, states section 145 is a modest step forward in achieving this but is not a radical departure from recognising the member as the one who is registered as such.

Therefore section 145(4) does not confer enforceable rights on anyone expect for the registered shareholders, which in this case is Dr Platt and BNY. Therefore failure to recognise the nominated person or afford them the same treatment as if they were a member, does not give enforceable rights to that nominated person. The only person who can enforce is the registered shareholder. At para [27] Norris J, citing Buckley, gave the example of failing to notify a nominated individual of a meeting. Whilst the company has to recognise that nomination and inform them accordingly, failure to do so would only allow the registered shareholder to challenge that failure.

Norris J concluded that from the submissions presented none lead to the conclusion that the account holders, let alone the claimants could enforce section 98. He states at para [29] 'These passages simply mean that the statutory rights that are directly exercisable by the nominated person are those which enable the right conferred and transfered by the articles to be effectively transferred'. He notes that this is why section 145(2) operates 'so far as is necessary to give effect [to the provision in the company's articles enabling a member to nominate another person as entitled to enjoy or exercise ... any specified rights of the member in relation to the company]'. Norris J stated that this 'does not mean that if the effective exercise of the transferred right produces a result that is not to the taste of the nominated person then the nominated person can, in order to bring about his desired outcome, himself use any of the provisions of the 2006 Act available to the transferring member'. As a result Norris J concluded the claimants were neither holders within a true construction of section 98, nor did section 145 enable them to bring a claim. Norris J also noted that there was no expectation beyond what the Articles said that would allow the ultimate beneficiaries to enforce said rights on the basis of the well known dicta in Re Astec (BSR) plc [1999] BCC 59, 87 that made clear that such expectations have no place in public listed companies and the public dealing in the market proceed on the basis of what is in the Articles.

Finally, Norris J suggested that it could add BNY as a party to the proceedings but deemed this would not be capable as BNY was a person who had voted in favour of the resolution to re-register the company as private and could not make an application under section 98 which bars those who voted in favour from doing so. This, in itself, was seen as problematic at para [32]. If the holder of the legal interest in the share has been instructed to vote in favour of the resolution it will make them incapable of  commencing proceedings for any ultimate beneficiary dissenting from the resolution.

All of this lead to Norris' J uncomfortable conclusion that the ultimate beneficiary would be deprived of protection, which those who formulated the 2006 Act thought should be extended to.

In summary, the claimants were not members. They could not apply under section 98 to have the re-registration cancelled, nor could they apply under section 145 to enforce rights as nominees because they were not nominees and by any means this section does not confer enforcement rights on nominees, those are vested in the shareholders only. As well BNY could not commence proceedings on behalf of the ultimate beneficiaries as it had barred itself from doing so by voting in favour of the resolution.

It seems quite right to postulate that investment has become so complex that investors are prevented from exercising their rights against the issuer. It is agreed that giving a mechanism to allow the end investor to enforce rights is likely to be impractical, as Hannigan argued, potentially opening up the floodgates to claims including duplicate claims, as well as the increased cost and time in maintaing a accurate share register. However, moving away from the orthodox concept of 'member' may not be catastrophic if approached with the right caution. The 2006 Act itself moved away from another fundamental principle of company law, namely majority rule, with the introduction of the statutory derivative claim, allowing any member to enforce a right vested in the company in respect of a breach of duty, trust, default or negligence. This removed the bar of wrongdoer control and the rule in Foss v Harbottle (1847) 67 ER 189, which only allowed a derivative claim to proceed in the common law where it was shown  the wrongdoers were in control of the company, because where they were not it was for the majority to decide if the company should litigate and not an individual shareholder. This was overcome by putting relevant restrictions in place on allowing a claim, such as mandatory bars where the conduct has been ratified or authorised by an unconnected majority. Further the court is given the discretion to consider whether the conduct is likely to be ratified or authorised as well as taking in to consideration the views of disinterested shareholders. Cases brought under the new statutory claim have also been dismissed at the court's discretion where wrongdoers were not in control, so whilst it is not a bar to a claim, the court may use its discretion when determining whether to allow a claim and consider the issue of wrongdoer control. Therefore, it is tentatively suggested that it may be appropriate to open up derivative claims to end investors, extending section 260(5) or introduce a similar concept that allows end investors to litigate pending court approval. This may eliminate the objection raised by Hannigan about cost and the issue of the floodgates being opened by imposing appropriate safeguards on standing. As well, the law reformers may draw on many areas for inspiration where protection for end users has been developed, which was seemingly difficult if not impossible before intervention such as the Consumer Protection Act 1987, part 1 which protected consumers from defective products put in to the market by manufacturers.

Another concern is the intermediary who acts for multiple beneficiaries. In this case it may have been in the interest of some of its end investors to vote in favour of the resolution but not for others. However, initially it seems, BNY would not have acted against their duties in doing so. They have acted in the interests of the end investors by voting the way they believed to be the best interests of the end investor or were subsequently instructed to do so by Clearstream account holders who equally would have instructed based on what they believed to be the best interests of the end investors. Being barred from applying to the courts was a result of the statute and not mala fides.

Whether there is a fiduciary breach would require deeper analysis. Yes, the position can rightly be described as fiduciary but it is not clear if the duty of loyalty would have been breached. This requires a conflict of interest, which itself requires the fiduciary (i.e. the investment intermediary, in this case BNY and Clearstream account holders) to suspend self-interest and the interest of others and act in the sole interests of the beneficiary. By acting for multiple beneficiaries it is possible a conflict has arisen between the interests of the respected beneficiaries and if that is so the only way the intermediary may immunise themselves from liability is to get authorisation to act or alternatively demonstrate that there was not a conflict. The latter would require the fiduciary to demonstrate that they had not taken responsibility for the particular interest of the beneficiary allowing them to act against it for others. See, for example, Kelly v Cooper [1993] A.C. 205. The question then is whether by acting for multiple beneficiaries and voting on the same resolution, is this a conflict of interest? My answer would be yes. There is a risk that by acting for more than one beneficiary that their loyalty to one may compromise their loyalty to the other, similar to that seen in Extrasure Travel Insurance v Scattergood [2003] 1 BCLC 598. However, a further problem here is that even if it is a breach, the end investor may still be left without a remedy since in duty-duty conflicts the fiduciary may not profit personally. Therefore there is no profit to disgorge to the end investor. They would then have to try and claim equitable compensation but this requires causation i.e. a link between the actions of the fiduciary and the loss suffered. This may be difficult to show that the way they voted caused the loss suffered since one investor (Wickeder) "owned" 75.005% thus the loss would seemingly have been suffered regardless but I think this needs more analysis to be certain on how difficult it would be to prove than this blog post will offer.

As well, claiming this is a breach of fiduciary duty may cause practical problems for investment intermediaries as it would seemingly impact on their ability to act for clients without authorisation, which in turn may increase the cost of engaging with an investment intermediary.

Monday, 17 February 2014

Student Feedback

A short presentation on student feedback that I produced can be found here. The key focus is on how to improve engagement with feedback and breaks this down in to four sub headings each of which have their own two sub-headings as identified in the table on slide 3. I drew on the word engagement as this seems to be the "buzz" word at the moment in the literature on student feedback and tried to elaborate on its meaning through this work. I draw on literature to emphasise the importance of each point to maximise student engagement with their feedback and is hopefully edifying for some.

Friday, 10 January 2014

Law Commission Consultation on Fiduciary Duties of Investment Intermediaries with Hogan Lovells

Yesterday I attended a Consultation Workshop at Hogan Lovells LLP on the Law Commission's Consultation on Fiduciary Duties of Investment Intermediaries. The event was attended by a variety of people from different backgrounds including trustees, academics, lawyers and fund managers to name a few. The Panel consisted of three members, David Hertzell - Law Commissioner; Nick Cray - Chief Operating Officer at Hogan Lovells; and Dominic Hill - Partner in the financial services department at Hogan Lovells.

The Consultation was a result of the Kay Review - see here for Consultation paper and Kay Review - that stated that a series of recommendations, particularly recommendation 9 that stated 'The Law Commission should be asked to review the legal concept of fiduciary duty as applied to investment to address uncertainties and misunderstandings on the part of trustees and their advisers'.

I hope to respond to the Consultation in detail but below I outline some initial observations that I wish to explore further at a later date. I intend this blog post to initially be putting my thoughts down from what I know and most would require further investigation to reach substantive conclusions.

From Kay Review and Consultation Paper two areas could be discussed. First, who in the investment chain owes fiduciary duties. This the Law Commission sees as a difficult question given the flexibility of fiduciary duties, but I believe this is caused by a misconception and a need to separate the two elements of a fiduciary that are first, when does the duty of loyalty arise and second, if so, what is the scope of that duty. This approach can be seen in University of Nottingham v Fishel [2000] I.C.R. 1462, 1494. Failing to do that it can often lead to erroneous statements such as those cited from Henderson and Others v Merret Syndicates Ltd and Others [1995] 2 A.C. 145, 205 that not all fiduciaries will owe the same duties in the same circumstances. This cannot be correct given Lord Millet's judgment in Bristol and West Building Society v Mothew [1998] Ch. 1 that the duty peculiar to fiduciaries is the duty of loyalty. If the duty peculiar to fiduciaries is the duty of loyalty then all fiduciaries must owe the duty of loyalty. Whilst not endorsed specifically, this seems to be supported by Sedley LJ in Plus Group Ltd v Pyke [2002] EWCA Civ 370 at [80]. To ascertain when the duty of loyalty arises one must consider three questions. What is the duty of loyalty, what is the purpose of it and finally when is that purpose fulfilled. If someone is determined to owe the duty of loyalty they are subject to the full expanse of fiduciary jurisdiction. If someone owes the fiduciary duty of loyalty one can turn to the second issue as to the scope of that duty. With this application to investment intermediaries it may become apparent who does and does not owe fiduciary duties in the investment chain.

This leads to another area that needs further consideration in respect of Kelly v Cooper [1993] AC 205, discussed 11.28-11.38, which considers terms of a contract may limit the scope of fiduciary duties. In essence this is true. This limiting of scope is on the basis that equity cannot alter the terms of a contract validly entered in to. As seen in Ranson v Customer Systems plc [2012] EWCA Civ 841 at [68] equity needs something to be "hung from". Therefore the duty is circumscribed by what the parties agree as someone cannot be loyal for something they did not take responsibility for. However, the courts must be careful as to what they imply in to contracts between parties as they did with Kelly v Cooper. There needs to be some differentiation between conflicts and interests in proposed transactions as is the case in the Companies Act 2006 with ss. 175 and 177. s. 177 breaches may be excused where a principal ought reasonably to have been aware of the conflict but s. 175 breaches require full disclosure with authorisation to act. Implied terms that the estate agent is authorised to act for multiple principals is unlikely to amount to full disclosure with authorisation.

The second issue in respect of the Law Commission's consultation concerns best interests. The question/statement I raised was how to promote best interests beyond short-term financial gain? The Commission looks at whether the law allows financial intermediaries and trustees to consider the long-term interests of the ultimate beneficiary through investment beyond the short-term interest of financial gain through transactions. The answer to this question seemed to be a resounding yes that the law does allow intermediaries to consider wider, long-term interests. This was evidenced in Chapter 10 of the Consultation paper by cases such as Cowan v Scargill [1985] Ch. 270; Harries v Church Commissioners [1992] 1 W.L.R. 1241; Martin v City of Edinburgh District Council [1989] Pen. LR 9, 1988 SLT 329; and Buttle v Saunders [1950] 2 All E.R. 193. Whilst this is the status of the Common Law the legislation in this area is not entirely reflective of this ability to consider wider, long-term interests. The Occupational Pension Scheme (Investment) Regulations 2005 SI 2005 No 3378, reg 4 provides that the investment of assets is 'in the best interests of the beneficiaries' and in a manner 'calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole'. The wording would seemingly focus most people's minds on profit in the short term.

Whilst the law seems to accommodate wider interests, there is an 'accountability gap' in ensuring wider, long-term interests are considered. This was discussed at 3.31-3.32 of the Consultation paper that trustees did not want to dictate to the investment manager what to invest in, but the investment manager believed it was the trustees who should instruct them to consider wider, long-term interests. Arguably the burden should lie with the managers who are the professionals but the incentives have to be right for them to apply the long term interests. Therefore it seems the law has reached a dead-end, and only a few subtle changes may be necessary such as a restatement of Regulation 4 and perhaps a statutory statement of duties for clarity similar to Part 10 of the Companies Act 2006. The law requires the intermediaries, if classified as fiduciary, to remove any self-interest in the performance of their functions to the ultimate beneficiary, and allows the freedom of the intermediary to assess what they believe to be in the best interests of the beneficiary. How to create the right incentives may not be an easy answer but there seems to be strong focus on better shareholder engagement to create trust and confidence in the businesses that are invested in so long-term plans can be supported rather than questioned, but equally there should be appropriate monitoring to prevent that trust being misplaced. Whilst the duties may deter trust being abused such duties are only reactive and some controls ex ante may need to be assessed.

My final point is that the Law Commission must be careful not to classify best interests as a fiduciary duty based on remedial result. Not to go in to great detail but loyalty is about removing the risk of self-interest by banning conflicts of interest. Best-interests is wider than this in that someone may not act in the best-interests of a principal but the decision may have been free from self-interest. This confusion may be seen in ODL Securities Ltd v McGrath [2013] EWHC 1865, which I blogged about here. However, incorrect classification may have wider implications as discussed in Chapter 5, particularly 5.46-5.54. The decision in Mothew discusses the implications of considering all breaches by fiduciary a fiduciary breach. A remedy for breach of fiduciary duty is normally a restitutionary one. This is much more favourable to the claimant than a compensatory one. Whilst compensatory remedies may be available for breach of fiduciary duty as seen in Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, restitutionary remedies may not be used for breaches of best interests.