Welcome!

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



Monday 13 November 2017

Piercing the Corporate Veil: Should we bother teaching it?

The short answer is yes. The concept has been reduced to little more than an anecdote or, at best, evidencing examples of fraud when practically applied in the UK. It is unlikely one would need to dedicate a whole lecture to it anymore. However, the concept still has considerable comparative wealth, which should justify a more fuller inclusion on advanced degrees.

The reason for this was the decisive judgment in Prest v Petrodel Resources Ltd [2013] 2 AC 415. The decision confirms that the courts will only pierce the corporate veil where: 1) there has been an evasion of an existing legal obligation, liability or restriction; and, crucially, 2) no other existing remedy is available. Ben Hashem v Ali Shayif [2008] EWHC 2380 provides that this evasion must be entirely de hors of the company. 

Subsequent case law has confirmed the position in Prest. Recently, Persad  v Singh [2017] UKPC 32 (Trinidad and Tobago) at [17] cited Prest with approval. Pennyfeathers Ltd v Pennyfeathers  Property Co Ltd [2013] EWHC 3530 at [112]-[119] followed Prest by declining to pierce the corporate veil. Finally, Antonio Gramsci Shipping Corporation v Stepanovs [2013] EWCA Civ 730 per Beaston LJ predicted that piercing the corporate veil would come to be seen as an anomaly incapable of further development.

The second element is crucial because there will always be some other remedy available. I will not go into detail on the aspects of these other remedies. What it does show is the pragmatic approach English courts take to the company. They recognise that a company is a distinct legal person from its incorporators and controllers. Therefore, the law applies to it as it does anybody else to respect that distinction, formally recognised by the court ever since the decision in Salomon v A Salomon and Co Ltd [1897] AC 22. Therefore, when questions arise on separate legal personality, the substance of that case is not company law. The substance is who is liable/obligated/restricted under some other aspect of law. In Prest it was an issue concerning family law. In Persad it was land law. Pennyfeathers was tax law. Chandler v Cape plc [2015] EWCA Civ 525 was tort law. Macuara v Northern Assurance Co Ltd [1925] AC 619 was insurance law. Gilford Motor Co ltd v Horne [1933] Ch 935 was restrictive covenants.

What this leads one to conclude is that when dealing with separate personality, the focus should not really be on when will it be disregarded. The simple answer to that is very rarely. The focus needs to be on the realisation that English courts will treat the company pragmatically and when applying the law to a company you apply it in the same way you would a natural person. This has been the approach since 1897.

This pragmatic approach is at odds with recent developments in the United States.  The discussion below shows that from a comparative perspective the concept of 'piercing' or separate legal personality still has a lot to offer.

The well known example of Burwell v Hobby Lobby Stores Inc (2014) is evidence of this, albeit there have been subsequent decisions that reaffirm this position, Trinity Lutheran Church of Columbia Inc v Comer (2016).

With Hobby Lobby, as a matter of law (emphasis added), the decision was correct. The discussion and reasoning of the court though demonstrates the different approach taken by the court to the nature of the company. It seemed unnecessary to expand into the discussion they did about the nature of the company, opening themselves up to justifiable criticism about equality.

In Hobby Lobby one question the court had to answer was whether the company was a person within the meaning of the Religious Freedom Restoration Act 1993. This Act provided that the government would not burden a person's exercise of religion even if the burden results from a rule of general applicability unless it was in furtherance of a compelling governmental interest; and is the least restrictive means of furthering that compelling governmental interest. The Patient Protection and Affordable Care Act 2010 provided that employers must provide minimum essential coverage or pay a substantial price. The owners of Hobby Lobby objected to this on the basis the company was a person within the meaning of the 1993 Act.

Under US constitutional law the ‘exercise of religion’ involves not only belief and profession but the performance of, or abstention from, physical acts that re engaged in for religious reasons. Business practices that are compelled or limited by the tenets of a religious doctrine fall comfortably within that definition. A law that operates so as to make the practice of religious beliefs more expensive in the context of business activities imposes a burden on the exercise of religion.

The reason the case is correct as a matter of law is because the Act applied to 'persons' and it is recognised that a company is a person. Therefore, government could not burden its religious freedom. Failure to recognise the company as a 'person' would have had "dramatic consequences", Alito J at [21]. This would certainly be true in the UK too, where Prest shows the steadfast commitment to doctrine and the company's separate personality as a distinct legal person. The best one could criticise the Act for, on a purely legal basis, is that is did not define 'person' clearly, if one wished to restrict it extending to companies.

However, the judgment then descends into an unnecessary expansion on the nature of the company. It shows that the rationale in the US for treating the company as a separate person is not one of pragmatism, but one of protecting the fundamental freedoms enshrined in the US constitution; in this case freedom of religion under the first amendment. From this, the question of piercing the corporate veil comes much more prevalent. For if one respects that the company is a legal person, is there any limit to what it can and cannot do, including holding religious rights? Or in this instance should we pierce the corporate veil and hold the controllers of Hobby Lobby were the real persons the rights applied to and not the company?

Alito J states that, in regards to the company, "the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends...". He continued "when rights... are extended to corporations, the purpose is to protect the rights of these people" and "protecting the free exercise rights of corporations like Hobby Lobby ... protects the religious liberty of the humans who own and control those companies". Effectively those freedoms should not be lost where on wishes to run a company, is the view of the Supreme Court. Alito J accepts that the consequence of the company being a person may undermine the religious freedoms of the incorporators and controllers and extends those freedoms to the company, to be determined by those incorporators and controllers.

This is easy enough to apply to small, closely held companies, but it becomes much harder to apply to large widely held corporations. It is also unclear how the reverse would work as well. How are the religious freedoms of third parties protected against the company? How are tension resolved where there are competing religious views either internally or with a third party? As Ginsbury J observed in her dissenting judgment, it would allow companies to impose disadvantages on others and protects the religious beliefs of a few regardless of the impact it can have on thousands, even a whole gender. There are also tensions created as to whose religious rights should prevail. In the Equal Employment Opportunity Tribunal v Abercrombie & Fitch (2015) the court ruled in favour of a job applicant who was denied a job at Abercrombie on the basis she was a practising Muslim. What would the court have done had the employers held religious beliefs regarding a woman's right to work?

The complexities of the US system based on this subtle difference in the way the courts treat the company as a 'person' raises questions about legal realism and how institutional complementarities can shape outcomes. Certainly, if the US believes in freedoms and capitalism, it seems odd that they would deny people access to goods, services, and rights based on personal characteristics of individuals.  













 
 
  

Tuesday 16 May 2017

Derivative Claims Data

The latest derivative claim to be reported has resulted in another success for the claimant shareholder. In SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) permission was granted where directors of a company that had the purpose of selling football club merchandise under a licence were part of the decision to revoke that licence to force the company to negotiate from a position of weakness.

The claim was distinguished from Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch) where the claim arose independently of the breach of duty permission would be refused. Here it was clear from the pleadings that the claim arose squarely from the directors' breach of fiduciary duty to revoke the licence.

Of note is the potential ease in which claims for breach of fiduciary duty can be maintained under the new procedure. The strict nature of liability for a fiduciary breach means the claimants often need to do little more than identify a conflicting position. While not always as straightforward as this claim, and other circumstances might bar relief, all the claimant had to do here was demonstrate the directors of the company who were meant to act in the company's interests had been involved in the decision to revoke its licence and it was enough to satisfy the court a hypothetical director would attach weight to the claim as the legal merits were described as "so powerful" and "sufficiently substantiated".

In respect to the figures on derivative claims:
Claims n = 21
Permission - 42.9% (9/21)
Refused - 57.1% (12/21)
Mandatory Bars - 33.3% (7/21)

When discounting those that are frivolous i.e. had mandatory bars (see here for why):
Claims n = 14
Permission - 64.3% (9/14)
Refused - 35.7% (5/14)

Wednesday 12 April 2017

Derivative Claims Until 2017

As reported on Westlaw, there have now been 20 derivative claims heard. To keep information updated on this as I write my paper the most recent decision was heard in November 2016, Zavahir v Shankleman [2016] EWHC 2772 (Ch). The claim was refused for a mandatory bar, namely no director would continue the claim when acting in accordance with the Companies Act 2006, s 172, to act in the company's best interests.

This takes the figures to the following:
Permission: 40% (8/20)
Refused: 60% (12/20)
Mandatory Bars: 35% (7/20)

It has been said that the success of the reform would depend on whether the claim was accessible to meritorious claims, so looking at the above numbers may not be particularly edifying. Descriptive data may be more useful if one focuses on those claims that had some merit to them, i.e. that did not succumb to a mandatory bar.

Therefore, the figures would be as follows:
Permission: 61.5% (8/13)
Refused: 38.5% (5/13)

By bringing the claim on to clearer grounds the intention of reform was to create access to meritorious claims, but also deter frivolous ones. By looking at the data on derivative claims, my current working paper is looking to assess whether that has happened.

The investigation is premised on the general concept that while a law may intend to do one thing, the outcome may be different. Take the example of 'criminal conversations', a particular offence in legal history for what is now referred to as adultery. The claim is brought by the husband against the adulterer. While the offence was intended to deter men from having adulterous relationships with married women, the law created incentives for married couples to dupe unsuspecting men of wealth in to sexual relations with the woman to extract compensation settlements from them, either in or out of court. There was such evidence of this in cases such as Cibber v Sloper and Worsley v Bisset. However, in both cases the jury, while finding in favour of the claimants, only awarded £10 and one shilling respectively, to reflect the limited injury suffered.

Moving back in to context, the same can be said of derivative claims. Will putting the claim on clearer footing make it more accessible or will it result in frivolous litigation? Speaking generally, the literature acknowledges that a legal system and its institutions generally need to be aligned if a particular outcome is to be achieved. Otherwise there is a risk in introducing a new mechanism or law that is not aligned may irritate the legal system, producing unexpected outcomes.

Therefore, given that it is generally accepted that the UK legal system and its institutions are generally set up against derivative enforcement, it seems unlikely that the new procedure will enable access for meritorious claims. However, making it clearer when claims can be brought to shareholders might be seen to encourage frivolous litigation where an attractive settlement or other benefit might be derived from pursuing the litigation, even if success is unlikely. Given that 30% of claims so far can be described as frivolous, since they failed to overcome the relatively low hurdle that no director would continue the claim if acting in accordance with s 172, suggests that some shareholders might be doing just that.

Case Name
Dismissed For/Allowed
Significant Circumstances Considered
Bamford
Dismissed at court’s discretion
Wrongdoer control
Bridge
Mandatory Bar
No reasonable director would pursue the claim; alternative remedy; company decision; independent views; wrongdoer control
Cinematic Finance
Dismissed at court’s discretion
Majority bringing derivative claim; wrongdoer control; side-stepping insolvency rules
Cullen Investments
Permission granted
Hypothetical director would question if full and frank disclosure was given for authorisation; and case was simple on this premise; significant sum could be recovered based on lack of evidence to contrary; no basis for lacking good faith; hypothetical director would attach considerable importance; claim being funded by C so no financial risk to company and possible benefit; claimant’s action may give rise to action in own right but this was not a decisive consideration since the defence necessitated it and as a precaution since the company was entitled to some or all of the relief
FanmailUK
Case adjourned
Case adjourned
Franbar
Dismissed at court’s discretion
Strength of legal claims; ratification; alternative remedy
Hook
Permission Granted
Good faith; 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
McAskill
Permission granted
Good faith; Alternative remedy; director would attach weight to the claim under s.172
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
Zavahir
Mandatory Bar
No director acting in accordance with section 172 would continue the claim. If incorrect little weight would be attached due to the costs involved were less than potential recovery, and there was an alternative remedy



Case
Type of company
Costs indemnity sought
Financial State of the company
Shareholding % (respondent/claimant)
Amount Claimed for*
Concerned a conflict of interest?
Length of proceedings
Bamford
Ltd
Yes
Solvent
50/50
£3,500,000
No
1 day
Bridge
Plc
Yes
Solvent
Minority (1.83%)/Director
N/A
Yes
2 days
Cinematic Finance
Ltd
N/A
Doubtful solvency
0/100

N/A
Yes
N/A
Cullen Investments
N/A
No
N/A
N/A
“Scant evidence”
Yes
N/A
Fanmailuk
Ltd
N/A
Solvent
Majority/minority
£70,000,000
Yes
N/A
Franbar
Ltd
N/A
Solvent
75/25
N/A
Yes
2 days
Hook
Ltd
Yes
Solvent
Minority/Majority

Yes
2 days
Hughes
Ltd
Likely
To be dissolved
50/50
£100,000+
Yes
1 day
Iesini
Ltd
N/A
Doubtful solvency
Majority/minority
N/A
Yes
4 days
Kleanthous
Ltd
N/A
Solvent
84.5/15.5
£120,000,000
Yes
4 days
Kiani
Ltd
Yes
Solvent
50/50
£296,000
Yes
1 day
McAskill
Ltd
Yes
Solvent
50/50
£197,640
Yes
1 day
Mission Capital
Plc
N/A
Solvent
N/A
N/A
Yes
N/A
Parry
Ltd
N/A
No assets
50/50
£248,577.24
Yes
1 day
Phillips
Ltd
N/A
Solvent
50/50
N/A
Yes
2 days
Seven Holdings
Ltd
N/A
Effectively no assets
50/50
£1,693,212.32
No
1 day
Singh
Ltd
Yes
Solvent/not trading
50/50
£873,000
Yes
1 day
Stainer
Ltd
Yes
Solvent
87/0.08
£7,000,000
Yes
1 day
Stimpson
Ltd by guarantee
N/A
No assets
Majority/minority
£5,300,000
Yes
4 days
Zavahir
Ltd
Yes
Solvent £20,000 only
Equal
£136,000
No
N/A