Supreme Court and Parent Companies

The Supreme Court is soon to hear a case on what constitutes a parent company under the Companies Act 1985 s736. The Court of Appeal decision is available here.

I thought it would be interesting to digress from other tasks for the day, due to adverse weather conditions in the UK affecting everyone's schedule, to look at what actually constitutes a subsidiary under the 2006 Act rather than the 1985 Act which the case is considering.

The facts of the Supreme Court case 'Farstad Supply A/S v Enviroco' (hereinafter Enviroco) are as follows:

A parent company pledged its controlling shares in one of its subsidiaries to a bank as security and the issue is whether it remains a subsidiary of that parent company.

On July 7th, the Appellant (E) was instructed to clean some tanks of an oil rig supply vessel owned by the Respondent (F), but chartered by Asco UK Ltd (C) under a charterparty. Included in the charterparty was an indemnity by F in favour of C and its affiliates, which included subsidiaries. E claimed that both it and C were subsidiaries of the parent company (P), who had given its shares in E to the bank as security and the bank's nominee became the holder of the shares but P retained the voting power. F claimed as a result, P ceased to be a member of E and could not obtain a benefit of the indemnity clause.

During cleaning, a fire killed one of E's employees and caused considerable damage. E, in the Supreme Court, launched proceedings for a declaration to the effect that at all material times it was an affiliate of C and entitled to an indeminty in the Charterparty.

The Deputy Judge decided under the 1985 Act that the person giving the security would be the registered holder of the shares otherwise that would lead to an easy evasion of s736. However, the Court of Appeal allowed the appeal and applied the Statutory definition of "subsidiary". They highlighted that merely providing security would not in itself, make you a member of the company within the meaning of s736. Membership was a status derived from the entry of the shareholder's name in the register of members.

Arguably the Deputy Judge also failed to consider the duty on a shareholder to make decisions in good faith (Allen v Gold Reefs [1900] 1 Ch 656 pp 671-2).

Importantly the Judge noted that the wording of the 1985 Act may lead to results that produce uncommercial result but they were not in a position to re-word the Statute.

The CA 2006 s1159 now defines the meaning of a "subsidiary" as:

(1) A company is a “subsidiary” of another company, its “holding company”, if that other company–

(a) holds a majority of the voting rights in it, or

(b) is a member of it and has the right to appoint or remove a majority of its board of directors, or

(c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it,

or if it is a subsidiary of a company that is itself a subsidiary of that other company.

(2) A company is a “wholly-owned subsidiary” of another company if it has no members except that other and that other's wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries.

My initial thoughts on the wording of the legislation, in relation to the facts of the case, would be that the outcome would highly depend on the content of the security arrangements between the parent company and the bank.

What the new section seems to infer is that what is important in determing whether the company is a subsidiary of the parent company is control. It would seem from the COA that the important factor is the wording of the Statute. The 2006 Act seems to have made improvements on the wording of the legislation itself in determining what is a subsidiary of a parent company and not based on whose name is on the register of members or the rights they may hold within the company.

I will await the verdict of the Supreme Court before making any more contributions to this discussion.

Leeds Conference on directors' duties and shareholder litigation

I recently attended a conference on Directors' duties and shareholder litigation in wake of the financial crisis at Leeds University.

Discussion focused mainly on s172 and the new statutory derivative claim, but there was also interesting insight from Andrew Campbell on psychological aspects affecting decision making, or John Armour's presentation regarding regulatory competition in Delaware.

The panel discussion was recorded and is available to download here. I managed to get a couple of questions in and you can hear them about a third to half the way in to the recording.

The papers are also available to download from the following links.

Mr Robert Hollington QC - The Winding up of Hedge Funds on Treasure Islands
Professor John Armour - Is Delaware Loosing its Cases?
Andrew Campbell - Why Good Leaders Make Bad Decisions (abstract only) - book available for purchase here.
Professor Janet Dine - Post-Concession Models in Potential European Company Law
Mr Louis Doyle - The Susceptibility to Meaningful Attack of Breaches of Directors' Duties under English Law
Dr Michael Galanis - The Dynamics of Corporate Bargaining and the Law vs Contract Debate: Chocolate, Cars and Other Systemic Issues
Professor Andrew Keay - The Duty to Promote the Interests of the Company: Fit for Purpose?
Professor Roman Tomasic - Shareholder Activism and Legislation Against UK Banks: The Limits of Company Law Remedies

I have also recently joined the LexisNexis Bloggers Network and will hopefully expand my readership

Conflicts research presented at UEA research seminar series

Yesterday evening in between talking to potential students at the Postgraduate open day at UEA I presented my work on conflicts of interest, which I have blogged about previously. The slides from the presentation are available here.
Duncan Sheehan and David Mead provided me with some interesting insight that I will investigate further.

Duncan pointed out understanding the difference between a conflict of interest and a conflict of duties and what the effect and differences of the two where for a director's liability. He mentioned conflicts of duties had rarely been looked, although there is some work out there by Matthew Conaglen.

David also highlighted the actual wording of s175 Duty to avoid a conflict of interest:

(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

The exact wording "must" under a literal interpretation could restrict a director from ever serving on more than one board in the same sector/industry. This wording however, may tie in to the understanding of the difference that Duncan raised between conflicts of interest or duties.

Watch this space for further updates on this matter in the coming weeks.

I am now currently preparing for my next presentation to the law in society group in Derby next week as well as preparing for the undergraduate seminars on Directors' Duties.

Understanding Conflicts of Interests

OK! So I am about to re-write my chapter on a director's duty of loyalty and his duty to avoid a conflict.

The main point of the work is to get across how we understand the duty of loyalty in a fiduciary relationship between director and shareholder. A lot of work seems to focus either on fiduciary duties generally or attempts to categorise them.

This chapter will look specifically at the director's duty. The main focus is pointing out the law relating to a director's fiduciary duties developed not out of company law but out of notably trusts and partnership law. Where both fiduciaries in those relationships are distinct from that of shareholder/director. It may be seen as a little naive by some judges and academics to just assume the duty applies the same to this fiduciary relationship as it does to the others.

Developing the law based on principles from other doctrines such as trusts leads to unnecessary and restrictive rules on the director who is fundamentally a different character from a trustee.

Trusts law relating to the relationships of the parties developed not on principles of economics but more on those of religion, morality and social.

The confusion of the exact nature of a fiduciary's duty of loyalty has lead people to believe there are two distinct rules inherent in this duty. That of no-conflict and no-profit. This chapter aims to show that two distinct rules in a director/shareholder relationship are restrictive and unnecessary let alone doctrinally flawed.

Many reasons for this approach have been unearthed including those of shareholder protection, disclosure, requirements, multiple directorships and so on.

I also plan to do some empirical work in relation to this chapter to gather evidence of directors (exec and non-exec) serving on more than one board, either concurrently or consecutively and look for correlations in market value of those firms.

I am presenting this work internally at UEA tomorrow in our research seminar group.