Christmas Procrastination

'Tis the season to procrastinate. So, for my final blog post of the year before I disappear for Christmas and New Year's here are some of my favourite Dilbert  PhD comics and one from stus from the semester. Enjoy!

Facts and figures about Directors

Directors. Who are they? What do they do? The decision from Mond v Bowles which I blogged about briefly here states that there is no definition of a non-executive in the Companies Act 2006.

Well, for one that is a bit of a presumption to make without really discussing the issue properly. For one, I can clearly see good arguments for and against non-executives being included under the definition in section 250 of the Companies Act. I hope to blog about this point in more detail at a later date.

For now, I have begun to run some analyses of directors who served on FTSE 100 boards between 2006 and 2010.

Below are some figures of executive and non-executive directors multiple directorships and remuneration in 2006 and 2010 from 30 FTSE 100 companies. Please note the following: These figures only represent the directors who served for the full year and does not yet account for those joining or leaving the board during the year. Also bear in mind the data was collected using my definition of a multiple directorship and remuneration. For 2006 one firm did not have any executive director serve for the full year. The data does also not account for the actual position held by the director as of yet for multiple directorships. Finally, the data is collected at company level. 

Year	Type	Number of directors	Mean Remuneration	Standard Error	Mean Multiple Directorships	Standard Error
2006	Exec	111	£5829724	908162.292	2.48	.414
2006	NED	201	£695500	71812.419	13.77	1.273
2010	Exec	102	£6753633	1039722.564	2.37	.354
2010	NED	200	£943095.67	108995.846	13.67	.971

Interestingly you will observe the increase of almost £250,000 paid to non-executives with less non-executives actually serving for the full year. The standard errors for remuneration all seem to be increasing which may suggest larger firms i.e. banks are increasing pay at a faster rate than smaller FTSE 100 companies.

Multiple directorships on the other hand do not seem to be greatly affected from these descriptive statistics by remuneration. Although, non-executive multiple directorships do seem to be declining after 2008, which I have reported elsewhere on my blog in regards to banks, after a steady rise from 2006-2008.

Forthcoming Publication in ICCLR

I blogged a couple of months ago that my submission to the International Company and Commercial Law Review had been accepted. See here. The publication on the court's power to order shareholder meetings under the s306 of the Companies Act 2006 is due out in January's edition of the Journal and will soon be available to view.

If you cannot wait that long... here are some of my early thoughts on the idea that I blogged about back in August. Demonstrating one of the benefits of a blog as a good way to express and record ideas.

WhatUni? award for UEA

The University of East Anglia has been ranked first in the overall rating of Universities in the WhatUni? student choice awards. See here and here.

UEA was ranked first in categories student union and accommodation and was ranked in the top 10 of the other categories that included job prospects (5th) and courses and lecturers (2nd).

If you are looking to apply you can order a prospectus here. You can also visit the law school's website here or the LL.B microsite here.  

A collection of responses to the EU Green Paper on Corporate Governance

In April the EU published a Green Paper on Corporate Governance in the EU. Below are links to a collection of responses to the Green Paper from different bodies.

Company law experts response

AP4 Swedish Pension Fund

Forsta AP pension fund response

Ecoda response

LSGE response
FRC response

NSFM response

UK BIS response
NAPF response
Danish shareholders' association response
German response
IOD response
IRS response
GC 100 response

European Commission to take Poland and Italy to Court

The EC is to take Poland and Italy to court for failing to complete the transposition of the third Directive on capital requirements. See here for press release.

Directive 2010/76/EU, which amends Directives 2006/48/EC and 2006/49/EC, requires banks and investment companies are financially sound by laying down rules on capital requirements that cover their risks to protect depositors.

It also requires appropriate remuneration policies that do not encourage or reward excessive risk taking; and this aims to combat remuneration incentive based practices that may have unfortunate consequences. Supervising authorities are allowed to impose penalties on banks that do not comply with these requirements. How the court identifies what is a "poorly designed remuneration structure" will be interesting to see. Although the Directive does lay down guidance as to what is an appropriate remuneration structure for credit institutions i.e. Annex I, which amends Annex V of the 2006/48/EC Directive on remuneration policies.

Finally, the Directive also lays down a ratio for capital specifically earmarked for re-securitisation to ensure banks take due regard to the risks involved with this kind of complex financial product.

The EC hopes to take advantage of the new possibility provided by the Lisbon Treaty to impose daily penalty payments on Member States that have not transposed the Directive in full by the date of its judgment establishing non-compliance. In this case the penalty requested for Italy €96446.70/day and for Poland €37396.80/day.

Innovation in Law Schools

The Financial Times have written a special report on innovative law schools. The short article focuses on the importance of combining law and business understanding in a move towards an increased inter-disciplinary learning and research environment between these different schools.

Having an undergraduate degree in business law and having studied a module on international business for my Masters I would largely agree with what the article has to say. I see a lot of value in people broadening their horizons and keeping their options open for the future.

Having a broader understanding from an inter-disciplinary approach can help develop new ways of thinking in research as well as being more employable for practice, whether as a lawyer or businessman.

Whether business and law schools will combine in the future may be a likely outcome but I do not think the need for inter-disciplinary research and study will be the sole driver of that. A stronger influence may be the reforms in higher education, in the UK at least, that drive schools to combine resources.

The special report also contains a number of other law school related articles. Access to all articles can be found here.

How much is too much?

A short discussion about a year long inquiry by the High Pay Commission as to executive remuneration is available on the BBC website. The full report can be found here.

See here for the news article.

Also, see here for the full business 'bottom line' about business ambition.

Chair of the High Pay Commission Deborah Hargreaves and Dr McGregor of the firm Taylor Bennett highlighted the following issues:

• Executive pay is complicated a should be simplified as shareholders cannot understand 

I would propose it is far from complicated. In fact it is pretty straightforward bar a few elements such as rights issue adjustments. Directors are usually awarded a base fee, a bonus based on year performance -sometimes 3 years (shares and cash), and an Long Term Incentive Plan (LTIP - in shares based on a 3 year performance period against a comparator group on measures such as Total Shareholder Return (TSR) and Earnings Per Share (EPS)). They also receive benefits e.g. company car and a pension which is not monies paid by the company rather it is a debt.

They are also entitled to participate in Save As You Earn (SAYE) schemes where they can buy shares in the company; as well as share option schemes.

• That executive pay is a 'closed shop'

Linking to the first point, really. It is quite transparent, executive remuneration, in truth.

• There should be worker representation on the board

As Dr McGregor rightly points out, but was drowned out, it is not right to have worker representation on remuneration committees as proposed by Deborah Hargreaves. We do not have co-determination. She is also right in pointing out the pension funds do have employee representation on them as they have an interest in it as it represents their shares.

If you listen carefully (at around 5:30) the host also tries to argue that the directors are all members of the "same club" who award each other vast amounts of remuneration - hinting towards the governance debate about multiple directorships - and employee representation will prevent abuse. From my own research there appears to be very little cross over between non-executives on remuneration committees and executive directors on FTSE 100 companies.

In truth there are probably better ways at encouraging consideration of employees than having a voice on the remuneration committee. If corporate governance codes are used to influence committee members to include median employee earnings, for example, alongside TSR and EPS when awarding LTIPs this may create a fairer system. So when directors' pay is up employees should not be losing their jobs and having salary reduced.

• Directors are unlikely to leave if pay becomes more stringent

Deborah Hargreaves argued that it is a myth that directors cross borders to get the best pay packages and it is merely used as an excuse to award high executive salaries. She argues that as you move up the ladder you actually become less mobile.

• Shareholders should set pay

Both guests suggested that shareholders should set pay. I would propose the opposite. Shareholders setting pay is not practical. We have spent years moving away from shareholder involvement because they generally do not take an active interest in the running of the company as they spread their risk across different companies. Governance structures tell us that better remuneration policies will come from a stronger non-executive board and remuneration committee.

Furthermore, if shareholders do not understand executive remuneration, what qualifies shareholders to set remuneration? It is a self defeating argument. There are very few reasons why shareholders would wish to increase their involvement.

If shareholders did set pay they would probably still consult the same advisors to the remuneration committee themselves and nothing is likely to change.

Blog voted as one of the Top 25 'International and Foreign Law' Blogs

Thank you to all those who voted for me. My blog has been voted as one of the top 25 blogs in the category of 'International and Foreign Law'. Voting now begins for the TOP BLOG of the year.

If you could again spare another five minutes to vote for my blog it will once again be greatly appreciated! Please vote here. Or if that link does not take you straight to the page click here then click on the 'VOTE' hyperlink.

Non-Executive Multiple Directorships in FTSE 100 Companies: An example

So, as I get to grips with SPSS and analysing my data... I thought I would upload one of the graphs that I have produced so far (see bottom of this blog).

It must be noted that the below graph has been produced from me playing around with the data. Thus, the totals below represent all of the firms non-executives' multiple directorships over the five year period. The data is multi-levelled and the graph does not account for different years of the same firm. This graph also only accounts for non-executives who served for the full year and does not account for any non-executive who joined or left the board during the years.

As you can see however, some firms in certain years, some companies have non-executives with over 30 other positions split between them. Looking at my data these companies were WPP, Unilever and HSBC. HSBC accounting for most of the instances below with their non-executives holding over 30 other directorships in the years 2006-2009, although that figure drops to 23 in 2010.

The mean highlights that companies' non-executive directors on average have 14.63 other directorships. The median was 13 and so there is not any great outliers pulling the mean although the box plot produced did identify 8 outliers but this may change once the different levels (years) are accounted for. 

For any prospective law PhD students I have definitely come to see the advantages of producing empirical research. Even if you are not trained, undertaking a PhD allows you the opportunity to gain these new skills just like I am doing at the moment. It can also add great value to your final piece as it offers inter-disciplinary opportunities and quite obvious originality.  

From a legal aspect of my research, recently, there has been a case to discuss the meaning of non-executive director in the case of Mond v Bowles (2011) 21st Oct Ch D. It was suggested that the meaning may vary from company to company and that the Companies Act 2006 provides no definition of a non-executive director. That would suggest that the definition of 'director' in the Companies Act 2006 s250 only applies to executive directors. With that said, I have not come across a case that says directors' duties and the meaning of director only applies to executive directors. Whilst other types of directors, such as shadow, do have their own definition and thus explicitly different from executives, there is no clear suggestion that s250 does not apply to non-executives as well as executives. It would seem such a definition under s250 would be quite fitting for non-executives as well since it states that directors are people occupying the position of director by whatever name called.

However, if s250 was adopted for non-executive directors it would have to be clear that every reference to director in the Companies Act does not apply equally to executives and non-executives; or in some cases not at all to the latter.

When deciding if the individuals where non-executives, the court highlighted that the individuals' roles had gone beyond merely protecting the investors investment, which may send a warning to other non-executives in larger companies who are quite actively engaged in strategy. Such consequences may see non-executives being classed as executive directors by an enthusiastic liquidator perhaps. It seems perfectly possible that somebody appointed a non-executive could become an executive due to the inclusive nature of s250.

European Commission Press Release: New rules for more efficient, resilient and transparent financial markets in Europe

The European Commission has recently published a press release announcing plans to revise the Markets in Financial Instruments Directive (MiFID) in the form of a Directive and a Regulation.

The aim is to ensure all trading venues have to "play by the same transparency rules and that conflicts of interest are mitigated". The reforms also aim to provide better access to capital markets for Small and Medium Sized Enterprises (SMEs) by creating a specific label for SME Markets that meet their needs.

There is also mention of taking in to account technological advances that have drastically increased the speed of trading that causes exposure to risk. Through increasing transparency and reinforcing supervisory powers by regulators the reforms aim to strengthen investor protection.

Nomination for top 25 blogs on International and Foreign Law

Each year LexisNexis honours a select group of blogs that set the online standard for a given industry. I am pleased to announce that my blog has been nominated in the category for International and Foreign Law. 

For all my readers out there, I would greatly appreciate your votes for my blog. Please follow the hyperlink here to the LexisNexis voting page and vote for me. Once you have registered all you have to do is follow the instructions on this link to vote for me - i.e. scroll to the very bottom and fill in your details and which blog you are voting for (Gibbs: Law and Life) and click send.

Registering is very simple and free. I hope that you will take the time to vote. It will be greatly appreciated. Winners will be announced in December.

Derivative claims: where are we?

One of the key objectives of the derivative claims reform, formulating in the statutory codification under Part 11 of the Companies Act 2006, was to allow more claims to proceed in appropriate circumstances.

My published articles in the Company Lawyer earlier this year demonstrated that despite six claims in England and Wales being brought before the courts, only in the case of Kiani [2010] EWHC 577 had there been permission to continue and here it was down to disclosure. (The other five cases where Franbar [2008] EWHC 1534, Mission Capital [2008] EWHC 1339; Fanmailuk [2008] EWHC 2198; Stimpson [2009] EWHC 2072; and Iesini [2009] EWHC 2526)

From these six cases all passed the initial hurdle that there was a prima facie case. However, two were dismissed for a mandatory bar, primarily on the fact that no director would continue the claim if acting in accordance with s172 (duty to promote the success of the company). The three remaining cases dismissed appeared to come up against a reluctant court to allow the claim to proceed since the final stage of the permission hearing leaves permission to continue to the judge's discretion. Although guidance as to what to consider under their discretion is given under s263(3), it is not an exhaustive list. None of these six cases considered anything beyond these factors under s263(3) though (although in the case of Stimpson the judge suggested he had done so, but in fact the interests of employees, I argued, should be considered under s263(3)(b) anyway).

Where permission was allowed down to disclosure, it appeared the only reason it got that far was the fact the other side had produced no evidence to the contrary. Comparing the Kiani position to the case of Franbar where they produced some rudimentary evidence to the contrary and permission was refused, it seems likely that Kiani would have failed if they had produced very little evidence to the contrary.

Since these six cases, four more derivative claims have been heard. These claims are Seven Holdings [2011] EWHC 1893; Kleanthous [2011] EWHC 2287; Stainer [2010] EWHC 1539; and Cinematic Finance [2010] EWHC 3387. 

Three have been dismissed and one, Stainer, has been allowed subject to various conditions. Cinematic Finance involved a rare instance of a majority shareholder bringing a derivative claim. Demonstrating it is technically incorrect to refer to derivative claims and unfair prejudicial petitions as minority shareholder protection. However, the judge quite rightly demonstrated that a majority shareholder would only be able to bring a derivative claim in very exceptional circumstances and the claim was denied.

The case of Kleanthous was a useful reminder that part 11 does not assert some sort of threshold test to allowing permission. Even if there is a strong, arguable case of breach of duty it does not necessarily mean permission will be allowed to continue. Thus, it is conceivable (although unlikely in this author's opinion) that permission could be allowed where the court in not convinced there is a strong case.

The case of Stainer was referred to by Kleanthous which originally highlighted the fact that there was no threshold test to allowing permission, i.e. if the case is very strong but recovery very small it may be appropriate to continue and vice versa.

In Seven Holdings permission was refused. The court acknowledged that derivative claims under s260(3) could only be pursued for 'a cause of action arising from an act or omission involving negligence, default or breach of duty by a director of the company'. It was held that some claims did not fall within this scope and those that did, no director would consider prosecuting them.

More importantly, Seven Holdings at [12] confirms my point that when considering to allow permission under s263(3)(b) 'whether a director acting in accordance with s172 would attach weight to continuing the claim' that the subsections to s172 should also be included in that consideration.

The judge in Seven Holdings also discussed the importance of the ex parte application stage i.e. establishing that there is a prima facie case without involving the company. He established that it was important that this stage was not ignored or removed. Although, contrary to what I said in my articles, I would now agree that this is the correct approach, although with some slight qualifications as to its standard. The judge at [6] appeared highly critical that this preliminary stage had been bypassed, and that he had to deal with the second stage despite no evidence or presumption that the application supported a prima facie case.

The fact that the stage has been bypassed demonstrates that despite a transparent statutory procedure it is by no means followed rigidly. This perhaps demonstrates the flexibility of the new claim to filter out unnecessary formalities and reduce costs, but in cases such as Seven Holdings where it was quite apparent that there was not even a prima facie case, the process should be followed.

Another objective of the reform was to reduce the cost of derivative claims as they had previously been a costly procedure. The judge in Seven Holdings at [61-3], however, pointed out that this would be a likely consequence of the reform, although we are yet to see a claim last as long as a month as we did pre-2006. He followed on from his criticism that the first stage had not been observed stating that it would have saved a lot of time and money if it had been.  

Thus, it still appears that the courts approach derivative claims with scepticism and reluctance, although Stainer offers hope to shareholders that there may be a departing from former ways.

Careers Seminar

On the 29th November UEA will be hosting an 'Academic Careers Seminar' for Postgraduate Research law students.

With uncertainty as to job prospects the aim of the day is to enhance employability by raising awareness and transparency of the application process for academic positions and what those positions involve.

For example, those wishing to pursue a research career will benefit from the talk about the Research Excellence Framework (REF) and what the requirements are for researchers.

There will be a number of talks from UEA law lecturers to help make the day a success.

Forthcoming publication in the ICCLR

Just a quick Sunday evening blog post.

You may remember I blogged about the court's power to order shareholder meetings a couple a months ago (see here).

Well in some PhD/teaching off time I thought I would write a case comment about the case of Wheeler v Ross.

I submitted it to the International Company and Commercial Law Review and they have agreed to publish it. So, watch this space! I estimate a 2012 release date.

As to my PhD. I have substantively begun learning about statistics to apply quantitative analyses in my research. Some concepts are definitely easier than others. Confidence intervals are proving a bit of an obstacle but I will put it down to being Friday afternoon.

Teaching has begun and is in full swing. I am teaching first and second semester company law seminars this year; contract law seminars in the second semester; and have begun running 3rd year undergraduate pastoral sessions, which students seem to be finding very beneficial.

Now things are up and running again, I will have more time to blog. Mondays are very busy days though with 4 hours of teaching; 2 hours of a methods of social enquiry course; and 1 hour of drop in sessions for students. Fortunately, organising my Excel data is pretty easy to fit in round teaching and classes.  

Fiduciary Law Publications

The Boston University Law Review has recently published a series of articles in its journal on fiduciary law.

These publications are the result of a symposium on 'The Role of Fiduciary Law and Trust in the Twenty-First Century'.

Panel 1 publications focused on the nature of fiduciary law and its relationship to other legal doctrines and categories. This panel includes a publication from Prof. DeMott on 'Causation in the Fiduciary Realm'.

Panel 2 was on interdisciplinary views of fiduciary law and includes an excellent article by Sitkoff on the 'Economic Structure of Fiduciary Law' which summarises some of the economic approaches to fiduciary law.

Panel 3 addressed current issues for fiduciary law although I think a more accurate title would have been continuing trends or problems in fiduciary law. Suprisingly there was no specific article on multiple directorships with analysis focusing on issues such as remuneration, public interest and accountability; all of which have been discussed to a large degree.

Finally, panel 4 looked at private servants and private fiduciaries. Perhaps the most relevant one of these papers looked at CEOs and limits on their terms.

Hopefully some of these papers will continue to provide me with valuable insight in to my analysis of directors' fiduciary duties.

These articles can be found on HeinOnline citation (2011) 91 B. U. L. Rev. 833.

TRIGGER - Municipal Mutual Insurance Limited v Zurich Insurance Company and Adur District Council: What triggers insurers' liability to the insured?

An interesting case is due to be heard in the Supreme Court this year regarding what "triggers" for liability of an insurer to indemnify the insured within any policy period.

It is of particular interest because of the facts and the fact Adur District Council is my home town local council.

The point in question is in regard to the construction of the employers' liability policy, which provided an indemnity if an injury or disease is sustained or contracted during the period of insurance.

Nine appeals are being heard by the Supreme Court regarding six separate actions. They arise from the deaths of employees who contracted mesothelioma who inhaled asbestos fibres during employment. The employee's personal representatives or the employers liable to them are seeking to recover from the employer's insurers under policies of the employers' liability insurance covering periods from the late 1940s to 1998.

The principle issue is what triggers liability for an insurer to indemnify the insured: in particular whether it is tortious exposure of a victim to asbestos dust or the onset of mesothelioma.

The policy logically was in force when the asbestos dust was inhaled but not 40 years later when the disease manifested itself.

The Court of Appeal decision can be found under the citation [2010] EWCA Civ 1096 containing 352 paragraphs and 113 pages on the PDF download from Westlaw.

The High Court had originally disagreed with the insurers that the disease had only be contracted when it manifested itself as a tumour and asserted that it had done so when the employees inhaled the dust.

Rix LJ and Stanley Burton LJ allowed the appeal in part. 

Rix LJ stated that "sustaining" an injury prima facie looked to the injury and not the cause. However, accordingly the phrase "disease contracted" prima facie referred to the disease's causal origins. Also, the commercial purpose of the insurance pulled towards the causal origins of the disease and the Court of Appeal stated that the commercial purpose should prevail.

In obiter Rix LJ also stated that a decision in the case of Bolton [2006] EWCA Civ 50 was doubtful, but was bound by precedent, which concluded that mesothelioma was not an "injury" until its onset. He continued that it was the risk of mesothelioma created by exposure which was the damage.

Stanley Burton LJ believed there was little gained in discovering the commercial purpose of the policy and one must look to the terms of the policy. He opined that the disease was caused in any year there was substantial exposure to asbestos.

Smith LJ dissented in part but believed the judge in the high court had been right to find there was no difference between a policy which used "sustained" or "causation" wording. Policies with "sustained" wording had to cover employers liable in respect of tortious exposure of an employee during the policy period.

The Supreme Court hearing is due in December.

A catalyst for change: Causes for non-executive majority on boards

From a plethora of academic articles on non-executives one could easily draw some general observations:

1) Non-executives emerged due to the need for there to be a body of supervision in the company.

2) Their role and responsibilities have increased largely in response to company malpractice and recessions where we see numerous reports aimed at improving corporate governance.

3) As well as supervising, non-executives are also recognised for providing a strategic function

Research on non-executives has largely been dominated by agency theory as non-executives serve to control management. As Sir David Walker demonstrated, the argument goes that even though two thirds of equity capital is now in the hands of the institutions that should have enough clout to look after themselves; they are in fact frequently reluctant for fear of adverse publicity. Thus responsibility must fall on the non-executives who have the knowledge and power to act.

Thus, when corporate misfeasance came to light it is generally assumed that non-executives could not exercise enough control in the corporate governance framework. As a result Governance Codes are revised and reports produced to place more emphasis on the monitoring of the management.

It appears then that it is generally assumed the cause of boards being non-executives in the majority has been a response to corporate misfeasance based on agency theory.

However, there appears to be strong evidence out there that suggests revisions of Codes and Reports do little to alter the nature of the non-executive director. One would argue the primary reason behind their prominence on company boards today was a result of a number of factors such as technological advancements and deregulation that created a wider need for non-executives beyond that of monitoring, and caused companies to view non-executives as of use rather than with scepticism. Thus, the strategic function served as a catalyst for non-executives to emerge on boards in the majority.

It was in 1945 that the Cohen Report was published. It identified that there was not an active body of supervision within the company and suggested different methods of supervision. Today we can see that the body of supervision is the non-executives directors.

However, by 1972 a study by the British Institute of Management revealed that non-executives were rare and were mainly appointed because of connections. The position was viewed as a "job for the boys" and they were effectively "yes men" on decisions already decided. Fast-forward to 1986 and only 6% of top companies lacked non-executives and on 20% of those boards, non-executives were in the majority.

During this time the UK had joined the European Union in 1973 and during this period there were significant developments in the reduction of trade barriers. There were also developments in technology and the ultra vires rule (that companies could not act beyond what they set out to do, as it were) had continued its decline in significance evidenced in some part by the Companies Act 1985.

All these events allowed businesses to expand in to different markets more freely as well as in to different sectors. The requirement for knowledgeable people to facilitate this expansion was apparent. ICI was noted for appointing a prominent Japanese business man to its board as non-executive for the primary purpose of helping them expand in one of its most important markets Japan. Without the knowledge and experience of these people, survival would not have been likely.

So whilst the need for monitoring was greeted with scepticism, non-executives were welcomed with open arms when it came to facilitating expansion. Companies are unlikely to do something, such as appoint non-executives, if they have no legal requirement or benefit in doing so.

It is not to say that the monitoring role has not played a small part in the increase in their numbers. Legal rules and Listing Rules have changed to urge companies to appoint non-executives. The standard of their conduct has also altered culminating in s174 of the Companies Act 2006. However, the change in legal standard came around in 1986 and again was probably a result of their increased responsibility in strategic matters rather than a response to monitoring, although it may have appeared that way.  

Thus, it must cast serious doubt over agency conceptions that non-executives can enhance performance through monitoring of management. Any enhanced performance may be down to strategic advancement by appointing the right non-executives and this moves us closer to views established by Resource Dependence Theory. One suspects most appointments are made with the view of enhancing the company through strategic advice. Decisions predominately based on their ability to monitor are probably rare.

However, as the law recognised non-executives increased involvement, they must now be active monitors rather than passive "yes men" and the need to monitor is of much more importance to non-executives due to fear of liability.  

Hydrodan (Corby) Ltd, Re v. Hydrodam (Corby) Ltd, Re and functions of de facto directors

Possibly one of the greatest mysteries of UK company law... or may be not I am just trying to find out the answer to whether this case should be referred to as Hydrodan or Hydrodam.

It seems in the majority of circumstances the [1994] 2 BCLC 180 citation is cited as Hydrodam; whereas the [1994] BCC 161 citation is cited as Hydrodan.

So what is the answer? Here are a number of sources I have looked at to discover the answer.

Westlaw
Westlaw cites both in fact. It says Hydrodan... also known as Hydrodam. Pretty useless in helping discover the answer. Clicking on the link to the BCC citation it is titled as Hydrodan however.

So I regard that as 1 for Hydrodan (1-0)

Recent cases
Holland [2010] UKSC 51. A Supreme Court decision refers to it as Hydrodam. The decision in Mumtaz, Re [2011] EWCA Civ 610, a Court of Appeal decision, also refers to it as Hydrodam

So 1 to Hydrodam (1-1)

Leading company law text books
The leading company law textbook Gower and Davies 8th edn refers to it as Hydrodan as which the litigation commenced but provides sub. nom. as Hydrodam indicating Hydrodan was incorrect at commencement of litigation or something was erroneous. Thus litigation continued under Hydrodam but started as Hydrodan.

Newer Company Law books such as Hannigan merely refer to it as Hydrodam

I would say 1 a piece for this source (2-2)

The Times
See here for report. On its report of a recent decision Gemma Ltd, Re [2008] BCC 812 they also refer to it as Hydrodam.

1 for Hydrodam (2-3)

Wikipedia
Against by better judgment I also looked at Wikipedia. The "informed author" approves with Hydrodam and says it is often cited incorrectly as Hydrodan.

Although I have looked at Wikipedia I think support here would be more like an own goal rather than support for one or the other. So I award no points to either side.

On this assessment I would conclude that Hydrodam is to be considered the best way to cite. It appears to be in the majority of cases - two to three - to be cited as Hydrodam. The main textbook also distinguishes that litigation continued under Hydrodam although it was originally Hydrodan. Thus, unlike Wikipedia, I would not class it as incorrect to call it Hydrodan. To be on the safe side I will probably cite both - so anyone reading this that has come up against the same trivial point you could just cite the following:

Hydrodan (Corby) Ltd, Re; sub. nom. Hydrodam (Corby) Ltd, Re [1994] BCC 161

The case itself
For those wondering, the case concerned de facto directors. Millet J distinguished between shadow directors and de facto directors (however it is argued that difference has now potentially disappeared - see Holland [2010] UKSC 51 at [91]) and was one of the initial cases to recognise that an individual could be recognised as a director for certain statutory provisions, even though never appointed. Previously the doctrine of de facto directors only encompassed those appointed but there was some defect (see Canadian Land Reclaiming and Colonizing Co, Re (1880) LR 14 Ch D 660) in that appointment;  and those who had ceased to be directors (see New Par Consols Ltd, Re [1898] 1 QB 573). Since certain provisions in the Companies Act were only applicable to directors, the courts extended the concept of de facto directors to those not appointed at all to ensure people could not obtain the position of director without incurring responsibility for any misfeasance or breach of duty. What is necessary to show is that they assumed the status and functions of a director. Although what factors are to be considered in deciding whether an individual has assumed the status and functions, it is opined that one must perform the functions to assume the status. Simply holding yourself out as a director, thus assuming the status, is a test that has been rejected by the courts in determining de facto directorship of those never appointed (see for example Tjolle [1998] 2 BCC 282).

These functions can be varied and may include behaviour as well as performing tasks. Whether these functions are to be considered as those only performed by directors is open to debate. Jacobs J in the case of Tjolle [1998] 2 BCC 282 stated that there would be no justification in making someone liable over actions which they had no control over. A similar position was taken in Lo-Line, Re [1988] Ch 477 where Browne-Wilkinson VC held that based on the wording of section 300 of the Companies Act 1985 that only conduct "as director" could be considered when deciding to disqualify an individual.

The view that is only the conduct as director that should be considered is supported by academic articles by De Lacy 'The concept of a company director' (2006) JBL 267; and Watson 'The significance of the powers of boards of directors in UK company law' (2011) JBL 597. De Lacy states that poor conduct in relation to the management of the company is different from poor conduct as director. Watson also argues that if directors' and managers' functions were the same then the law would not need to distinguish between the two.

Thus in determining de facto directorship it is argued that functions only attributed to a director should be considered.

However, modern developments have looked to whether the individual had a "real influence over the corporate governance structure" (see for example Mea Corpn Ltd, Re [2006] EWHC 1846 (Ch)). Although Lord Collins in Holland at [91] believed this was just as difficult to determine as what can only be attributed to a director, it appears far more inclusive. It would seem to encompass not only functions attributable to directors, but functions directors normally perform as well, i.e. external business with third parties.

This second approach would appear to be more in keeping with the idea of preventing people assuming the position of directorship without the responsibility. However, it would still require them to perform some functions that are only attributable to directors. One cannot ignore Browne-Wilkinson VC and Jacob J who remind us that you cannot find someone responsible for actions they had no control over.

Holland [2010] UKSC 51: Extracting a rationale for determining de facto directors

Last year the Supreme Court passed down its judgment on a matter regarding de facto directors.

De facto directors are those who were either appointed defectively or were not appointed at all. Holland deals with this latter type of de facto director in trying to address when one can be classed as a de facto director.

To give a simplified version of the facts Mr Holland was part of a group of companies. He was a sole de jure director (formally appointed) of one of the companies. That company itself was a sole de jure director (corporate director) of a composite company - something which is now unlawful under s155 Companies Act 2006 which requires one human director, but events here happened pre-2006 and sole corporate directors were perfectly lawful since the decision in Bulawayo Market and Office Co Ltd [1907] 2 Ch 458.

Her Majesty's Revenue and Custom brought a claim against Mr Holland trying to make him liable for breach of fiduciary duty under s212 of the Insolvency Act. They claimed he was in breach of duty and misfeasance for causing the unlawful payment of dividends to shareholders when the composite company did not have sufficient reserves to pay its creditors, which is unlawful under what is now s830 CA 2006. Since s212 only applies to directors, and Mr Holland was only a de jure director of the corporate director, HMRC tried to claim Mr Holland was ultimately a de facto director of the composite company.

It was held that Mr Holland was not a de facto director as it was demonstrated that he was merely discharging his duties as de jure director of the corporate director. The judgment focused primarily on how one can determine a de facto director. Lord Collins provided a precedent based line of reasoning showing that one has to assume the status and functions of a director. This was supported by Lord Hope.

Watts however wrote that Lord Collins' precedent line of reasoning fails to furnish a rationale. He states that there can be aberrations in precedent-based argument, as counsel or judge will not grasp the principles. However, it is submitted, with respect, that Watts has failed to grasp the thrust of the case and Lord Collins is, at points, at pains to stress his rationale, which in fact had little to do with how you determine who is a de facto director.

To elaborate further, modern case law on de facto directors has developed to include not only those with a defective appointment but also those never appointed at all (see Lo-Line Electric Motors Ltd, Re [1988] Ch 477). Although people have attempted to devise specific tests, determining who a de facto director is has been decided on a factual basis. A judge must ask themselves whether an individual has assumed the status and functions of a director. This may include looking at whether one has held themselves out as a director; whether they are on equal footing with the other directors; or if they have "real influence" in the corporate governance structure. Thus for Mr Holland to be a de facto director of the composite company he would have had to assume the status and functions of a director in that composite company. However, it had already been accepted that this was not the contentious issue in the case. It was clear that Mr Holland had merely been discharging his duties as a de jure director of the corporate director.

The question for Lord Collins (at [96]) then was not whether Mr Holland had assumed the status and functions of a de facto director but whether an 'individual director who made all the significant decisions of a corporate director is to be regarded as being taken as if they were directors of the company of which it is the corporate director'. To put it another way could the judicial extension of de facto directors to include those not appointed at all encompass an individual director of a corporate director? He answered in the negative.

Lord Collins provided three reasons (rationale) for why Mr Holland could not be a de facto director:
1) The rule in Foss v Harbottle - A company is its own separate legal personality and distinct from its directors

2) The company structure was perfectly legitimate - Since the decision in Bulawayo it has been possible for there to be individual corporate directors.

3) Legislative interference - in the form of s155. Lord Collins did not believe it was the place of the court to interfere. s155 was intended to insure that there could be at least one natural person for which responsibility could be attributed to. If Parliament wished to legislate there could be no corporate directors, or all directors be natural persons, it would have done so.

Thus, a factual assessment will still take place when trying to determine if someone is a de facto director. The case of Holland was merely an "incidental issue" as described by Lady Justice Arden in Mumtaz, Re [2011] EWCA Civ 610, which supported the 2008 decision in Gemma Ltd, Re [2008] BCC 812 both of which proceeded on a factual assessment. The notion suggested by Watts that Lord Collins distinguished between a factual assessment and whether one assumes the status and functions of a director holds no weight. They are one in the same.

To conclude Lord Collins did not need to provide a rationale on what was meant by assuming the status and functions as it was clear Mr Holland had not done so. Lord Collins was merely demonstrating that that is what is necessary for someone to be a de facto director and the concept could extend to those not appointed at all. However, extending de facto directors to include those serving as sole directors of individual corporate directors would be beyond the powers of the court and the law.

Watts' case comment can be found under the following citation: P Watts, 'De facto directors' (2011) 127 LQR 162

Contributor Spotlight on Lexis Nexis Blog Community

I am pleased to announce that my blog posts have resulted in me being added to the Lexis Nexis International & Foreign Law Blog Community contributor spotlight.

I hope to keep up with regular blog posts to keep my readership happy!

For a quick update I am currently doing the following:

1) Writing my chapter 3 - This is focusing on: Who is a director; What are director functions; When do fiduciary duties arise. This will hopefully result in providing insight as to when non-executives owe a conflict of interest duty

2) Preparing for the new year of teaching - This year I am involved in Company Law and Contract Law. There is also work in progress for preparing new classes for pastoral support for students which I am involved in.

3) Organising a careers seminar. In an attempt to improve employability of research students and transparency of what academic careers offer and involve.

Bartz firing and "group think": An apple is an apple no matter what you call it

As many of you may have read about this morning, Carol Bartz, CEO of Yahoo! Inc, was fired. A single instance of a female CEO being fired: But what can this potentially tell us about the phenomenon of "group-think"?

Group-think is a simple idea that those working closely together with similar characteristics from the same background will often fail to recognise external threats. Something that, in a corporate setting, is receiving a lot of attention where boardrooms are dominated by middle-aged white males. This has been touted as a possible failing of corporate governance that was a factor that lead to the events of 2008.

Chester Barnard, The Functions of the Executive, wrote in 1964, from his reprinted lectures from 1938, that:

'It must not be understood that the desired degree of compatibility is always the same or is the maximum possible. On the contrary it seems to me to be often the case that excessive compatibility or harmony is deleterious, resulting in "single track minds" and excessively crystallized attitudes and in the destruction of personal responsibility'

So, does having female or diverse representation on your board necessarily mean enhanced firm performance or help avoid catastrophe? From a purely subjective view I would have to say no. Distant investors may originally see such representation as an indicator of good corporate governance, but eventually people will realise a director is a director, just like a politician is a politician, no matter who they are. By focusing on corporate governance reforms as a way of reducing economic instability is purely a scapegoat from true causes: Lack of control and unfavourable directors' duties.

1) Lack of control - by this I mean from the law or parliament. Not from non-executives. Group-think solutions/hyperbole seem to suggest that if there were more diverse boards 2008 may never have happened. The truth is while interest rates and low cost borrowing could be driven to unstable levels, lenders would continue to try and undercut one another until that unstable level was reached. This leads to the second point of directors' duties

2) By this I mean mainly s172 - 'the duty to promote the success of the company'. This requires focus on the long term but also requires that you consider the interests of the shareholders/company as a whole effectively. Such was the economic climate any director who noticed problems before they happened in the economy/sector may be stuck in a catch 22 position. If they, as lenders, do not reduce lending prices they risk of losing customers etc and the total shareholder return/earnings per share reduces, which in turn reduces the director's bonus and even risk not being re-elected.

If they do reduce prices then the market becomes unstable and again bonuses are lost and directors ousted; or even worse being accused of not acting in accordance with s172 by focusing on the short term.

Further to s172, groupthink ignores that s172 can have an overriding element to that of personal views. Even if a board is diverse it does not necessarily mean a different course of action will be taken. A director has a duty to promote the success of the company, and this may conflict with their own views.

By having a diverse board wouldn't have been able to stop what was happening because if the market allows it, people will exploit it. Being male, female, young, old etc does not make you good at your job: Being good at your job makes you good at it.

Trying to predict where the next external threat to a sector or the economy as a whole will come from requires more than just robust corporate governance. Legislation at a national or even EU/international level is needed to stem "over-competitive" or harmful behaviour. However, one is aware of the arguments for and against legislative interference in the market.

*For those wondering I see the next collapse coming from social networking* - How many of us actually click adverts on Facebook? Not to mention the continuing presence of privacy...

As a disclaimer I fully support equality of access for board positions but assuming that the external threats can simply be overcome by having diverse people on the board is ignoring the bigger picture. It may be anecdotal but did Bartz improve Yahoo! by being female? No.

Anyway, that is my two pence worth...

EC publishes Green Paper on Modernising the Professional Qualifications Directives

The EC have published a Green Paper on 'Modernising the Professional Qualifications Directive' (COM) 2011. This Green Paper seeks to modernise professional qualifications within the EU where the service sector accounts for 70% of GDP whereas intra-EU trade in services only accounts for 25% of overall trade in the EU.

According to a recent report there will be a need for 16 million more high-skilled professionals by 2020, which under current trends will leave a severe shortage, in particular in the health sector. 

The view of the Green Paper is to enable citizens to realise their right to work anywhere in the EU and to have their professional qualifications recognised anywhere in the EU. The implications of regulatory competition within the EU may play a part in the formation of clearer and simpler rules. If different EU states have different requirements to qualify then such asymmetries must be addressed by creating a uniform approach.