European Commission send Czech Republic and Latvia request to withdraw rules infringing freedom of establishment

This is not entirely about company law but interesting none the less to note one of the exceptions available to Member States in regards to freedom of establishment rules which prohibit it.

Under the Treaty of the Functioning of the European Union (TFEU) Chapter 2 Article 49 provides for Freedom of Establishment in the European Union (EU). It prohibits restrictions on nationals of the EU setting up companies (see Art 54), branches, agencies and subsidiaries in other Member States. It includes the right to take up and pursue activities as a self-employed person.

Article 51 does allow States to disregard this section though, 'so far as an given Member State is concerned, to activities which in that State are connected, even occasionally, with the exercise of official authority'.

The Czech Republic and Latvia had certain restrictions relating to notaries and argued that they had judicial powers bringing them within this exception. The EC maintain that despite this, their notaries do not have the power to rule on disputes. The Commission took the view that such participation in public authority did not justify their nationality requirement. See the note from the EU about this action as well as their main decisions from November here.  

Forthcoming publication

In amongst life as a 1st year academic I have managed to find a slither of time for a case comment on the Court of Appeal decision in Chandler v Cape plc [2012] EWCA Civ 525.

It is due out in January and will be published by the International Company and Commercial Law Review. The thurst of the article (spoiler alert) is to highlight that whilst the decision may be interesting and hold practical significance, it does not alter the legal landscape as it was based on a pre-existing concept of assumption of responsibility.

Updates and Developments in Regulatory Competition

Having not blogged in a few weeks I thought I should post something.

Teaching has started down at Hertfordshire and as expected every minute is being filled with meetings and class preparation. I am currently teaching on the LL.B in Company, Commercial and International Commercial alongside the LL.M in Company. For Company Law I have been made module organiser, albeit after the module guide went out to students so including areas such as regulatory competition are very much on an ad hoc basis at the moment.

In regards to regulatory competition a new case has emerged from the ECJ (Vale Costruzioni) over the last couple of months that effectively allowed a transfer of seat without restrictions using national transformation laws as a cross-border conversion. See here for overview before the case was decided. The decision can be seen here. Although I do not know too much of the exact details it seems the court has allowed an Italian company to use the Hungarian Transformation Act to transform itself in to a Hungarian company. It is quite a surprise that the ECJ reached this conclusion despite my own recent observations that the ECJ would be unlikely to depart easily from its stance on restricting movement due to shareholder and creditor protection and its own ability to establish rules on cross border transfers. However, having spoken recently to a professor and judge in Germany recently, Prof Ries, who is visiting currently at the University of Hertfordshire, he informs me that he has not heard of any instances of companies taking advantage of this new ruling. By any means it is certainly an interesting development.

As to the thesis.... The thesis is almost complete! Just an introduction and conclusion to brush up then the full draft has to be dealt with by my supervisors. With any luck it will all be done and dusted by February next year.

Post-Crisis Trajectories of Corporate Governance: Dealing with the present and shaping the future

This Friday I shall be attending a conference at Leeds University on European Corporate Governance. Details of the events including speakers and abstracts can be found here. I shall provide a summary of the event upon my return.

Some useful information on derivative claims

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
Cinematic Finance	Ltd	N/A	Doubtful solvency	0/100	N/A	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	N/A
Hughes	Ltd	Likely	To be dissolved	50/50	£100,000+	Yes	N/A
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	N/A
Kiani	Ltd	Yes	Solvent	50/50	£296,000	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	N/A
Phillips	Ltd	N/A	Solvent	50/50	N/A	Yes	N/A
Seven Holdings	Ltd	N/A	Effectively no assets	50/50	£1,693,212.32	No	1 day
Stainer	Ltd	Yes	Solvent	87/0.08	£7,000,000	Yes	N/A
Stimpson	Ltd by guarantee	N/A	No assets	Majority/minority	£5,300,000	Yes	N/A

Apologies that the table extends over the end. Formatting problems are preventing editing. The final two columns "concerned conflict of interest" are all yes except for Seven Holdings. Only 2 of the cases provided details on how long the permission hearing lasted.

As derivative claims continue to pass through staying on top of them is quite useful so as to determine how successful the procedure will be. How successful derivative claims are likely to be are demonstrated by two quotes. One from Siems and one from Reisberg: Siems has noted that the 'use of the derivative claim will depend on its relationship to the unfair prejudice remedy'.[1] Reisberg has also said that success of the statutory claim will not be judged by quantity 'but by whether the rules governing the circumstance in which such an action may be brought are made more comprehensible and accessible so that, in exceptional circumstances, the commencement of a derivative claim will be regarded as a remedy worth pursing'.[2]

So far the relationship with the unfair prejudice remedy seems to be complementary rather than preferable. Claims are successful despite the availability of another remedy. As well the rules seem accessible with no lengthy trials or issues of wrongdoer control or what conduct can be ratified taking up too much of the court's time. It certainly appears that the concern that what conduct can be ratified will maintain the need to establish wrongdoer control are unsubstantiated. There has been some slight confusion with the procedure though as some courts have tended to ignore the need to establish a prima facie case. Thus in some instances courts will rigorously follow procedure from the statute. In others they will simply only address points they deem as relevant. The latter may be cost and time saving but may reduce the certainty of procedure.

In total five of the thirteen claims have successfully survived the permission stage and have been granted permission to commence a derivative claim. All 13 have survived the ex parte application (prima facie case)

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[1] M Siems, “Private Enforcement of Directors' Duties: Derivative Actions as a Global Phenomenon” UEA LAW WPS 2010-MS-1 at <http://ssrn.com/abstract=1699353>  accessed January 24, 2011

[2] A Reisberg, ‘Shadows of the Past and Back to the Future: Part 11 of the UK Companies Act (in)action’

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* or rough estimate where figure not available

Fiduciaries and competing principals

At the end of July the Court of Appeal discussed in its judgment in Rossetti v Diamond Sofa Company Ltd [2012] EWCA Civ 1021 the capacity to which an agent could act for a competitor of their principal. The question was whether the fiduciary had breached their duty of loyalty to their principal by acting for a competitor.

The fiduciary in this case was an agent. The type of fiduciary and the role they undertake are always important facts to establish. The reason being as established by Sedley LJ: 'The fiduciary duty of a director to his company is uniform and universal. What vary infinitely are the elements of fact and degree which determine whether the duty has been breached'. Plus Group Ltd v Pyke [2002] EWCA Civ 370

It is generally accepted that one is a fiduciary because they owe a duty of loyalty rather than the other way round. Thus circumstances must demonstrate that loyalty was reasonably expected. When it is to be reasonably expected is open to competing theories but the most compelling argument is when one has been granted limited access to the affairs and property of another. Thus for example trustees, company directors and agents are obvious examples of individuals likely to owe the fiduciary duty. Directors are granted control of the company's property and affairs to advance the company's interests and not their own personal interests. However, with control of another's affairs and assets comes with it the problem of self-regard and opportunism to prefer one's own interests over their principal's. Thus the fiduciary duty of loyalty is owed to protect the principal for the director/trustee/agent acting opportunistically.

In Rossetti there was no question as to whether the duty was owed as they were clearly acting in a fiduciary capacity as an agent. However, the question was whether the duty had been breached; or was the duty of loyalty owed in the particular circumstance. For fiduciaries the duty of loyalty cannot be open ended as it would 'prevent a [fiduciary] from utilizing his spare time ... and impose upon a man, in relation to the rest of the week an obligation which would unreasonably tie his hands'. Hivac Limited v Park Royal Scientific Instruments Ltd [1946] Ch 169 . Therefore the duty of loyalty is only owed on matters for which they are retained. As Lord Upjohn described: 'It is perfectly clear that a solicitor can if he so desires act against his clients in any matter in which he has not been retained by them'. Boardman v Phipps [1967] 2 AC 46

Therefore scope can be a particularly tricky issue in identifying when loyalty is owed. For fiduciary relationships such as trustees, solicitors, estate agents the issue may be easier. These roles usually involve specific identifiable property that they have undertake to advance/protect/sell. Thus in the infamous case of Keech v Sandford (1726) 25 ER 223, the trustee was to protect the lease for an infant beneficiary. When he took the lease personally he was in breach of his duty of loyalty as his personal interests conflicted with his duty. Yet, his duty would not have prevented him from taking on personally a separate lease, even if the infant beneficiary was interested in it, since the trustee was only retained to hold on trust that specific lease.

Now to the facts of Rossetti. Diamond were a company based in Thialand who appointed SML as agents to advance their UK business. The agreement eventually came to an end and Diamond appointed another company, RML, to act for them. RML had in fact been set up by the people behind SML to take on the clients of SML. However, the relationship had begun to deteriorate. Diamond eventually terminated the agreement because it was discovered that RML had been representing two direct competitors.

Lord Neuberger delivered the judgment which Rimer and Moses LLJ agreed with. As a general rule he found that it would be a breach of fiduciary duty to act for competing principals but identified two situations where a fiduciary may act for a competing principal: (1) the principals agree to them so acting; and (2) where the principal appreciated it was the fiduciaries business to act for multiple principals.

The former is certainly true, the latter seems inaccurate based on the House of Lords decision in Boardman v Phipps. Here the beneficiaries to a trust were fully aware, and even encouraged the purchase of shares in a company by the trustees in which the beneficiaries already held shares. Yet the House of Lords decided in a 3v2 majority that there was a breach. The fact that a principal may appreciate them acting for multiple principals does not mean they should tolerate them acting for a competing principal. If the conflict has not been approved by the principal(s) the only question that needs to be addressed is whether there is real sensible possibility of a conflict. If Lord Neuberger is correct then it is conceivable that a non-executive director could act for numerous principals, even competing ones, and not incur liability. This would seem unlikely based on the Court of Appeal's decision in Pyke. Sedley LJ, again, said, what if a director used his boardroom vote/influence to assist a competitor when the 'competitor was the director himself or another company of which he was also a director'. Strict fiduciary liability cannot be watered down on the fact that the principal knew it was the fiduciaries business to act for multiple principals. Such leniency would easily allow the fiduciary to be negligent or opportunistic if they deem it preferable to prefer one principal over another. Acting for multiple principals though is not the offending act. As Lord Upjohn stated, acting against your principal on matters for which you have not been retained is not objectionable. It is objectionable, however, to compete against your principal.

Yet, Lord Neuberger did not find either of these exceptions in this case.  He found that Diamond had been told by SML there would be no clash of products with other competitors before it was discovered they were acting for two other competing businesses. This supported the conclusion that Diamond would not have expected SML, and subsequently RML, to act for competitors.

The Court of Appeal's decision fails to address a couple of points. One is what is mentioned above and determining the scope of fiduciary liability for different in different relationships. Second is discussing what is meant by competing. These two questions have serious consequences for directors ever since an earlier decision from Rimer J in Re Allied Business & Financial Consultants [2009] EWCA Civ 751 where he described directors as general fiduciaries with unlimited capacity meaning their loyalty was not circumscribed by the contract since a company's constitution is open to any business ever since the removal of the ultra vires rule, if not before. For non-executive directors it would seem excessively harsh to describe them as general fiduciaries when it is, as Lord Neuberger suggests, general place for such a fiduciary to act for multiple principals. Even executive directors commonly act for one other principal. Therefore determining the scope of fiduciary liability and what is meant by competing in such cases must be addressed in questions concerning competing principals. Answers to these questions are discussed in more detail in my thesis.

New affiliation!

I have recently begun working as a full time lecturer in law (research and teaching) at the University of Hertfordshire. Hopefully once I am settled blog posts will be a bit more frequent.

Significant agency problems and multiple directorships

Part of my analysis on multiple directorships considers corporate governance theories such as agency theory and applies this against the issue of multiple directorships.

Agency theory in a nutshell is where somebody parts with control over their assets to the control of another due to, inter alia, an inability or unwillingness to deal with them personally. Inherent in such a relationship is the ability of the person in control to use those assets and the access to them to serve their own self-interest. In a corporate context the owner then must incur agency costs to align the interest of those in control with his own.

This is a premise for "good corporate governance" and what are the best ways, effectively, to minimise agency costs. Agency theory has developed a number of solutions to curtailing self-interest through a number of governance factors (alongside any existing legal deterrents to self-interest such as fiduciary duties). The theory identifies factors such as splitting the role of CEO and chair to two different individuals so no one individual controls the board, holding regular board meetings (as well as directors not missing too many), regular committee meetings such as the remuneration committee, executives not holding too many external appointments, a high level of independent directors to executives, high equity ownership from executives, high percentage of pay for performance element in compensation package, and a good sized board all as features of good governance.

These are just a few of potentially numerous agency problems in a firm but gives a good account of what is considered good governance according to the UK Corporate Governance Code.

The amount of agency problems present in any given firm may vary. Executives may be more able than others to impose higher agency costs. Agency theory would predict this is due to insufficient monitoring from the independent non-executives. A reason why non-executives are not monitoring effectively may be from their own external appointments that they have viewed them as a perquisite consumption due to the increasing value of remuneration available in such positions. Therefore one may predict that where a firm has more agency problems then the firm will also have a higher level of non-executives with more external appointments.

To test for this, indicator variables were created to show whether a firm had an agency problem from those just mentioned above (9 in total) and were collated. This figure was put in to a multiple regression model with other predictors (non-executive remuneration and non-executive equity) to predict the outcome of non-executive external appointments.

The first regression model did not demonstrate agency problems had a significant relationship with multiple directorships. However, to further this analysis the regression model was adapted to include each individual agency problem to identify whether there were any significant individual agency problems. Therefore the regression model included non-exec remuneration and equity as well as the 9 individual agency problems.

These results demonstrated that three agency problems (CEO-chair duality; board meetings missed; executive equity ownership) had a significant positive relationship with non-executive external appointments. Thus where a firm has these significant agency problems increasing then the non-executives will hold more appointments. There was also one significant negative relationship with the ratio of independent directors to executives. Thus where the ratio of independent directors to executives is greater the non-executives will hold fewer appointments.

Using these significant agency problems the final stage was to create dummy variables for each firm to indicate whether a firm had either 0, 1, 2, 3 or 4 of these agency problems present in the firm. These dummy variables were then placed in to the regression model again with non-executive remuneration and equity to see if there were any significant results. The dummy variable for 0 and 4 factors were omitted since they were constant.

The results show that where the firm has more of these significant agency problems present the significance of the relationship to predicting non-executive multiple directorships also increases. As a result there is evidence available that agency problems increase the amount of external appointments for non-executives and executives are thus able to place more agency costs on the firm.

Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.
		B	Std. Error	Beta
1	(Constant)	13.048	2.095		6.227	.000
	Non-Exec Remuneration per NED	.000	.000	.223	2.850	.005
	Equity held per Non-Exec (percent)	-16.154	4.186	-.297	-3.859	.000
	One significant agency problem	1.912	1.576	.119	1.213	.227
	Two significant agency problems	2.453	1.808	.128	1.357	.177
	Three significant agency problems	7.050	2.592	.229	2.719	.007