Corin Ltd, Re 5th March 2012 (unreported)

A while ago I wrote about de facto directors and the test for determining who one might be. See here and here.

As a quick reminder, de jure directors are those who have been officially appointed, whereas de facto directors are those who have either: (1) been appointed with defect (Canadian Land Reclaiming and Colonizing Co, Re (1880) LR 14 Ch D 660); (2) have since retired but continued to serve (New Par Consols Ltd, Re [1898] 1 QB 573); (3) or have not been appointed at all (Lo-Line Electric Motors Ltd, Re [1988] Ch 477). A further extension of these categories of de facto directors was recently rejected by the Supreme Court in Holland [2010] UKSC 51. The rejected the notion that a natural director of a corporate director of a composite company could be a de facto director of the latter.

As I highlighted previously, the Supreme Court decision was not determining whether Holland was a de facto director based on his status and functions but deciding on whether the categories of de facto directors could be extended to such an instance.

P Watts in his case comment in the (2011) 127 Law Quarterly Review 162 makes this mistake as to what the case was saying and tries to argue that a fact based test of who a director is, is flawed. He states one must look to whether one has assumed the status and functions of a director. It was respectively submitted that these two are actually one in the same. Arden LJ, in Mumtaz, Re [2011] EWCA Civ 610 confirms this belief when she called Holland an 'incidental issue' and confirmed the case of Gemma Ltd, Re [2008] BCC 812 which used a fact based test in determining whether somebody was a de facto director.

This month the decision in Corin Ltd, Re has confirmed this approach of determining whether someone is a de facto director. The case analysis available on Westlaw noted that there was no one decisive test and all relevant circumstances had to be taken in to account, including whether someone had become part of the corporate governing structure and assumed a role which imposed fiduciary obligations on someone.

This latter point is interesting as it begs the question of whether the courts need to look closer as to whether a fiduciary relationship has been established before imposing director liability.

Confirming that assuming the status and functions and a fact based test are effectively synonyms, is where the court established that the important question was whether someone had assumed the status and functions of a company director so as to make himself liable under the Companies Act as if he were a de jure director.

Consultation: European Company Law - What Way Forward?

I was asked to comment on the recent Consultation, that I have been discussing in my previous two blog posts, by Lexis.

My comments have been published on LexisLibrary for those of you with access. The citation is Lexis News Bites 7th March 2012 54.

The Structure of European Corporate Law

Following on from my previous blog post I thought to look a bit further in to what is the structure of European Corporate Law (ECL).

Structure and purpose
The structure and purpose are not something that can be easily ascertained. Purpose can certainly be a thorny issue at European and National level. Take for example the intense debate that surround section 172 of the UK's Companies Act 2006, as to what it means to act in the "best interests" of the company.

Looking at the Consultation released last month, the EU seems to highlight the areas it is most concerned with regarding its "purpose" in regulating company law. From Q5 these areas are protection of employees, creditors and shareholders, the regulatory competition framework, facilitating creation of companies, and improving the environment companies operate in i.e. reducing transaction costs making business efficient.

Structure is also another complicated area. One cannot simply look to a single codified piece of legislative material. A combination of European Court of Justice (ECJ) decisions, which have sought to lay down rules relating to the establishment and movement of Companies under the EC Treaty Articles 49 and 54 ; and a variety of innovative legislative materials in areas including: takeovers, capital maintenance, securities, cross-border mergers, and legal forms all form part of the structure.

Problems with the structure
The difficulties with this structure is, as the Consultation identifies, not "user-friendly". The legislation ranges from maximum harmonisation to "soft-law" recommendations. Further harmonisation has become increasingly difficult and a number of aspects of ECL have opt-out provisions or allow for an a la carte approach. This is perhaps most noticeable in the Takeover Directive. As such, it can often be difficult to ascertain what the law of any particular State will be without looking at its national laws. There are also practical problems with such an approach in that the judicial system may have different attitudes to aspects of ECL. Thus, even where two States appear to have implemented similar regimes cultural attitudes may cause unforeseen differences. This can create significant difficulties for smaller companies looking to expand or international investors.

Reform
Although other areas are mentioned the two areas that seem to receive significant attention are assisting small and medium sized enterprises (SMEs) and regulatory competition.

Regulatory competition
After a series of ECJ decisions the law relating to the mobility of companies in the EU has remained unaltered for a few years since the decision in Cartesio C-210/06. The position currently is that companies have freedom of establishment anywhere in the EU. States are to treat companies establishing in their State equally unless there are genuine reasons, such as public policy, not to.

The importance of this is that where a company establishes itself, the laws of that State will govern the company. States adopt two different theories as to what binds the company to its State's national laws. Real Seat Theory requires companies to have their headquarters and place of incorporation in the same States. Incorporation Theory insists that the place of incorporation will determine the applicable laws but does not require the headquarters to also be located in the State.

As such, when a company has tried to move its seat of incorporation or headquarters questions as to whether a State can restrict the movement of the company have arisen. The restrictions have been challenged as infringing freedom of establishment, however the ECJ has recognised the need to protect interested parties from companies wishing to move State and thus the applicable laws governing the company.

Currently, the ECJ allows restrictions for companies moving out of a State. A rationale behind this is shareholder and creditor protection.

The European Commission (EC) have previously discussed whether a Directive on jurisdictional mobility was necessary. However, in 2007 they concluded that it was not since there were already instruments in place to facilitate movement such as the European Company and cross-border mergers. They also expected that the ECJ would further extend its decision from Cartesio. Whilst the former is true, the latter is unlikely to happen. The ECJ are not in a position to lay out a system of protection for shareholders and creditors to facilitate easier mobility. They can effectively, only have a binary approach that either restrictions are allowed or they are not. The ECJ seems to have firmly settled on the former and it should be a matter for the EC to develop a clear system for mobility if they wish to prevent restrictions on movement.

Even if the EC adopts measures to facilitate easier movement, it is likely only to serve as a real benefit for larger companies. Again, practical problems such as culture, judicial attitudes and language may serve as barriers to movement for SMEs.

SMEs
The European Private Company (Societas Privata Europaea SPE) although not agreed to after three years demonstrates the EC's desire to broaden its scope of regulation to assist SMEs in Europe. Certain reforms seem to focus on creditor protection. As SMEs can be more susceptible to default, insolvency or liquidation organisations and practitioners will need to be aware of any proposed changes.

The failure to agree to the SPE however leaves this area as to how the EC shall proceed a bit unclear. Its likely aim is to be similar to that of its approach to large public companies of reducing transaction costs and facilitating trade in Europe.

The European Company Model Act
The European Company Model Act is a current project being undertaken by academics. It sets out as an alternative to the current approach taken by the EC to regulate corporate law. The Model Act is only advisory with the aim of setting a "European standard", which they hope States will implement giving it binding force.

I for one am very sceptical about how successful this will be. The group's rhetoric, that States will find it difficult to deviate from a European standard, goes against years of contrary evidence and the failure of States to agree on a variety of issues. Deviation may not necessarily be for better or worse but States are still likely to do so, if given the freedom, based on their national interests.

Furthermore, since it will not replace any of the existing framework it is only going to serve as another element to the regulatory jigsaw that is ECL. In fact it is likely to result in 27 new pieces as States may choose to adopt the Act to varying degrees. It also brings it back to practical problems faced by the EU, which such a Model Act will not address. Even if all 27 States adopt the Act, different cultures and judicial attitudes may result in different national interpretations and application leaving ECL no better off in terms of understanding it.

Conclusion
ECL has certainly come a long way. After a series of reforms, further harmonisation dropped off with States failing to agree. However, Armour and Ringe have recently highlighted the the economic crisis in the West has given ECL a much needed boost with a rush of reform activity.

It is difficult to see what is going to happen in the future but it is likely that the EC will continue its aims of facilitating growth and reducing transactions costs. This author certainly believes the EC will make efforts to assist SMEs. But reform elsewhere may be difficult as national interests in some States, probably most notably in the UK, may make uniformity in how to proceed difficult as States may be reluctant to concede powers that are not in the national interest of the State. The UK's veto on a new Treaty and Fiscal Treaty goes to show that it may be difficult under the current regime to further improve ECL. As business becomes more global it is likely that more uniformity in EU will be needed to compete with States such as America and China. Reform may just be a question of when rather than if.