Introduction
The decision in
Eckerle is of some significance to company law. It concerned the ability of a beneficiary in an investment chain being able to enforce rights within the company as a member within the definition of the Companies Act 2006, s. 112. The decision reached by Norris J caused him to remark that he had not reached 'a particularly comfortable conclusion, but reaching any other conclusion would involve an impermissible form of judicial legislation'. This has lead to debate about the role of investment intermediaries and their legal obligations with recent
discussion on how if at all the law should be reformed to allow the ultimate beneficiary in an investment chain to exercise rights against issuers of securities.
Here I will give a brief summary of the case and discussion.
Facts and judgment
DNick Holding plc, registered in England but operated in Germany, was owned by Wickeder GmbH who acquired 75.005% of the company's shares (albeit through an intermediary, the significance of which is detailed below) giving it enough control to pass a special resolution (75%), which is required to make certain changes within the company.
The board of DNick proposed to cancel its shares and re-register as a private limited company (Ltd) for a public limited company (plc). This caused a drop in value of DNick's shares. A meeting was called and a special resolution was passed to re-register with Wickeder using its 75.005% ownership to secure it. The meeting was attended by shareholders (or their proxies) representing 83.71% of the vote.
Eckerle and Ors were claimed (claimed being the operative word) to be minority shareholders owning 6% of the issued shares. They commenced proceedings against Wickeder under section 98 of the Companies Act 2006 to have the resolution cancelled on the basis that they had standing to do so.
The Act under section 97 provides a company may re-register as a private company provided the conditions are met in this section and no application under section 98 has been made to cancel the resolution to re-register. Section 98 itself provides who may make such an application for cancellation and this includes: (a) the holders of not less in the aggregate than 5% in nominal value of the company's issued share capital; (b) ...; (c) ...; but (2) not by a person consented to or voted in favour of the resolution. Under subsection (3) the court may then make an order either cancelling or confirming the resolution.
Wickeder sought to strike this claim out, inter alia (see para [11]), on the basis there was no reasonable grounds on which the claim could be brought; or alternatively for summary judgment. The decision focused on the considerations set out for summary judgment and the dispute about the construction of the provisions in section 98 (see para [12]).
The key/common facts were laid out in para [14]. An important fact to note was that according to the share register DNick only had two registered shareholders who held the 5,671,318 issued ordinary shares. Dr Platt (CEO of Wickeder) held 1 share and the Bank of New York Depository (nominees) Ltd (BNY) the remainder. BNY acted as a depository of the issued shares, holding those shares on trust for account holders with Clearstream according to the account holder's respective holdings in Clearstream Interests (CI). Clearsteam was the settlement division of Desutsche Borse. Through Desutsche Borse trades on the relevant exchange between Clearstream account holders are transacted electronically. These account holders could not be individuals and could only be banks or financial institutions. What was traded on Desutsche Borse was the underlying ownership rights in DNick shares the CIs but not shares in DNick themselves. The trades were between Clearstream account holders, concluded on behalf of the customers of those account holders, who could be described as the end investor or ultimate beneficiary. Thus Eckerle and Ors plead to have 7.2% in the nominal value of the issued share capital but, in truth, they only have the ultimate economic interest in those securities which amounts to a specified percentage of the shares held by BNY on trust for Clearstream account holders whose customers Eckerle and Ors are.
As you can see, the claimants were far removed from the being the owners of the shares and simply held the economic interest in those securities. BNY held the shares, who held them on trust for Clearstream account holders whose customers the claimants are. They were 3 times removed in summary. This means when dividends are paid they are paid to BNY. Although the Articles did allow direct payment to Clearstream account holders who would ultimately account to its customers.
According to the facts set out at para [14] the company's articles provided that 'each person who is a CI holder at the relevant CI record date' can either direct the registered holder of the share how to exercise the vote attaching to the underlying share or to appoint a proxy to do so (who might be the end investor).
Thus it became important to identify who was the CI holder as it would give them the right to direct a vote or appoint a proxy. A CI holder was interpreted, according to the Articles, to mean 'the holder of [an interest in the shares in the capital of the company traded and settled through Clearsteam]'. They are then identified by the electronic register of CI holders. The only interests traded and settled through Clearstream are the interests of Clearstram account holders which were the banks and/or financial institutions. Only they fitted this description and so the right to appoint or direct would fall to them, not the account holders' customers. The Articles under Article 10 continued that DNick did not recognise beneficial interests and made clear they would not recognise any right except an absolute right to the 'entirety thereof in the registered holder'.
All of this ultimately lead to an initial observation that there is potentially a 'serious loophole in the protection afforded to minority shareholders'.
It was submitted for the claimants that, essentially section 98 should be interpreted widely and construe the provision as to who were holders as those who were shareholders in all but name and not simply those registered as holding the shares. At para [15] it was argued that: (1) section 98 should be construed with regard to the deliberate use of the terms 'holder' and 'person' instead of member; (2) alternatively the provision in section 145 should be approach purposively to enable the claimants to exercise rights otherwise vested in a member to enable that person to protect the economic value of their shares; (3) alternatively the common treatment of the holder of the ultimate economic interest as if he were a shareholder should mean in the present case that the prospects of the claimants showing that they were entitled to the relief they claimed cannot be dismissed as fanciful (required to allow the claim to proceed under the Civil Procedure Rules)
The first point was addressed that member or shareholder is one and only one (para [18]) citing at para [17]
National Westminster Bank plc v Inland Revenue Commissioners [1995] 1 A.C. 119, 126. Therefore the claim that the term 'holder' should be interpreted widely was seen as needing an extremely strong reason to do so so as to depart from the orthodox understanding. Norris J continued at para [19] that the whole basis of the 2006 Act proceeds on the this basis as to the definition of a member, which is found in section 112 and concluded that the person who is registered as a member is rightfully deemed the holder of said shares. Thus, the definition does not include the person holding the ultimate economic interest. Norris J, at para [20] did not believe the specific use of the term 'holder' in section 98 should mean the court should look to the holder of the economic interest on the basis the other two subsections in section 98 referred to 'member'. He continued that under section 98 the court can only adjourn to have the shares purchased from the dissenting members. Therefore no relief could be granted to the holder of the ultimate economic interest.
Norris J continued in his reasoning that section 260 makes provisions in respect of rights directly enforceable by non-members, under section 260(5)(c) which states a member includes a person who is not a member but has been transferred shares in the company or has had them transmitted by operation of law. It was stated in
Enviroco Ltd v Farstad Supply [2011] UKSC 16 at [37]-[38] that the term member is defined by section 112 and is a fundamental principle of company law and can only be departed from where expression provision allows it. Without such a principle company law would be unworkable.
Therefore section 98 does not apply to anyone expect those who are on the register.
However, Norris J continued to express reasons why summary judgment would not be given in favour of the claimants. He cites the Explanatory Notes for the 2006 Act at paragraph 210 and notes nobody believes on a true construction that section 98 extends to anybody beyond those members on the register.
Norris J further adds that the provisions in the Articles did not protect the claimants. These only provided that account holders i.e. Clearstream account holders (the banks or financial institutions) could direct BNY on how to vote or require BNY to appoint the account holder as proxy. Therefore the account holders could direct BNY as a member how to exercise its votes. As a result no rights are conferred upon the customers of the account holders under the articles.
To continue Norris J cites section 145 that provides anything required or authorised to be done by or in relation to the member shall be done or may instead be done by or in relation to the nominated person... as if he were a member of the company. This generally allows the nominated person to act is if they were a member of the company. However, section 145(4) adds that the section, nor does the Articles, 'confer rights enforceable against the company by anyone other than the member'. Norris J states at para [26] that these provisions were introduced due to investors increasingly holding their shares through intermediaries. Norris J elaborates at para [26], citing Hannigan, that company law 'demands a mechanism whereby the indirect investor can engage with, and be recognised, by the company'. But Hannigan admits such a mechanism, whilst ideal, would, in practice, be difficult. Hannigan, as cited by Norris J, states section 145 is a modest step forward in achieving this but is not a radical departure from recognising the member as the one who is registered as such.
Therefore section 145(4) does not confer enforceable rights on anyone expect for the registered shareholders, which in this case is Dr Platt and BNY. Therefore failure to recognise the nominated person or afford them the same treatment as if they were a member, does not give enforceable rights to that nominated person. The only person who can enforce is the registered shareholder. At para [27] Norris J, citing Buckley, gave the example of failing to notify a nominated individual of a meeting. Whilst the company has to recognise that nomination and inform them accordingly, failure to do so would only allow the registered shareholder to challenge that failure.
Norris J concluded that from the submissions presented none lead to the conclusion that the account holders, let alone the claimants could enforce section 98. He states at para [29] 'These passages simply mean that the statutory rights that are directly exercisable by the nominated person are those which enable the right conferred and transfered by the articles to be effectively transferred'. He notes that this is why section 145(2) operates 'so far as is necessary to give effect [to the provision in the company's articles enabling a member to nominate another person as entitled to enjoy or exercise ... any specified rights of the member in relation to the company]'. Norris J stated that this 'does not mean that if the effective exercise of the transferred right produces a result that is not to the taste of the nominated person then the nominated person can, in order to bring about his desired outcome, himself use any of the provisions of the 2006 Act available to the transferring member'. As a result Norris J concluded the claimants were neither holders within a true construction of section 98, nor did section 145 enable them to bring a claim. Norris J also noted that there was no expectation beyond what the Articles said that would allow the ultimate beneficiaries to enforce said rights on the basis of the well known dicta in
Re Astec (BSR) plc [1999] BCC 59, 87 that made clear that such expectations have no place in public listed companies and the public dealing in the market proceed on the basis of what is in the Articles.
Finally, Norris J suggested that it could add BNY as a party to the proceedings but deemed this would not be capable as BNY was a person who had voted in favour of the resolution to re-register the company as private and could not make an application under section 98 which bars those who voted in favour from doing so. This, in itself, was seen as problematic at para [32]. If the holder of the legal interest in the share has been instructed to vote in favour of the resolution it will make them incapable of commencing proceedings for any ultimate beneficiary dissenting from the resolution.
All of this lead to Norris' J uncomfortable conclusion that the ultimate beneficiary would be deprived of protection, which those who formulated the 2006 Act thought should be extended to.
Summary
In summary, the claimants were not members. They could not apply under section 98 to have the re-registration cancelled, nor could they apply under section 145 to enforce rights as nominees because they were not nominees and by any means this section does not confer enforcement rights on nominees, those are vested in the shareholders only. As well BNY could not commence proceedings on behalf of the ultimate beneficiaries as it had barred itself from doing so by voting in favour of the resolution.
Discussion
It seems quite right to postulate that investment has become so complex that investors are prevented from exercising their rights against the issuer. It is agreed that giving a mechanism to allow the end investor to enforce rights is likely to be impractical, as Hannigan argued, potentially opening up the floodgates to claims including duplicate claims, as well as the increased cost and time in maintaing a accurate share register. However, moving away from the orthodox concept of 'member' may not be catastrophic if approached with the right caution. The 2006 Act itself moved away from another fundamental principle of company law, namely majority rule, with the introduction of the statutory derivative claim, allowing any member to enforce a right vested in the company in respect of a breach of duty, trust, default or negligence. This removed the bar of wrongdoer control and the rule in
Foss v Harbottle (1847) 67 ER 189, which only allowed a derivative claim to proceed in the common law where it was shown the wrongdoers were in control of the company, because where they were not it was for the majority to decide if the company should litigate and not an individual shareholder. This was overcome by putting relevant restrictions in place on allowing a claim, such as mandatory bars where the conduct has been ratified or authorised by an unconnected majority. Further the court is given the discretion to consider whether the conduct is likely to be ratified or authorised as well as taking in to consideration the views of disinterested shareholders. Cases brought under the new statutory claim have also been dismissed at the court's discretion where wrongdoers were not in control, so whilst it is not a bar to a claim, the court may use its discretion when determining whether to allow a claim and consider the issue of wrongdoer control. Therefore, it is tentatively suggested that it may be appropriate to open up derivative claims to end investors, extending section 260(5) or introduce a similar concept that allows end investors to litigate pending court approval. This may eliminate the objection raised by Hannigan about cost and the issue of the floodgates being opened by imposing appropriate safeguards on standing. As well, the law reformers may draw on many areas for inspiration where protection for end users has been developed, which was seemingly difficult if not impossible before intervention such as the Consumer Protection Act 1987, part 1 which protected consumers from defective products put in to the market by manufacturers.
Another concern is the intermediary who acts for multiple beneficiaries. In this case it may have been in the interest of some of its end investors to vote in favour of the resolution but not for others. However, initially it seems, BNY would not have acted against their duties in doing so. They have acted in the interests of the end investors by voting the way they believed to be the best interests of the end investor or were subsequently instructed to do so by Clearstream account holders who equally would have instructed based on what they believed to be the best interests of the end investors. Being barred from applying to the courts was a result of the statute and not
mala fides.
Whether there is a fiduciary breach would require deeper analysis. Yes, the position can rightly be described as fiduciary but it is not clear if the duty of loyalty would have been breached. This requires a conflict of interest, which itself requires the fiduciary (i.e. the investment intermediary, in this case BNY and Clearstream account holders) to suspend self-interest and the interest of others and act in the sole interests of the beneficiary. By acting for multiple beneficiaries it is possible a conflict has arisen between the interests of the respected beneficiaries and if that is so the only way the intermediary may immunise themselves from liability is to get authorisation to act or alternatively demonstrate that there was not a conflict. The latter would require the fiduciary to demonstrate that they had not taken responsibility for the particular interest of the beneficiary allowing them to act against it for others. See, for example,
Kelly v Cooper [1993] A.C. 205. The question then is whether by acting for multiple beneficiaries and voting on the same resolution, is this a conflict of interest? My answer would be yes. There is a risk that by acting for more than one beneficiary that their loyalty to one may compromise their loyalty to the other, similar to that seen in
Extrasure Travel Insurance v Scattergood [2003] 1 BCLC 598. However, a further problem here is that even if it is a breach, the end investor may still be left without a remedy since in duty-duty conflicts the fiduciary may not profit personally. Therefore there is no profit to disgorge to the end investor. They would then have to try and claim equitable compensation but this requires causation i.e. a link between the actions of the fiduciary and the loss suffered. This may be difficult to show that the way they voted caused the loss suffered since one investor (Wickeder) "owned" 75.005% thus the loss would seemingly have been suffered regardless but I think this needs more analysis to be certain on how difficult it would be to prove than this blog post will offer.
As well, claiming this is a breach of fiduciary duty may cause practical problems for investment intermediaries as it would seemingly impact on their ability to act for clients without authorisation, which in turn may increase the cost of engaging with an investment intermediary.
