Social Science Research Network Download

For those who don't have a subscription to legal databases or the journal itself an early version of my published articles are now available here for download.

There are minor asymmetries with this and the final version.

Are we there yet?

No David, we are not!

I am nearing the date of my transfer from Mphil to PhD and perhaps this is a good time to reflect on what has been done and look forward to what needs to be done.

It takes no Mathematician to figure out 20,000 words of potentially 100,000 is no where near half way to completion of the thesis despite being 16 and half months in to it. I expect once in my transfer and after I will be made aware of how much needs to be done in a short period of time.

But it is not all such a gloomy outlook; one could easily draw on a clichéd comparison with the recession to describe mine or possibly anybody’s thesis at this stage. So, what have I achieved so far and what is there in the pipes?

My articles on derivative claims now both available on Westlaw, see here for blog on part 1. They really offered some positives in my first year which was demanding and a relief from lots of reading and seminar preparation with teaching. The articles were in total around 10,000 words in length and will form some part of my thesis. They will however be adapted to make it applicable to the central topics of directors' duty of loyalty and multiple directorships. The articles themselves provide more of an analysis of some of the objectives of the derivative claim.

I have just completed a chapter analysing conflicts of interest for directors as well. This chapter focused on how we understand a conflict rather than a detailed analysis of what an "interest" is. This will form some part of the following chapter to this one.

The chapter looked at some of the key functions of the duty of loyalty from Conaglen's protective function of non-fiduciary duties to Fischel and Easterbrook's theory on the purpose of avoiding high contractual costs.

These theories, amongst others, were applied an analysed against some of the key elements of the duty of loyalty: The no-profit and no-conflict rules; scope of business test; ex-directors; and corporate opportunities. In the context of directors it appeared to be that Conaglen's protective function served best as a last resort rather than any driver behind directors aligning their interests with those of the company.

However, they were still true and applying them to ex-directors it was discovered that there has been various erroneous decisions relating to ex-directors where the courts have attempted to apply a somewhat varied corporate opportunities doctrine. This part of the chapter, as well as applying some of the key theories, looked at Sealy and Worthington's and Lowry and Edmund's views on corporate opportunities of ex-directors and suggests that these approaches are too wide and overlook the purpose of the duty of loyalty.

So what is in the pipe line?

The next port of call is the theory chapter itself. What are the key theories to look at. I do not intend to list them here but the focus will be on those relating to agency theory and how they apply to the duty of loyalty. On a deeper level there will also be focus on methods and theories applying to how parties to the fiduciary relationship interests are aligned. Analysis seems to be available across different schools from Law; business; economics; psychology etc.

Board structures also need to be analysed to coincide with the discussion multiple directorships and there is plenty of information out there although perhaps not as much on non-executive directors who I believe will form a significant amount of the discussion. See blog here for why.

I have also collected some sample data on multiple directorships and board remuneration. I aim to wait until the next financial year to collect all the data as firms are more likely to meet higher transparency requirements in line with recommendations from the market (source lost at time of writing).

I have also begun collecting sample data on case levels of directors' duties. There were numerous claims pre and post 2006 about duties and their transparency, clarity, effectiveness. This data can aid on two fronts throughout the thesis, first on the duty of loyalty: I hypothesise that this is the most frequent breach of duty which may suggest increased pay is not helping to align interests. This may be especially so if the data in fact shows an increase in duty breaches. One would have to consider the issues of enforcement as well. Duties are not frequently enforced but a correlation can possibly be drawn between remuneration levels and level of breaches of duty.

So to reiterate the title's answer, no I am not at the completion of my thesis, nor am I close. But there is plenty to look forward to with possibly a little less reading and most likely a lot more writing to come in the next 19 months.   

Queen's Bench Considers Companies Act 2006 s 175 - Duty to Avoid a Conflict of Interest

The Queen's Bench Division recently passed judgment in Cambridge v Makin [2011] EWHC 12 (QB) available here. The case made reference to but did not decide upon a director's conflict of interest including a conflict of duties.

An overview of the complaint by the company (NRPSI) in relation to s175 was:

"Two NRPSI Board Directors, … and Janet Cambridge had interests in CINTRA Ltd, an agency which obtained our data … Janet Cambridge worked as a trainer for CINTRA at the time our data were sold. There is evidence in the Coventry Partnership Project, the Lincolnshire Business Case Study, the East Midlands Delivery Plan and CINTRA's Training Manual from 2005 that CINTRA used its connections with the CIOL [Chartered Institute of Linguistics] and NRPSI, through the two directors, to obtain a contract with five East Midlands constabularies and Norfolk."

A Ms Glegg owed duties as an executive to NRPSI and non-executive of CINTRA and the court observed there was little comparable facts to previous case law. The judge - citing Company Directors Law and Liability (Sinclair, Vogel and Snowden Sweet & Maxwell, 2005 ed, updated April 2008) at para 3.86 - stated:

“Although it is clear that an executive director (ie a director who carries out a management function on behalf of a company, often employed pursuant to a service contract) is prohibited from competing with a company of which he is a director…, it does not appear that non-executive directors are prohibited from competing with the company or from taking directorships of competing companies. This stems from the difference in function between an executive and non-executive director. A non-executive director's role is usually limited to a supervisory one, effectively a policing function. By contrast executive directors actively manage its business”.

Since Ms Glegg was not a party to the action and the court stated it was not equipped to make rulings on conflicts of interest. The court mentioned though that Ms Glegg's relationship with CINTRA was well known by NRSPI. The law on conflicts of interest under s175 is well settled though, at least on the following point. Nothing short of full authorisation will avail Ms Glegg of this type of conflict. The claimant's knowledge of the conflict under s175 is not an adequate defence for a defendant. The case would be different under a s177 conflict where the director has an interest in a proposed transaction or arrangement with the company. In such a scenario, disclosure or knowledge of the conflict will allow the company to proceed with all the knowledge and facts to make an informed decision.

It is unfortunate that no ruling was able to be given in relation to Ms Glegg. The difference in conflict of interests between executive and non-executive directorships (as opposed to executive-executive directorships) highlighted by the Tugendhat J seems to suggest that a conflict may not arise where the companies are competing, at least not automatically. Tugendhat J stated that this case "illustrates how non-executive directors, who are chosen because of their experience, may find themselves in a position where they are at least open to criticism (whether well founded or not) for acting in pursuit of an interest when that may be said to in conflict with a duty".

The acclaimed conflict of interest against Cambridge however was unfounded since it was evidenced that Cambridge had no personal interest in CINTRA at the time leading up to and awarding of the licence to them. The court did provide some opinion on whether a conflict may arise in a situation where a person is a director of one company and employed by another. Citing again Company Directors Law and Liability (Sinclair, Vogel and Snowden Sweet & Maxwell, 2005 ed, updated April 2008) at para 3.54:

“It is not clear what is required in order for a director to be considered as having an interest in a contract. … A direct financial interest will clearly be sufficient… Similarly, a director will be considered as being interested in a contract in which he has an indirect financial interest, such as a contract entered into by a company in which he holds shares (whether beneficially or as trustee) or a partnership of which he [is] a partner … In certain circumstances, a director would be considered as being interested in a contract between the company of which he is a director and a second company by which he is employed. This will largely depend upon the role that the director has within the company by which he is employed and the extent to which he benefits as a result of the relevant contract”.

It is unclear exactly how such a scenario may give rise to a conflict. For example, in Bhullar v Bhullar the directors came across an opportunity in their free time and pursued it personally and where liable for a secret profit to the company for a conflict of interest.

However, in this scenario the employee is not the one pursuing the contract. If they come across the information there is no separate fiduciary duty of disclosure. In their capacity as director they may be liable under s172 for failing to promote the best interests of the company. This would be because the information is clearly something the company would be interested in knowing. This test is subjective though and it would have to be demonstrated that he did not honestly believe, or no reasonable man could believe, that the information was not going to be of interest to the company. See for example the case of Fassihi.

There is no breach of s175 by simply failing to disclose. The company which the director works for would have to show that the director omitted or actively did something to divert the opportunity away from the company to the company which employs him. This may result in a claim for equitable compensation. They could also attempt to show that they did in fact have some interest in the opportunity, i.e. increased opportunities for offering interpretation services to the public sector by being able to charge lower rates and may be able to claim secret profits.  

Article Publication Released

The Company Lawyer have published part one of my article on the 'Statutory Derivative Claim' and is available online from the normal legal databases.

Citation is (2011) 32(2) Company Lawyer 41

Part 2 is in the pipeline for next month as I am just going through the final proofs.

Since I have returned to work after the festive break I have focused my attentions on completing my first chapter and looking at the arguments for an individual no-profit rule for directors. Watch this space for a blog update on the topic!

Decrease in Disqualified Directors

The Times have reported today an increase in reports to the Insolvency Service about directors from 3539 in 2002 to 7030 in 2009. The number of directors disqualified has decreased from 1594 to 1387.

The Insolvency Service budget has fallen as well from £9305 to £4097 per case since 2002. According to The Times the lack of resources means that investigators will only take cases that are considered to be "low hanging fruit" leaving the more serious violations unpunished.

From a breach of duty point of view it may provide further evidence that although the ways in which directors may be subject to liability the likelihood of that ever being a worry for a director is minimal. More practical ways in ensuring directors are not acting in breach of duty or not fulfilling their non-fiduciary duties are needed. Merely making directors more liable will not prevent those with an intent to breach duties regardless of any ethical codes of conduct. Accidental breach their duties will continue to occur for reasoning of generality of the codified statement or misinterpretation of it.

What more practical ways may work is unclear. An early thought may be something similar to compliance programs that you see as a method to prevent breaches of competition law. Further research would be needed for more recommendations however.

Preliminary thoughts on BIS Companies Act 2006 Review

The Department of Business Innovation and Skill have published a two part review on the impact of the Companies Act 2006 (Vol 1 available here and Vol 2 here).

Here are some of my preliminary thoughts on the sections relatings to my work, namely derivative claims and conflicts of interest.

It is hard to come to terms with the notion that the law relating to conflicts of interest is clearer.

I agree that it is simplified and understandable for directors and may narrow or reduce those people in conflict, but it does not change what constitutes conflicting behaviour which was unclear before 2006. So, if you find yourself in court for conflict of interest the generality of the statutory statement may be of little assistance to a director. A restatement of the law which the Companies Act supposedly does will not rectify to problems relating to conflicts.

Furthermore directors and shareholders can interpret a general statement differently and may overlook a blatant conflict of interest whilst at the same time try and claim a breach of duty for a conflict when it clearly is
not. The biggest issue may be the interpretation of s175(4) that there will not be a conflict where it is not reasonably likely to give rise to a conflict

The part on derivative claims was a bit empty as well as assessing the CA 2006 effectiveness of the claim. It mentions people are aware they can bring a claim for a breach of duty but in reality case law is demonstrating it is all a bit of a false dawn for minority shareholders.

I for one am starting to believe the interim permission (prima facie) stage should be a significantly higher threshold as I don't see it serving as anything more than giving shareholders false hope. I portray the removal of the this stage in my forthcoming papers rather than increasing the level of the threshold but I still believe either way the stage is not serving a positive function.
These are my preliminary assessments and my last actions on my research for the year! Clocking off at 19:39 23rd Dec 2010. A Merry Christmas and a Happy New Year to all those reading this.

Duty-Duty Conflicts

How important are duty-duty conflicts in a fiduciary relationship between company and director? This is what I am now aiming to find out. With more firms becoming inter-connected it is foreseeable, or even true, that directors are serving on more than one board that possibly may conflict with one another.

Much has been written about duty-interest conflicts but very little by way of duty-duty conflicts, although both topics will form part of my thesis.

After assessing how duty-interest conflicts are regulated, which also appears inconsistent in itself, it is appears that such regulation would not cover substantially duty-duty conflicts for directors.

Dr. Matthew Conaglen has written substantially on the topic however, my work is in reference to the fiduciary relationship between director-company which has fundamental differences from that of other fiduciary relationships.

S.175(7) of the Companies Act 2006 does try to address duty-duty conflicts:

(7) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties

The section clearly treats duty-duty conflicts as something "additional" to duty-interest conflicts rather than its own separate principle.

Notably in the parliamentary debates in the Grand Committee a lot of the discussion focused on directors serving on more than one board when referring to s175, which is clearly a duty-duty conflict, however they were talking about it in reference to s175 and duty-interest conflicts. This perhaps demonstrates the vagueness of the principle or a reluctance to allow it to be its own principle.

Few cases have made reference to the duty-duty conflicts. Most read so far, i.e. the case of Mothew, usually refer to where the fiduciary's two principals are contracting with one another in some way. None seem to make reference to  a case regarding opportunities coming to a director that could be taken by either principal. Directors are restricted by the "double management" rule (meaning they cannot serve on competing boards) but with the interconnected firms growing, e.g. Steve Jobs serving on Apple's board and Disney's board, the duty-duty conflict may become more relative in years to come.