Companies and separate legal personality: Found when needed

I am having early thoughts about research in to this topic. The more I read on the separate legal personality of companies the more I seem to find instances of it being ignored or found depending on whether it suits the court or not.

Take the instance of Chandler v Cape plc [2012] EWCA Civ 525, for which I summarise as I have blogged about in more detail here. The individual was attempting to claim against his company's parent company for harm suffered from asbestos poisoning claiming the parent company owed a duty of care to its subsidiary employees. Here the court actively recognised both company's separate legal personality to find that the parent company was capable of owing a duty of care based on the criteria for owing such a duty. It was not ignoring the separate legal personality of the subsidiary though.

Now take the number of instances involving corporate directors i.e. a company as a separate legal entity serving as a director. On numerous occasions the court has found that individuals who control corporate directors cannot be shadow directors "without more". See Revenue and Customs Commissioners v Holland [2009] EWCA Civ 625 for an overview and example of this. Thus, they leave the door open to certain circumstances where an individual controlling a corporate director may be a shadow director. Generally speaking the court finds they are not. They often find that merely attending the meetings and voting will not open up the individual to personal liability where those decisions can be attributed to the corporate director, and it is not "without more" enough to constitute them as a shadow director, nor a de facto director.

However, in most these cases there has been individuals controlling a sole corporate director. It is difficult to perceive how an individual who makes all the decisions of the corporate director can do more so as to be classed a shadow director.

Ultimately the court is saying that an individual and the corporate director are separate and that all the decisions whilst made by the individual, are attributed to the corporate director as a separate legal entity. The difficulty is that it seems inconsistent with Chandler. The court is ignoring in this instances the ability of an individual to tell the corporate director as a separate legal personality what to do; whereas they acknowledged in Chandler the ability of the parent company to owe a duty of care. The courts would undoubtedly find such a circumstance to be a shadow directorship if the corporate director was a natural person instead. It seems absurd that the only reason they are not a shadow director is because they did not have communicate to anyone what they wanted the corporate director to do.

Ultimately section 155 of the Companies Act 2006 may remedy this anomaly, which I have blogged about here. Since this requires every company to have one natural person, where an outside individual controls a corporate director to avoid liability, they will undoubtedly have to control the individual in question as well and thus it is much more likely to be classed as a shadow directorship.

More cases will need to be examined to fully address these concerns.

On another note, blog post may be slightly less frequent over the next few months as I am in the writing up phase of my PhD.

Directors' pay: Guide to government reforms: It is not transparency it is simplification

I am thinking these reforms are as watered down as I was on my way to work this morning. The government has published its report on directors' pay reform proposals.

These plans are to strengthen the hand of shareholders and increase transparency. Well I think transparency is the wrong word because that implies more disclosure. Well in fact most of what is being proposed is already disclosed in most if not all annual reports. What these proposals are, is at best simplification.

I do not think I have to discuss the proposal to give shareholders a binding vote to a great extent. This is simply a bad idea. The government has pandered to its audience that believe shareholders own the company and somehow employee the directors. Quite simply they don't. The company as a separate legal personality appoints directors to undertake responsibility for its assets. It is for the company to reward its directors, not the shareholders. But for this to remain viable and for there to be a reduction in agency costs there needs to be a body of independent directors who reward the executive directors who actively run the company. This is where the real problem has stemmed from. These independent directors only became prominent on boards when they became useful to the executives, i.e. through helping in strategy and advice. Supposed independent non-executives have become increasingly involved with the running and strategy of the company which reduces their independence.

Thus I remain unconvinced that shareholders deserve a stronger hand. They buy shares in a company, they do not own it. If they do not like what the bought then they can sell it.

If remuneration is going to be managed properly you need to ensure that the non-executives who are deciding on remuneration are truly independent. This does not mean all non-executives need to take a step back, just those deciding remuneration. The Corporate Governance Code or the Financial Reporting Council is suggesting to revise the Code with measures on restrictions in regard to executives sitting on remuneration committees at other companies. This is probably a positive step, but one from the FRC rather than the government proposals. See here for relevant links.

For some of the proposals...

It would be interesting to see how the government tries to disclose details of the directors' employment contracts. Their rights as an employee are separate for rights as a director. I am not quite sure if this is something that should be published in annual reports. More information needed though before further comment.

The proposals want details of what directors will get paid for performance that is above, below or on target. Well anyone who owns a calculator could figure that out from the annual report already. They are required to disclose the shares awarded in a particular year and share price they were awarded at. They also publish the criteria that performance is measured against at the percentage that will vest depending on what targets they meet. Some firms do in fact already publish an estimated value at maximum vesting of the awards.

Thus this point does highlight that it is simplification and not increased transparency.

They also want information on the change of profit, dividends and the overall spend on pay. Well yet again this information is available through the annual reports. It is just more simplification.

They also want material facts taken in to consideration when setting pay to be published. Well let us face it, that is not worth the paper it is written on. Not to mention in most cases companies do already publish this. BP for example after the oil spill detailed their consideration of that matter in awarding remuneration. It did not stop their chief executive resigning that year on a package worth well over £5million if I remember correctly. What is the Government expecting from this proposal. A declaration that they considered these wider interests and then ignored them anyway. Increased evidence of watered-down simplification.

Table B of the proposals in the report do not seem to have any differences from what is already required of companies in annual reports. The requirement of a total single figure of remuneration does require companies to publish a single figure that includes variable pay and pensions. Again, the trusty calculator could have already done this without the need for reform. Apparently this figure will be calculated using a methodology complied by the FRC to include actual pay earned rather than potential pay awarded. However, the report does not clarify how this will then encompass pensions since this is never pay earned and is merely a debt on the company's balance sheet.

These are early days though. The next steps are for the government to bring forward reforms to the Enterprise and Regulatory Reform Bill as well as publishing revised Regulations setting out what companies must publish on directors' pay.

Do companies actually require a natural director or is Section 155 not worth the paper it is written on?

Under the Companies Act 2006 section 155 all companies are required to have at least one natural director. This is different from the common law position which allowed companies to have a sole corporate director (i.e. a company itself being a director) as established in the case of Bulawayo [1907] 2 Ch 458.

For any rule there has to be deterrent or incentive to follow it. Section 156 gives the Secretary of State power to give direction to any company where it does not satisfy this requirement. Section 156(6) makes it an offence for failure to comply with that director and is committed by every officer in default including shadow directors.

But what if the company is simply a sole corporate director that has no officers and no other directors? How can anyone commit the offence?

Naturally one may assume, well it should be the one who controls the corporate director and thus makes them a shadow director.

Unfortunately that natural assumption is incorrect according to the courts of first instance and Court of Appeal. On a number of occasions courts have categorically denied that an individual who controls a corporate director is a shadow director "without more". What the courts have meant by without more is that it means that the individual must not simply be performing the functions of a de jure director (i.e. someone formally appointed) at another company, or simply discharging the functions of the corporate director in that capacity. For case examples of this denial see Re Hydrodam [1994] BCC 161 or Secretary of State for Trade and Industry v Hall and Nuttall [2006] EWHC 1995 (Ch)

Thus the courts have not denied that on the facts it is possible for someone to be classed as a shadow director. However, it seems fanciful that it will ever be the case on the facts when in the recent case of Holland [2009] EWCA Civ 625 at first appeal, better known for the Supreme Court ruling [2010] UKSC 51, the court found the individual was not a de facto director despite being the guiding mind behind the company and the only one involved in the process. It is most likely that the court also affirmed Holland would not have been a shadow director either if the liability in question extended to shadow directors. The obiter comments from the Court of Appeal seem to suggest as much.

Thus, whilst the common law reached the position that an individual who controls the corporate director is prima facie not a shadow director, it is possible that Parliament have altered that position through section 156(6) otherwise the deterrent of ensuring one natural director will have no substance.

However such a stance does not pierce the corporate veil, i.e. treating the individual and the corporate director as one. It recognises that section 251 of the Companies Act 2006 is designed to catch those trying to usurp the position of director without formal appoint. Section 251 defines a shadow director as someone who the de jure directors have become accustomed to act on their direction and instruction. Thus the courts would be recognising that the corporate director as a separate legal entity has become accustomed to act on the individual's instruction and direction.

Despite this the courts may still be reluctant to find as much since they were unwilling to extend the concept of de facto directorship in the Supreme Court case of Holland on the basis, inter alia, that to do so would be to say all individuals who control corporate directors are de facto directors. Thus the same would apply here that to rule as such would be to say all individuals who control corporate directors are shadow directors regardless of whether they have instructed or directed them. However, this may be defeated on the basis that shadow directorship is case sensitive and it is not to say it does extend it for every case. This would effectively reverse the ratio from Hydrodam that without more someone is not a shadow director. This is because it would create the assumption that someone controlling a corporate director is a shadow director unless shown they did not instruct or direct them, rather than the other way round that someone is not a shadow director without more i.e. they did instruct or direct the corporate director.

The distinction is very artificial that has been created by the common law and section 155 attempts to remedy that through the requirement of having one natural director responsible for every company. However, if that requirement is to have substance it must be acknowledged that someone who controls a corporate director is in some capacity connected to that company, and is suggest that connection is through shadow directorship, otherwise the common law principles will prevent that enforcement.

Executive Remuneration and banks

I have blogged elsewhere briefly about executive remuneration see here.

According to a recent survey from Manifest, see here, executive pay was up by 10% in FTSE 100 companies in 2011 but in more than 25 companies the rise was greater than 41%.

So, who is dragging this figure up? Such averages would suggest outliers. So from my data of 30 FTSE 100 companies over 5 years 2006-2010 below are two tables of accumulative executive remuneration. The first is the mean and median of executive remuneration which includes: Salary and benefits, annual bonuses, share options exercised, and estimated value of long term incentive schemes.

The second table is the mean and median of executive remuneration from the banking sector.

Executive Remuneration FTSE 100	2006	2007	2008	2009	2010
Mean	£13252224	£14015869	£12873733	£12842835	£15786086
Median	£10688919	£12181900	£11690076	£8715581	£13254605

Executive Remuneration FTSE 100 (banking sector)	2006	2007	2008	2009	2010
Mean	£26537106	£27249329	£25528610	£18476199	£25184382
Median	£23432917	£22214810	£22349487	£17130259	£22695000

Thus it is no great surprise to find the banking sector is the one that is dragging up remuneration. The mean between 2009 to 2010 itself saw an increase of 26.6%. However, this data is only descriptive and accumulative. Further evidence from the data also shows a significantly larger ratio of long term incentives to base salary in the banking sector. Thus, whilst the figures are high not all of the figure represents money earned. The long term incentive schemes is merely an award that is subject to performance and service conditions, see here for a little more detail.

Effective e-learning reflection

I have recently been on a Teaching Skills course and had to write a reflective 1000 word piece about my teaching experiences. I chose to focus on my use of e-learning tools. Here is what I wrote.

Introduction

‘Essentially, flexible learning has two features: It provides students with the opportunity to take greater responsibility for their own learning; it enables students to be engaged in learning activities and opportunities that meet their own needs’[1]

Student learning does not have to start and finish in the classroom. Developing effective e-learning tools for students over the past year has allowed for discovery as to what works well and what does not. After implementing some of these tools in practice and reading around the subject it is possible to reflect on how these tools can be successfully adapted in to student learning.

Literature on e-learning often comes across with two fundamental points that it should not merely mimic that which was taught in the classroom where it is combined with face-to-face learning; and where it is pure e-learning that a sense of community is created. Lecturers see a problem with mimicking the face-to-face sessions, as highlighted in a qualitative study, that ‘the students think they don’t have to attend so much that they will pick up the slides and by some sort of osmosis they’ll learn everything that’s on it’.[2] Online learning that merely repeats the face-to-face contact also has its problems from a student perspective as without human contact and social interaction it means students are unable to ‘construct their own knowledge and take responsibility for their learning’.[3]

As such it is important that e-learning facilitates the face-to-face contact time through what is referred to colloquially as “blended learning”[4] as well as creating a sense of community to allow for creative thinking. A final benefit to consider of e-learning is widening participation. Effective e-learning can help meet the goal of widening participation by making learning flexible to meet the needs of different students. With these benefits in mind the reflection below shall focus on how the use of e-learning tools for a third and second year undergraduate course in Company Law and Contract Law respectively, succeeded in meeting these benefits.

Methods Deployed

Online pre-recorded videos

The online pre-recorded videos that were provided discussed and provided a model answer for problem questions which were well received by students. The usage by students on the Company Law course was 100%.

These videos had many added benefits than simply going over the question in class. For one it gave a sense of community and virtual presence with students. From a teaching perspective it also made it easier to clarify difficult points of law through re-recording, which you do not have the opportunity to do in the classroom. Whilst this may have been more time consuming it narrowed the room for confusion on topics. Students also cited the videos as very beneficial to their learning. They were able to watch the videos on a number of occasions at their own leisure. It also helped them interact with the online learning environment and take responsibility for their own learning, rather than what one commentator referred to as a “snatch and grab” or surface approach to downloading slides.[5]

Moving forward, to improve on this tool it would be an added benefit to release the videos before the seminar rather than after. This may facilitate greater discussion and independent learning in the classroom as well as helping with their preparation. This would certainly help in facilitating the face-to-face learning rather than repeating it. It would also further their ability to take responsibility for their own learning. If such an approach is taken, the way in which the face-to-face learning is conducted will also need to be reflected upon to ensure the answer to the problem question is not merely repeated.   

PowerPoint Slides

Providing slides can have numerous problems. To name a few there is the surface approach, the problem of non-attendance and the issue regarding lack of concentration if the slides are too detailed.

In Law, sometimes the class required the use of detailed slides to convey information, but not all was necessary for the class discussion. For example, in discussing directors’ remuneration, facts and figures were used to show practical examples. To overcome the problem of having to use detailed slides two approaches were used. One is discussed under the next heading of online tasks, and the other was one of simple disclosure. By drawing students’ attention to the fact the slides were for their use after the class it often focused their attention to discussions and questions rather than trying to read off the slides.    

Online tasks

The use of online tasks before the seminar also helped develop the face-to-face sessions and allowed students to take responsibility for their own learning. Since the class was based around directors’ remuneration students were asked to find and disseminate information from a directors’ remuneration report. This facilitated the discussions in class as students were forthcoming with opinions as they were aware of how it operates in practice.

Quick Reader (QR) Codes

The use of QR codes is something of a more recent phenomenon. With the increased availability of information on the go it is important that teaching stays abreast of these developments so students are able to disseminate information wherever they go rather than having to sit in front of a desktop or attend classes.

QR codes allow quick access to information on smart phones and tablets by scanning the codes, which brings up the relevant information. For Law this has been put to use in accessing certain websites as well as lists of information such as case lists. The use of these codes can be beneficial for meeting the goal of widening access. Allowing for easier access to information on the go can save valuable time and frees up the time as to when students are able to interact with the materials.

However, upon reflection their use has been limited. Finding innovative ways to use them more effectively in higher education to supplement face-to-face learning and help develop an online community for a richer experience may take more time.

Social Networks

Operating a blog and Twitter has been able to serve as a useful resource for students in providing up-to-date information on recent developments. Using social networks can assist in the development of an online-community with both student-student and tutor-student engagement. Similar to the online tasks it has also helped students in preparing for classes. By providing labels to blog posts relating to the different classes on the modules, students can quickly search for posts about that topic. Blogs can also support hyperlinks to other recent developments on topics that can help develop students’ commercial awareness. This can be a valuable benefit over the use of textbooks and will increasingly supplement the face-to-face learning. Anecdotal evidence from assessments this year has suggested students have benefited from using the e-learning tools this way.

Conclusion

Use of e-learning tools needs to be effective to help students develop. One of the main benefits found whilst using them is that they help students take responsibility for their own learning. They can be used to help students prepare for a class, which can make them more engaged in discussions to reflect on different concepts. Whilst not all students engaged with the online tasks this year, to increase participation it may be beneficial to include a discussion board, or other collective engagement mechanisms, with the task to develop peer assisted learning to enhance the online community. This may help prevent students continually taking a surface approach to e-learning tools.

[1] K Pond, R Ul-Hag and W Hade, ‘Peer Review: A pre-cursor to assessment’ (1995) 32(4) Innovations in Education and Teaching International 314

[2] N Fry and N Love, ‘Business lecturers’ perceptions and interactions with the virtual learning environment’ (2001) 9(4) The International Journal of Management Education 51, 54

[3] N Fry and N Love, ‘Business lecturers’ perceptions and interactions with the virtual learning environment’ (2001) 9(4) The International Journal of Management Education 51, 53

[4] See N Jones and A Man Sze Lou, ‘Blended Learning: Widening participation in higher education’ (2010) 47(4) Innovations in Education and Teaching International 405

[5] N Fry and N Love, ‘Business lecturers’ perceptions and interactions with the virtual learning environment’ (2001) 9(4) The International Journal of Management Education 51, 53

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Corporate Law History: Where do we come from? Why are we here?

Ok I am not Prof. Cox but is it worth understanding the past of corporate law anymore? How much value does it add to current debates in this field such as corporate social responsibility, financial regulation, European company regulation and probably a few others.

This blog post is the first of a brief overview of some of the key events in the corporate law timeline.

Year 1720 - This was the year of the introduction of the "Bubble Act". The Act received Royal Assent on the 11th June 1720.

Scholars have debated its purpose. Two primary theses are: 1) was to enhance the importance of charters and to enhance Parliament's ability to raise revenue through the issue of charters. It was argued by one scholar, Henry Butler, that "the Bubble Act was a government created entry barrier designed to put out of business all business associations which were competing with Parliament's charter business"; 2) A now more established thesis is that it was the South Sea Company who initiated the Act to protect its own bubble from a wave of small bubbles that competed with the company's conversion scheme. (R Harris, 'The Bubble Act' (1994) 54(3) Journal of Economic History 610) This would, according to Harris, hinder investment opportunities and divert more capital to South Sea shares. By the 24th June share price at South Sea had peaked at £1050 but by the end of the year the bubble had burst and shares had dropped to below £200 at the end of the year. The crash constituted the first international stock market bust. It severely threatened English public finance.

The passage of the Bill demonstrates the problems a severe lack of independence can have when formulating legislation and decision making. Those responsible for debating the Bill in Parliaments were mostly connected to the company either as directors, friends or subscribers to shares. Also at the time of Royal Assent there was significant optimism over the success of the debt conversion scheme that would lower the national debt notably through payments by the company to the Treasury, meaning the Act was probably not a response to any impending crash.

The Act itself prohibited incorporation of new joint stock companies. Incorporation could only be achieved by charters granted by the Crown or private Acts of Parliament. However, as observed by Watson this did not stop the creation of unincorporated forms of business organisations ((2011) Journal of Business Law 597). Harris also notes that acting as a corporate body without incorporation was deemed illegal prior to the Act under common law under an ancient common law writ of scire facias. If anything, the Bubble Act only added new procedure and punishment to what had already been sanctioned.

As such Harris views the Bubble Act as less intrusive on the development of corporate law as others have made out. Harris notes the Act did little to prevent the South Sea bubble crash and it was not designed to regulate the market or practice of investors.

It was not until 1825 though that the Bubble Act was repealed. Despite the crash of the market Harris highlights that the events served to strengthen the market developing an integrated and efficient international financial market. So despite the crash the economy recovered and developed. It appears the South Sea Company was not too big to fail.

Watson argued that the Bubble Act in fact helped develop company law by forcing individuals to find new ways of creating organisations to run a business. However, the Bubble Act, as Harris showed, did nothing more than add additional punishment to something that was already sanctioned under the common law. The effect of the Bubble Act may not be as important though to the next phase of development since either way judges began to recognise and develop a body of law around these new forms of unincorporated business organisations.

In the next piece on corporate law history I plan to look briefly in to the Joint Stock Companies Acts and Limited Liability.

FSA's loss, CEO's gain

A quick blog post to note the recent decision by the Upper Tribunal to unanimously clear John Pottage CEO at UBS Wealth Management (UK).

The decision can be found here. A review from Travers Smith LLP can be found here.

Despite the fact the FSA's fine of £100,000 was unanimously over turned the opinion of Travers Smith is that it was very much based on the facts. However, this result may still undermine the FSA's credible deterrence strategy and motivate other members of senior management to challenge decisions of the FSA. Firms may also back their management more often.