Company report 2019 B PDF

Preview

Summary

Download Company report 2019 B PDF

Description

Examiners’ reports 2019

Examiners’ reports 2019 LA3021 Company law – Zone B Introduction The exam paper followed the same format as in previous years. Students should refer to the Assessment Criteria to familiarise themselves with the criteria that are applied to assessed work. As in past years, the best scripts always focused on the actual questions being asked, and the specific issues they raised. Good answers also demonstrated that the student had read around the subject and was able to apply this wider reading to the issues raised by the questions. The most common weakness was a failure to stick to the question, as the specific comments below explain. Once again, there were only few instances this year of students failing to follow the rubric, by answering too many questions from one section or the other. But a few students did still do this, and it’s worth restating that if a student answers more questions than is permitted from one of the sections, then one of their answers will be ignored entirely. Note that errors in student extracts, below, were present in the original text. References to ‘CA 2006’ are to Companies Act 2006. References to IA 1986 are to the Insolvency Act 1986.

Comments on specific questions PART A Question 1 ‘The remuneration of directors is out of control. “Remuneration committees” provide little control over excessive pay. And shareholders have no powers, and no incentive, to take action.’ Discuss. General remarks This question relates to Chapters 14 and 16 of the module guide. It is, broadly, on the topic of ‘corporate governance’, but focuses only on some specific issues within that broad topic, namely how the remuneration of directors is determined. It asks you to comment on two particular methods to control directors’ remuneration, namely ‘remuneration committees’ and ‘shareholder power’. Law cases, reports and other references the examiners would expect you to use To show whether such pay is ‘out of control’, students might refer to a variety of sources, such as media comment, or the work of the ‘High Pay Centre’. Reference to the UK Corporate Governance Code (2018) is essential, but specifically its

1

provisions on executive pay, including ‘remuneration committees’. Mention should also be made of existing statutory provisions that address pay, for example those relating to the directors’ remuneration report, found in ss.420-422A CA 2006, and including Companies (Miscellaneous Reporting) Regulations 2018/860. Common errors As in past years, the most common error on this ‘corporate governance’ question was the regurgitation of a pre-prepared answer which summarises the history of the UK Corporate Governance Code, and perhaps mentions some of its specific provisions, but has almost nothing to say about remuneration in particular. A good answer to this question would… say something about whether executive pay is ‘out of control’ – perhaps noting media comment about executive pay, and awareness that this problem is much greater in larger companies with dispersed ownership, especially quoted companies. The answer would focus on the two forms of control mentioned in the question. It would explain ‘remuneration committees’ - their composition, and how they might regulate executive pay. It would say whether such committees are mandatory for companies, noting the recommendations of the UK Corporate Governance Code, and commenting on the code’s enforcement. There should be some awareness of whether such committees appear to have worked well in regulating executive pay, and then some discussion of the strengths, and also the weaknesses, of such committees and the NEDs which compose their membership. Turning next to shareholder control, a good answer would look at the specific rules that do to some extent empower shareholders to have greater involvement in the process of setting executive pay – the reporting requirements for quoted companies in s.447 CA 2006, and the requirement for a shareholder vote on the remuneration report (s.439). Some evaluation of whether these mechanisms work well – especially around the issue of whether shareholders have any incentive to become involved in the process – should also be given. Finally, a good answer might also note the recent corporate governance reforms that have been implemented. In particular, the Companies (Miscellaneous Reporting) Regulations 2018/860 require quoted companies to reveal the ratio between the pay of their CEO and the average pay of the company’s UK workforce. Poor answers to this question… failed to answer the question asked – they did not address the specific topic of remuneration of directors, and did not examine the effectiveness of remuneration committees, nor the powers enjoyed by shareholders. Question 2 ‘Provisions in a company’s articles provide little protection for minority shareholders. Such provisions are rarely enforceable, and too vulnerable to alteration by the majority.’ Discuss. General remarks This question relates to Chapters 9 and 10 of the module guide. It looks at one specific area of minority shareholder protection, namely that provided by the company’s articles of association. The answer must focus on that. Simply writing out a pre-prepared essay on minority protection is insufficient. And an answer that makes no reference to the articles fails to answer the question at all.

2

Examiners’ reports 2019

Law cases, reports and other references the examiners would expect you to use Section 33 CA 2006 and case law interpreting s.33, for example: Foss v Harbottle; Hickman v Kent; Pender v Lushington; Rayfield v Hands; Eley v Positive Government Security Life Assurance; Beattie v E and F Beattie, Salmon v Quin & Axtens. Academic commentary thereon, for example by Wedderburn, Baxter. On alteration: s.21 CA 2006 and relevant cases such as Allen v Gold Reefs, Greenhalgh v Arderne Cinemas. Common errors Too many essays failed to mention the articles, their enforcement under s.33, or their alteration under s.21. Some answers focused exclusively on, say, s.994 CA 2006, or on derivative claims. Whilst some mention of these alternative ways of protecting minorities might have been relevant, after considering the strengths and weaknesses of the articles, an essay focused entirely on those alternatives, and saying nothing about the articles, did not answer the question at all. A good answer to this question would… note the continuing uncertainty over key aspects of the ‘statutory contract’, created by s.33 CA 2006, which permits enforcement of the articles. One area of doubt/controversy concerns the enforcement of ‘outsider rights’. A good answer would discuss some of the relevant case law that illustrates the lack of consistency in the cases, and would also note academic attempts to explain or resolve such inconsistencies. A second area concerns the categorisation of some breaches of duty as ‘mere internal irregularities’, with the breach of the articles seen as a wrong done to the company to be resolved by the operation of majority rule. Again, a good answer would note the apparently conflicting case law, such as Pender, and MacDougall, and again might note academic attempts to resolve this controversy. On the alteration point, explain s.21 and the need for a special resolution. Analyse the judicial policing of alterations through the requirement that such be passed ‘bona fide for benefit of company as a whole’. A good answer would explore the judicial construction and application of this test, through the relevant case law. It is generally applied as a subjective test, and the requirement of ‘benefit of the company as a whole’ seems to come down to a rather easily satisfied requirement to avoid discrimination against the minority. A good answer might note a rather stricter approach in ‘expropriation’ cases, as well as the ability of well-advised minorities to prevent future alteration through the use of ‘provisions for entrenchment’ under s.22 CA 2006 or the creation of ‘class rights’. Poor answers to this question… did not answer the question asked, instead giving a (presumably pre-prepared) essay on some entirely different area of minority protection. Weaker answers also often failed to address the issue of alteration, or failed to support the answer with sufficient reference to case law, or to academic commentary. Student extract In general principle, the company is a separate legal person. Only the company itself can sue the wrongdoer. If the wrongdoer control the majority of the board of the company, they can ratify the act by passing a resolution. It is impractical for the minority shareholder to protect their interests under the articles. Therefore it leads the transformation of derivative claim from common law to statutory action. And it provides a personal claim of unfair prejudice for the minority to bring an action to the wrong act of the company.

3

At common law, the principle of derivative claim was established in the case of Foss v Harbottle. Subsequently, Edwards v Halliwell list some exceptional circumstances to the rule in Foss. If the act is ultra vires the company or illegal, or interferes the personal interests of member, or the acts is improper procedure, or existence of fraud or wrongdoer control of the majority. However, the courts are reluctant to open the gate and consider the derivative claim at common law. The statutory derivative claim is provided for under s.260–264 CA 2006. [The essay then worked through the statutory rules governing derivative claims, including referring to articles that discuss how these new provisions are being applied by the courts, concluding:] As such, the court discourage the use of derivative actions to enhance the balance between shareholders’ rights and the directors’ development in order to help the growth of the company. However, the minority can still have an unfairly prejudicial remedy governed by s.994 CA 2006. This is brought on grounds that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or some part of its members, including at least the shareholder himself. The actual or proposed act or omission is not only prejudicial but also unfair (O’Neill v Phillips). [There then followed a reasonable description of the basics of s.994 actions, including again mentioning relevant academic opinion.] Comments on extract Overall: this essay was a bad fail. It failed to answer the question set at all. Much of the information given was accurate. Had the question been different (had it, for example, asked about derivative claims or s.994 CA 2006, or to identify the most effective area of minority protection), then it would have been a pass. But the ‘answer’ said nothing about articles of association. Interpretation of the question: inappropriate. Relevance of the answer to the question: almost entirely irrelevant. A brief discussion of, for example, s.994 might have been appropriate, at the end of an analysis of the articles (their enforceability and alteration), but merely to describe these alternative areas of minority protection on their own simply did not answer the question. Substantive knowledge: good – but not used in a way that answers the question. Use of authorities: no relevant authorities used. Articulation of argument: OK – but not relevant to the question asked. Accuracy of information: OK – but again, not relevant to the question asked. Question 3 Does UK company law ensure that directors must prioritise the interests of shareholders? Should it do so? General remarks This question relates to Chapters 15, 16 and 17 of the module guide. It had two parts to it, both of which a student needed to answer. The first part was ‘descriptive’: does UK company, currently, require directors to put shareholders’ interests first. The second part was a ‘normative’ question. It required students to say whether, in their opinion, shareholders’ interests should be treated in this way (or whether, for example, the interests of other ‘stakeholders’ (such as employees) should sometimes take priority over the interests of shareholders).

4

Examiners’ reports 2019

Law cases, reports and other references the examiners would expect you to use Section 172 CA 2006, and relevant case law, for example: Regentcrest plc v Cohen; Extrasure Travel Insurances Ltd v Scattergood; Charterbridge Corp v Lloyds Bank Ltd; West Mercia Safetywear Ltd v Dodd. On enforcement of s.172: s.170(1) CA 2006, the rule in Foss v Harbottle and Part 11 CA 2006 (derivative claims). Finally, reference to changes made following the Government’s recent Corporate Governance Review. On the normative part of the question, reference the abundant literature that discusses the debate around shareholder primacy versus stakeholding. Common errors Failure to mention s.172 CA 2006 – really the key statutory provision. Discussion only of the first, descriptive part of the question, with no mention of whether the law should, in the student’s opinion, require directors to prioritise shareholders’ interests. A good answer to this question would… first, consider whether or not UK company law does indeed require directors to prioritise the interests of shareholders. This requires examination of s.172. Students might note how this does seem to require directors to put shareholders first. Although it says directors are ‘to have regard to’, stakeholder interests, this is to be done only so as to ‘promote the success of the company’ and ‘for the benefit of the members’ (meaning shareholders). It would note that creditor interests are put somewhat higher, at least where insolvency is threatened; note s.172(3), and statutory provisions which elevate creditor interests when a company is near insolvency (e.g. s.214 Insolvency Act 1986). It might also question how easily shareholders can enforce this provision against directors if the latter were determined to prioritise stakeholder interests? Note that s.172 entails a ‘subjective test’ – Regentcrest. It is for directors themselves to judge what will best promote the company’s success, and it is difficult for shareholders to challenge that. Note also that the duty is owed to the company itself (section 170(1)) making enforcement more difficult still. The answer might then widen its focus beyond s.172 to other elements of UK company law or corporate governance that support shareholder primacy (e.g. shareholders alone hire/fire directors; executive pay tends to be ‘performance related’ – in terms, essentially, of shareholder value; the role of takeovers etc .). And reference changes that followed from the Government’s recent Corporate Governance Review, such as the inclusion in the UK Corporate Governance Code (2018) of a recommendation that companies adopt a method for allowing the views of employees to be represented within company decision making. Finally, the answer should say at least something about whether company law ought to require shareholder interests to be prioritised. A good essay would give some flavour of the arguments that are used in the debate between shareholder primacy and stakeholding. A very good answer would discuss and critically evaluate some of the wider literature addressing this question. Poor answers to this question… tended only to answer half of it, by focusing only on what the current law says, without addressing whether the law ought to prioritise shareholder interests. Poor answers also tended to be rather weak in their analysis of s.172. Some, for example, simply copied out the whole of the section, from the statute book. This is a waste of time. Credit can be given for knowing that s.172 is relevant, but not for copying out the section from a book that students are allowed to take into the exam. Instead, students should summarise, in their own words, the key points from the

5

statute, explaining, again in their own words, the meaning and significance of these key points, and how they are relevant to the question asked. Question 4 A parent company which exercises control over a subsidiary will be held liable for any torts that the subsidiary commits. Moreover, such a parent will also be liable for any contractual debts incurred by the subsidiary, in accordance with the so-called “single economic entity” principle. To what extent do you agree with the above statement? General remarks This question relates to Chapters 3 and 4 of the module guide. It addresses two related areas of law. The first is whether a parent company is liable for any torts committed by its subsidiary company, if the parent is ‘in control’ of that subsidiary. The second is whether there is a ‘single economic entity’ principle that means that a parent is also liable for the contractual debts that its subsidiary incurs. The question is phrased as a clear statement that a parent is indeed liable, and so answers need to reach a conclusion to demonstrate whether the student does, or does not, agree with the statement. Law cases, reports and other references the examiners would expect you to use For the ‘tortious part’: Connelly v RTZ Corporation plc; Lubbe v Cape Industries plc; Chandler v Cape plc; Thompson v The Renwick Group plc; AAA v Unilever; Vedanta Resources plc v Lungowe; Okpabi v Royal Dutch Shell plc. For the ‘single economic entity’ principle part: Adams v Cape and Petrodel Resources Ltd v Prest; DHN Food Distributors v Tower Hamlets LBC ; Woolfson v Strathclyde Regional Council; Re FG (Films); Smith, Stone and Knight v Birmingham Corporation. Common errors Some dealt only with one part of the question – for example, only examining liability in tort, or under the single economic entity principle. Some answers repeated a (presumably) pre-prepared summary of the basic rules governing veil-piercing, but without relating this to the actual question. Some students confirmed the existence of the single economic entity principle, quoting older cases, such as DHN, but without mentioning the significance of subsequent cases, such as Adams v Cape. A good answer to this question would… begin by asking whether a parent company that is controlling its subsidiary would be held liable for torts committed by its subsidiary. It is true that, in some circumstances, a parent can owe a duty of care to those who might be injured by the negligence of its subsidiary. This is first established in Chandler v Cape. Chandler imposed a duty of care on a parent where the Caparo test is satisfied, and offered four ‘indicia’ for identifying whether the Caparo test was likely to be met. However, it is not quite accurate to suggest that a parent which controls its subsidiary will always be liable for its subsidiary’s torts. For one thing, the Chandler indicia don’t necessarily require the parent to be in control of the subsidiary. And the post-Chandler cases, such as Okpabi, Lungowe, Vedanta, and AAA v Unilever, while putting more emphasis on control, require that the parent be controlling the particular activity which causes harm, rather than requiring the parent to be generally in control of all its subsidiary’s activities. Moving to the second half of the question, it is not true that a parent controlling its subsidiary is likely to be held liable for its subsidiary’s contractual debts. The ‘single economic entity’ ground for veil piercing was rejected in both Adams v Cape and Prest v Petrodel. Moreover, VTB Capital v Nutritek suggests that even where the veil can be lifted, it should not be done in order to impose on a shareholder a

6

Examiners’ reports 2019

contractual liability incurred by their company. A good answer would explain when the veil can be pierced, post-Prest, and show how this is a much narrower ground than the question suggests. Poor answers to this question… made the ‘errors’ noted above. Also, weaker answers tended to lack a deep knowledge of case law, and especially more recent case law. Poorer answers got the basic points about parental liability for subsidiaries’ torts, and discussed Chandler. But they failed to discuss the post-Chandler case law, and its growing emphasis on the need to show that the parent company was in control of the subsidiary’s activ...