Seminar 7 CG - Summary Debt Restructuring and Corporate Insolvency PDF

Preview

Summary

corporate governance ...

Description

SEMINAR 7: MANAGEMENT CONTROL II: REGULATING CONFLICTS & CORPORATE OPPORTUNITIES, AND REMEDIAL ISSUES Reading:  Simon Johnson, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, “Tunnelling” The American Economic Review, Vol. 90, No. 2, (May, 2000), pp. 22-27 (KEATS)  Keay, “The Authorising of Directors’ Conflicts of Interest: Getting a Balance” (2012) 12 Journal of Corporate Law Studies 129 (KEATS)  "GC100: Companies Act 2006 - Directors’ conflicts of interest" (Published: 18 January 2008) (KEATS) The Background First, we must understand the underlying equitable principles. The case law made it clear that the fiduciary duty was prima facie very strict. See: Aberdeen Rly Co. v Blaikie Bros (1854) 1 Macq. 461. However, as the “beneficiary” of the duty, “the company” could: (a) waive the breach of duty by ex post ratification (N-West Transportation v Beatty (1887) 12 App Cas 587) Or (b) ensure its ex ante modification in the articles. Statute however supplied mandatory rules to limit the extent of a contracting out. Furthermore, the courts strictly construed such modifying articles. See Guinness Plc v Saunders [1990] 2 AC 663. Against this background we must now turn to examine the statutory changes/restatement. 

Aberdeen Rly Co v Blaikie Bros Company set aside a contract entered into by it and a partnership when the Chairman of the Board was also a partner in the partnership. The conflict is obvious: wishing to sell at the highest price, against wishing to buy at the lowest price!

References: (1854) 1 Macq 461, (1854) 17 D (HL) 20 Coram: Lord Cranworth LC Ratio:The plaintiff needed a large quantity of iron chairs (rail sockets) and contracted for their supply over an 18-month period with Blaikie Bros a partnership. Thomas Blaikie was the managing partner of Blaikie Bros and a director and the chairman of the Aberdeen Railway Company. The contract was partly performed but, having taken delivery of about two-thirds of the iron chairs, the Aberdeen Railway Company refused to accept any more. The defendant sought to enforce the contract or for damages for breach. Held: The railway company’s defence succeeded on the grounds that Mr Blaikie’s self-dealing rendered the contract voidable at its suit. equitable rule as to the accountability of directors is not limited to cases in which there is a maturing business opportunity but extends to cases in which the director either has or can have a personal interest conflicting, or which possibly may conflict, with the interests of whose whom he is bound to protect. ‘This, therefore, brings us to the general question, whether a Director of a Railway Company is or is not precluded from dealing on behalf of the Company with himself, or with a firm in which he is a partner. The Directors are a body to whom is delegated the duty of managing the general affairs of the Company. A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.’and ‘Mr Blaikie was not only a Director, but (if that was necessary) the Chairman of the Directors. In that character it was his bounden duty to make the best bargains he could for the benefit of the Company. While he filled that character, namely, on the 6th of February, 1846, he entered into a contract on behalf of the Company with his own firm, for the purchase of a large quantity of iron chairs at a certain stipulated price. His duty to the Company imposed on him the obligation of obtaining these chairs at the lowest possible price. His personal interest would lead him in an entirely opposite direction, would induce him to fix the price as high as possible. This is the very evil against which the rule in question is directed, and I here see nothing whatever to prevent its application. I observe that Lord Fullerton seemed to doubt whether the rule would apply where the party whose act or contract is called in question is only one of a body of Directors, not a sole trustee or manager. But, with all deference, this appears to me to make no difference. It was Mr Blaikie’s duty to give his co-Directors, and through them to the Company, the full benefit of all the knowledge and skill which he could bring to bear on the subject. He was bound to assist them in getting the articles contracted for at the cheapest possible rate. As far as related to the advice he should give them, he put his interest in conflict with his duty, and whether he was the sole Director or only one of many, can make no difference in principle. The same observation applies to the fact that he was not the sole person contracting with the Company; he was one of the firm of Blaikie Brothers, with whom the contract was made, and so interested in driving as hard a bargain with the Company as he could induce them to make.’ N-West Transportation v Beatty Facts: A director caused the company to buy a steam ship (price was not unreasonable and the steam ship was the only one suited for the role the company needed at that time). The director also had the contract ratified by a majority of shareholders, but he held a large portion of the shares that voted for the ratification. Issues: Can a director ratify a contract/transaction that breaches his fiduciary duty? Can a director act as shareholder and vote regarding ratification of the impugned transaction? Holding: Yes to both.

Ratio: A ratification is valid if it is supported by a mere majority of shareholders and its adoption not brought about by unfair or improper means; not illegal or fraudulent or oppressive towards opposing shareholders (fraud on the minority exception to Foss). Subject to the articles, directors are not precluded from also acting as shareholders and voting regarding the ratification. THIS IS OVERRULED BY STATUTE Notes: ·SCC supported “majority of the minority ratification” – the requirement that a majority of impartial, independent, intelligent, and disinterested shareholders vote for ratification; recognizes that people should not be able to ratify their own wrongs to avoid liability

GUINNESS PLC V SAUNDERS; HL 8 FEB 1990 July 21, 2016 dls 0 Company, References: [1990] 2 AC 663, [1989] UKHL 2 Links: Bailii Coram: Lord Templeman, Lord Goff Ratio:A committee of the board of Guinness had authorised payment of remuneration to Mr Ward, who was a director. However, the articles of association did not give authority to a committee of the board (as opposed to the full board) to authorise such a payment. Mr Ward attempted to rely on section 727. Held: The claim failed: ‘Mr. Ward had no right to remuneration without the authority of the board. Thus the claim by Guinness for repayment is unanswerable. If Mr. Ward acted honestly and reasonably and ought fairly to be excused for receiving £5.2m. without the authority of the board, he cannot be excused from paying it back. By invoking section 727 as a defence to the claim by Guinness for repayment, Mr. Ward seeks an order of the court which would entitle him to remuneration without the authority of the board.’ (Lord Templeman) Statutes: Companies Act 1985 727 Facts  A former director of the recently taken-over Guinness brand was paid a Ј5.2 million sum as a bonus  The bonus was authorised by a committee of directors  The articles of association provides that the whole board must consent to such a bonus Issue • Could the bonus be retained? Decision • No Reasoning Breach of fiduciary obligation based on terms set out in the company’s articles of association, which could not be overruled 1. Duty to avoid conflicts of interest (and duties): s.175 A director must avoid situations in which he has or can have a direct or indirect interest that conflicts with, or may conflict with, the company's interests. This applies, in particular, to the exploitation of property, information or opportunity, and regardless of whether or not the company could take advantage of such. Any director with a conflict of interest with the company must disclose it to other directors and refrain from voting and adopting any resolution relating such conflict. Note: Special provisions in s.180(1)-(3) Ex ante modification of duty and ex post ratification Antecedent modification: S180(4). See also s. 232(4). Ex post ratification: s 239 – note the disenfranchisement provisions. Note limits to ratification: s 239(7). Section 180(4) confirms that s.175 directors’ authorisation is an additional relaxation of director’s duty (to avoid conflict of interest). So, the general rule that ‘the company’ (subs.(4)(a)) or ‘the articles’ (s.180(4)(b)) may modify duty applies. But note that s.180(4)(b) does not permit articles watering down disenfranchisement of directors in s.175(6). s 180 Consent, approval or authorisation by members (1) In a case where— (a) section 175 (duty to avoid conflicts of interest) is complied with by authorisation by the directors, or (b) section 177 (duty to declare interest in proposed transaction or arrangement) is complied with, the transaction or arrangement is not liable to be set aside by virtue of any common law rule or equitable principle requiring the consent or approval of the members of the company. This is without prejudice to any enactment, or provision of the company's constitution, requiring such consent or approval. (2) The application of the general duties is not affected by the fact that the case also falls within Chapter 4 (transactions requiring approval of members), except that where that Chapter applies and— (a) approval is given under that Chapter, or (b)

the matter is one as to which it is provided that approval is not needed, it is not necessary also to comply with section 175 (duty to avoid conflicts of interest) or section 176 (duty not to accept benefits from third parties). (3) Compliance with the general duties does not remove the need for approval under any applicable provision of Chapter 4 (transactions requiring approval of members). (4) The general duties— (a) have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors, or any of them, that would otherwise be a breach of duty, and (b) where the company's articles contain provisions for dealing with conflicts of interest, are not infringed by anything done (or omitted) by the directors, or any of them, in accordance with those provisions. (5) Otherwise, the general duties have effect (except as otherwise provided or the context otherwise requires) notwithstanding any enactment or rule of law

232 Provisions protecting directors from liability Nothing in this section prevents a company's articles from making such provision as has previously been law dealing with conflicts of interest. 239 Ratification of acts of directors (1) This section applies to the ratification by a company of conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company. (2) The decision of the company to ratify such conduct must be made by resolution of the members of the company. (3) Where the resolution is proposed as a written resolution neither the director (if a member of the company) nor any member connected with him is an eligible member. (4) Where the resolution is proposed at a meeting, it is passed only if the necessary majority is obtained disregarding votes in favour of the resolution by the director (if a member of the company) and any member connected with him. This does not prevent the director or any such member from attending, being counted towards the quorum and taking part in the proceedings at any meeting at which the decision is considered. (5) For the purposes of this section— (a) “conduct” includes acts and omissions; (b) “director” includes a former director; (c) a shadow director is treated as a director; and (d) in section 252 (meaning of “connected person”), subsection (3) does not apply (exclusion of person who is himself a director). (6) Nothing in this section affects— (a) the validity of a decision taken by unanimous consent of the members of the company, or (b) any power of the directors to agree not to sue, or to settle or release a claim made by them on behalf of the company. (7) This section does not affect any other enactment or rule of law imposing additional requirements for valid ratification or any rule of law as to acts that are incapable of being ratified by the company.

Tunnelin In every system it’s occurs The compares civil and common law jurisdictions What do you mean by social interest ? – first case

GC 100 company – very important

174 – only duty about director’s competence the director must reache the standart od reasonable person on his shoes objective standard when you delegate task – you have to supervise think about duties not separately you cannot be loyal if you have the conflicts of interest s 172 – completely subjective Aberdeen railway S175 situation of conflicts...