Company Law Reform

Question 1

B what is CLR background? 7

Answer 1

•Review commissioned by the Department of Trade and Industry in 1998
•Review overseen by Company Law Review Steering Group (CLRSG)
•CLRSG Final report 2001
•Government response in Modernising Company Law
•Company Law Reform Bill 2005
•Companies Bill 2006
•Companies Act 2006

Question 2

B corporate purpose (approaches) ? 7

Answer 2

Options
1.The Enlightened Shareholder Approach
2.The Pluralistic Approach
●Enlightened Shareholder Value approach with a Pluralist overall objective
•a statutory statement of principles, covering all directors’ general duties;
•an duty to achieve the success of the company for the benefit of the shareholders having regard to stakeholders’ interest; and
•an Operating and Financial Review.

Question 3

B CLSRG on Wealth and Welfare For All

Answer 3

The means which company law deploys for achieving this objective must take account of the realities and dynamics which operate in the running of commercial enterprise. It should not be done at the expense of turning company directors from business decision makers into moral, political, or economic arbiters”

Question 4

B aims of CLR ? 4

Answer 4

1.A ‘think small first approach’;
2.To make it easier for entrepreneurs to set up and run a company;
3.To promote a long-term investment culture and to enhance shareholder engagement; and
4.To provide flexibility for the future

Question 5

DD directors duties and their sections? 6

Answer 5

●Duty of care
○Section 174: general duty of care, skill and diligence
●Duty of Loyalty
○Section 171: general duty to exercise powers for a proper purpose
○Section 172: general duty to promote the success of the company
○Section 175: general duty to avoid conflicts

Question 6

DD scope of duties per 170 (4) ?

Answer 6

The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties

Question 7

DD duty of care from directors ?

Answer 7

Directors must devote “sufficient time, care, and diligence to managing the company, establish information and monitoring systems, supervise business operations, and possess the necessary skills and experience to discharge their functions effectively”.

Question 8

DD what is section 174 ? 4

Answer 8

Duty to exercise reasonable care, skill and diligence
(1)A director of a company must exercise reasonable care, skill and diligence.
(2)This means the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has

Question 9

DD how to assess duty of care ? 5

Answer 9

●Dual objective/subjective approach
●Three parts:
1.Identify the director’s role and duties
2.Measure conduct by reference to the care of an ordinary businessman performing that role/duty
3.where the director has greater skill than the average director, they will be assessed based on the skill they actually possess
●Common law: a director only had to exhibit skill that might reasonably have been expected from a person of his/her knowledge and experience (City Equitable).

Question 10

DD duty of loyalty?

Answer 10

The duty of loyalty requires managers to place the interests of the corporation and its shareholders above their own interest

Question 11

DD what are the duties directors have ? 3

Answer 11

●s.171 establishes a duty to act with proper purposes
●s.172 provides a duty to promote the success of the company
●s.175 sets out the duty to avoid conflicts of interest

Question 12

DD what does s171 say about DD ? 2

Answer 12

A director of a company must—
(a ) act in accordance with the company’s constitution, and
(b) only exercise powers for the purposes for which they are conferred.

Question 13

DD how do you assess directors duties? 5

Answer 13

Identify what purposes are proper
2.Ascertain whether the powers were exercised for a purpose qualified as proper Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71.
●The judge “will necessarily give credit to the bona fide opinion of the directors” when ascertaining their intentions (Howard Smith).
●The judge will also look at the situation objectively to test the assertions the directors have made.
●Mixed motives: the “primary” purpose of the exercise of power

Question 14

DD improper purpose of corporate powers ? 4

Answer 14

●Corporate powers cannot be used to usurp the basic constitutional rights of shareholders
○The right to vote (Hogg v. Cramphorn Ltd [1967] Ch 254)
○The right to accept or reject an offer for your shares (Howard Smith v. Ampol Petroleum Ltd. [1974] UKPC 3)
○Affirmed in Eclairs Group Ltd. V. JKX Oil & Gas Plc [2015] UKSC 71

Question 15

DD what does section 172 (1) say? 7

Answer 15

A director of a company must act in a way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to–
a)The likely consequences of any decision in the long term
b) the interests of the company’s employees
c) the need to foster the company’s business relationships with suppliers, customers and others
d)the impact of the company’s operations on the community and the environment
e)the desirability of the company maintaining a reputation for high standards of business conduct, and
f)the need to act fairly between the members of the company.

Question 16

DD what is best interests regarding duties? 4

Answer 16

●The common law “best interests” duty was interpreted subjectively, not objectively
○“it would be wrong for the court to substitute its opinion for that of management, or indeed to question the correctness of management’s decisions, on such a question if bona fide arrived at” (Howard Smith v. Ampol Petroleum)
○A judge “will necessarily give credit to the bona fide opinion of the directors” and “will respect their judgment as to matters of management” but will also look at the situation objectively to ascertain whether to believe the directors (Howard Smith)
○“Consistent with the general point that the court will not, speaking hypothetically, step too eagerly into the confines of the boardroom, it is unlikely that the court will doubt the director’s honesty and professed support for the company’s best interests unless substantial detriment to the company has resulted from his act or omission” (Stobart Group Ltd. v Tinkler [2019] EWHC 258)

Question 17

DD what did Lord goldsmith say about success in 2006?

Answer 17

for a commercial company, success will normally mean long-term increase in value, but the company’s constitution and decisions made under it may also lay down the appropriate success model for the company. … it is essentially for the members of a company to define the objectives they wish to achieve. The normal way for that to be done—the traditional way—is that the members do it at the time the company is established. In the old style, it would have been set down in the company’s memorandum. That is changing … but the principle does not change that those who establish the company will start off by setting out what they hope to achieve. For most people who invest in companies, there is never any doubt about it—money. That is what they want. They want a long-term increase in the company. It is not a snap poll to be taken at any point in time.”

Question 18

DD what is section 175 about? 6

Answer 18

●At common law, a director was under a duty not to enter into engagements in which he or she had a personal interest conflicting, or which possibly might conflict, with the company’s interests (Aberdeen Railway v. Blaikie 1 Macq. 461)
●s. 175 codifies this duty
●The duty is not infringed “if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest” (s. 175(4)(a))
●A company’s board of directors can potentially authorize conduct that would otherwise fall afoul of s. 175(1) (s. 175(4)(b))
●s. 177 requires disclosure to the board before the transaction is finalized
●If ex ante disclosure under s. 177 is not possible or has not occurred, there must be disclosure to the directors “as soon as is reasonably practicable” (CA, s. 182)

Question 19

DD discretion? 4

Answer 19

Commercial judgement, commercial decision, business judgement rule (US terminology)
●The common law duty to act in the company’s best interests obliged directors to act “bona fide in what they consider– not what a court may consider – is in the interests of the company” (Re Smith and Fawcett).
●Howard Smith Ltd v Ampol Petroleum Ltd 3 [1974] AC 821 Lord Wilberforce stated that the courts ‘will respect (directors’) judgment as to matters of management’
●Xu et al (2013) define the business judgment rule as “a legal presumption that the directors and officers of the corporation have exercised due care by acting on an informed basis, in good faith and in the honest belief that their actions are in the best interests of the corporation”

Question 20

DD summary of directs duties? 6

Answer 20

●Directors’ duties are based on an enlightened shareholder value approach with a Pluralist overall objective.
●The Companies Act 2006 largely reflects the common law position
●The purpose of directors’ duties is to tackle the managerial agency problem
●Directors have a duty of care and loyalty to the company
●Directors must act in good faith in the best interests of the corporation with skill, care and diligence
●The court is unlikely to substitute its judgement for the business judgement of a director acting in good faith.

Question 21

SP what are shareholders rights ? 5

Answer 21

●Special resolution directions
●Selection/dismissal of directors
●Shareholder voting
●Derivative litigation
●Unfair Prejudice

Question 22

SP What was the VK emission scandal “

Answer 22

VW installed software to circumvent emissions testing. The scandal cost the car company 32 billion euro.

VW directors and supervisory board were motivated by compensation schemes that were linked to share value or were appointed by shareholders’ with large shareholdings.

VW shareholders reach a settlement deal with CEO Martin Winterkorn (11 millions) and Stadler (4.1 million). The resolution had been passed with more than 99% of the votes. More than 90% of the ordinary shares are held by Porsche SE, the state of Lower Saxony and the Emirate of Qatar.

Minority shareholders believe the settlement is unjustifiable and want to challenge the resolution

Question 23

SP Derivative Litigation at Common Law ? 3

Answer 23

•The “proper plaintiff (claimant)” principle has been described as “…the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C” (Prudential Assurance)
•The internal management principle requires that decisions as to whether a company will sue are to be taken by those with managerial authority and implemented in accordance with the principles of majority rule
•Exception to the rule: where the alleged misconduct was sufficiently serious, and where shareholders could demonstrate that the board and the general meeting were controlled by the alleged wrongdoers (Foss v. Harbottle (1843) 2 Hare 461; 67 E.R. 189).

Question 24

SP Derivative Litigation under CA 2006? 5

Answer 24

Known as “derivative claims” in England (CA 2006, ss 260-264) and “derivative proceedings” in Scotland (ss 265-269)
•Member of company brings proceedings on behalf of the company (s 265(1))
•Any damages are awarded to the company
•Relevant conduct = actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by director (s 265(3))
•Leave of court needed to bring proceedings (s 266

Question 25

SP when leave must be denied? 4

Answer 25

Under s. 268(1)(a) leave must be denied where the court is satisfied that the shareholder is not acting in accordance with the s. 172 duty to promote the success of the company

•The court needs to be satisfied that no director acting in accordance with s. 172 would seek to continue the claim (Iesini)

•A court must dismiss an application for leave where the alleged misconduct has been authorized by the shareholders in advance (CA s. 268(1)(b)) or ratified after the fact (CA s. 268(1)(c))

•Shareholder resolutions will only have this effect if voting by the defendant directors were not decisive on a ratification resolution; those votes have to be disregarded (CA s. 239(4))

Question 26

SP what are the discretionary factors? 8

Answer 26

Whether the member is acting in good faith (s.268(2)(a))
•The importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to raising or continuing the claim (s. 268(2)(b) )
•CA s. 268(2)(c), (d) deal with the possibility of shareholder resolutions absolving breaches of duty
•A judge should have “particular regard” for views of members with no personal interest in the matter (s. 268(3)), meaning the judge will be more likely to dismiss the application if these shareholders oppose the litigation

A judge should take into account whether the company itself has decided not to sue (s. 263(3)(e))
•With s. 268(2)(f) a judge is more likely to deny leave if the shareholder has the option to seek relief in a personal capacity (e.g. under CA s. 994)
•CA 2006 s. 268(2) does not provide an exhaustive list of factors a court can focus on when deciding whether to grant leave
•“Wrongdoer control” is an obvious possibly relevant variable

Question 27

SP unfair prejudice section ?

Answer 27

s.994 Petition by company member
(1)A member of a company may apply to the court by petition for an order under this Part on the ground—
(a)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 of some part of its members (including at least himself), or
(b)that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

Question 28

SP what is unfair prejudice? 4

Answer 28

Fairness depends on background and context
•A member will not usually be able to complain of unfairness unless:
1)There has been some breach of the terms on which he agreed that the affairs of the company should be conducted; or
2)The rules have been used in a manner contrary to good faith

Question 29

SP remedies to UP? 7

Answer 29

)regulate the conduct of the company’s affairs in the future;
b)require the company-
i.to refrain from doing or continuing an act of, or
ii.to do an act that the petitioner has complained it has omitted to do;
c)authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;
d)require the company not to make any, or any specified, alterations in its articles without the leave of the court;
e)provide for the purchase of the shares of any members of the company by other members of by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly

Question 30

SP examples of UP? 10

Answer 30

deliberately devaluing the value of the minority’s shareholding
●excluding minority shareholders from the management of the business
●majority shareholders withholding information, such as company accounts or records, from minority shareholders
●directors using company assets inappropriately and for their own benefit
●diverting business to another company in which the majority shareholder holds an interest
●repeatedly failing to hold AGMs
●mismanaging the business
●breaching the Articles of Association or a Shareholder’s Agreement
●non-payment of dividends
●excessive financial awards to the director

Question 31

SP summary of SP ? 4

Answer 31

Shareholder’s have limited control rights: right to select and dismiss directors, right to direct management through special resolution, right to vote at general meetings.
●Shareholders may take a derivative action on behalf of a company to enforce a breach of duty under limited circumstances
●Shareholders can take an unfair prejudice claim if they believe the company’s affairs are being conducted in an unfairly prejudicial manner
●There is no duty of stewardship on shareholders who remain typically unengaged

Question 32

NP back ground of narrative report? 6

Answer 32

Operating and Financial Review or OFR
●Companies Act 1985 (Operating and Financial Review and Directors’ Report, etc.) Regulations 2005 (SI 2005/1011)
●Companies Act 1985 (Operating and Financial Review) (Repeal) Regulations 2005 (SI 2005/3442)
●The Kay Review of UK Equity Markets and Long-term Decision Making, published in 2012, reiterated the need to establish a culture of communication and trust between investors and businesses.
●In August 2013, Parliament approved The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.
●Strategic report replaces business review

Question 33

NP directors report 8

Answer 33

Directors during the financial year (s.416(1)a)
●Recommended dividend payment (s.416(3))
●Statement as to disclosure to auditors (s.418)
●Important events that have effected the company
●Corporate governance statement
●A statement summarising engagement with employees
●A statement regarding business relationships with suppliers, customers and others
●Information on emissions
●“up-grade” option

Question 34

NP strategic reporting.? 5

Answer 34

The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (SI 2013/1970);
●The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 (SI 2016/1245);
●The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860);
●The Statutory Auditors Regulations 2017 (SI 2017/1164); and
●The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31