Corporate Blawg UK

Cool terms: "spring-loading" or "bullet-dodging"

The guns came out at dawn. The legal phrase was cocked and ready to blow.  At the start of September the U.S. marshalls declared they would clamp down on the cowboys that manipulate markets with news affecting the price of share options.  Corporate Blawg UK notes that two weeks later the same whirlwind was to hit our chalky shores.
            This week the FSA have warned in its Market Watch September newsletter (published on the 25th) that companies should not attempt to manipulate the market with spring-loading or bullet dodging, or they could face unlimited fines and public sanction.
            Corporate Blawg whistled towards these cool terms and explains that when options over shares are granted, a company may manipulate the market with good or bad news to make those options worth more or less. 
            Spring-loading is when a company brings forward an option allocation date so the holder can benefit from anticipated rises in the share price.
            Bullet-dodging is the opposite, when the company delays the grant of an option so the owner can benefit from an expected fall in share price.
            The facts of each case will determine whether spring loading and bullet dodging amounts to market abuse under the Financial Services and Markets Act 2000 (FSMA). Market abuse may be caused by an employee acquiring, or person granting, options on the basis of inside information.  Section.118(3) FSMA (improper disclosure) may apply where a director discloses information to the person responsible for granting options, in order to affect the timing of the grant of the option, and that information relates to a forthcoming announcement. Section 118(4) (misuse of information) might also be applicable for where information is used to decide the timing of grants.  Any decision by a company to give clearance for dealings during the run up to the release of inside information would be a breach of the Model Code. There are a number of other provisions under which the FSA could stir trouble for dodgy directors or corrupt CEOs.
            Although the widespread use of share options as executive remuneration is relatively new, this method of manipulation of the market has been recognised since at least 1997.  In this year, the US Journal of Finance published an article by Dr David Yermack on "Good Timing:  CEO stock option awards and company news announcements." 
           The irritiation of the financial regulators with this "good timing" reached a crescendo on 11 September 2006 with a speech by John W. White, Director, Division of Corporation Finance of the U.S. Securities and Exchange Commission ("SEC").  John highlighted the issue, and obfuscated it with interesting jargon including a name for the process in which companies should disclose their option strategies: nicknamed "CD&A" or Compensation Discussion & Analysis.  Inspiring.
            CD&A boils down to companies having a scheduled plan or strategy that is clear and transparent. Companies should disclose these plans and strategies to their audit firms, and fully address the issues of timing for options and for disclosing information.  Whether such strategies will hit the mark, and are adminstratively feasible is yet to be tested.  Corporate Blawg looks forward to reviewing option grant strategies in corporate due diligence in the future.
            The fact that this is not the first media-hitting declaration to come out of the FSA two weeks after a similar excitement in the U.S., suggests that the Anglo-speaking financial regulators are a bit like film distributors, and launch their new products in the US market before the rest of the world.  Accordingly, Corporate Blawg U.K. has decided to keep a closer eye on movements in the U.S. financial regulatory markets, in order to forecast the news-worthy motions of the FSA and be a fortnight ahead of the game.  Whether this will help Corporate Blawg's solicitous career or his salacious blog is anyone's guess.

Sarbox creeps - we bar Sox

There is a tide of discontent rising in the City.  From accountancy firms to financial investors, lawyers are resisting admitting to their clients that they should know the ins and outs of the Sarbanes-Oxley Act 2002. Already the U.S. Securities Act 1933 creeps into UK documentation for private equity investment funds, but how much longer will U.S. law unsettle the jurisdiction of UK qualified lawyers?
            Over the last few weeks, several major events have catalysed the debate.  Last week the news became public that the London Offices of Ernst & Young had been under investigation by inspectors from the US audit watchdog, the Public Company Accounting Oversight Board.  Their investigations are empowered by the s.404 of the Sarbanes-Oxley Act. 
           More recently, Christopher Cox, chairman of the Securities and Exchange Commission, said:

While competitors in other countries are using Sarbanes-Oxley as a reason for foreign companies to list in the jurisdictions, many of those same countries are adopting provisions of the act as part of their own regulatory regime.

Does he dispell the fallacy?  Not really.  Just because some provisions (begging the question - which ones?) are being adopted does not mean that the Sarbanes-Oxley is not why foreign companies list in non-U.S. countries.  Chris Cox has demonstrated the fallacy of composition.
             The “Sarb-Ox” (as it is called, a name which echoes in the legal halls like a bad collision between a motorcar and a bull), requires the PCOAB to report on all audit firms that have more than 100 clients in the US stock markets.  Staff at Ernst & Young have been interrogated (or interviewed) and audit documents have been scrutinised (or read).
           KPMG are thought to be next in the firing line, followed by PwC and the fourth major accounting firm, which has not yet commented.  One glimmer of hope is that the Financial Reporting Council is overseeing the investigations, and as an independent body has the UK ’s accountancy industry at the heart of its interests. 
           It may be incidental, but probably not, that last week Edward Balls, the Economic Secretary to HM Treasury, gave a speech on the possible takeover of the LSE by "a company outside the UK", i.e. Nasdaq, who already own 25% of LSE’s shares.   
           The government have promised not to intervene in the independent judgements of the FSA, and will legislate to enhance the FSA’s powers.  The stated risk is that a new foreign owner would try to integrate the LSE with its existing business and the legal framework in its domestic country.  If the domestic country is the U.S., the LSE may be smothered by having to answer to two masters, one being Sarb-Ox and the Securities Act, the other being the FSA. 
           The focus of the foreseen legislation is to enable the FSA to veto changes to the rules of any body recognised by s.18 of the Financial Services and Markets Act 2000 (including the LSE, Virt-C, ICE Futures, the London Meat Exchange and CREST).  This veto may be exercised in "defined circumstances", which were not defined in Edward Balls' speech.  Balls makes it clear that the right would be a right to veto and not a right of approval of rule changes.
           Corporate Blawg UK suggests that the FSA should be consulted on all changes to LSE rules, or at the very least notified of them.  There should then be a standstill period for the FSA to consider any proposed changes.  This standstill period would give the FSA chance to exercise its veto before such changes were implemented.  Otherwise, the government runs the risk that later down the line, after numerous appeals of judicial review, the FSA's remedy of rescission of the rules is considered disproportionate due to the time lag.

Addendum: as if for a moment you thought the government was acting independently by offering to give the FSA this power, Corporate Blawg UK draws your attention to the fact that Balls noted that he had welcomed the statement of the US’s Securities and Exchange Commission (i.e. Cox) which provided "helpful clarification", i.e. they said we could do it if we wanted. Well done Ed.  Somewhat predictably, Corporate Blawg thinks that Ed and Chris have got into bed and come up with a load of cox and ball.

The many faces of Profits

The great Soweto Kinch sings in his latest album “It’s all about the m-o-n-double eee”, so the corporate world may agree.  Unlike Soweto's sound earning future pound (sterling), profits should always be distinguished from prophets.  This is true even if some dodgy Independent Financial Advisor tries to make (you) believe they are one the same.
           So here is the breakdown:

           Profit is the difference between total revenue and total cost.

           Gross profit, also known as “trading profit” or "operating profit", is the difference between income and the direct costs.  This is a measure of a company's earning power from operations.

           Net profit is gross profit less expenses associated with running costs, including interest and tax. 

           Distributable profit is realised profits minus realised losses (s.263 Companies Act 1985).

           Retained profit is the remaining profit after the shareholders have received their dividends, and is normally reinvested in the business.
           Sub-normal profit is any profit less than normal profit. In the long run a firm will leave an industry or crumble into dust if it continues to make only sub-normal profits. This is also known as economic loss, which lawyers are aware of in regard of breach of contract and limitations on liability.
           Normal profit is where income that equals the opportunity cost of labour and capital.  Normal profits are the minimum level of profit required to keep the factors of production in their current use in the long run.
           Supernormal profit exceeds the normal return from input factors in production.  Supernormal profits greatly exceed the normal or average, and may also be referred to as abnormal profit. 

           Super profit is where a firm obtains monopoly profits due to a lack of viable market competition.  Super profits arise from where the company sets its prices higher than the equilibrium price and does not lose profits to competitors.
           Optimum Profit is a figure which takes into account marketing strategy, market position, and other methods and manners of increasing returns above the competitive rate. When optimum profit is obtained, it is a type of supernormal profit.

           Non-profit is a charity, and gets to avoid all this complication.

Corporate lawyers and business people would be wise to keep in mind episode 217 of South Park “The Underpants Gnomes” where a community of underground gnomes steal underpants as part of a three-phase business plan, consisting of:

1. Steal underpants
2. ?
3. Profit!

None of the gnomes know what the second phase is - all the gnomes assume that someone else in the company does know.  Apparently this is meant to represent the dot.com boom, but Corporate Blawg does not accept that, since analysis of satire is a tire.

Fallacies in the law

Since investigating the logic of argument, Corporate Blawg has seen large fallacies everywhere, pursuing him down the street.  Corporate Blawg has come out of the closet and admitted that he is fascinated by fallacies, obsessed by fallacies, and ultimately in awe of fallacies.  How did fallacies become so commonplace?  What is it about a fallacy that makes it convincing? 
           Lawyers must make every effort to avoid unqualified fallacious statements, especially in due diligence reports, private placement memorandums, letters of claim and when giving any legal advice.
           A fallacy is a technical flaw which makes an argument unsound or invalid. A "formal fallacy" is based solely on the logical form whereas an "informal fallacy" takes into account the non-logical content of an argument.  This roughly parallels the distinction between deductive and non-deductive reasoning.  There are exceptions to this, such as the "begging the question" fallacy.
          Fallacies operate in a number of ways.  They may distract the recipient from what is really going on, or they may use vagueness or ambiguity to cause confusion.  Some subliminal fallacies appeal to emotions rather than logic or reason.
          The rest of this blog highlights a few select fallacies that have sprung up in legal cases, or are in common usage.  Once you have memorised these fallacies, if you lift up your ears next time you are in an argument you may infuriate your counterpoint by noting each time they state a fallacy.  This is one way to distract your argumentor so that they lose the thread and you win the tapestry on a fallacious basis.  There is also no quicker way to getting a punch on the nose from a pacifist. 
          Here is your literary armoury:
          Equivocation is when a key word is used with two or more different meanings in the same argument.  For example:

1. Geological events produce rocks
2. Rock is a type of music
3. Therefore geological events produce rock music

This was highlighted in Klienwort Benson Ltd v Malaysia Mining Corporation Berhad [1988] 1 Lloyd's Rep 556 QBD. The judge gave the following example for when the courts must probe the intention of the parties and get to the bottom of the contract:

When two businessmen wish to conclude a bargain but find that on some particular aspect of it they cannot agree, it is not uncommon for them to adopt language of deliberate equivocation.

A non-sequitur is an argument where the conclusion is drawn from premises which aren't logically connected to it.  The classic is Tom DeLaw telling CongressDaily on 4 April 2003 "Nothing is more important in the face of a war than cutting taxes".  He must have eaten fish.
          UK legal examples of non-sequiturs are R v Clarke (Ediakpo) [1985] 2 All ER 777 where the judge held that even though immigration officers...

...were empowered by the Immigration Act to arrest Mr Osman [...] [that] they were therefore acting in the execution of the Act in making inquiries about him, is a complete non-sequitur.

The straw man fallacy is when someone else's position is so misrepresented it can be attacked more easily.  Straw men do not deal with the actual arguments that have been made.  In Oystertec Plc's Patent [2003] EWHC 2324 (Pat) a straw man was used as a false opposition to a patent application in order to give the applicant the opportunity to make further amendments. 
          Begging the question is found in Inter-Islands Exporters Limited v Berna Steamship Company Limited (1959).  Begging the question is when the premesis are questionable or incomplete so the conclusion may be doubted too. 

The averment that "there was no other crew on board" is irrelevant beacuse it is begging the question, the question [is] actually being does a night watchman alternating with a day rigger make a crew?

There are two types of non cause pro causa , or false cause fallacy.  The fallacy of Post Hoc Ergo Propter Hoc occurs when something is assumed to be the cause of an event merely because it happened before that event - see Robert Nixon v J F Contracting Limited (2000) [2001] All ER 2418. and  c.f. Cum hoc ergo propter hoc when just because events happen together does not mean they are related.
          The slippery slope argument was highlighted in R v G [2003] 3 All ER 206 where the judge quoted Smith and Hogan's Criminal Law (10th edn, 2002):

And what about temporary handicaps - the person who strikes a match, being unaware because of his heavy cold, that the premises reek with petrol fumes? Caldwell, as interpreted in Elliot v C and R v Stephen Malcolm, appears to be a slippery slope to intolerable injustice with no obvious exit.

Let's scoot through the rest:

Argumentum ad antiquitatem - I'm right because that's the way it's always been
Argumentam ad baculum - I'm right because I'm bigger and stronger
Argumentum ad hominum - I'm right because that person is an idiot
Argumentum ad ignorantiam - I'm right because you haven't proved me wrong
Argumentum ad numerum - I'm right because lots of people believe me
Argumentum ad verecundiam - I'm right because I am the recognised expert.  Leonardo Da Vinci said that "any one conducts an argument by appealing to authority is not using intelligence, just his memory"

There are a whole bunch more including reification (when an abstract concept is treated as concrete c.f. intellectual property), and the fallacy of the undistributed middle (arguing that things are similar without specifying the way they are similar), and the fallacy of the corrupt continuum (different things are the same as they are connected by incremental differences), fallacy of composition (an item contains the same properties as it many parts).  See there are so many fallacies you can't escape them - have I made my point clear, or is this a matter for Argumentum ad nauseam?
          So why do fallacies exist? Corporate Blawg is aware that the world not ruled by science and logic, and that ego and emotion are married in life.  The fallacy is the argument of the latter, it is exciting, passionate and rousing.  For this reason the fallacious actor will always hold court over the meticulous logician.

Company Law Sticks and Stones

Deadlines deadlines deadlines.  Dates and times.  Sticks and stones. Hoorah!

Deadlines for sending documents to the Registrar

• Changes of directors and secretaries, or changes in their details - within 14 days of resignation, appointment or notification.
• Special and extraordinary resolutions - within 15 days of being passed.
• Annual Returns - within 28 days of the date on the form.
• Annual Accounts - for a private company within 10 months of the year end date; for a public company within 7 months of year end date.  This date may be shortened by the company on notice to Registrar.  In the case of Ex parte (1) Pow Trust (2) Al's Bar & Restaurant Ltd [2002] EWHC 2783 (Admin) a charity brought a judicial review for a £100 fine received from the Registrar for late filing of Annual Accounts.  The court found that imposing penalties for the late filing did not infringe Arts.1 and 6 European Convention on Human Rights.  The court then referred the charity to the Charity Commission for wasting charitable funds in "expensive and (at best) speculative litigation".  The lesson being: Don't mess with the Registrar man.
• Mortgage or charge details - within 21 days. This time period may be shortened by clauses within the mortgage or charge deed (Re Greenport Ltd (in liquidation); Obaray v Gateway (London) Ltd [2004] 1 BCLC 555).  Since the mortage or charge is not registered until it is received by the Registrar, this deadline has received the most litigation, especially by liquidators.
• If any document is unacceptable to the Registrar the company has 14 days to correct it, or else.

Deadlines for informing members and auditors of meetings

• Members and auditors - 21 days written notice of an AGM (s.369(1)(a)).
• 14 days written notice of a meeting which is not an annual general meeting nor is to pass a special resolution (s.369(1)(b)).
• Only 7 days written notice of a meeting is required for unlimited companies.
• Deadlines for the allotment of shares are set out in s.82-85 of the Companies Act 1985, and there are a number of deadlines for appointing and resigning auditors (both of which will be set out in more exciting detail in a future blog).

Similar deadlines for Limited Liability Partnerships

• Changes of members and designated members - within 14 days.
• Change of their details - within 28 days.
• Details of any mortgage or charge - within 21 days.
• A change of registered office - within 14 days.
• Every limited liability partnership has 28 days to return the Annual Return.

Limited Partnerships, anything fresh and thrilling?

• Alterations to details must be notified of the change on within seven days.

Caught by the rocky turbulence of Company Law Reform

On 1 March 2006, on the 6th day of the meeting of the Grand Committee in the House of Lords, just after the meeting has resumed at fifteen minutes to four (phew) Lord Sainsbury of Turnville (but not Lord Dean of Harptree) pointed out a change to a deadline, at s.319 of the Companies Bill (as of 20 July 2006).  This section of the Companies Bill applies where members call a special resolution.  A special resolution is used when a written resolution is not permitted, i.e. to remove or appoint an auditor or director.  Notice of a special resolution must be given at least 28 days before the meeting.  However, the Companies Bill now permits the company to give notice in a newspaper 14 days before the meeting, which replaces the current 21 day period.  Apparently:

It ties in with our general policy to standardise notice periods at 14 days, except in the case of public company AGMs.

Accordingly, Corporate Blawg UK has explored this "general policy" and found the new clauses int he Companies Bill for the same 14 day periods in the Companies Act 1985.  So are you prepared for the tricky changing of forms at Companies House (will a Form 288 become a Form 167)?  Watch this space.

• Notice of opening of overseas branch register (s.130).
• Duty to notify register of changes to directors or in their particulars (s.167).
• Duty to notify register of changes to secretaries or in particulars (s.276).
• Duty to notify register of changes to authorised signatories (s.287).
• Notice required of general meeting (s.314).
• Notice to register the resignation of auditor (s.531).
• And a few others mainly to do with auditors.

And they say the law can be dry.

LLPs are VI(legal)Ps

Corporate Blawg loves listening to cassettes, CDs, MP3's, and his iPod banging out a million beats on the walk to work.  Having missed the whole LP thang (except for being the proud owner of an 1971 LP of John Lennon's "Imagine", in a picture frame), Corporate Blawg is very excited about this relatively new hybrid in the corporate world, the LLP. 
           The sweet music of the LLP is still reverberating in the ears of professional firms around the country,and is now unravelled in one short soundbite of a post:
Limited liability partnerships emerged from the U.S. in the early 1990s. In the U.K. LLPs are governed by the Limited Liability Partnership Act 2000 and Regulations 2001.  LLPs have the flexibility of a partnership and are taxed as a partnership, but in all other respects are like a company (and can be wound up in the same way as a company, In the Matter of Magi Capital Partners LLP [2003] EWHC 2790 Ch D).  Most importantly this means that LLP's reduce the personal responsibility of the partners for the business debts. 
           In addition, an LLP is taxed as a partnership, which means that the members provide working capital and share in the profits.  Members will be liable to pay Class 2 and Class 4 National Insurance contributions.  Apparently this is good, but Corporate Blawg is not a tax lawyer.
           What is less good is that, under certain circumstances, claims for economic loss could be made against individual members who have been negligent, and any such claim of negligence would be a civil action against the LLP itself.  This is because the contract would be outside the individual's contract and the LLP would be a party.
           The LLP's business is controlled by the members and more importantly by the 'designated members'.  The designated member has greater responsibility (like a designated individual in the Human Tissue Act 2004, although somewhat less gory).  In an LLP the designated member is analagous to a director of a limited Company.
           LLPs clearly work... since their inception in the UK, Corporate Blawg can only find one significant case concerning Limited Liability Partnerships.  This case was BFI Optilas Ltd v Blyth [2002] All ER 287.  The case referred to section 6(1) of the 2000 Act restating that:

Every member of a limited liability partnership is the agent of the limited liability partnership.

And in section 6(4):

Where a member of a limited liability partnership is liable to any person [...] as a result of a wrongful act or omission of his, [...] the limited liability partnership is liable to the same extent as the member.

Yet the judge in this case found that although the relevant section provides for vicarious liability in the event of a wrongful act or omission of a member of the partnership, potential liability cannot form the basis for a restrictive convenant on a member being binding on the limited liability partnership itself, unless the limited liability partnership was responsible for the breach of that covenant. Well, tell us something we don't know...
        For the eager beaver, Feetum v Levy [2005] EWCA Civ 1601 also caused a minor flurry of excitement, but is not worth mentioning because the appeal was dismissed.
         Inspired by the hybrid vigour of limited liability partnerships, Corporate Blawg has dug up a few other acronyms for LLP, some more appropriate than others.  Can you decide which is your firm?

• Lead Logistics Provider
• Lifelong Learning Plan
• Lightweight Laser Printer
• Limited Licensed Psychologist
• Live Long and Prosper

Corporate blawg's personal favourite is "Clifford Chance Lightweight Laser Printer".

Word music

Have you ever heard of a derivative action on a company's investment in derivatives?

Has there ever been a standstill agreement between a bank and an insolvent company, awaiting the outcome from a standstill agreement before the courts in a dispute between the FSA and two shareholders whose case is based on a standstill agreement between those two shareholders selling shares in the company?

Have you heard of the issue on an issue of shares concerning which share of those shares the director directs to be granted to the guarantor?

What if the Board are bored of meeting at Board Meetings, they might claim there is a claim that the company is in bad company by its informal agreement to formally agree with the de facto director who is in fact a director?

Law is about the meaning of words?  Law is about the intent behind the meaning of words.

Mergers in the Money Markets

Renowned for their short and punchy titles, on Tuesday the Financial Services Department of the Internal Market Directorate of the European Commission released a proposal for a directive called: the Directive of the European Parliament and of the Council amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of shareholdings in the financial sector.
           Right.
           What does it do then? 

The proposal aims to considerably improve the legal certainty, clarity and transparency of the supervisor approval process with regard to acquisitions and increase of shareholdings in the banking, insurance and securities sectors.   

Lord Woolfe eat your heart out.  Whilst ploughing through this tome, it becomes clear that although the proposed directive does not contribute much to Eurojargon it does cause a vicious wound on the international plain language campaign.
           Drilling down, the proposal closes the list of criteria on which an acquiring company should be assessed by a Member State authority.  These criteria include the reputation of the proposed acquirer, the financial soundness of the proposed acquirer, the reputation and experience of any person that may be in charge of the resulting institution or firm, compliance with relevant EU Directives, and the risk of money laundering and financing terrorism (can't keep away that paranoid old chestnut).
            The Directive reduces the assessment period from three months to 30 days and allows the supervisory authority to 'stop the clock' only once, under certain conditions.  Corporate Blawg UK contends that this may lead to administrative difficulties, errors, oversights and altogether frantic inefficiency, but the Commission's risk assessment says it will not.
            The Markets in Financial Instruments Directive (slightly more succinct) requires parrallel provisions for investment firms and regulated markets (Articles 10 and 38).  In view of this, and further consolidation of stock markets, the Commission has promised to urgently consider whether these procedures and markets should apply to regulated markets too.  They intend to facilitate the smooth functioning in the Internal Market by preventing protectionist policies in Member States.   This sounds fine in principle, but how the Commission will go about it is more the worry.  When investigating whether to apply these procedures to capital markets the Commission has stated that it will take into account the special nature of the business conducted on these markets, as well as the views of stakeholders and regulators, so send in your petitions now!
            Hurry.

Derivative actions, and its derivatives

Today we squint through our legal binoculars and focus on the little man.  No, this is not a post on voyeur-style deviant actions but on lawyer-style derivative actions.  Same same, but different.
           A derivative claim (or derivative action if you prefer) is one of three main shareholder remedies - see if you can spot which one:

1. "unfair prejudice" remedy, in which a member seeks redress for action by the company which injures his interest as a member; 
2. derivative action, in which a member seeks to enforce a claim belonging to his company; and
3. action to enforce the companys constitution.

That wasn't very hard, but it gets harder... A derivative action is an exception to the rule in Foss and Harbottle (1843) 2 Hare 461 which prevents a shareholder from bringing an action against the company. A derivative action may be commenced by one member of a company on behalf of all the other members (other than the wrongdoer) to enforce a cause of action that belongs to the company (Re Incasep Ltd Jones v Jones and others [2002] EWCA Civ 961). 
             In a derivative action the claimant requires the permission of the court to continue the claim (CPR 19.9).  Further, the court has a discretion to order the company to indemnify the claimant against the costs incurred in the claim.  The test is whether an independent board exercising the standard of care which a prudent business man would exercise in his own affaris would have decided to bring the proceedings (Jaybird Group Ltd v Greenwood [1986] BCLC 319).
             The key case and summary of English law and procedure on the bringing of derivative actions was stated in Barrett v Duckett and Others [1995] 1 BCLC 243.  This set out the general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs. 
             A derivative action may be prevented from taking place by the majority of a company ratifying the decision or having approved it before the contested decision was made.  And if the court does allow the action to proceed, the claimant will be entitled to an indemnity from the company for the costs of bringin the suit!
             Derivative Actions are supposed to be the action of last resort, a bit like judicial review for the acts or omissions of public authorities (cf Social Issues - a new duty for directors).  The courts have held derivative actions to be an alternative remedy to actions under s.459 of the Companies Act, but the availability of this alternative remedy does not necessarily preclude a derivative action from being the remedy of last resort.  This is an interesting dichotomy, and one that has required the muscle of the Company Law Reform Act to sort it out.  This is not the case with an action under s.459.
             Although there is no statutory authority in Scotland, the case of Anderson v Hogg [2000] SLT 634 makes it clear that derivative actions are available in Scotland and that their availability did not debar section 459 proceedings and vice versa, and where both were available there was no need for minority shareholders to elect for a derivative claim. 
             Getting a bit bogged down here... Time for some refreshment...
             The Company Law Reform Act looks to simplify, formalise and ease the case law conundrum in s.260-269 (of the Company Bill as at 20 July 2006).  However the Company Bill takes all the power out of the blur between s.459 and derivative actions by facing up to it and effectively saying "I'm not scared of you" (s.260):

(2) A derivative claim may only be brought—(a) under this Chapter, or (b) in pursuance of an order of the court in proceedings under section 459 of the Companies Act 1985 (c. 6) (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both).

(4) It is immaterial whether the cause of action arose before or after the person ,seeking to bring or continue the derivative claim became a member of the, company.

Corporate Blawg UK looks forward to seeing more derivative actions in court, as this codification of the cluttered case law should bring the remedy to the attention of more astute shareholders, and dodgy directors should tremble (accordingly).
           That is all I shall derive from this matter for now, until another day.

A Brief History of Financial Markets

Following the “History of Shares” post on 22 August, Corporate Blawg UK decided that some further clarity on Stock Exchanges was required.  Corporate Blawg UK has summarised below the glittering history of the stock exchange:

• The first stoke brokers were established under Phillip, the Fair, of France (1268-1314).  Phillip was known as "the fair" for his good looks, and not for his brutal persecution of Templars, Jews and Lombards (Italian bankers).  A bit of a control-freak, Phillip found a need to regulate those who dealt in commercial bills of exchange, and those who managed the debts of agricultural communities.
• In many European countries the stoke exchange is known as the Bourse.  The origin of the Bourse can be traced to the 13^th Century when traders gathered to trade in front of the hours of the Van Der Buerse family in Bruges, Belgium.
• By the mid 13th century Venetian bankers traded in government securities, and in 1351 the Venetian Government outlawed the spread of false rumors which could lower the price of these securities.
• Antwerp has long been a centre for diamond trading and in 1460 the Antwerp Stock Exchange (1460) was the first to be housed in an official building.  In 1531 the first building was erected that had been designed specifically for the purpose of being a stock and trade exchange.
• Other centres of commerce popped up in Lyons (1506), Toulouse (1540), Hamburg (1558), and London (1571).
• In 1602 the Dutch invented the concept of the Join Stock Company, and the Amsterdam Stock Exchange was the first on which shares could be bought and sold, with the shareholder taking a part of the companies profits and losses.
• In 1773, London stock dealers, who had been meeting informally in coffee houses, excitedly moved into their own building to establish their own exchange.
• The London Stock Exchange now has more than 2,800 companies, worth over £3,500bn.
• The biggest three Stock Exchanges are New York ($13 trillion), Tokyo and London.

The Stock Exchange in the UK

The London Stock Exchange (LSE) is regulated by the Financial Services Authority (FSA) which acts through the UK Listing Authority (UKLA).  Listing securities is regulated through legislation including the Financial Services and Markets Act 2003 and EC Directives, and through internal regulation such as UKLA’s Listing Rules and the LSE's Admission and Disclosure Standards.

            AIM is the LSE's Alternative Investment Market and was launched in 1995 for small or new companies. In 2004 AIM alone accounted for 65% of all Initial Public Offers (IPOs) in Western Europe.  Currently there are more than 1,060 issuers listed on AIM with a combined market capitalisation of £37bn.  AIM companies are not bound by the UK Listing Authority's Listing Rules.

            There are a number of other sub-markets in the UK, and huge variety of markets throughout the world (LandMARK, Euronext.liffe, NASDAQ, Osaka etc) and whichever market is best for a company depends on the sector, the investor-base and the size of investments.  Although geographical proximity is still very central to the market a company will float on, the Sarbanes-Oxley Act has made it much more difficult for small business to raise money on the U.S. capital markets.  The ease with which companies may raise funds, and the reasonable amount of regulation giving invester comfort, is a prime reason for the massive success of the AIM market for overseas companies. As long as it brings in the fees for corporate lawyers, Corporate Blawg UK is happy to see this prosperity continue (unless it means working at weekends).