Corporate Blawg UK

Directors' duties vs cucumber duties

The duties of directors to their companies include: not exceeding their powers, acting in the best interests of the company, exercising due skill and care, acting honestly and in good faith, notifying the company of any personal interests, having regard to the interests of their employees, etc, and so on, in this regard. 
           Directors owe their duties to present and future shareholders where the company is solvent.  Where the company becomes insolvent it is a trigger for the directors duties to shift from the shareholders/members to the creditors of the company (Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512).  It was therefore a  shock to Corporate Blawg, who was perusing the Official Journal of the European Union today, to discover the following new directive:

Commission Regulation (EC) No 1619/2006 of 30 October 2006 amending Regulation (EC) No 1555/96 as regards the trigger levels for additional duties on cucumbers, artichokes, clementines, mandarins and oranges

Corporate Blawg UK is impressed by the level of control the EU has over the behaviour of fruit and vegetables.  On further investigation Corporate Blawg has discovered that there is a world outside of corporate law, and it's a bit fruity.

Company Law Re-Yawn Bill

A rant, not a rave:

The purpose of the Company Law Reform is to consolidate the company law statutes i.e. one statute to rule them all. However, it has recently been stated by Margaret Hodge, the Industry Minister, that there will be a provisional timetable as to the implementation of the Companies Bill. Accordingly, if the Bill gains royal assent in November 2006 it may still not come into full effect until October 2008!

           Clearly by October 2008 there will be a whole new set of concerns affecting the business community and the Company Law Refom Bill will need reforming again. Perhaps Margaret Hodge feels that such further reforms can be the late nights and long hours of the next government?
           Whilst it is well known that fast law is bad law, it is also common knowledge that the law is one step behind the business community, which is one step behind the innovators who exploit the loopholes in the old law. So at one end the law drags its feet (the CLR is eight years in gestation), and at the other end it is a round brick shoved through a square window to meet impending EU deadlines.

           Corporate Blawg once met Sir Jeremy Lever QC and asked him whether the UK was a bridge between the US and the EU. Sir Jeremy said that it was bridge that went down at both ends. The same must be true of the Company Law Reform Bill, which is only vaguelly useful to young lawyers trying to impress their future employers in the hope of a level playing field, or to aging parliamentary academics who wish to pontificate on the (insignificant) role of third world considerations in the governance of UK companies.
           This is the biggest bill to ever go through parliament and, despite the enormous potential to clarify and update UK Company law, there is much yet to be consulted on. As the powers of the statute trickle into force, numerous statutory instruments will be needed to patch up the corners of this round brick, and once the judges get their teeth into it the power of the one statute to rule all company law will be lost forever.
           As MPs sycophantically congratulate each other for their work to date, Corporate Blawg wonders whether the UK should simply hand over control to the EU which, for the first time known to Corporate Blawg, appears to be enforcing progressive company law much faster and more efficiently than the UK.

Cool terms: bear hugs, golden handcuffs, lemons and plums

Cool terms is back and bad, I mean, good.  This favourite regular feature explores the cornicopia of inventive expressions used in the business and legal markets, which all good corporate lawyers should be aware of:

A "bear hug" is an exceedingly good offer for the shares of a target company made directly to its board of directors.  This offer, at a price much higher than the actual value of the shares, is aimed to encourage an unwilling board to sell their shares.  In fact, the  duty on directors to act in the best interests of the members of the company, means that the directors are effectively forced into accepting the offer.  The bear hug  squeezes an agreement out of reluctant directors wary of breaching their fiduciary duties.  This is not to be confused with the 'inverted bear hug'; where one wrestler locks his hands  behind his opponent's lower back and presses his forehead into their sternum.

Another cool term from the investment world is "golden handcuffs".  This is where an employee is incentivised to stay with the company on the basis of future reward, for example, an employee may be required to relinquish any unvested stock options if he terminates his employment early.

Also found in investo-speak are the cool terms: "Lemon", which is an investment with a poor or negative rate of return (i.e. "lemons ripen before plums"); and "Plum", which is an investment with a healthy rate of return (i.e." plums ripen after lemons").  So if you hear an investor boasting about the size of his plums, don't turn away like a sour lemon.

Corporate Blawg would be interested to hear of any situations where directors have been placed in a bear hug with golden handcuffs made of plums.

Infiniteland: a favourite in Warranty World

Whilst nurturing a cold on a congested day off work, Corporate Blawg has put his time to good use by finishing level 6 of the delightfully named “KillZone” (PS2).  Since Corporate Blawg is not one to put the "fist" in pacifist, Corporate Blawg has also spent some gentle hours paddling in the pool of legal intrigue.  As a result, Corporate Blawg now spills out a summary of the three Warranty World (new) classic cases, namely: New Hearts, Eurocopy, and Infiniteland. 
           For the average (and exceptional) corporate lawyer, these three cases pop up regularly as key points of interest, pinned issues of contention and small pricks of concern.  Corporate Blawg now wants to knock them on the head (in a friendly, non-violent manner) here in his blog of knowledge.
           In case you are wondering where the facts of the cases have gone, the answer would be to the dustbin of legal verbosity.  The facts of legal cases are only relevant to waffling barristers on an academic ego-trip and/or academics with aspirations of village storytelling.  What we need here are cold results, hard answers, and no fluffiness.
           When negotiating a share-purchase agreement, the seller must disclose to the buyer all relevant information concerning the target business.  Afterall, you wouldn’t buy a chocolate bar without reading the ingredients, would you? Perhaps not, but if that chocolate bar was worth £50million you might be more interested.
          The seller will give a warranty in the share-purchase agreement that the information disclosed to the buyer is complete.  All matters which may affect the value of the target business would be disclosed in what is imaginatively known as a “disclosure letter”.  Such itsy-bitsy teeny-weeny yellow polka-dot detail is vital to both sides - it reassures the buyer that there has been a decent level of disclosure; and the seller knows that the level of nudity is not so indecent as to leave it exposed to either a price reduction or an indemnity claim after the deal. 

          Often the share-purchase agreement will contain a clause that there has been “full and fair disclosure”. This may be further clarified with additional wording. Picking the way between the brambles of language construction, the courts have tugged at the roots of such phrases that have so entangled business common sense.
          Where a warranty requires “full” disclosure, more detail is required than simply indicating where the answers may lie.  Lord Penrose, in the Scottish case, New Hearts Ltd v Cosmopolitan Investments Ltd [1997] 2 BCLC 249 stated that: 

Mere reference to a source of information, which is in itself a complex document, within which the diligent enquirer might find relevant information will not satisfy the requirements of a clause providing for “fair disclosure with sufficient details to identify the nature and scope of the matter disclosed”.

     It is not uncommon for the warranty to state that the disclosure letter will contain all material matters covered by the warranty, and that any other matters within the buyer’s actual knowledge will not affect the buyer’s claim for breach of warranty. However if the buyer agrees that all material facts are “fully, fairly and specifically disclosed” then this may prevent the buyer for bringing a claim under breach of warranty for what had been his actual knowledge at completion.  This was basically the bone of contention in the preliminary ruling of Eurocopy plc v Teesdale [1992] BCLC. 
         Eurocopy was referred to in Infiniteland Limited, John Stewart Aviss v. Artisan Contracting Limited, Artisan (UK) Limited 2005 EWCA Civ 791, although it was held to be different on the facts. In the first instance of Infiniteland it was held that where a buyer’s agents were aware of a breach of warranty at completion, the buyer’s agents conveyed actual knowledge on the buyer.  This is because the warranty had the following clause: 

The rights and remedies of the Purchaser in respect of any breach of the Warranties shall not be affected....by any investigation made by it or on its behalf into the affairs of any Group Company (except to the extent that such investigation gives the Purchaser actual knowledge of the relevant facts and circumstances)...

The case was decided on its facts by the Court of Appeal.  The ruling had the impact of lending support to the decision of Eurocopy (despite being distinguished on the facts).  One issue, which remains unresolved is whether the "actual" knowledge of the buyer included the knowledge of its agents. The Court of Appeal was divided on this issue. Pill LJ disagreed with Chadwick LJ who had stated that:

In simple terms, as I understand conventional legal usage, "actual knowledge" connotes a person's own knowledge; as distinct from knowledge which the law attributes to him, either because he ought to have it ("constructive knowledge"), or because it is knowledge of his agent ("imputed knowledge"). The distinctions are well-established (see e.g. the judgments in Al Ajou v Dollar Land Holdings [1994] 2 All ER 685), even if the precise boundaries and demarcation lines may sometimes become blurred, particularly in the difficult area of corporate knowledge.

So, where does this leave us?  In view of the cases above, sellers and buyers must ensure that clear wording is set out in the warranties to avoid the risk of putting money in the pockets of litigation lawyers.  For either side, it would not be difficult to clarify whether "actual" knowledge includes agents and employees (for the seller) or excludes them (for the buyer).  Ignoring this issue would be at either party's peril.
          Corporate Blawg now has actual knowledge of a headache to add to his ills, so he will construct a deep herbal bath which he has imputed therapeutic qualities upon.  Corporate Blawg warrants that he will feel much better after his fingers have turned to prunes and he has drunk his special toddy of lemon, honey, ginger and Oban whisky.

Two weekend poems

Because poetry on the internet works sooo well, Corporate Blawg has decided to post the following two poems to celebrate his cold this weekend.  No work be done here, only merriment in sickness:

WHAT I LIKE ABOUT PROPERTY LAW

Appeasements for easements the schooling is fooling that it's fun is this one I abhor;
Property is properly the medium of tedium it's a lesson in how to ignore...
The client who's reliant on paying my saying that I'll harry to carry out the chore,
Since learning an earning from filling a form is the norm of conveyancing's flaw.

CONTRACTUAL CONSIDERATIONS - A POEM OF REASON

It's not unfeasible for a word like "unreasonable" as decoration for a peroration of law;
None knows what it means but a youth in his teens whose mindings for findings we bore;
And the judge knows no better than to smudge and to fetter to screw you cos who's keeping score?
This word is absurd with a meaning so blurred it's unreasonablly reasonable for sure.

Your good health...

The Power of None

On this day, Corporate Blawg reviewed an $8,000,000,000 intra-group subordinated loan facility for a client. The terms and conditions are about 15 pages long - shorter than Corporate Blawg's overdraft agreement. The opening clause of the subordinated loan facility states that the loan: "shall not exceed $800,000,000".
          Initially aghast, Corporate Blawg's eagle-like eye for detail did not pop out with horror, but his buffalo of pragmatism marched on. All along the commercial beaver had been placid since the loan is intra-group and states "Eight Thousand Million" in a number of places (excuse the pun) - so what's a missing zero between friends?
          In the tax case 6960: Kubota (UK) Ltd (1992) the court held that although perfection is not required in documents - the larger the business, the higher the standard to be expected. Facts which might excuse a sole trader will often be of no avail to a large enterprise. Even where the penalty is very substantial compared with the error giving rise to it; that is not a relevant issue when determining whether a reasonable excuse exists.
          Corporate Blawg recommends not finalising any documents until they have had a sixteen-eye review, 3 cold reads, a 2 day stand-still period, 10 sanity checks and have been sniffed over by an afghan wolf hound.

One legal maxim

Corporate Blawg is mega-busy with client work this week.  However, in time honoured tradition, he finds a legal maxim to be his raison d'etre - his current view, for now:

To write is to act

The lawyer's condition.

EU changes capital rules for plcs

Yup, they've done it.  Never accuse the European Commission of making law too quickly.  Seven years after the initial proposal, the Commission have now adopted a new directive to change the rules on maintenance of capital by plcs. 
          This furtive young directive, which becomes law on 15 October 2006, will amend the aging 2nd Company Law Directive of 1976, in relation to the formation, maintenance and alteration of a company’s capital.  These modifications were first taken on board after a report by the SLIM group (Simpler Legislation for the Internal Market).  Corporate Blawg infers that the Commission would have to trim down the SLIM group report to make the issues more palatable to Member States, as otherwise it would be a bit like asking CND for their views on nuclear weapons.
          The Commission's mantra on this new directive is that:

Simplification and modernisation of the second directive would significantly contribute to the promotion of business efficiency and competitiveness without reducing the protection offered to shareholders and creditors.

Corporate Blawg's considers that the Commission should also adopt the mantra that "shorter sentences are easier to read".
          This new directive is not prescriptive, with each Member State having a wide berth of discretion.  It is likely to be adopted by most since it easies administrative burdens and gives businesses more scope for flexibility. However, the precise mechanisms of the provisions have been left quite open, and it will be the prerogative of each Member State whether to feast upon the European-style of principles-based regulation, or to clamp down with rules-based jaws of iron.
       The directive provides that public limited companies (plcs) may allot shares for consideration other than cash without requiring a special expert valuation.  This applies where there is a clear reference for the valuation of such consideration.  This valuation reference must not be more than 6 months old, and must have been performed in accordance with "generally accepted valuation standards". 
           In light of the IFRS replacing the idiosyncratic GAAP, Corporate Blawg considers the introduction of such GAVS to be a bit on the VAGUE side (Very Annoying Gobbledygook by Union of Europe).  The valuation may be contested by one or number of shareholders holding 5% or more of the shares in the company. Where the above is not applied by Member States, the EU has held that it will still be open to companies to use an expert’s report of the fair value of an asset which has been provided to the company within one month of the asset contribution.  Accordingly the management of the company will have to declare that there have been no new qualifying circumstances since the valuation was made.
          The second main provision of the directive is that plcs may now be authorised in a general meeting to acquire their own shares, for a period of up to five years.  This applies to only fully paid shares and such purchase may not exceed the limit of the company's distributable reserves.  The legislation provides that the acquisition shall not be allowed to prejudice creditors’ claims.
          After the excitement in the Companies Law Reform bill, that limited companies could give financial assistance, the new directive permits financial assistance by plcs, to a limit.  Proposals for transactions involving fair market conditions may be submitted to a general meeting for prior approval where the company has duly investigated its interests and securities for loans.  The management must provide a written report to the meeting.  This report must include a raft of information, including the risks involved for liquidation and solvency, and the price at which the third party will acquire the shares.  Again a plc may only provide financial assistance up to the limit of the company's distributable reserves, and should not, under any circumstances, result in a reduction of the net assets of the company.  Whatsmore, the company must include liabilities on the balance sheet and a reserve, unavailable for distribution, of the amount of aggregate financial assistance.
          As an afterthought of its enthusiastic liberation of plcs from onerous capital maintenance provisions, the directive considers creditors.  The last part of the legislation states that creditors should be able to resort to judicial or administrative proceedings where their claims are at sake as a consequence of a reduction in the capital.  It is thought that this is to harmonise law across the EU, since it is already a factor in UK legislation. 
          Corporate Blawg welcomes these changes to plcs, but notes the trade off.  Where company administration is de-regulated there is always going to be the moral hazard that such freedoms may be abused.  The due date for this legislation to be implemented is 15 April 2008, but Corporate Blawg anticipates that it is likely to become UK law sooner than that since the UK likes to appear at the forefront of company law developments, and the benefits to plcs may be quite considerable. The Company Law Reform Act has not received assent yet, and Corporate Blawg would not be surprised to see it pushed back to incorporate this new directive - in fact, that would be a terrific use of time and effort by parliamentary draftspersons (not to be confused with parliamentary daftpersons - i.e. politicians).

Case spotlight: Nearfield Ltd

Case Spotlight. Yeah. We love it. Case Spotlight. Yeah. Although this could work for people with synesthesia, Corporate Blawg is considering getting a podcast, just so he can add jingles to his favourite themes like Case Spotlight (Yeah), but that might be a bit sad.
            Corporate Blawg has paused in thought on the very recent case of Nearfield Ltd v (1) Lincoln Nominees Ltd (2) Lincoln Trust Co (Jersey) Ltd [2006] EWHC 2421 (Ch), of 9 October 2006. Very recent, see.
            The facts are that there was a joint venture where one party "procured" to ensure that another party was repaid a £3 million loan. Basically, the procuring party didn't procure anything. The case came before court on the meaning of the work "procure".
            The judgement held that to "procure" meant "to see it be done". This would have been quite obvious if the judge had consulted a dictionary, but due to The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. 19851 A.C. 191, 201, judges aren't allowed to do this. Fortunately, Corporate Blawg can do whatever he pleases.  Corporate Blawg has found that procuring means to "obtain or get by care, effort, or the use of special means". No sh*t Sherlock. However, and somewhat more interestingly to procure also means "to act as a procurer or pimp". Since pimping is illegal in the UK, this was clearly not the intention of the parties and the judge found no need to comment on this.
            In sum, the claimant won, the case was done.
            Rather curiously, in his judgement, Peter Smith J said in relation to a minor point:

One is reminded of the well known phrase “one does not hire a dog and bark oneself”

Corporate Blawg is mystified, and can only imagine that it is something to do with West London life (being a thoroughbred east ender).  Afterall, how does one hire a dog? Have you ever hired a dog? Where can one hire a dog?  Making more sense is the well-known phrase "one does not hire a dog because it's wierd" and "one does not bark at oneself or else one gets locked up". Despite this minor flaw in the judgement, there were a number of interesting contract law points raised, as summarised below:

• There can be no claim for rectification where there is no unilateral mistake known to the other party, or any mutual mistake.
• Where a company agrees to procure but does not procure that party is liable for damages to the extent that it did not procure - Moschi v LEP Air Services [1973] AC 331 as summarised in Barnicoat et al v Knights et al [2004] 2 BCLC 464.
• It is unlikely that the word "procure" would have a different meaning in different parts of the agreement. Very unlikely says Corporate Blawg, smelling potential negligence claims.
• Documents and drafts as evidence of intention are unhelpful and inadmissible in attempting to answer the question of construction. Documents cannot be construed in isolation from the "matrix of fact" from which they were derived. "evidence of negotiations, or of the parties' intentions […] ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively the "aim" of the transaction.” - Prenn v Simmonds [1971] 1WR 1381
• The meaning of the document is what the parties use in its words, against the relevant background and what they would have reasonably understood them to mean - Investors Compensation Scheme v West Bromwich Building Society [1998] 1.

All Corporate Blawg has left to say is whichever lawyer advised the defendant to bring this case must have been barking.

Law Society in credit card shame

Corporate Blawg UK wishes to begin a campaign against the Law Society for bringing the profession into disrepute.  Yesterday Corporate Blawg received information about applying for a Law Society credit card (13.9% APR).  Slightly off theme, but what the f**k is the Law Society doing by issuing a credit card?

1. Is the Law Society a bank?  Not last time Corporate Blawg bought a pint there.
2. Is the Law Society a profit-making organisation?  The shop never seems to do very well, but no, essentially.
3. Should the Law Society profit from lawyers in financial difficulty?  Tricky one...
4. Does the Law Society get enough money from lawyers without providing any tangible benefits? Most definitely yes.

Let's try some other questions:

5. Do credit cards encourage personal debt? Yes.
6. Is personal debt depressing and miserable, leading to more debt?  That's what I've heard.
7. Would prospective bankruptcy make a lawyer more likely to commit a crime? Would have thought so.
8. Does the Law Society aim to uphold the reputation of the profession?  I think so - but it so often misses the mark, like now.

Corporate Blawg anticipates that the Law Society will soon open a debt recovery advisory bureau or some other cynical attempt at pretending to sit on the fence.  Whoever came up with this idiotic income-generating idea should ask the wizard for a brain.

          Is this overreacting? Corporate Blawg thinks he should leave the profession alone and go back to thinking about corporate law, which makes him happy.