Corporate Blawg UK

EU Update: auditors liability, and the Collateral Directive

Corporate Blawg has toured widely in Europe, and left a small deposit of his friendship in every country he visited.  From a deaf Oboe player and his wife in Eger, to the professional croupier and gambler in Dubrovnic; from hot Israelie rave-chicks in Samothraki, to a famous painter of horse bottoms in Barcelona.  With these fond memories tucked under his armpit, Corporate Blawg cannot forget that he is a member of the EU - not as a State but in a state of community and involvement in the global market economy.
            Accordingly, Corporate Blawg proposes a end-of-the-month round-up of EU information that is kind-of relevant to the subject-matter of this blog. So here we go:

Auditors' liability caps

On 18 January the Commission began its consultation on possible reform of auditors' liability rules in the EU. The U.K. is leaps ahead of the E.U. which shows some disparity in the Member States' approaches to limiting auditor liability (s.532-538 of the Companies Act 2006 in the UK limits auditors liability to a "fair and reasonable" amount negotiated by contract on a yearly basis).  The Commission has suggested four possible options for reforming regimes, and invites stakeholders to respond by the Ides of March (15th) 2007. 
              As Commissioner Charlie McCreevy pointed out, auditors cannot often obtain sufficient insurance to cover their risks.  Charlie says "there is a real danger of one of the "Big Four" being faced with a claim that could threaten its existance".  God forbid threatening the existence of a complacent auditing firm!  The four modes, as suggested in a study by the thinktank London Economics in October 2006 are:

• a fixed monetary cap at European level;
• a cap based on the size (market capitalisation) of the audited company;
• a cap basd on a multiple of teh audit fees charged to the client; and
• introduction of the principle of proportionate liabilty, meaning that the auditor is only liable for the portion of the loss that corresponds to the party's degree of responsibility.

Since the final bullet point is vague, subjective and uses the word "proportionate" (thereby allowing each Member State to exercise a relative proportion of protectionist-oriented discretion), Corporate Blawg considers it very likely that this loose EU legal colloqualism will be the way ultimately chosen. 

Collateral damage prevention of finance directive

The Commission Press Release of 9 January on increasing the scope of the Financial Collateral Directive (FCD) states ever-so-succinctly that: financial collateral means assets provided by a borrower to a lender in order to minimise the risk of financial loss to the lender in the event of the borrower defaulting under his obligations to the lender.  Corporate Blawg is better than EU Press Releases and can summarise financial collateral as assets provided in security of a default between a borrower and a lender.  Faster, sharper, and quicker-off-the-block! Like Superman.
            The Commission informs us that the 'classic' way of providing collateral is by a "pledge". Here, the borrower provides the lender with cash or securities collateral. The ownership remains with the borrower but is usually "blocked" in favour of the lender. If the debt is not repaid, the lender can liquidate the collateral and redeem the debt.
           The 'not so classic' way of providing collateral is by a "title of transfer" (an example includes repurchase agreements - also known as "repo").  Here, the borrower sells the collateral to the lender in exchange for the loan. At the same time, the parties agree that at a future date the lender will sell the collateral back to the borrower at an agreed price (typically including interest on the loan).
         The big news here is that the Commission proposes to extend the Collateral Arrangements Directive (2002/47/EC) to include certain credit claims that are elligible as collateral for Eurosystem credit operations from 1 January 2007.  This will enable cross-European collateral supported transaction to progress even more smoothly and transparently.

Corporate Blawg hopes you enjoyed this whistle stop of two EU press releases, and will be happy to introduce you to further primary materials on request. 

Queue: Corporate Blawg playing air-trombone whilst humming the French National Anthem, and marching up and down the Champs Elise of his office corridor. 

Check: Corporate Blawg is not bound in white sheets and bundled out of the office and into the back of an ambulance.

Stop.

TAKE NOTICE, of section 212, or is it 793?

Corporate Blawg promised that he would pay more attention to recent newbies from the Company Act 2006.  SO TAKE NOTICE!
                 The first newbie is the new provision that public companies can serve (what used to be) section 212 Notices by electronic communications.  These new provisions are set out in sections 791-810, 811(1)-(3), 813 and 815-828 (information about interests in a company's shares).  Most importantly a section 212 notice will now become a section 793 notice.  No room for confusion there.
          Besides some finer details of company procedure (how information is entered on the register when the name of the present holder of the shares is not known - section 808; the requirement for a company to keep information on the register in relation to notices issued more than 6 years previously - section 816, and removing the requirement on the company to verify third party information supplied in response to a section 793 notice before putting it on the register - section 817), this provisions allow for notices to be given in electronic form, (section 793 in conjunction with Part 37 on the sending or supplying of documents or information). 
          But why should such a notice be sent in the first place?
          The purpose of a section 793 notice will be to establish who has control over the votes represented by the shares.  Once control is established, the company may apply to the court for various restrictions over those shares, under section 454 of the Companies Act 1985, i.e. any direction in relation to:

• transfer of those shares
• restriction on voting rights in relation to those shares
• issued of further shares in pre-emption right of them.

In fact, section 454 can also be used to prevent the holder receiving any dividends, and enables a company to see who is "friendly" in advance of a bid! Now you see why its so important. 
               The key case which enhances, yes enhances, the statute is that of In re Lonrho plc (1988) Times, 16 November, where the court foud that one and a half working days was an unreasonable time for a foreign recipient to have to comply with a notice under section 212.  The court stated that two full working days would probably have been a reasonable, and that five days was two long.   
               Such detailed and subjective proselytising over tiny differences in time limits, seems like bolllocks to me.
               The case went on to rightly suggest that foreign investors on the London Sock Exchange had to be prepared to comply with both the Companies Acts and the Sock Exchange regulations.  It is interesting that Lord Irvine is recorded as being hesitant to state that one and a half days was unreasonable.  This must be because what had been deemed a non-working day had been a Jewish holiday, but working day for everybody else.  The danger is that religious holidays might have to be provided for as non-business days, which would turn all statutory timings upside down.  How would we cope?  However, you have to admire Lord Irvine's sensitivity in this matter, and he clearly felt that the serving party did or should have known that such a day would not be a working day for the recipient of the notice, and that the serving party should have taken that information into account before applying to the court for s.454 restrictions.
           So, in sum, now these notices can be served electronically.  If you've put a lien on your shares without authority, or given someone else any rights without telling the company, keep checking those emails...

Arising out of (a waste of money)

It has come to Corporate Blawg's attention that in the very recent case of Fiona Trust & Holding Corporate 20 Others v Yuri Privalov & 17 Others 2007 EWCA Civ 20, the judge held that the term "a dispute arising out of the contract" meant every dispute connected with the contract other than whether a contract exists at all. 
             Also, the words "out of" and "under" should be widely construed, Mackender v Feldia (1967) 2 QB 590, and mean the same thing.  Another pearl of wisdom is that international arbitration clauses should also be widely construed.

No shit Sherlock.  For the 37 other parties to this case, the one thing Corporate Blawg wants to say to you is - big f*cking waste of money. 

Smack my wrists if I oversimplify.

Resist the Tagging enemy

Corporate Blawg has been meta-tagged by The Landlord Law Blog and The Barristers Blog.  Not feeling much weight to pander to this chainmale equivalent on the net, nor independent enough to resist partaking in a harmless game to link blogs to blogs and share the net, he has succumbed, so here are 5 (five) of the least interesting things about Corporate Blawg:

1. The average human body consists of 100 trillion (million million) cells.  10 trillion of these makes up the body, and 90 trillion are bacteria.  Since Corporate Blawg is developing his 'paunch' (for gravitas purposes) and ate a rather nasty donor on Saturday (to further his paunch) Corporate Blawg has approximately 300 trillion cells, but 285 trillion of these are bacteria.

2. Corporate Blawg once met Cherie Blair/Booth in person, and was shocked by how sexy she was.  After withdrawing his sweaty hand from her soft and elegant paw, Corporate Blawg decided that he had been seduced by her L'eau De Power.

3. Corporate Blawg's favourite T-shirt says "Human Being not Human Doing"

4. Corporate Blawg's last birthday party was a fancy dress party on a boat on the Thames, the theme was 007 - James Bond, and Corporate Blawg went as this.  Think Blofeld's accessory.

5. Corporate Blawg is going to the Galapagos Islands with his wife in September and is more excited about this than (a) the second coming, (b) discovering life in space, and (c) Big Brother being banned from our airwaves.

Okay, so the next part of the game is to meta-tag 5 other blogs to tell 5 interesting things about themselves.  Corporate Blawg chooses: The Magistrates Blog, My Daily Fatwa, The Blawg Review, Kierkegard Lives, and... must resist... baaah baaah (trans-ethnic sheep). AH-HA - DON'T DO IT - REBEL AGAINST INSIDIOUSLY COHESIVE SOCIAL ACTIVITIES! BE FREE! RUN TO THE HILLS! GET OUT OF HERE BEFORE IT'S TOO LATE!...

and Blawg's Blog.

New law in force tomorrow - hip hip hooray

Ooooh it's pretty exciting... tomorrow, on the 20 January 2007, section 463, Part 22 and ss 1143-1148 of the Companies Act 2006 come into force, but also the Transparency Directive as a whole!

I know.  Corporate Blawg's knees are also knocking with exhileration.

This excitement is explosive, and everyone in Corproate Blawg's office is buzzing  with anticipation of amending Articles of Association to enable companies to post information and documents on their websites (provided all the shareholders have individually agreed to such process).
          Not only that but also, I'm shaking like jelly, yes also a public company has a right to investigate who as an interest in its shares.  Isn't that amazing????  This is in sections 791-810, 811(1)-(3), 813 and 815-828 of the Companies Act 2006 (the new one).  This is all in Part 22 of the new one and expands on section 212 of the old one (1985).  WOW!
          And there's more - the new section 463 of the Companies Act 2006 (liability for making false or misleading statements in reports) will mean that directors are liable to the company for the information contained in the directors report (including business review), remuneration report and summary financial information compiled from those reports!  Corporate Blawg can hardly con-con-contain himself, in fact he is beside himself with Awe (whoever Awe is).

Corporate Blawg is so excited the only thing that can prevent him from bouncing off the walls before midnight, when he is likely to leap over the moon, is to play with his wee (his wii). 

When he calms down, if he can ever calm down, Corporate Blawg will consider these new provisions in greater detail. Yikes.

Sharp as a razor, fast as a ninja

Having cut his chin with an electric razor that has opti-grip and vibrates, Corporate Blawg now buys disposable cheapo blades.  Having broken his wife's blender, Corporate Blawg now whisks with a fork (in the garage where he sleeps).  These are two examples of Corporate Blawg applying Occam's razor to help him get by in this dangerous and breakable non-padded world.
          Occam's razor is the theory attributed to William of Occam for his making up of a nifty maxim in latin.  The theory is actually found further back to Thomas Acquinus and even Mr. "Walking About" himself - Aristotle.  The maxim is:

"Plurality ought never be posed without necessity." (William's version)

Or:

"Entities should not be multiplied beyond necessity." (Rip off version)

Or:

"One should not increase, beyond what is necessary, the number of entities required to explain anything." (Verbose version)

Of any philosophical theory, this one has spawned the most variations that all say the same thing. Of such an ironic batch, Corporate Blawg's personal favourite is KISS: "Keep it simple stupid". 
        Whilst attacking the blender with a screwdriver and woodglue, Corporate Blawg asked himself how then, could this maxim also apply to contract drafting?  Let's now discuss the traps and pitfalls, gold-dust and glory of Occam's razor in commercial contracts.
          Clearly the principle of parsimony adds great value to a well crafted contract. But how should parsimony be applied?  Firstly, repetition risks two interpretations, and the potential lack of legal certainty makes repetition a grevious sin.
           Secondly, a contract which is heavy with excessive drafting is (a) costly to write, (b) difficult to negotiate, (c) will increase the risk of unnecessary clauses being unreasonable (and the whole contract being void for lack of legal certainty), and (d) boring.
           The application of the the razor begins at the most basic level of contact.  Ask yourself, what do the parties intend?  A contract should reflect only genuine intentions and no more.  A lawyer should never forget that his job is to deal with the legal issues, because clients should deal with the commercial points.
           Besides damnation from repetition, Corporate Blawg considers that key areas where Occam's razor should slice through poor drafting is that:

1. defined terms must not be circular,
2. core obligations must not be described in so much detail as to be unwieldly or unduly restrictive, and
3. boilerplate clauses must be used sparingly and appropriately.    

Albert Einstein's variation adds a wonderful caveat to the above:

"Everything should be made as simple as possible, but no simpler". 

And on that note, Corporate Blawg is off to the shops to buy a new blender.

Case spotlight: Logic Alliance Limited (this time it's payback)

Having indulged far too much in his own fancy, Corporate Blawg's head is going down again.  It is time to give back some of the legal knowledge, accumulated in his mind like pollen for honey bee lavae.  As a camera button half pressed, or a ciliary muscle pulled taught, it is time to focus back on the law...
           In the matter of Logic Alliance Limited (in liquidation) (Case No. 25C of 2006), heard on 24 November 2006, an application was made by the liquidators to declare that certain dividends were at an undervalue and constituted an unlawful preference.  Although the judge pointed out that the instinctive answer to the defence - "No" - he also said that the defendant had advanced a serious argument on s.270 of the Companies Act 1985, which deserved serious consideration.  No jokes here then. Especially no jokes about a judge with a conjoined twin who, when asked to decide a case resting on stolen-identity, said "who am I two judge(s)?" [note to self - don't give up the day job].
           The facts we shall not bother with, because Corporate Blawg has an aversion of facts and avers that judgements are better without them.  S.270(3) of the Companies Act 1985 provides that the relevant accounts for establishing distributable reserves for dividends are the most recent annual accounts laid in a general meeting (see s.241).   The defendants claimed that this section meant that the relevant accounts would be for the accounting reference period when the last compliant accounts laid.  Well, at para 26 the judge's response qualified his support of the liquidators:

"It is legitimate for the liquidators to argue that the wording of s.270(3) is somewhat convoluted, probably tautologous and somewhat ambiguous."

Put that under your parliamentary draftsman's hat and smoke it.  For those of you checking out the Statute Law Database, the element of tautology was in the repetition of "[which] were laid."  The judge accepted the argument that the purpose fo the tautology was empahsis.  He did not accept the defendants' case, which was on the other hand, mainly on the basis that:

"If the defendants' interpretation were correct, the provision would expose companies and creditors to the potential for the most extraordinary abuse."

No extraordinary abuse here please.  The judge reinforced his view by reference to the Second Directive on Company Law (77/91/EEC), and such resourcefulness should be commended.
           In justifying their dodgyness, the defendants also put forward an argument using In Re Duomatic [1969] 2 Ch. 365.  The defendants claimed that as directors and shareholders they had automatically complied with various requirements for a general meeting.  Good ol' judge Livesey QC rejected this argument on the basis that the Duromatic principle does not apply where compliance with a particular requirement is compulsory (see Bairstow & Others v Queen's Moat Houses PLC [2001] EWCA Civ 712).  Neither does the Duomatic principle apply where no assent or decision was taken, even where one might could or should have been taken had the parties remembered or even thought about it. 
            Looks like the defendants in this case are going to end up paying back £249,000 of unlawful dividends.  Since the relevant companies ended up over £3million in debt one has to wonder, how did they screw up so bad?  Nevermind, at least the liquidators will get paid.
            So here ends the first proper law posting of the new year.  Hope you enjoyed it.  Lots more to come be assured, and only three months until Easter (for a return to more festive, nestive and eggselent home-made yokes by Corporate Blawg).

Help me OBE - you're my only hope

Corporate Blawg read in the Lawyer's Garotte that Vanessa Knapp, a partner at Freshfields has received an OBE for services to Corporate Law, in the New Years Honours list of 2007. How cool is that?
          Initially Corporate Blawg was delighted at the idea that an OBE could be awarded to a lawyer who implements "tax-efficient" structures for multi-national corporations.  However, Vanessa is not that, but a bit of a whizz on mergers & acquisitions.       
           Corporate Blawg, clearly a keeno for extra-curricular work-related activities, is rather excited about the committees' and what-nots that Vanessa is part of, and which have earned her this high esteem.  Corporate Blawg is going to spend this year attempting to wiggle his way into various company law committees, and will report back here on his progress.  Vanessa's CV has highlighted a few potential avenues:

• The Law Society Company Law Committee
• The City of London Law Society Company Law Sub-committee
• UK representative of the Company Law Committee of the Council of the Bars and Law Societies of the European Union

Clearly Vanessa has waived substantial fees in order to spend many units of otherwise billable time with civil serpants sorting out the Companies Act 2006, and this OBE is her pay-orf from the Treasury.  Such a cynical view should not and does not detract from her brilliant and awe-inspiring success.  (For the avoidance of doubt, Corporate Blawg is not a Freshfields lawyer, nor does he want to be one thank you very much.)
         And finally, Corporate Blawg believes that there should be less honours awarded to pop stars and TV entertainers and more to doctors, nurses, teachers, headmasters, post-office workers, streetcleaners, corporate lawyers and traffic wardens.
         Maybe not traffic wardens.

Industry Trawl Leads to the Secret of Happiness

Corporate Blawg is a well-rounded individual, and not just in stature.  Clients do not want a young spunky solicitor to be solely focussed on paper trails, puppy dogs tales and disclosure requirements.  They want a balanced, healthy, best-living dialectic that uses an industry commodity of knowledge to their best logical advantage.
          It is in this vane, flapping in the wind, spurting from the aorta, that Corporate Blawg has indulged in the intricacies of the health sector, as one of his many pet-interests.  In his diverse practice Corporate Blawg has provided bountiful advice to all heights of the NHS, all host of private healthcare providers and to a raft of buoyant biotech and pharmaceutical megaliths.  Accordingly, Corporate Blawg regularly undertakes a market-review during which he spends several modicums looking at these particular industries.  And so, Corporate Blawg has discovered the following two gems published in the research pages of the most recent edition of the British Medical Journal:
           The first is a report on research carried out by Gloucestershire Royal NHS Foundation Trust on "Sword swallowing and its side effects".  The ground-breaking research states that:

"Sword swallowers know their occupation is dangerous."

The report describes in graphic detail the horrors of this "entertainment".  Following his reading of said research Corporate Blawg wishes to set up a pressure group to prevent this disgusting and inhumane act from being part of the "entertainment" encouraged by circuses and practiced amongst teenagers:

"Some respondents swallowed a sword easily, but mastery for most required daily practice over months or years. The gag reflex is desensitised, sometimes by repeatedly putting fingers down the throat, but other objects are used including spoons, paint brushes, knitting needles, and plastic tubes before the swallower commonly progresses to a bent wire coat hanger."

          The second report on research, that is particularly worthy of note to non-medics, is titled Why Danes are smug: comparative study of life satisfaction in the European Union. This inspired research investigates whether the (uninspiring) comfort food of the Danes is contributory to their happiness, or whether such happines is due to the large percentage of blondes in the populace (a hypothesis dispelled by comparison with the Swedish). Ultimately, the research concludes that the reason the Danes are so smug is that:

"Danes have consistently low (and indubitably realistic) expectations for the year to come. Year after year they are pleasantly surprised to find that not everything is getting more rotten in the state of Denmark."

          So there we go - the trick to happiness is to lower your expectations (which may be why Corporate Blawg is always so happy with off-the-bone chicken from KFC until chicken juice splurts down his new coat).  The lesson here for lawyers is in the way we deal with our clients, especially where fee estimates are either too high, or overshot.  In order to manage expectations, just a little more value needs to be delivered, and a few less trans-fats.
          Corporate Blawg hopes that he has also disseminated the value of generally keeping abreast of new developments in client's industries.  Such abreastation (new word) of personal interests not-only improves one's practice in those areas but also increases one's enjoyment of the daily working life! Hoorah for the new year.