Corporate Blawg UK

The Pursuit of Perfection

It's not the 1st January;
It's not Corporate Blawg's birthday; and
It's not resulting from a rap on the knuckles by the boss (or the wife). 

• Could it be his spreading tum? ("purposely to increase gravitas, because businessmen have big bellies" - Corporate Blawg's verbose excuse)
• Could it be a new age dawning, due to his next birthday having a zero on the end?
• Could it be magic?

For an inexplicable reason, Corporate Blawg is thinking that it's time for self-improvement.  The blawg has been reinvented, now the mind behind the blawg needs a bit of personal development. 

To get the body fixed before the spirit, Corporate Blawg visited the dental hygenist to remove the calcites from his teeth.  After 60 minutes of the most enjoyably painful experience he has ever had, Corporate Blawg now has a twice-daily 15 minute routine to ensure his teeth are brushed, flossed, rinsed, gargled and his tongue well and truly scraped to be fungus free.  Corporate Blawg's mouth is now so hygenic that he could lick crockery clean enough for babies to eat off!

Since Corporate Blawg clearly needs to improve in a number of other ways, such as exercise (beyond walking to the bus stop), eating habits (not splashing soup on tie), social advancement (remembering names of people he meets) and personal development (buying new PS2 games and increasing his 2000 a.d. collection), Corporate Blawg has turned to management training to fine tune his life to be healthier, more efficient and more spiritually rewarding. 

Through a complex adaption of Six Sigma (not to be confused with Sigma 6), Corporate Blawg intends to systematically remove defects in his lifestyle to achieve perfection.  Firstly, he DEFINES, then he will MEASURE, then ANALYZE,  IMPROVE and finally CONTROL.  Tackling the first step, Corporate Blawg found that he was having troubling "defining".  Accordingly, Corporate Blawg must first project manage this Six Sigma to success, by using PMBOK, PERT, waterfall development, critical chain and CMMI.  It may also be necessary to first use SWOT, BHAG, TRO and SMART to establish his strategic direction.  Corporate Blawg may take a few years to reach the end of the "defining" stage, because understanding management jargon is like knitting with fog.

However, when he is ready to fully engage with his pathway to perfection, he will be sure to let you know how smug he has become.

The end result of this process will be that Corporate Blawg will have removed all decision-making to ensure that time is used in the most efficient burger-flipping way, and that Corporate Blawg becomes an automaton to health and happiness.

So how do director's of company's profit from their activities?  Well, besides under a service contract, or through dividend distributions, Corporate Blueg notes that directors should not exercise their powers to obtain a personal profit.  And like Corporate Blawg on his pathway to perfection, personal achievement should be measured by other people's respect rather than by personal profit.

It is a common law fiduciary duty that directors do not make a personal profit, under Regal (Hastings) Limited v Gulliver [1967] 2 AC 134, and also (the slightly easier to remember) Bamford v Bamford [1970] Ch 202. 

This fiduciary duty has been subsumed into the Companies Act 2006 in sections 175 (Duty to avoid conflicts of interest), but is mainly in section 176 (Duty not to accept benefits from third parties).  An interesting defence to accepting benefits from third parties is set out in section 176(4):

This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Going back a section, section 175(1) states:

A director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

Accordingly, section 176 is actually redundant, unless we want to argue the semantics of whether "cannot reasonably be regarded as likely to give rise to" means the same as the horrible tautology: "possible may"? So taxi for semantics... get your coat semantics! 

To add insult to the injury and death of any meaningful use of section 176 (conflicts of interest), the Explanatory Notes to the Companies Act 2006 state at para 338:

Conflicts of interest may also arise whenever a director makes a profit in the course of being a director, in the matter of his directorship, without the knowledge and consent of his company.

If you're very determined to argue that benefits are not the same as profits, Corporate Blawg welcomes your lyrical waxing.

So, on that friendly note, and the fond memory of Bamford v Thumper (ok - Bamford v Bamford), Corporate Blueg is keen discover more comedy case-names?  Corporate Blueg can find smut without any problem, thanks to Westlaw and a male mind, (e.g. The Willy v Trento (1920) 2 Li L Rep 598 relates to a steamship called willy and not to a surprise in a cubicle). 

Let's ask some bar-stewards to demonstrate their knowledge of comedy case-names: Geeklawyer? Charon QC? Pupilblog? See if you can beat The Willy?

Corporate Blawg is now off to spend an efficient 2.25 minutes making a cup of tea.

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.

NEWSFLASH: Companies Act 2006

On Wednesday (just gone), the Company Law Reform Bill became the Companies Act 2006. Most provisions won't be in force until October 2008.  Accordingly, Corporate Blawg considers his approach to the Companies Act 1985 now to be somewhat like this:

      

Shareholders' rights are important

The DTI have published a consulation document called "a proposal for a Directive on the exercise of voting rights by shareholders".  Aimed at those in the know, this consultation commences with the ground-breaking statement that:

Shareholder rights are important.

In the same vein, Corporate Blawg sincerely hopes that when the Ministry of Defence was consulted before going to war in Iraq the first sentence of their report was "War is bad".  Anyway, the EU's proposal that has inspired this consultation document will affect the rights of shareholders to  be informed of meetings and how those shareholders exercise their rights at those meetings.  The consultation can be boiled down to four key horsemen for trading between Member States:

1. The abolition of "share-blocking".  Whilst not quite being a "cool term" share-blocking is the process by which shareholders must notify the company of the intention to vote at a forthcoming meeting by a certain date.  After this date shares are not permitted to be traded.  The EU suggests 30 days before the meeting is the earliest.  Currently in the UK we have 2 days.
2. Sufficent advance notice for meetings.  The EU proposes 30 days, which will impact on the UK's 21 days for AGMs and 14 days for EGMs. 
3. Removal of legal obstables to electronic participation.  Hooray for the digital age - yet speed and cost must be proportionate to security and identification (the oldies warn us).
4. The ability to vote without attending the meeting.  It is proposed to have a right to vote in absentia, by post or electronic means, without appointing a proxy.

Because it is unlikely that Corporate Blawg will put together a full response to this consultation, Corporate Blawg thought he would express his views here, for discussion by regular readers and those accidental web-tourists looking for porn.

1. SHARE BLOCKING - keep two days - the market will be less efficient with longer time of non-trading shares duh.
2. ADVANCE NOTICE - if it's that important to you, go to it, otherwise vote by email - you don't need 30 days notice, who takes holidays for more than 14 days anyway - you'll have your blackberry with you, so what?
3. ELECTRONIC PARTICIPATION - right on, digitise the lot. 
4. VOTE WITHOUT ATTENDING - apparently Corporate Blawg is a stakeholder in parliament - he's never attended but has voted, so bring it on.

Since the consultation needs to crystallise, and the Commission needs to send the directive to and from the European Parliament a million times, and the directive will then have some way-off implementation date, Corporate Blawg finds it hard to get overly excited about this consultation.  Accordingly, and after this high-level analysis, Corporate Blawg is off to the pub.

p.s. Corporate Blawg thought up a law joke today: How do you serve a judge his whisky?  Just-ice.  Stupid really since judges prefer their whisky straight (off the belly of a Brazilian housecleaner).

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.

Written resolutions go cyber

Are your directors or members lounging in Kathmandu, Ulaanbaatar or the South Peninsula of Sulawesi? What happens if you don't have any rich tea biscuits left?  Does the sight of the finance director make your feet sweat?  Have you recovered from the falling off the pier after the meeting in Brighton? 
           For whatever reason it may be, sometimes a company or its members just doen't want to hold a general meeting.  In this circumstance there is one time-travelling, internet-friendly warrior of administrative process – the written resolution.
          Currently, there are two mechanisms for a written resolution.  The first is under s.381 of the Companies Act 1985, which includes a requirement to send notification to auditors prior to the resolution (s.381B).  The second more sly mechanism is under Article 53 of the Table A, and no auditor notification is necessary. 

          Nevertheless, where a company has excluded Article 53 from their Articles, the company may use the s.381 route, and save all the shareholders catching the no.73 bus on a rainy Tuesday afternoon. Who cares if Stoke Newington is trendy now?

          The written resolution is a tough cookie which may be applied to all types of resolutions, except those to remove a director or auditor during their term in office.  Written resolutions are just as effective as formal resolutions made at a meeting duly convened (Re Express Engineering Works Ltd [1920] 1 Ch 466).  The reason written resolutions are currently not used for companies with large numbers of members is that agreement of 100% of members is required to pass it.  Written resolutions may all be signed at the same time, since the signatures do not have to be on the same page, and the resolution is dated the last date of the last signature.  Under s.380 of the Companies Act, written resolutions that replace a special or extraordinary resolution must be filed at Companies House within 15 days of being passed. 

          The Companies Law Reform Bill, as of July 2006, makes a number of changes to the nature and procedure of written resolutions (s.295 – 307).  The key new developments are:

• written resolutions must be sent or submitted to every eligible member in hard copy form, in electronic form or by means of a website;
• the resolution must explain how it may be signed and the date on which it will lapse;
• agreement to the resolution may be in hard copy or electronic form (why don't they just say email? Perhaps voting buttons on websites will become all the range for written resolutions of the future);
• a written resolution may be agreed when the required majority of eligible members have signified their agreement to it (s.303).  This means that if the Articles of a company state that certain written resolution require 75% of the company (for replacing special resolutions) or over 50% (for ordinary resolutions) this may be permitted;
• if no period is specified a written resolution will lapse within 28 days of it being circulated.

There are also a number of circumstances where 5% or less (as provided for in the Articles) of members can insist that a resolution is passed as a written resolution.  This applies of the resolutoin proposed for a board meeting is frivolous or vexatious.  Whatsmore, the members could require the company to give a 1000 word description on the subject matter of the resolution.  In this situation, a company has 21 days to circulate such a written resolution after it becomes required by the members.  However, the costs of this circulation must be born by the members (how costly is an email?).  The court or an aggrieved person may prevent the mechanism.

          The Company Law Reform Act ignores the Article 53 of Table A except to say that the Articles cannot prevent a written resolution being proposed and passed where an enactment provides for such a resolution.

          Corporate Blawg UK believes that these reforms are excellent and should lead to a lot less electric lighting in large town halls.  There is also a risk that a minority group of shareholders could themselves become vexatious, frivolous and a downright nuisance - if allowed to insist every resolution is passed as written. 

          Corporate Blawg also questions the wisdom behind allowing written resolutions to "submitted" by website, since unless members regularly check their investment's homepage every month, there is no obligation on the company to go to reasonable endeavours to notify them.  This could be a disadvantage for minority shareholders, and one that could lead to litigation by that minority! 
          Ultimately, the Company Law Reform Act (s.516) still requires the company to notify the Auditor prior to any proposed written resolution where the statutory route is followed.  It therefore seems highly likely that the mighty Article 53 of Table A will remain the chief of these two brothers in Company proceedings.  The question is, how will companies modify Article 53 to introduce more of the statutory wording yet avoiding the auditor provision?  How indeed, drafting pens ready to squirt...

Why would a company insure its auditors?

Auditors are currently prohibited from limiting their liability to a company, or obtaining an indemnity, for negligence, default, breach of duty or breach of trust.  This restriction, in s.310 of the Companies Act 1985, aims to prevent auditors from agreeing provisions that protect themselves from their own misfeasance. 

          Yet s.310(3) allows companies to insure auditors against any such liability, or be indemnified against the costs of incurred when successfully defending proceedings (where the court grants relief from liability under s.727 of the Companies Act 1985).  Since auditors are contracted in to the company, and have a duty of care to the company and the shareholders (as a body) and third parties, why should the company wish to purchase insurance on behalf of its auditors?   Why take on this risk?

          Auditors have long campaigned for a change to s.310, especially in light of recent corporate failures.  Auditors are concerned of their exposure to unlimited liability and the high costs of obtaining appropriate professional indemnity insurance.  Plucking thoughts from thin air, Corporate Blawg UK conjectures that a company may wish to obtain insurance for its auditors if:

1. the overall insurance costs are reduced as a result of being tied in to the company's directors' and officers' liability insurance; and/or
2. auditors' contract costs are further reduced as a result of the administrative process undertaken by the company to obtain insurance on behalf of the auditor; and/or
3. the company will brings its claims directly against the insurer rather than the auditor, who would then have to claim against its insurer.  This would only reduce costs for the auditor, but the apportionment of risk may have some commercial value to the company.

Are there any other circumstances under which a company would want to obtain insurance on behalf of its auditors?  Corporate Blawg UK has suffocated its idea-cloud.

          Due to the assumed lack of use in the market place of this insurance provision, the Company Bill (as of 20 July 2006) dispenses with it.  As a result of wide consultation, the Company Bill retains the voidance of indemnities, but incorporates provisions for new liability limitation agreements (in s.548-552) in regard to the audit of accounts. 

          A liability limitation agreement between a company and its auditor may be authorized by the company passing an ordinary resolution, subject to any provision of the company’s articles requiring a higher percentage for approval.  The limitation of liability must be fair and reasonable, baring in mind the auditor's responsibilities, the nature and purpose of the auditor's contractual obligations and the required professional standards of the auditor.  Flexibility of form and structure in these new agreements is wide, although the Secretary of State may (by regulations) require or prohibit specified provisions or types of provisions in such agreements.  Also the Secretary of State may require disclosure of liability limitation agreements in annual accounts or directors reports.

          The removal of the provision for company's ability to obtain auditors' liability insurance demonstrates how the role of auditors and directors are being pushed out to a more commercial and independent relationship over a collaborative one.  In the same way as the role of auditors and lawyers are clearly distinguished, increasing such "separation of powers" in the regulatory compliance of a company leads to greater transparency, accountability and greater overall comfort for investors.

Social issues - A new duty for directors?

The first codified step for company law to be socially and environmentally conscious is likely to enter the UK statute books in 2007.

          The draft Company Bill contains a new duty on directors to "promote the success of the company" (in good faith) for the benefit of the shareholders (s.173 of the July 2006 draft).  The matters (in (a)-(f)) that directors must have regard to when promoting such success include the impact of the company’s operations on the community and the environment.

          This is perhaps the first time that statute has imposed on directors a requirement for consideration of wider social issues.

          However, there seems little point in getting too excited over this section.  What constitutes "promotion" and "success" are hugely subjective, and if no successes are made no promotion is required.  It is difficult to think of a situation where the director may fall foul of this section by not promoting the success of the company (even half a sentence in the annual accounts may suffice to meet the duty), or where promoting the success of the company will be in bad faith (potentially giving rise to a cause of action in misrepresentation, or breach of shareholder's agreement).

          There is pressure for a company to have greater transparency with its investors (the Transparency Directive), as well as being aware of its social and environmental impact.  Coupled with the increasing accountability of public bodies to implement the principles of fair competition when awarding public contracts, it would appear that public and private law are converging. 

          The Public Contracts Regulations 2006 (SI 2006/5) sets out the requirements for public bodies to enter into contracts in accordance with competitive principles in an open market.  This legislation pressurises public bodies to be subject to the same market forces that maintain value for money in the private sector.  Besides strengthening the requirement for open and fair competition in the public sector, the new regulations codify the option for public bodies to include relevant social and environmental considerations (as technical specifications) in an award of a public contract.

          It is arguably the legacy of Enron and Worldcom that greater transparency is to be increasingly important in company law, rather than as a result of any social trend.  When both private and public bodies are obliged to be environmentally and socially responsible, without restricting competition in any way, we will be much closer to a permanently fixed legal landscape.  In this "Star Trek Utopia", value will be measured by cost and profit to all stakeholders (including the community and environment), and such value will be kept in place by open and competitive market forces. 

           Although environmental and social concerns are clearly more prominent than 10 years ago, Corporate Blawg UK expects that these are not the first steps in that gravitation towards a social centre, but a unitary crowd-pleasing appeasement without any real teeth.