Corporate Blawg 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...

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.

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.

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".

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.

Back to basics - title in shares

You know law stuff is basic when all the cases that relate to the point are over a hundred years old.  Although at the time those issues seemed cloudy and complex, now we see clearly to the simple foundations.  Perhaps in 100 years time the logic behind the failure of the Doha round will also be taken for granted; for now the mind is boggled by the number of intelligent souls that got lost in the moral maze of making international trade decisions for the benefit of mankind. 

           So, searching for a deeper more profund clarity, it is time to focus on the simpler rules of life, the Taoist lawyer, but even that term obfuscates. 

           Now away from jurisprudence, away from multi-jurisdictional debt restructuring... it's time to go back to basics.

           Shares - when do you actually own them?  Why do we care? Because Corporate Blawg UK had a blip earlier today, a spell of forgetfulness that lasted 90 seconds.  This brainjam was enough to cause rather great embarrassment and turmoil.  So, chasing away those demons of doh, here is a refresher summary, without any ancient authorities to dust up the paragraphs...

• Allotment

Shares are "allotted" when a company grants a person an unconditional right to own the shares (s. 738 of the Companies Act 1985).  The relevant events are:

1. When a company is being incorporated, and the allottee is entered on the company’s memorandum of association, the right is established on the day the company is registered. 
2. On a rights issue (when a company offers shares to existing shareholders at a specified price to be purchased by a specified time) the date of each allotment is the date when the company receives its acceptance by each shareholder.
3. Where a prospective allottee applies for shares (offers to exchange cash for shares) from the date of allotment is when the company accepts that offer.  This is the date when the company's acceptance is posted to the allottee, even if that notification is never received.

• Issue

Shares are issued in two circumstances:

1. As with allotments, when a company is being incorporated the signatories to the memorandum are officially issued the shares on the date the company is registered.
2. In all other circumstances shares are issued when the recipient of the shares is entered onto the company’s register.

Under section 185 of the Companies Act 1985, a share certificate does not have to be sent to the recipient of new shares until up to 2 months (and even then it only has to be fully completed and ready for delivery) after the date they are allotted or transferred.

• Transfer

The transfer of a share is deemed to be when the name of the transferee is entered in the Register of Members. However, it is not enough to simply put the name on the register, full legal title to the share will only occur provided:

1. the stock transfer form has been signed;
2. the Board has agreed to register the transfer; and
3. the appropriate stamp has been placed on stock transfer form

The date of the last of these three actions will be the date legal title is transferred.
          A company may refuse to transfer a share if it has power in its articles to do so, and that power is effectively exercised.  The power is set out in s.24 of Table A and Articles often add that the directors power is widened by being "at their absolute discretion and without assigning any reason therefore" – the only restriction to such discretion is that the director must act in the company's interest.

           Ho hum.

           For corporate lawyers, this issue of allottment, issue and transfer should not be transferred to the out-of-town allotment of memory [tenuous, but pleasurable]. For this could be mega important in establishing whether a client has a legal right to receive a dividend, or whether a purchase of shares had occurred that was unlawful due to some other event (e.g. not having proper authority, the company going into liquidation) thus affecting a persons liability for those shares.

Case spotlight: Re Duomatic

Re Duomatic LW [1969] 2 Ch 365 is a shining beacon of pragmatic common law.  The case lights a path through the murky legal landscape of administrative irregularities in company procedures.  Members of a company may informally and unanimously agree to override procedures designed to protect minorities.  For example, a public company may make written resolutions instead of special resolutions, despite there being no provisions for written resolutions by public companies in the Companies Act 1985.

          The effects of Re Duomatic have been refined by Re Barry Artist Ltd [1985] 1 WLR 1305, where the court held that it was reluctant to allow a written resolution to replace a special resolution in the preparation for a reduction of share capital.  Due to the specific circumstances of this case the court did allow the written resolution to be effective, but expressly stated that the case should not be followed.  The reason given for this distinction was that the reduction of a company's capital, unlike the amendment of articles of association for example, is not a matter for the company alone - the court has discretion to confirm or refuse to confirm it (s.136 of Companies Act 1985).  Nourse J pointed out, most pleasantly:

Why should the court confirm it if it is done in some other way, however effective it may be? Moreover, if the reduction is confirmed the minute cannot, as is at present proposed in this case, refer to a special resolution which has not been passed. It will have to refer to a written resolution of all the members, which is something which may cause confusion and uncertainty amongst those who are not versed in the niceties of company law.

More recently in this line of legal logic, Re Torvale Group Ltd - [1999] 2 BCLC 605 distilled the essence of Re Duomatic to be where the members of specified group (prescribed by statute or articles) require a prescribed procedure for certain courses of action, and those members all agree to the course of action, the prescribed procedure is no longer necessary.  

          It may be tempting to use the Re Duomatic principle to avoid the administrative burden of holding meetings or obtaining the proper prescribed resolutions.  Such deliberate contravention of the rules could damage the reputation of the company, create difficulties for future investors and/or be part of a maladministration claim by officious shareholders. Corporate Blawg UK expects that the courts would not look favourably on deliberate uses of the Re Duomatic principle.  However, the principle does exist and has been applied by the court on numerous occasions. Corporate Blawg UK would be interested to hear of any experiences of this principle being used prospectively?