Corporate Blawg UK

No work no pay puts pay to play

Jeepers.

Corporate Blawg is looking like he's about to enter his 3rd week in a row of 50+ hours in the office.  In May 2005:  "The European Parliament has voted to scrap Britain's opt-out from the Working Time Directive and to limit workers to a 48-hour week." But it never happened.

"Just as some people exercise their right to flexi-time, downsizing and self-employment, shouldn't others be able to work 90-hour weeks in the City if they want to?"  Yikes!  No no no.

Oh well, enough welcome distraction.

p.s. Corporate Blawg is hosting the Blawg Review next week in a phenomonal post that has been under construction for two weeks already.  Be prepared.  This swan might start singing.

Case spotlight: Bruce v Carpenter

Blogging eh?  Is there any value in a blog?
            Now that the final resting place of Jesus has been found, the big question amongst bloggers is How does one value a blog?
            For a community so eager to propound its honesty and transparency, most bloggers are rare to discuss the true material value in their blogs.  Corporate Blawg is not one to keep his cards so close, but rather bears his three chest-curlies with great pride and aplomb.

            But before we go into the reward, let's look at the cost:

            Corporate Blawg's subscription to Typepad costs him $6 per month, and 3-4 hours a week of his user-friendly time.  This time could either be spent discussing corporate law in a bar with anyone who will listen, or fee-earning into the night and earning around £600 (+VAT) per week for his firm.  So after 6 months (and approximately £18,000 (+VAT)), what has Corporate Blawg obtained in return?

           The statistics show that in 6 months, Corporate Blawg has received 6700 hits, currently averaging around 50 per day.  Most hits are recieved are for his blog on "Russian Roulette" of 21 August 2006.  Corporate Blawg has been hit by some global internationals, the magic circle, a few governments, and from over 1100 different servers situated in most of the countries around the world.  30% of readers are return readers and Corporate Blawg loves them all the more for it.  Although these stats. pale into minor significance when compared with some U.S. blogs, Corporate Blawg is pretty chuffed.  But what about the real materialistic success, the kudos, the fame, the fantastic new client opportunities?
           In the early stages there was an invitation to scribe for the Times law blog, but that fell through as Corporate Blawg found he could not juggle his work, his blog, his playstation and his wife (no comment on juggling the wife please).  Neverthless the Times did publish his conveyancing poem which caused a spike in his hits (120 that day).
           Several months later, a free novel, arrived which Anonymous Lawyer sent for review.  Despite Corporate Blawg's favourable review, Corporate Blawg found it hard to engage in literature about lawyers, and interviewed Anonymous which resulted in a quick and dirty blog.
           More recently Corporate Blawg has been asked by an independent company whether he would like to get involved with overseas training of corporate law, to which Corporate Blawg has leapt up the gangplank at the chance.  Corporate Blawg also introduced his new contact to a partner at his work (who is in a better position to provide such training, but may need Corporate Blawg to design the hand-outs and carry the slide projector to exotic locations).  Corporate Blawg has achieved this networking joy whilst still keeping his law firm unawares of his blog, in accordance with his disclaimer.
             So all in all, the value, plus the peace of mind of being "part of something", makes this blog pretty high, to Corporate Blawg at least.  To non-lawyers, the value may only be a cursory interest in the poetically-placed non-legal commentary, such as this.

           The corporate law relevance to this rambling is the case of Bruce v Carpenter et. al. [2006] All ER (D) 405 (Nov) which was heard on 29 November 2006 last year. In this case an expert valuer was contracted under a compromise agreement to provide a valuation of shares, without any necessity to give reasons behind that valuation.  Mr Bruce brought the action on the basis that the expert valuation was not conducted properly, and did not take into account all the facts.

           The court was faced with three issues, although the first of these was “the justiciability issue”, (a word not recognised by spellcheck), on which the case rested. The judge referred to Sudbrook Trading Estate Limited v Eggleton [1983] and held that:

1. Where a valuer does not carry out his instructions and is in default of his agreement, the court may intervene.
2. Where a valuer refuses to fix the price under contract, or is unable to do so through death or disability, the contract is frustrated.
3. The true distinction is between those cases where the mode of ascertaining the price is an essential term of the contract and those cases where the mode of ascertainment is subsidiary and non-essential.

Since Bruce had not required any reasons or methodology of the valuer, when he signed up to the agreement, he was left stranded up the creek without a paddle, flares, tent or salt tablets (always leave behind the salt tablets).  Clearly, this is something to be wary of whenever valuations are present in contracts, or you find yourself in a creek as twilight sets in.

            Coolio, thought Corporate Blawg, before instructing himself to value his blog without reference to any statistics of any relevance, and without giving any reasons.  Accordingly, Corporate Blawg values his blog at approximately £2.3 million.  Any takers?

O'er the Corporate Veil and Hill

With all this fuss and commotion over hajibs in the news recently, Corporate Blawg has retreated into his cocoon of legal comfort and pondered recent applications of lifting the corporate veil. 
             Whilst Corporate Blawg firmly believes that if an individual wishes to hide her face she should (but may have to identify herself in other ways, such as fingerprints or a secret password), Corporate Blawg finds that he is often considering whether his corporate structures enable persons to avoid responsibility and liability where due.  This is because Corporate Blawg loves shareholders and creditors.  Although he loves shareholders and creditors, he also loves the well-paying client who instruct Corporate Blawg to set up an impenetrable corporate veil, but most of all he loves his wife.
             The veil of incorporation was first tested in Salomon v Salomon & Co [1897] AC 22, where it was decided that, amongst other issues, a company is different to the persons in its memorandum, and that after incorporation the company is not the agent of its subscribers.  Further cases cemented the company as an independent legal entity carrying its own liability.  A good corporate structure would mean that at each company in the group the buck would stop.
           Despite the veil of incorporation, the courts are often invited to lift the veil and peek at the chanel lipstick underneath.  The most famous example is Adams v Cape Industries plc [1990] BCC 786 when the court famously said:

Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v Salomon merely because it considers it just to do so.

However, in the circumstances, the court in Adams decided that it:

...will lift the corporate veil where a defendant by the device of a corporate structure attempts to evade... limitations imposed on his conduct by law

The best example for flinging the veil to one side is Jones v Lipman [1962] 1 WLR 832 where the relevant company was described as "a device, a sham, and a mask".  In our tortured analogy this would also apply to persons who used the hajib to hide their identity as they rob banks.  Not that Corporate Blawg has ever heard of a hajib wearer robbing a bank, nor a moustached man stealing razors, it doesn't mean it never happened.  For the avoidance of doubt, Corporate Blawg does not think that hajib wearers are any more prone to robbing banks than woolly jumper wearers are to jumping into cold rivers whilst singing a Moon River by Henri Mancini.
             In the recent case of Kensington International Ltd v Republic of Congo (formerly the People's Republic of Congo) and others [2005] EWHC 2684 Comm the court referred to a "creature of Cape" and, for those that like details, this is a handy piece of instructive dicta:

The court accepted that it would lift the corporate veil where a defendant, by the device of a corporate structure, attempted to evade such rights of relief against it as third parties already possessed, whilst rejecting the notion that the corporate veil would be lifted where the corporate structure was created to evade rights of relief which third parties might in the future acquire. The corporate structure could legitimately be used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) would fall on a particular member of the group, rather than upon its parent or other associated companies.

Corporate Blawg agrees with this in principal, and notes that the key issue here for corporate lawyers are the words "where the corporate structure was created to evade rights of relief"  Bring on arms length transactions at market value!
          Corporate Blawg considers that the veil should stay firmly on in all circumstances other than a clear and present sham, device, mask, facade, myth, deceit, falsity, perversity and absurdity, and where there is ANY DOUBT that such structure was created for bona fide purposes, that veil should stay firmly down, especially if it makes over-the-hill politicians feel uncomfortable.

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.

Sarbox creeps - we bar Sox

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

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

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

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

Parental guidance can be dangerous

Phillip Larkin, in "This Be The Verse", blamed his parents for being "fucked up" by them. To what extent may subsidiary companies look to their parent companies for this responsibility, and pass the buck up the tree? 
          For specific acts of a subsidiary there are certain remedies from the parent. For example, subsidiary companies (or their liquidators) may locate parental blame via a contract (e.g. by way of guarantee).  Also, liquidators may find parents directly liable for their subsidiaries' transactions at an undervalue, fraudulent or wrongful trading, or unlawful distributions, but these are all discrete misfeasances through which a liquidator may seek an (indiscrete) remedy.  Such events are slaps on the wrist compared to when a parent brings up their subsidiary poorly, encouraging hooligan behaviour and contempt for authority...
          It is oft a far greater fear of a parent company to be found to be a shadow director or de facto director of its subsidary.  Not only would the parent be personally liable for all the wrongs of the tear-away, but the longer-lasting effect may be the damage to the parent's reputation in the business community. 
          In sum, a "shadow director" is a legal entity/person who controls the company but is not officially appointed as a director (an officially appointed director is a de jure director); a de facto director is also not officially appointed but effectively sits on the board and is involved with decision-making.  The exact distinction between shadow and de facto directors has caused much debate in case law, and the rest of this post follows the most recent rulings:

           In Re Hydrodan (Corby ) Ltd [1994] 2 BCLC 180 the court decided that directors of parent companies are not automatically shadow directors of their subsidiaries.  Limiting options available to prosecution, the judge held that the case for a shadow dierctor as opposed to a de facto director would be mutually exclusive.  On de facto directors the judge said:

A de facto director is a person who assumes to act as a director. He is held out as a director of the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.

The case of Secretary of State for Trade and Industry v Laing and others [1996] 2 BCLC 324 found that a company which is a shadow director does not automatically make the directors of that company shadow directors too.
           In Secretary of State for Trade and Industry v Tjolle [1998] BCC 282 the judge highlighted the grey scale, stating that being a de facto director was "very much a question of degree".  The court repeated some of the Hydrodan factors as "relevant" and added further factors to include: whether the individual used the title of director, whether the individual had proper information (e.g. management accounts) on which to base decisions, and whether the individual had to make major decisions.  The judge distinguished his analysis from Hydrodan by stating that it was key to ask whether the indvidual was "part of the governing structure"?  The reason for this is that there would be no justification for the law making a person liable for misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. 
          The Tjolle court's retention of its discretion was the last word to date on defining the de facto test.
          Of shadow directors, the Court of Appeal agreed with the definition in section 22(5) of the Company Directors Disqualification Act 1986 (Secretary of State for Trade and Industry v Deverell & Another [2000] 2 All ER 365).  In this case, the court held that:

1. The purpose of the legislation was to identify those (other than professional advisers) with real influence in the company's corporate affairs, but this influence did not have to be over the whole field of its corporate activities.
2. Whether a communication, by words or conduct, was to be classified as a "direction or instruction" had to be objectively ascertained by the court in light of all the evidence.
3. It would not be necessary to show the subservient roles of the properly appointed directors.
4. A person may be held to be a shadow director notwithstandiong that he took no steps to hide the part he played in the affairs of the company.

This last point is difficult to reconcile with the mutual exclusivity of de facto directors.  It suggests that the person/company may impliedly hold itself out as being a director, by not hiding the fact that he is behaving in such a way.  In this situation previous case law would find the legal entity to be de facto, yet Deverell suggests it could actually still be in the shadows. 
          In certain circumstances being a shadow director may be preferable to being a de facto director. Ultraframe v Fielding and Others [2005] EWHC 1638 (Ch) created a trade-off between shadow and de facto directors.  Whereas shadow directors could be liable for controlling all its subsidiaries' misfeasances, the definition of a shadow director is not wide enough to impose the same fiduciary duties as owed by the company's de jure or de facto directors.  However, the court held that a shadow director may be subject to specific fiduciary duties where his acts go beyond indirect influence.
          Corporate Blawg UK expects that the courts will cling to their discretion, in order to lift the coroprate veil when it is justified and appropriate to do so.  To reduce this risk, corporations can ensure they have clear and distinct management boards, and that all group companies can be seen to act independently of each other. 
          Despite the risks, large successful companies find parenthood hard to ignore.  It is unlikely that grown-up corporate entities will follow Philip Larkin's tongue-in-cheek advice:

Man hands on misery to man.
  It deepens like a coastal shelf.
Get out as early as you can,
  And don't have any kids yourself.

Corporate Manslaughter - directors' duty of care

On 20 July, shortly before Parliament's summer recess, our representatives in the House were given the slim but potent Corporate Manslaughter and Homicide Bill to read on their gin palaces in the Med.  The bill is widely considered to have been long-time coming, and could not have come soon enough - public outrage has been justified at the major tragedies that have passed without punishment for the corporate entities that were ultimately responsible. 
          This new legislation is relevant to corporate lawyers, particularly in regard to due diligence, but also in relation to advising on directors duties and liabilities.
          Under current common law a company can be found guilty of corporate manslaughter if the director, who can be demonstrated to be the "controlling mind" of the company, can also be found guilty of gross negligence manslaughter himself. (P&O European Ferries (Dover) Limited [1991] 93 App R 72).
          The new Bill has significantly extends the duty of care to all corporate and some Crown entities working or performing services.  The duty of care will be owed by a company:

1. to its employees or to other persons working or performing services for it
2. as occupier of premises
3. in connection with: (i) the supply of goods or services (whether for consideration or not),(ii) construction or maintenance operations,(iii) any other activity on a commercial basis, or (iv) the use or keeping of any plant, vehicle or other thing

The offence is caused if the level of care exercised by senior management is a gross breach of the conduct that can be reasonably expected of the corporation.  This is intended to focus the offence on the overall way in which an activity was being managed or organised by an organisation, and to exclude more localised or junior management failings as a basis for liability.
          Senior management is defined as a person in control of the whole or a substantial part of the company, which is a lower threhshold than the "controlling mind" test.  Further, it is no longer necessary for senior management to have prior knoweldge, awareness or motives to be grossly negligent, merely the non-compliance with health and safety legislation will suffice.  Attitudes, policies, internal procedures, and health and safety guidance of a company may also now be taken into account by juries when considering whether a company has been grossly negligent.
           Special provisions and exemptions have been made for the emergency forces.  For the rest of the corporate world, financial penalties on summary conviction are now limitless. 
           The bill should become law around April 2007. 
           Corporate Blawg UK finds it somewhat bizarre that the Explanatory notes to the Bill proudly state:

It is estimated there will be 10 - 13 additional cases of corporate manslaughter/homicide a year following implementation of the offence. Costs of defending these are likely to be around £5 - 6.5 million. The costs of prosecution service preparation for these cases is expected to be £2 - 2.5 million and court costs are expected to be £0.1 - 0.2 million. However, because the offence is aimed at the sort of behaviour which would already be subject to prosecution (either under the existing law of corporate manslaughter or health and safety law), not all of these costs will be in addition to costs currently incurred both by defendants and the Crown. In addition there are likely to be savings as a result of fewer cases of corporate manslaughter failing at court which currently can result in large sums being awarded by the courts to defendants in respect of costs.

Corporate Blawg UK is intrigued that the new Bill also makes economic sense; and is not simply a bill to rectify a failing in the courts' ability to administer justice!

All about cash? – Executive Remuneration

The remuneration of directors is a sensitive issue for directors, investors and the general public.  Newspapers revel in publicising directors' huge bonuses, especially when those directors are responsible for raising the prices of key public facilities above the base rate of inflation.  Excessive remuneration of top level staff clearly damages the reputation of companies and the morale of the staff; it is a balance between visibly recruiting and keeping the best people in the job, whilst not appearing to disproportionately line senior pockets with platinum.  

          Directors may quell some criticism if they follow the International Corporate Governance Network's ("ICGN") new guidelines on the remuneration of executives and directors.  The guidelines aim to ensure that remuneration is in the best interests of the shareholders and investors, thereby meeting the fiduciary duties of the directors.   

          The guidelines set out general principles that reflect best international practice. It is not yet clear how effective they will be as the ICGN admits they are simply a communication tool.  The ICGN believes remuneration programs should be carefully designed and implemented in accordance with the unique situation of each company. There are three principles which underpin the new guidelines:

• transparency, so investors can clearly understand the remuneration program and can see total pay;
• accountability, to ensure boards maintain the proper levels of remuneration by representing owners and by obtaining shareowner approval of a remuneration report; and
• performance-based, so remuneration programs are linked to relevant measures of company's performance over an appropriate timescale.

These guidelines help fill the void left open by statute, and unexplored by common law.  Common law is more concerned with the failure to fully disclose all remuneration and to calculate it correctly, than with the method of calculating what it should be.  Statute on directors' remuneration originates from the Directors' Remuneration Report Regulations 2002 (SI 2002/1986).  These insert provisions into the Companies Act 1985 in sections 232 (requiring disclosure in notes to accounts of emoluments and benefits of directors and others), 234B and 234C (duty to prepare directors remuneration report, applying only to directors of quoted companies; and approval and signing of directors' remuneration report).  There are also a number of minor referrals to directors remuneration in the Companies Act 1985 such as in sections 235 (Auditor's report), 237 (Duties of Auditors) and 241 (laying of accounts in a general meeting).

          Whether UK companies implement the ICGN guidelines will depend on how public and accountable those companies are or intend to be.  Any company intending to make shares publicly available on an official list would be wise to follow these guidelines and the guidelines in the Combined Code, especially where remuneration for any period in the past may be perceived as excessive.  The driver for directors is that if their actions are called into question, they can refer to the guidelines as evidence of compliance with best practice.

           Corporate Blawg UK asks whether these guidlines are sufficient to protect investors?  The Company Bill (of 20 July 2006) requires any director's service contract lasting longer than 2 years to be approved by the members (s.189).  This will mean either a greater degree of transparency in  service contracts, or shorter service contracts of directors.  Corporate Blawg UK would be interested to hear your views....

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.