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Lectures 1 & 2

Legislation:
Joint Stock Companies Act 1844 and 1856
1844: Quick and easy registration process to create Company (separate entity)
1856: Established limited liability
Companies Act 1862, 1929, 1948, 1985
Companies Act 2006 (s.1-16)
1 Companies
(1)In the Companies Acts, unless the context otherwise requires
company means a company formed and registered under this Act, that is
(a)
a company so formed and registered after the commencement of this Part, or
(b)
a company that immediately before the commencement of this Part
(i)
was formed and registered under the Companies Act 1985 (c. 6) or the Companies (Northern Ireland) Order
1986 (S.I. 1986/1032 (N.I. 6)), or
(ii)
was an existing company for the purposes of that Act or that Order,
(which is to be treated on commencement as if formed and registered under this Act).
(2)Certain provisions of the Companies Acts apply to
(a)companies registered, but not formed, under this Act (see Chapter 1 of Part 33), and
(b)bodies incorporated in the United Kingdom but not registered under this Act (see Chapter 2 of that Part).
(3)For provisions applying to companies incorporated outside the United Kingdom, see Part 34 (overseas
companies).
2 The Companies Acts
(1)In this Act the Companies Acts means
(a)the company law provisions of this Act,
(b)Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (c. 27) (community
interest companies), and
(c)the provisions of the Companies Act 1985 (c. 6) and the Companies Consolidation (Consequential
Provisions) Act 1985 (c. 9) that remain in force.
(2)The company law provisions of this Act are
(a)the provisions of Parts 1 to 39 of this Act, and
(b)the provisions of Parts 45 to 47 of this Act so far as they apply for the purposes of those Parts.
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Types of company
3 Limited and unlimited companies
(1)A company is a limited company if the liability of its members is limited by its constitution.
It may be limited by shares or limited by guarantee.
(2)If their liability is limited to the amount, if any, unpaid on the shares held by them, the company is
limited by shares.
(3)If their liability is limited to such amount as the members undertake to contribute to the assets of the
company in the event of its being wound up, the company is limited by guarantee.
(4)If there is no limit on the liability of its members, the company is an unlimited company.
4 Private and public companies
(1)A private company is any company that is not a public company.
(2)A public company is a company limited by shares or limited by guarantee and having a share capital
(a)whose certificate of incorporation states that it is a public company, and
(b)in relation to which the requirements of this Act, or the former Companies Acts, as to registration or reregistration as a public company have been complied with on or after the relevant date.
(3)For the purposes of subsection (2)(b) the relevant date is
(a)in relation to registration or re-registration in Great Britain, 22nd December 1980;
(b)in relation to registration or re-registration in Northern Ireland, 1st July 1983.
(4)For the two major differences between private and public companies, see Part 20.
5 Companies limited by guarantee and having share capital
(1)A company cannot be formed as, or become, a company limited by guarantee with a share capital.
(2)Provision to this effect has been in force
(a)in Great Britain since 22nd December 1980, and
(b)in Northern Ireland since 1st July 1983.
(3)Any provision in the constitution of a company limited by guarantee that purports to divide the
company's undertaking into shares or interests is a provision for a share capital.
This applies whether or not the nominal value or number of the shares or interests is specified by the
provision.
6 Community interest companies
(1)In accordance with Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004
(c. 27)
(a)a company limited by shares or a company limited by guarantee and not having a share capital may be
formed as or become a community interest company, and
(b)a company limited by guarantee and having a share capital may become a community interest company.
(2)The other provisions of the Companies Acts have effect subject to that Part.

General
7 Method of forming company
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(1)A company is formed under this Act by one or more persons


(a)subscribing their names to a memorandum of association (see section 8), and
(b)complying with the requirements of this Act as to registration (see sections 9 to 13).
(2)A company may not be so formed for an unlawful purpose.
8 Memorandum of association
(1)A memorandum of association is a memorandum stating that the subscribers
(a)wish to form a company under this Act, and
(b)agree to become members of the company and, in the case of a company that is to have a share capital, to
take at least one share each.
(2)The memorandum must be in the prescribed form and must be authenticated by each subscriber.
Requirements for registration
9 Registration documents
(1)The memorandum of association must be delivered to the registrar together with an application for
registration of the company, the documents required by this section and a statement of compliance.
(2)The application for registration must state
(a)the company's proposed name,
(b)whether the company's registered office is to be situated in England and Wales (or in Wales), in Scotland
or in Northern Ireland,
(c)whether the liability of the members of the company is to be limited, and if so whether it is to be limited
by shares or by guarantee, and
(d)whether the company is to be a private or a public company.
(3)If the application is delivered by a person as agent for the subscribers to the memorandum of association,
it must state his name and address.
(4)The application must contain
(a)in the case of a company that is to have a share capital, a statement of capital and initial shareholdings
(see section 10);
(b)in the case of a company that is to be limited by guarantee, a statement of guarantee (see section 11);
(c)a statement of the company's proposed officers (see section 12).
(5)The application must also contain
(a)a statement of the intended address of the company's registered office; and
(b)a copy of any proposed articles of association (to the extent that these are not supplied by the default
application of model articles: see section 20).
(6)The application must be delivered
(a)to the registrar of companies for England and Wales, if the registered office of the company is to be
situated in England and Wales (or in Wales);
(b)to the registrar of companies for Scotland, if the registered office of the company is to be situated in
Scotland;
(c)to the registrar of companies for Northern Ireland, if the registered office of the company is to be situated
in Northern Ireland.
10 Statement of capital and initial shareholdings
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(1)The statement of capital and initial shareholdings required to be delivered in the case of a company that is
to have a share capital must comply with this section.
(2)It must state
(a)the total number of shares of the company to be taken on formation by the subscribers to the
memorandum of association,
(b)the aggregate nominal value of those shares,
(c)for each class of shares
(i)prescribed particulars of the rights attached to the shares,
(ii)the total number of shares of that class, and
(iii)the aggregate nominal value of shares of that class, and
(d)the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the
nominal value of the share or by way of premium).
(3)It must contain such information as may be prescribed for the purpose of identifying the subscribers to
the memorandum of association.
(4)It must state, with respect to each subscriber to the memorandum
(a)the number, nominal value (of each share) and class of shares to be taken by him on formation, and
(b)the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the
nominal value of the share or by way of premium).
(5)Where a subscriber to the memorandum is to take shares of more than one class, the information required
under subsection (4)(a) is required for each class.
11 Statement of guarantee
(1)The statement of guarantee required to be delivered in the case of a company that is to be limited by
guarantee must comply with this section.
(2)It must contain such information as may be prescribed for the purpose of identifying the subscribers to
the memorandum of association.
(3)It must state that each member undertakes that, if the company is wound up while he is a member, or
within one year after he ceases to be a member, he will contribute to the assets of the company such amount
as may be required for
(a)payment of the debts and liabilities of the company contracted before he ceases to be a member,
(b)payment of the costs, charges and expenses of winding up, and
(c)adjustment of the rights of the contributories among themselves,
not exceeding a specified amount.

12 Statement of proposed officers


(1)The statement of the company's proposed officers required to be delivered to the registrar must contain
the required particulars of
(a)the person who is, or persons who are, to be the first director or directors of the company;
(b)in the case of a company that is to be a private company, any person who is (or any persons who are) to
be the first secretary (or joint secretaries) of the company;
(c)in the case of a company that is to be a public company, the person who is (or the persons who are) to be
the first secretary (or joint secretaries) of the company.
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(2)The required particulars are the particulars that will be required to be stated
(a)in the case of a director, in the company's register of directors and register of directors' residential
addresses (see sections 162 to 166);
(b)in the case of a secretary, in the company's register of secretaries (see sections 277 to 279).
(3)The statement must also contain a consent by each of the persons named as a director, as secretary or as
one of joint secretaries, to act in the relevant capacity.
If all the partners in a firm are to be joint secretaries, consent may be given by one partner on behalf of all of
them.
13 Statement of compliance
(1)The statement of compliance required to be delivered to the registrar is a statement that the requirements
of this Act as to registration have been complied with.
(2)The registrar may accept the statement of compliance as sufficient evidence of compliance.
Registration and its effect
14 Registration
If the registrar is satisfied that the requirements of this Act as to registration are complied with, he shall
register the documents delivered to him.
15 Issue of certificate of incorporation
(1)On the registration of a company, the registrar of companies shall give a certificate that the company is
incorporated.
(2)The certificate must state
(a)the name and registered number of the company,
(b)the date of its incorporation,
(c)whether it is a limited or unlimited company, and if it is limited whether it is limited by shares or limited
by guarantee,
(d)whether it is a private or a public company, and
(e)whether the company's registered office is situated in England and Wales (or in Wales), in Scotland or in
Northern Ireland.
(3)The certificate must be signed by the registrar or authenticated by the registrar's official seal.
(4)The certificate is conclusive evidence that the requirements of this Act as to registration have been
complied with and that the company is duly registered under this Act.
16 Effect of registration
(1)The registration of a company has the following effects as from the date of incorporation.
(2)The subscribers to the memorandum, together with such other persons as may from time to time become
members of the company, are a body corporate by the name stated in the certificate of incorporation.
(3)That body corporate is capable of exercising all the functions of an incorporated company.
(4)The status and registered office of the company are as stated in, or in connection with, the application for
registration.
(5)In the case of a company having a share capital, the subscribers to the memorandum become holders of
the shares specified in the statement of capital and initial shareholdings.
(6)The persons named in the statement of proposed officers
(a)as director, or
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(b)as secretary or joint secretary of the company,


are deemed to have been appointed to that office.
PART 38 COMPANIES: INTERPRETATION

Meaning of subsidiary and related expressions


1159 Meaning of subsidiary etc
(1)A company is a subsidiary of another company, its holding company, if that other company
(a)holds a majority of the voting rights in it, or
(b)is a member of it and has the right to appoint or remove a majority of its board of directors, or
(c)is a member of it and controls alone, pursuant to an agreement with other members, a majority of the
voting rights in it,
or if it is a subsidiary of a company that is itself a subsidiary of that other company.
(2)A company is a wholly-owned subsidiary of another company if it has no members except that other
and that other's wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned
subsidiaries.
(3)Schedule 6 contains provisions explaining expressions used in this section and otherwise supplementing
this section.
(4)In this section and that Schedule company includes any body corporate.

The Partnership Act 1890


Nature of Partnership
1 Definition of partnership.
(1) Partnership is the relation which subsists between persons carrying on a business in common with a view
of profit.
(2)But the relation between members of any company or association which is
(a)Registered as a company under the Companies Act 1862, or any other Act of Parliament for the time
being in force and relating to the registration of joint stock companies; or
(b)Formed or incorporated by or in pursuance of any other Act of Parliament or letters patent, or Royal
Charter;
is not a partnership within the meaning of this Act.
2 Rules for determining existence of partnership.
In determining whether a partnership does or does not exist, regard shall be had to the following rules:
(1)Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself
create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any
profits made by the use thereof.

(2)The sharing of gross returns does not of itself create a partnership, whether the persons sharing such
returns have or have not a joint or common right or interest in any property from which or from the use of
which the returns are derived.
(3)The receipt by a person of a share of the profits of a business is prim facie evidence that he is a partner
in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a
business, does not of itself make him a partner in the business; and in particular
(a)The receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the
accruing profits of a business does not of itself make him a partner in the busines or liable as such:
(b)A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the
profits of the business does not of itself make the servant or agent a partner in the business or liable as such:
(c)A person being the widow or child of a deceased partner, and receiving by way of annuity a portion of the
profits made in the business in which the deceased person was a partner, is not by reason only of such
receipt a partner in the business or liable as such:
(d)The advance of money by way of loan to a person engaged or about to engage in any business on a
contract with that person that the lender shall receive a rate of interest varying with the profits, or shall
receive a share of the profits arising from carrying on the business, does not of itself make the lender a
partner with the person or persons carrying on the business or liable as such. Provided that the contract is in
writing, and signed by or on behalf of all the parties thereto:
(e)A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration
of the sale by him of the goodwill of the business is not by reason only of such receipt a partner in the
business or liable as such.
3 Postponement of rights of person lending or selling in consideration of share of profits in case of
insolvency.
In the event of any person to whom money has been advanced by way of loan upon such a contract as is
mentioned in the last foregoing section, or of any buyer of a goodwill in consideration of a share of the
profits of the business, being adjudged a bankrupt, entering into an arrangement to pay his creditors less
than in the pound, or dying in insolvent circumstances, the lender of the loan shall not be entitled to recover
anything in respect of his loan, and the seller of the goodwill shall not be entitled to recover anything in
respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer
for valuable consideration in money or moneys worth have been satisfied.

4 Meaning of firm.
(1)Persons who have entered into partnership with one another are for the purposes of this Act called
collectively a firm, and the name under which their business is carried on is called the firm-name.
(2)In Scotland a firm is a legal person distinct from the partners of whom it is composed, but an individual
partner may be charged on a decree or diligence directed against the firm, and on payment of the debts is
entitled to relief pro rat from the firm and its other members.
5 Power of partner to bind the firm.
Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership;
and the acts of every partner who does any act for carrying on in the usual way business of the kind carried
on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact
no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows
that he has no authority, or does not know or believe him to be a partner.
9 Liability of partners.
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Every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts
and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable
in a due course of administration for such debts and obligations, so far as they remain unsatisfied, but
subject in England or Ireland to the prior payment of his separate debts.

The Limited Partnership Act 1907


4 Definition and constitution of limited partnership.
(1) limited partnerships may be formed in the manner and subject to the conditions by this Act provided.
(2)A limited partnership must consist of one or more persons called general partners, who shall be liable for
all debts and obligations of the firm, and one or more persons to be called limited partners, who shall at the
time of entering into such partnership contribute thereto a sum or sums as capital or property valued at a
stated amount, and who shall not be liable for the debts or obligations of the firm beyond the amount so
contributed.
(3)A limited partner shall not during the continuance of the partnership, either directly or indirectly, draw
out or receive back any part of his contribution, and if he does so draw out or receive back any such part
shall be liable for the debts and obligations of the firm up to the amount so drawn out or received back.
(4)A body corporate may be a limited partner.
6 Modifications of general law in case of limited partnerships.
(1)A limited partner shall not take part in the management of the partnership business, and shall not have
power to bind the firm:
Provided that a limited partner may by himself or his agent at any time inspect the books of the firm and
examine into the state and prospects of the partnership business, and may advise with the partners thereon.
If a limited partner takes part in the management of the partnership business he shall be liable for all debts
and obligations of the firm incurred while he so takes part in the management as though he were a general
partner.
(2)A limited partnership shall not be dissolved by the death or bankruptcy of a limited partner, and the
lunacy of a limited partner shall not be a ground for dissolution of the partnership by the court unless the
lunatics share cannot be otherwise ascertained and realised.
(3)In the event of the dissolution of a limited partnership its affairs shall be wound up by the general
partners unless the court otherwise orders.
(4)
(5)Subject to any agreement expressed or implied between the partners
(a)Any difference arising as to ordinary matters connected with the partnership business may be decided by
a majority of the general partners;
(b)A limited partner may, with the consent of the general partners, assign his share in the partnership, and
upon such an assignment the assignee shall become a limited partner with all the rights of the assignor;
(c)The other partners shall not be entitled to dissolve the partnership by reason of any limited partner
suffering his share to be charged for his separate debt;
(d)A person may be introduced as a partner without the consent of the existing limited partners;
(e)A limited partner shall not be entitled to dissolve the partnership by notice.

The Limited Liability Partnerships Act 2000


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1 Limited liability partnerships.


(1)There shall be a new form of legal entity to be known as a limited liability partnership.
(2)A limited liability partnership is a body corporate (with legal personality separate from that of its
members) which is formed by being incorporated under this Act; and
(a)in the following provisions of this Act (except in the phrase oversea limited liability partnership), and
(b)in any other enactment (except where provision is made to the contrary or the context otherwise requires),
references to a limited liability partnership are to such a body corporate.
(3)A limited liability partnership has unlimited capacity.
(4)The members of a limited liability partnership have such liability to contribute to its assets in the event of
its being wound up as is provided for by virtue of this Act.
(5)Accordingly, except as far as otherwise provided by this Act or any other enactment, the law relating to
partnerships does not apply to a limited liability partnership.
(6)The Schedule (which makes provision about the names and registered offices of limited liability
partnerships) has effect.
6 Members as agents.
(1)Every member of a limited liability partnership is the agent of the limited liability partnership.
(2)But a limited liability partnership is not bound by anything done by a member in dealing with a person
if
(a)the member in fact has no authority to act for the limited liability partnership by doing that thing, and
(b)the person knows that he has no authority or does not know or believe him to be a member of the limited
liability partnership.
(3)Where a person has ceased to be a member of a limited liability partnership, the former member is to be
regarded (in relation to any person dealing with the limited liability partnership) as still being a member of
the limited liability partnership unless
(a)the person has notice that the former member has ceased to be a member of the limited liability
partnership, or
(b)notice that the former member has ceased to be a member of the limited liability partnership has been
delivered to the registrar.
(4)Where a member of a limited liability partnership is liable to any person (other than another member of
the limited liability partnership) as a result of a wrongful act or omission of his in the course of the business
of the limited liability partnership or with its authority, the limited liability partnership is liable to the same
extent as the member.

Promoters:
An individual who persuades others to invest capital to a company to be incorporated for the purpose of
carrying on a venture.
A person who solicits people to invest money into a corporation, usually when it is being formed.
An investment banker, an underwriter, or a stock promoter may, wholly or in part, perform the role of a
promoter. Promoters generally owe a duty of utmost good faith, so as to not mislead any potential investors,
and disclose all material facts about the company's business. A promoter is a person who does the
preliminary work incidental to the formation of company.
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The primary remedy for breach of fiduciary obligation by a promoter is an account of profits (sometimes
referred to as an accounting for profits or simply an accounting) is a type of equitable remedy most
commonly used in cases of breach of fiduciary duty. It is an action taken against a defendant to recover
the profits taken as a result of the breach of duty, in order to prevent unjust enrichment.
Twycross v Grant (1877): A promoter, I apprehend is one who undertakes to form of a company with
reference to a given project and to set it going, and who takes the necessary steps to accomplish that
purposeand so long as the work of formation continues, those who carry on that work must, I think, retain
the character of promoters. Of course, if a governing body, in the shape of directors, has once been formed,
and they takewhat remains to be done in the way of forming the company, into their hands, the functions
of the promoter are at an end.
Erlanger v New Sombrero Phosphate Co (1878) [Fiduciary Duty]: The have in their hands the creation
and moulding of the company; they have the power of defining how, and when, and in what shape, and
under what supervision, it shall start into existence and begin to act as a trading corporation.
A promoters undisclosed profit is usually called a secret profit; failure to disclose the interest of the
companys promoter in a transaction with the company is voidable at the companys option. The company
may rescind the transaction.
Gluckstein v Barnes [1900]: Mr Gluckstein and others formed a syndicate to promote a company. They
purchased a (Olympia) hall for the price of 120,000.00, but the prospectus (for the public) gave the
impression they had actually paid 140,000. Macnaghten L found this to be dishonest and Mr Gluckstein (the
only promoter proceeded against) was ordered to pay the company his share of the profit. [Because the
fiduciary relationship/duty of the Promoter does not exist in Statute, and exists only in Equity, one must
apply maxims in order to determine if a wrong has transpired]
*A promoter usually makes money by selling an asset to the company at an enhanced price, and then
disclosing that profit. If not, the promoter may be subject to repay this profit. Alternatively, if the asset was
purchased many years prior to the deal and with no intention to sell to the company then those profits [are
personal] and need not be disclosed.
*A promoter cannot enter into a contract with the company (and be paid through agreement/contract) as the
company has yet to be formed and Past Consideration is Not Good Consideration. That said, the
promoters can be paid through the companys Constitution but this is unsafe if they do not control the
board (as they will have no power over levels of remuneration).

Pre-Incorporation Contracts:
Companies Act 2006 s.51:
51 Pre-incorporation contracts, deeds and obligations
(1)A contract that purports to be made by or on behalf of a company at a time when the company has not
been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to
act for the company or as agent for it, and he is personally liable on the contract accordingly.
(2)Subsection (1) applies
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(a)to the making of a deed under the law of England and Wales or Northern Ireland, and
(b)to the undertaking of an obligation under the law of Scotland,
as it applies to the making of a contract.
Two possibilities:
1) Either, pursuant to s.51 above, the person acting as agent for the anticipated company is
personally liable (Kelner v Baxter (1866) Guy buys wine for hotel which has yet to
incorporate; wine supplier sues principle (company) claiming that entrepreneur is acting as
agent for the principle; judge however finds entrepreneur liable as principle); or
a. A person may avoid liability by entering into an agreement to the contrary though this
concept was rejected by the CoA.
2) The contract is between the contractor and the company, in which case, the company being nonexistent, there is no contract and no one is liable. (Newborne v Sensolid (Great Britain) Ltd
[1954] Mr. Newborne, founder of intended company, as it was, signed contract for purchasing
equipment in companies name.)
a. Position depends on INTENTION of parties at contract formation (Phonogram Ltd v
Lane [1982]). It was suggested that, for the purposes of s 51(1), a contract is purported
to be made by a company only when there has been a representation that the company is
already in existence.
i. Promoters are now personally liable in respect of pre-incorporation contracts
made for the benefit of the unformed company, irrespective of the capacity in
which they purport to contract and irrespective of their subjective beliefs.
b. It makes no difference that the shelf company (a company with no activity) did not have
the right name at the time the contracts were made (Oshkosh BGosh Inc v Dan Marbel
Inc Ltd. [1989] s.51 Held not to apply)
Novation: What may be provided in a pre-incorporation contract is that the person making it will be
released from liability on it if the company, after incorporation, enters into a second contract with the
contractor in the same terms as the pre-incorporation contract.

Registration/Incorporation:
In the UK, a company is created by registering it with a government agency call Companies House (the
executive agency of the Department of Business, Innovation and Skills). www.companieshouse.gov.uk
The Chief Executive of the Companies House is the registrar of companies. To register a company you must
have at least 2 members.

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Lecture #3: Corporate Personality and the Veil of Incorporation


Piercing the Corporate Veil: Its when the courts ignore the concept of the company having a separate
corporate personality and find the individual responsible. On page 127 there is a more precise definition:
Where the Courts ignore the separate legal personality and treat a companys property, rights and
obligations as belonging to a person who owns and controls the company. There is probably only one
circumstance in which veil piercing is possible: where it is necessary in order to apply the evasion
principle.
Salomon v A Salomon & Co Ltd [1897] AC 22
Landmark UK company law case. The effect of the Lords' unanimous ruling was to uphold firmly the
doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent
company could not sue the company's shareholders to pay up outstanding debts.
Salomon conducted his business as a sole trader (owning a shoe company). He sold it to a company
incorporated for the purpose called A Salomon and Co Ltd (advised by solicitor to sell business to an
incorporated company at this time the requirement was that there be 7 members). The only members were
Mr Salomon, his wife, and their five children. Each member took one 1 share each. The company bought
the business for 39,000. Mr Salomon subscribed for 20,000 further shares. However, 10,000 was not paid
by the company, which instead issued Salomon with series of debentures (with a security device the
factory) and gave him a floating charge (v fixed charge) on its assets. 8,993 was paid to Mr Salomon in
cash. When the company failed the company's liquidator contended that the floating charge should not be
honoured, and Salomon should be made responsible for the company's debts. (Raw materials, ie, leather and
coal, were supplied to Mr Salomon by Trade Creditors, later sold to the Company.)
Upon sale, Mr. Salomon is no longer the owner, but becomes the director (manager and major shareholder
with 20,001 shares, and the owner of the debenture). The floating charge attaches to all assets of the
company, and anything of value: acts as a security device upon insolvency of company giving priority to
debenture (floating charge) holder.
Lord Halsbury LC stated (at 30-31):
it seems to me impossible to dispute that once the company is legally incorporated it must be treated like
any other independent person with its rights and liabilities appropriate to itself, and that the motives of
those who took part in the promotion of the company are absolutely irrelevant in discussing what those
rights and liabilities are.
From this case comes the fundamental concept that a company has a legal personality or identity separate
from its members. A company is thus a legal person'. As long as the company has filed the requisite
documents and has been registered via Companies House (compliance with the Rules), they become a
separate identity. In the instant case, after establishing there was a bona fide, properly incorporated
company, they would examine whether the debenture was issued correctly which it had.
At first instance under heading Broderip v Salomon [1895] it was held that the company conducted the
business as agent for Mr. Salomon, so he was responsible for all debts incurred in the course of the agency
for him. The HoLs rejected this approach.
At the CoA, under the same heading, it was held that Mr. Salomon had incorporated contrary to the true
intent and meaning of CA 1862, and because of Mr. Salomons fraud, the company should be declared to
have operated the business as trustee for Mr. Salomon, who should therefore indemnify the company for all
debts incurred in carrying out the trust. (In a trust, if the trustee loses the property, the beneficiary is entitled
to sue for the full amount of that loss). The HoLs also rejected this argument.
12

Debenture: is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed
rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or
acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note.
A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to
pay a specified amount with interest and although the money raised by the debentures becomes a part of the
company's capital structure, it does not become share capital. Senior debentures get paid before subordinate
debentures, and there are varying rates of risk and payoff for these categories.
Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to
vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g.
on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the
company's financial statements.

Floating charge: is a security interest over a fund of changing assets of a company or a limited liability
partnership (LLP), which 'floats' or 'hovers' until the point at which it is converted into a fixed charge, at
which point the charge attaches to specific assets of the company or LLP. This conversion into a fixed
charge (called "crystallisation") can be triggered by a number of events; inter alia, it has become an implied
term (under English law) in debentures that a cessation of the company's right to deal with the assets in the
ordinary course of business leads to automatic crystallisation. Additionally, according to express terms of a
typical loan agreement, default by the chargor is a trigger for crystallisation. Such defaults typically include
non-payment, invalidity of any of the lending or security documents or the launch of insolvency
proceedings.
Floating charges can only be granted by companies or LLPs. If an individual person or a partnership was to
purport to grant a floating charge, it would be void as a general assignment in bankruptcy.
Floating charges take effect in equity only, and consequently are defeated by a bona fide purchaser for value
without notice of any asset covered by them. In practice, as the chargor has power to dispose of assets
subject to a floating charge, this is only of consequence in relation to disposals that occur after the charge
has crystallised.
The floating charge has been described as "one of equity's most brilliant creations."

The Corporate Veil:


Pg 127: Can the court ignore the separation between the separate legal personality and treat a companys
property, rights and obligations as belonging to a person who owns and controls the company. This has been
called piercing the corporate veil.
There are specific legal principles that can be used to attribute one persons property to another person,
whether the persons are natural or legal: 1) Statutory; 2) Contract; 3) Agency; 4) Trustee.
1) Statutory Provisions: The separate personality of a company is created by a statute, CA 2006, and
can be modified by other statutes, for example, Landlord and Tenant Act 1954, s30, the Inheritance
Tax Act 1984, Inheritance Act 1986 s. 213. it is submitted that these provisions to not represent a
desire on the part of the legislature to disregard the companys separate personality, but merely
impose additional liability on those responsible for the expression of the corporate personality in
these circumstances. (pg 129)
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2) Contract: Nothing in company law prevents a person from contracting out of any benefit the person
could derive from the principle of separate corporate personality.
3) Agency: Principle Agent relationship is a question of fact, and agency can be inferred from the
surrounding circumstances, though it can only be established by the consent of the principle and the
agent. The liability arises under agency law, and not company law. Agency cannot be inferred,
however, from the control exercisable by the members over the company either by virtue of their
votes in general meeting or because they are also directors or from the fact that the sole objective
of the company is to benefit the members. (Smith Stone Knight Ltd v Birmingham Corp [1939])
4) Property held in Trust: Prest v Petrodel Resources Ltd UKSC [2013] (Pg 128): Mrs Yasmin Prest
claimed under Matrimonial Causes Act 1973 sections 23 and 24 for ancillary relief against the
offshore companies solely owned by Mr Michael Prest. Mrs Prest said they held legal title to
properties that he beneficially owned, including a 4m house at 16 Warwick Avenue, London. They
had married in 1993 and divorced in 2008. He did not comply with orders for full and frank
disclosure of his financial position, and the companies did not file a defence. The Matrimonial
Causes Act 1973 section 24 required that for a court to be able to order a transfer a property, Mr
Prest had to be entitled to the properties held by his companies. Mr Prest contended that he was not
entitled to the properties.
The SC heard three arguments: 1) no relevant impropriety therefore not entitled to pierce corporate
veil; 2) Court could not claim special (or wider) jurisdiction under Matrimonial Act (but under
evidence) 3) Mr Prest had been beneficial owner of property and therefore held on trust. SC held,
unanimously, that piercing the corporate veil could not be used to treat the companies assets as
belonging to Mr. Prest as there was no impropriety. However, the evidence showed that the
companies held the properties as a trustee for Michael Prest, not simply because he was the owner
and controller of the companies, but because of the circumstances in which the properties were
acquired by the companies.

Lord Sumpton in Prest at para 28: The difficulty is to identify what is a relevant wrongdoing. References
to a facade or sham beg too many questions to provide a satisfactory answer. It seems to me that two
distinct principles lie behind these protean terms, and that much confusion has been caused by failing to
distinguish between them. They can conveniently be called the concealment principle and the evasion
principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all.
It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real
actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In
these cases the court is not disregarding the facade, but only looking behind it to discover the facts which
the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the
corporate veil if there is a legal right against the person in control of it which exists independently of the
companys involvement, and a company is interposed so that the separate legal personality of the company
will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some
circumstances the difference between them may be critical. This may be illustrated by reference to those
cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.
Concealment Principle: when a company is used as a device or faade to conceal the true facts and avoid
or conceal the liability of the individual controlling the company (e.g. Prest v Petrodel Resources Ltd
14

[2013]). In that vein, the interposition of a company or perhaps several companies so as to conceal the
identity of the real actors will not deter the courts from identifying them, assuming that their identity is
legally relevant. In these cases the courts is not disregarding the faade, but only looking behind it to
discover the facts which the corporate structure is concealing.
Evasion Principle (pg 134): When an individual interposes a company so as to evade, or frustrate the
enforcement of, an existing legal obligation, liability or restriction. In this scenario, rather than looking
behind the faade, here the Courts disregard the corporate veil, depriving the company or its controller of the
advantage that they would otherwise have obtained by the companys separate legal personality. (Eg Jones v
Lipman)

Gilford Motors Ltd. v Horne [1933] ch 935


Facts: Mr EB Horne was formerly a managing director of the Gilford Motor Co Ltd. His employment
contract stipulated (clause 9) not to solicit customers of the company if he were to leave employment of
Gilford Motor Co. Mr. Horne was fired, thereafter he set up his own business and undercut Gilford Motor
Co's prices. He received legal advice saying that he was probably acting in breach of contract. So he set up a
company, JM Horne & Co Ltd, in which his wife and a friend called Mr Howard were the sole shareholders
and directors. They took over Hornes business and continued it. Mr. Horne sent out fliers saying,
Spares and service for all models of Gilford vehicles. 170 Hornsey Lane, Highgate, N.6. Opposite
Crouch End LaneNo connection with any other firm.
The company had no such agreement with Gilford Motor about not competing, however Gilford Motor
brought an action alleging that the company was used as an instrument of fraud to conceal Mr Horne's
illegitimate actions.

Jones v Lipman [1962] 1 WLR 832 [Evasion Principle] (Pg 134)


The defendant had contracted to sell his land. He changed his mind, and formed a company of which he was
owner and director, transferred the land to the company, and refused to complete. The plaintiff sought relief.
Held: Specific performance is available against a contracting vendor who has it in his power to compel
another person to convey the property in question. An order for specific performance was made against both
the director and the company. The company could not escape from or divest itself of its knowledge gained
through the director. The company was: A creature of [the controlling director], a device and a sham, a
mask which he holds before his face in an attempt to avoid recognition by the eye of equity.
Parent v subsidiary distinction: sometimes risky investments are placed in the subsidiary in the event that
this company runs up debts which they are unable to pay the parent company simply allows that subsidiary
to become insolvent, as the parent company remains intact.
Subsidiary: A company whose voting stock is more than 50% controlled by another company, usually
referred to as the parent company or holding company. A subsidiary is a company that is partly or
completely owned by another company that holds a controlling interest in the subsidiary company. If a
parent company owns a foreign subsidiary, the company under which the subsidiary is incorporated must
15

follow the laws of the country where the subsidiary operates, and the parent company still carries the foreign
subsidiary's financials on its books (consolidated financial statements). For the purposes of liability, taxation
and regulation, subsidiaries are distinct legal entities.

DNH Foods v. London Borough of Tower Hamlets [1976] WLR 852 [Subsidiaries Evasion Principle
Group Entity/Single Entity]
LBTH made a compulsory purchase of land in which Golden Foods operated which was a subsidiary of
DNH Foods. Under the legislation compensation was to be paid: whatever the value of the land. However,
the parent company, DNH Foods, carried on some of its business at this Golden Foods location, which the
legislation did not address.
CoA Lord Denning: Group Entity if part of entity is damaged, all the parts that are damaged must be
compensated. Prof. Ryan suggests this is not a lifting of a veil but rather piercing the veil which is
different. The positive public reception was short-lived as the distinction between the parent and subsidiary
was muddied
A company may operate its business in separate branches at geographically separate locations. It is possible
for a company to incorporate separate companies, as subsidiaries, to operate each branch and each of those
subsidiaries will be a separate legal person. If that is not done, company law does not treat each branch as a
separate person, even if it is in another country: instead there is just one legal person operating the whole
business. (pg 124 MF&R)

**Adams v Cape Industries Plc [1990] ch 433 [Subsidiaries]**(READ PG 143)


Facts: The defendant was an English company and head of a group engaged in mining asbestos in South
Africa. A wholly owned English subsidiary was the worldwide marketing body, which protested the
jurisdiction of the United States Federal District Court in Texas in a suit by victims of asbestos. The
defendant took no part in the United States proceedings and default judgments were entered. Actions on the
judgment in England failed.
[Question: Should parent company be liable for actions/debts of subsidiaries (in the instant case, the
default judgment against it)? Three arguments advanced: (1) this is a group entity; and (2) the subsidiary
was an agent for the parent. If there is a contract of agency between them, or by implication, the latter
argument may be accepted. (3) The last argument advanced was that the Company was a sham/facade
(entity), and so not a separate legal entity. All three arguments were rejected]
Held: The court declined to pierce the veil of incorporation. It was a legitimate use of the corporate form to
use a subsidiary to insulate the remainder of the group from tort liability. There was no evidence to justify a
finding of agency or facade.
There is an exception to the general rule, that steps which would not have been regarded by the domestic law
of the foreign court as a submission to the jurisdiction ought not to be so regarded here, notwithstanding that
if they had been steps taken in an English Court they might have constituted a submission to jurisdiction.

16

Slade LJ said: Two points at least are clear. First, at common law in this country foreign judgments are
enforced, if at all, not through considerations of comity but upon the basis of the principle explained thus by
Parke B. in Williams v Jones.
Secondly, however, in deciding whether the foreign court was one of competent jurisdiction, our courts will
apply not the law of the foreign court itself but our own rules of private international law. . and First, in
determining the jurisdiction of the foreign court in such cases, our court is directing its mind to the
competence or otherwise of the foreign court to summon the defendant before it and to decide such matters
as it has decided: see Pemberton v Hughes [1899] 1 Ch. 781, 790 per Lindley M.R. Secondly, in the
absence of any form of submission to the foreign court, such competence depends on the physical
presence of the defendant in the country concerned at the time of suit... we would, on the basis of the
authorities referred to above, regard the source of the territorial jurisdiction of the court of a foreign country
to summon a defendant to appear before it as being his obligation for the time being to abide by its laws and
accept the jurisdiction of its courts while present in its territory. So long as he remains physically present in
that country, he has the benefit of its laws, and must take the rough with the smooth, by accepting his
amenability to the process of its courts.
[*Must Read Judgment, in particular, Lord Slades reasoning, and why he did not find the group
entity argument convincing]
Following this decision, more miners were diagnosed with asbestosis, and before litigation commenced, the
parent company dissolved the subsidiary. Instead of trying the case in South Africa, the HoLs, rather
surprisingly, allowed the matter to be heard in front of them. Before the trial commenced Cape Industries
settled, fearing the corporate veil would be lifted.
Bank of Montreal v Canadian Westgrove Ltd (1990): demonstrates an incredibly high threshold for a
finding of Parent company liability for (contractual relations) made by a wholly owned subsidiary. The CoA
stated that one would need pretty clear possibly overwhelming evidence of agency or something else.
(Pg 145)

Smith Stone Knight Ltd v Birmingham Corp [1939] 4 ALL ER 116 [Company carrying on business as
agent of its members agency through implication - SUFFICIENT CONTROL] (Pg 131)
Facts: An application was made to set aside a preliminary determination by an arbitrator. The parties
disputed the compensation payable by the respondent for the acquisition of land owned by Smith Stone and
held by Birmingham Waste as its tenant on a yearly tenancy. Birmingham Waste was a wholly owned
subsidiary of Smith Stone and was said in the Smith Stone claim to carry on business as a separate
department and agent for Smith Stone. As a yearly tenant, Birmingham Waste, however, had no status to
claim compensation. The question was whether, as a matter of law, the parent company could claim
compensation for disturbance to the business carried on at the acquired premises. The arbitrators award
answered this in the negative. Smith Stone applied to set the award aside on the ground of technical
misconduct.
Held: An implied agency existed between the parent and subsidiary companies so that the parent was
considered to own the business carried on by the subsidiary and could claim compensation for disturbance
caused to the subsidiarys business by the local council. In determining whether a subsidiary was an implied
agent of the parent, Atkinson J examined whether, on the facts as found by the arbitrator and after rejecting
certain conclusions of fact which were unsupported by evidence, Smith Stone was in fact the real owner of
17

the business and was therefore entitled to compensation for its disturbance. Accordingly, the parent
company was entitled to compensation both for the value of land and for disturbance of the business
because it owned both the land and the business.
The rule to protect the fact of separate corporate identities was circumvented because the subsidiary was the
agent, employee or tool of the parent. The subsidiary company was operating a business on behalf of its
parent company because its profits were treated entirely as those of the parent companys; it had no staff and
the persons conducting the business were appointed by the parent company, and it did not govern the
business or decide how much capital should be embarked on it. In those circumstances, the court was able to
infer that the company was merely the agent or nominee of the parent company.
Atkinson J formulated six relevant criteria, namely:
(a) Were the profits treated as profits of the parent?
(b) Were the persons conducting the business appointed by the parent?
(c) Was the parent the head and brain of the trading venture?
(d) Did the parent govern the venture, decide what should be done and what capital should be embarked on
the venture?
(e) Did the parent make the profits by its skill and direction?
(f) Was the parent in effectual and constant control?

In Yukong Lind Ltd v Rendsburg Investments Corp. [1998] Toulson J rejected the submission that these
points should determine whether a company is carrying on business as another persons agent.

Chandler v Cape Plc [2012] EWCA Civ 525 [Tortious Liability]


The Court of Appeal has upheld a decision of the High Court which found that a parent company owed a
direct duty of care to an employee of one of its subsidiaries.(This case is not about lifting the Corporate
Veil this is about finding liability for negligence re Cape (parent) undertaking to regulate the Health
& Safety across its subsidiaries)
In this case, the claimant, Mr Chandler, was employed by a subsidiary of Cape plc for just over 18 months
from 1959 to 1962. During the course of his employment, Mr Chandler was exposed to asbestos fibres and
in 2007 Mr Chandler was diagnosed with asbestosis. By this time, the subsidiary entity had been dissolved.
Mr Chandlers estate brought a claim against Cape plc alleging it had owed (and breached) a duty of care to
Mr Chandler. It was held at first instance that Cape plc owed Mr Chandler a duty of care. Cape plc appealed,
but its appeal was dismissed.
The key points to note are as follows: The Court of Appeal stated that Cape plc assumed responsibility to Mr
Chandler and owed a direct duty of care to Mr Chandler which it breached. The Court of Appeal stressed
that the duty of care from a parent company to subsidiary employees did not exist automatically and only
arose in particular circumstances. That is, there was no imposition or assumption of responsibility to the
employee by reason only that the defendant was the parent company: parent companies have a separate legal
personality and it should, as a rule, not be possible to pierce the corporate veil.
However, in the case of Cape plc, the Court of Appeal identified parallel duties of care between the parent
company and subsidiary employees and the subsidiary company and its employees. This was because:
(i)
the parent company and subsidiary had relatively similar businesses;
18

(ii)
(iii)
(iv)

the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety
in the particular industry;
the subsidiarys system of work is unsafe as the parent company knew, or ought to have known;
the parent company knew (or ought to have foreseen) that the subsidiary or its employees would
rely on its using that superior knowledge the employees protection.

The case results in case law catching up with the group/subsidiary corporate structures that are now
relatively common. It is likely that courts will look at group structures holistically. Moreover, the country of
incorporation of a subsidiary is unlikely to make a difference if the parent entity is a UK plc.
In particular, in the case of M&A transactions involving the sale or purchase of a subsidiary entity, parties
will need to think about contingent and residual liability issues arising for parent companies.
Daimler AG v Bauman et al [2013] [Parent-Subsidiary liability; Extra-territorial jurisdiction]
Plaintiffs (respondents here) are twenty-two residents of Argentina who filed suit in California Federal
District Court, naming as a defendant DaimlerChrysler Aktiengesellschaft (Daimler), a German public stock
company that is the predecessor to petitioner Daimler AG. Their complaint alleges that Mercedes-Benz
Argentina (MB Argentina), an Argentinian subsidiary of Daimler, collaborated with state security forces
during Argentinas 19761983 Dirty War to kidnap, detain, torture, and kill certain MB Argentina
workers, among them, plaintiffs or persons closely related to plaintiffs. Based on those allegations, plaintiffs
asserted claims under the Alien Tort Statute and the Torture Victim Protection Act of 1991, as well as under
California and Argentina law. Personal jurisdiction over Daimler was predicated on the California contacts
of Mercedes-Benz USA, LLC (MBUSA), another Daimler subsidiary, one incorporated in Delaware with its
principal place of business in New Jersey. MBUSA distributes Daimler-manufactured vehicles to
independent dealerships throughout the United States, including California. Daimler moved to dismiss the
action for want of personal jurisdiction. Opposing that motion, plaintiffs argued that jurisdiction over
Daimler could be founded on the California contacts of MBUSA. The District Court granted Daimlers
motion to dismiss. Reversing the District Courts judgment, the Ninth Circuit held that MBUSA, which it
assumed to fall within the California courts all-purpose jurisdiction, was Daimlers agent for
jurisdictional purposes, so that Daimler, too, should generally be answerable to suit in that State.
Held: Daimler is not amenable to suit in California for injuries allegedly caused by conduct of MB
Argentina that took place entirely outside the United States.
Today, the Supreme Court of the United States held in Daimler AG v. Bauman, et al. that due process
prevents a court from applying an "agency" theory to exercise general personal jurisdiction over a foreign
corporation based solely on unrelated contacts of its domestic, wholly-owned subsidiary, if the subsidiary is
not otherwise an alter ego of the parent corporation. Justice Ginsburg delivered the opinion of the Court, in
which Chief Justice Roberts and Justices Scalia, Kennedy, Thomas, Breyer, Alito and Kagan joined. Justice
Sotomayor wrote a concurring opinion. The Court's ruling reversed a 2011 decision of Judge Stephen
Reinhardt of the United States Court of Appeals for the Ninth Circuit.
The Court held that the Ninth Circuits two-part "agency" test did not satisfy the requirements of due
process. Under the Ninth Circuit test, a court could exercise general personal jurisdiction over a foreign
parent corporation for activities that occurred entirely outside of the U.S. if (1) it would perform the tasks of
the subsidiary if the subsidiary did not exist and (2) it had the right to control the subsidiary. Applying this
test, the Ninth Circuit had held that the foreign parent (the corporate predecessor to Daimler AG) would
perform all the tasks of its domestic subsidiary, Mercedes Benz USA, i.e., selling cars in the American
market, if the subsidiary did not exist, and that the parent had the right to control virtually every function of
the domestic subsidiary. Thus, the Ninth Circuit held that it could exercise general personal jurisdiction over
the foreign parent based on the activities of its subsidiary in California.
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The Supreme Court rejected the Ninth's Circuit's "agency" test for general personal jurisdiction. The Court
found that the "Ninth Circuit's agency theory appears to subject foreign corporations to general
jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond
even the 'sprawling view of general jurisdiction'" that the Court previously rejected in its decision
in Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. __ (2011). The Court noted that "[i]f
Daimler's California activities sufficed to allow adjudication of this Argentina-rooted case in California, the
same global reach would presumably be available in every other State in which MBUSA's sales are sizable.
Such exorbitant exercises of all-purpose jurisdiction would scarcely permit out-of-state defendants 'to
structure their primary conduct with some minimum assurance as to where that conduct will and will not
render them liable to suit.'" The Court concluded that "[i]t was therefore error for the Ninth Circuit to
conclude that Daimler, even with MBUSA's contacts attributed to it, was at home in California, and hence
subject to suit there on claims by foreign plaintiffs having nothing to do with anything that occurred or had
its principal impact in California."
The Court also emphasized the transnational context of the dispute in reaching its holding, and found that
the Ninth's Circuit's decision "paid little heed to the risks to international comity its expansive view of
general jurisdiction posed. Considerations of international rapport thus reinforce our determination that
subjecting Daimler to the general jurisdiction of courts in California would not accord with the 'fair play and
substantial justice' due process demands."
Choc v HudBay Minerals Inc. & Caal v HudBay Minerals Inc. [2013] [Parent-Subsidiary liability;
Extra-territorial jurisdiction]
Agency & Faade arguments advanced in Canadian cases, but not Group-Entity
Members of the indigenous Mayan Qeqchi population from El Estor, Guatemala have filed three related
lawsuits in Ontario courts against Canadian mining company HudBay Minerals over the brutal killing of
Adolfo Ich, the gang-rape of 11 women from Lote Ocho, and the shooting and paralyzing of German Chub
abuses alleged to have been committed by mine company security personnel at HudBays former mining
project in Guatemala.
In a precedent-setting ruling with national and international implications, Superior Court of Ontario Justice
Carole Brown has ruled that Canadian company Hudbay Minerals can potentially be held legally responsible
in Canada for rapes and murder at a mining project formerly owned by Hudbays subsidiary in
Guatemala. As a result of Justice Browns ruling, the claims of 13 Mayan Guatemalans will proceed to
trial in Canadian courts.
As a result of this ruling, Canadian mining corporations can no longer hide behind their legal corporate
structure to abdicate responsibility for human rights abuses that take place at foreign mines under
their control at various locations throughout the world. There will now be a trial regarding the abuses
that were committed in Guatemala, and this trial will be in a courtroom in Canada, a few blocks from
Hudbays headquarters, exactly where it belongs.
Hudbay argued in court that corporate head offices could never be held responsible for harms at their
subsidiaries, no matter how involved they were in on-the-ground operations. Justice Brown disagreed and
concluded that the actions as against Hudbay and HMI should not be dismissed.
This is the second significant legal victory for the Mayan plaintiffs in 2013. In February 2013, Hudbay
abruptly dropped its argument that the lawsuit against it should be heard in Guatemala.

20

Two judgments handed down in the last year have caused renewed interest in the court's ability to 'pierce the
veil of incorporation'. The starkly contrasting decisions given by Mr Justice Burton in Antonio Gramsci
Shipping Corp v Stepanovs [2011] EWHC 333 (Comm) ("Gramsci"), and by Mr Justice Arnold in VTB
Capital plc v Nutritek International Corp [2011] EWHC 3107 (Ch) ("VTB Capital") have provoked debate
about the scope of the concept.
In VTB Capital, the plaintiffs sued originally in Tort (for deceit) and then in Contract. VTB declined to
follow Gramsci, and the Courts found that they could not lift the Corporate veil. Proceedings should have
taken place in Russia, where Torts were committed, and all of the evidence and testimony would be in
Russian. Whats important to note, however, is that Burtons judgement in Gramsci is overruled by VTB
Capital.
In VTB Capital Arnold concluded, quoting a passage from Justice Mumby in Ben Hashem v Ali Shayif, that
the courts have only taken the step of piercing the corporate veil when 'the company was being used by its
controller in an attempt to immunise himself from liability for some wrongdoing which existed
entirely dehors the company'. He went on to explain that a wrongdoing 'dehors' the company is one which is
'anterior or independent' of it. This was the case in both Gilford and Jones; both Mr Horne and Mr Lipman
attempted to avoid liability for their own wrongdoing by using a company that they controlled as a shield. In
those circumstances the courts were willing to grant relief against their respective companies in order to
prevent the claimants being denied an effective remedy. It is important to note that in both cases it was an
equitable remedy, rather than damages, which the court awarded after piercing the corporate veil.
In Gramsci the claimants successfully argued that the corporate veil should be pierced and Mr Stepanovs
treated as a party to certain agreements entered into between the claimants and five companies registered in
the British Virgin Islands and Gibraltar, one of which was beneficially owned by Mr Stepanovs. Mr Justice
Burton held that there was a good arguable case that the claimants should be able to enforce a contract
against Mr Stepanovs, the 'puppeteer', despite the contracts being entered into by his 'puppet' company.
This was a potentially radical decision as it raised the prospect of non-parties being made liable on a contract
to which it was not a signatory and at the same time raising the issue as to whether the 'puppeteer' was bound
by all the terms of the contract. In reaching his conclusion Burton made a number of findings regarding the
court's ability to pierce the corporate veil, which have subsequently received strong criticism from Mr
Justice Arnold in VTB Capital.
In VTB Capital, the claimants applied to amend their particulars of claim in order to bring a contractual
claim against Mr Malofeev, Marcap BVI and Marcap Moscow, despite these defendants not being parties to
the loan facility under which the claimants claimed to have been defrauded. Arnold J was therefore required
to consider the law regarding piercing the corporate veil, and in declining to follow Gramsci took the
opportunity to criticise the judgment given by Burton and to set out the circumstance he believed would
justify the courts taking this step and the remedies available once the corporate veil is pierced.
In Gramsci, Burton J held that the corporate veil could be pierced, and a claim for damages made, if the
conditions in Trustor v Smallbone (No 2) [2001] WLR 1177 ("Trustor") were satisfied. These are (1)
fraudulent misuse of the company structure, and (2) a wrongdoing committed 'dehors' the
company.12 Arnold J rejected this finding, stating in particular that he did not agree that there can be a claim
for common law damages, as distinct from an equitable remedy, whenever the Trustor conditions are
satisfied. Arnold J went on to say that a number of authorities show that it is 'inappropriate', where a claim
of wrongdoing is made against the controller of a company, to pierce the corporate veil to enable
21

a contractual claim against that person. In Arnold J's eyes, Trustor is instead authority for the proposition
that, in a claim for knowing receipt, the court will treat receipt by a company as receipt by the individual
who controls it if both conditions above are satisfied.
Finally, Arnold J was dissatisfied with Burton J's acceptance of the submission that the notional puppeteer
can be made liable for a contract, but that "as a matter of public policy" he cannot enforce it. Arnold J asked
why such a defendant, who is being treated by the courts as a party to a contract, should not be able to
enforce rights within it such as a set off or cross claim for unpaid sums.

Macaura v Northern Assurance Co Ltd [1925] AC 619


*A companys property is the property of the company as a separate person not the members.
Facts: Owner of Timber estate sold all the timber property to a company in which he owned almost all the
shares. He was also the largest creditor. He insured the timber against fire by policies taken out in his own
name. Timber was destroyed and he sued the insurance company. The HoL held that in order to have an
insurable interest in property a person must have a legal or equitable interest in the property not merely a
moral certainty of profiting or losing from the property.
Lord Wrenbury: My Lords, this appeal may be disposed of by saying that the corporator even if he holds all
the share in the corporation, and that neither he nor any creditor of the company has any property legal or
equitable in the assets of the corporation.

Lee v Lees Air Farming Ltd [1961] AC 12: [A company can employ one of its members under a contract
of service]
A company employed Mr. Lee who owned 2,999 of 3000 shares, was its only director and have been
appointed governing director for life. He was killed in the course of his work for the company. The
companys insurers alleged that there was no contract of service so that no claim could be made.
Lord Morris of Borth-y-Gest: In their lordships view it is a logical consequence of the decision in Salomon
that one person may function in dual capacities. There is no reason, therefore, to deny the possibility of a
contractual relationship being created as between the deceased and the company.
The Privy Council also rejected the insurers arguments. Lord Morris said there appears to be no greater
difficulty in holding that a man acting in one capacity can give orders to himself in another capacity than
there is in holding that a man acting in one capacity can make a contract with himself in another capacity.

LIABILITY FOR FRAUDULENT TRADING:


A person who is found to have been knowingly party to the carrying on of a business of a company with
intent to defraud its creditors, or creditors of any other person, or for any other person, of for any fraudulent

22

purpose, may be declared by the court to be liable to make such contributions (if any) to the companys
assets as the court thinks proper (Insolvency Act 86 s.213)( pg. 690)
A person who was knowingly party to a companys fraudulent trading may be may be made liable to
contribute to its assets only when it is wound up, but such a person may at any time be prosecuted for the
criminal offence of knowingly being a party to fraudulent trading (CA 2006, s. 993).
Section 214 Insolvency Act Wrongful Trading comes into operation ONLY if a company goes into
liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the
expenses of winding up (s.214). In order to establish liability to elements must be proved (1) knowledge that
insolvent liquidation was unavoidable (2) and failure to take every step to minimise potential loss to
creditors.

COMPANIES ACT 2006


PART 29
FRAUDULENT TRADING
933 Offence of Fraudulent Trading
(1)If any business of a company is carried on with intent to defraud creditors of the company or creditors of
any other person, or for any fraudulent purpose, every person who is knowingly a party to the carrying on of
the business in that manner commits an offence.
(2)This applies whether or not the company has been, or is in the course of being, wound up.
(3)A person guilty of an offence under this section is liable
(a)on conviction on indictment, to imprisonment for a term not exceeding ten years or a fine (or both);
(b)on summary conviction
(i)in England and Wales, to imprisonment for a term not exceeding twelve months or a fine not exceeding
the statutory maximum (or both);
(ii)in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months or a fine not
exceeding the statutory maximum (or both).
CHAPTER 2
MINIMUM SHARE CAPITAL REQUIREMENT FOR PUBLIC COMPANIES
767 Consequences of doing business etc without a trading certificate
(1)If a company does business or exercises any borrowing powers in contravention of section 761, an
offence is committed by
(a)the company, and
(b)every officer of the company who is in default.
(2)A person guilty of an offence under subsection (1) is liable
(a)on conviction on indictment, to a fine;
(b)on summary conviction, to a fine not exceeding the statutory maximum.
(3)A contravention of section 761 does not affect the validity of a transaction entered into by the company,
but if a company
(a)enters into a transaction in contravention of that section, and
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(b)fails to comply with its obligations in connection with the transaction within 21 days from being called on
to do so,
the directors of the company are jointly and severally liable to indemnify any other party to the transaction
in respect of any loss or damage suffered by him by reason of the company's failure to comply with its
obligations.

Insolvency Act 1986


Penalisation of directors and officers
213 Fraudulent trading.
(1)If in the course of the winding up of a company it appears that any business of the company has been
carried on with intent to defraud creditors of the company or creditors of any other person, or for any
fraudulent purpose, the following has effect.
(2)The court, on the application of the liquidator may declare that any persons who were knowingly parties
to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions
(if any) to the companys assets as the court thinks proper.
214 Wrongful trading.
(1)Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection
(2) of this section applies in relation to a person who is or has been a director of the company, the court, on
the application of the liquidator, may declare that that person is to be liable to make such contribution (if
any) to the companys assets as the court thinks proper.
(2)This subsection applies in relation to a person if
(a)the company has gone into insolvent liquidation,
(b)at some time before the commencement of the winding up of the company, that person knew or ought to
have concluded that there was no reasonable prospect that the company would avoid going into insolvent
liquidation, and
(c)that person was a director of the company at that time;
but the court shall not make a declaration under this section in any case where the time mentioned in
paragraph (b) above was before 28th April 1986.
(3)The court shall not make a declaration under this section with respect to any person if it is satisfied that
after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every
step with a view to minimising the potential loss to the companys creditors as (assuming him to have
known that there was no reasonable prospect that the company would avoid going into insolvent liquidation)
he ought to have taken.
(4)For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or
ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which
would be known or ascertained, or reached or taken, by a reasonably diligent person having both
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the
same functions as are carried out by that director in relation to the company, and
(b)the general knowledge, skill and experience that that director has.
(5)The reference in subsection (4) to the functions carried out in relation to a company by a director of the
company includes any functions which he does not carry out but which have been entrusted to him.
(6)For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a
time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the
winding up.
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(7)In this section director includes a shadow director.


(8)This section is without prejudice to section 213.
216 Restriction on re-use of company names.
(1)This section applies to a person where a company (the liquidating company) has gone into insolvent
liquidation on or after the appointed day and he was a director or shadow director of the company at any
time in the period of 12 months ending with the day before it went into liquidation.
(2)For the purposes of this section, a name is a prohibited name in relation to such a person if
(a)it is a name by which the liquidating company was known at any time in that period of 12 months, or
(b)it is a name which is so similar to a name falling within paragraph (a) as to suggest an association with
that company.
(3)Except with leave of the court or in such circumstances as may be prescribed, a person to whom this
section applies shall not at any time in the period of 5 years beginning with the day on which the liquidating
company went into liquidation
(a)be a director of any other company that is known by a prohibited name, or
(b)in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or
management of any such company, or
(c)in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business
carried on (otherwise than by a company) under a prohibited name.
(4)If a person acts in contravention of this section, he is liable to imprisonment or a fine, or both.
(5)In subsection (3) the court means any court having jurisdiction to wind up companies; and on an
application for leave under that subsection, the Secretary of State or the official receiver may appear and call
the attention of the court to any matters which seem to him to be relevant.
(6)References in this section, in relation to any time, to a name by which a company is known are to the
name of the company at that time or to any name under which the company carries on business at that time.
(7)For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at at
time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the
winding up.
(8)In this section company includes a company which may be wound up under Part V of this Act.
217 Personal liability for debts, following contravention of s. 216.
(1)A person is personally responsible for all the relevant debts of a company if at any time
(a)in contravention of section 216, he is involved in the management of the company, or
(b)as a person who is involved in the management of the company, he acts or is willing to act on instructions
given (without the leave of the court) by a person whom he knows at that time to be in contravention in
relation to the company of section 216.
(2)Where a person is personally responsible under this section for the relevant debts of a company, he is
jointly and severally liable in respect of those debts with the company and any other person who, whether
under this section or otherwise, is so liable.
(3)For the purposes of this section the relevant debts of a company are
(a)in relation to a person who is personally responsible under paragraph (a) of subsection (1), such debts and
other liabilities of the company as are incurred at a time when that person was involved in the management
of the company, and

25

(b)in relation to a person who is personally responsible under paragraph (b) of that subsection, such debts
and other liabilities of the company as are incurred at a time when that person was acting or was willing to
act on instructions given as mentioned in that paragraph.
(4)For the purposes of this section, a person is involved in the management of a company if he is a director
of the company or if he is concerned, whether directly or indirectly, or takes part, in the management of the
company.
(5)For the purposes of this section a person who, as a person involved in the management of a company, has
at any time acted on instructions given (without the leave of the court) by a person whom he knew at that
time to be in contravention in relation to the company of section 216 is presumed, unless the contrary is
shown, to have been willing at any time thereafter to act on any instructions given by that person.
(6)In this section company includes a company which may be wound up under Part V.
Re Patrick Lyon Ltd [1933] [Fraudulent Trading/ Wrongful Trading] Ch 786 [s.213 Fraudulent]
Maugham J said: "I will express the opinion that the words 'defraud' and 'fraudulent purpose,' ... are words
which connote actual dishonesty involving, according to current notions of fair trading among commercial
men, real moral blame."
Re Produce Marketing Consortium Ltd (No 2) [1989] 5 BCC 569 (Pg 696) [s.214 Director Liability]
*First UK company law or UK insolvency law case under the wrongful trading provision of s
214 Insolvency Act 1986.
Facts: Eric Peter David and Ronald William Murphy ran Produce Marketing Consortium Ltd, importing
fruits from Cyprus. They were the only employees by the end (except Davids wife who did clerical work
for 70 per month). PMC was incorporated in 1964 as an amalgamation of three smaller businesses. David
was director from the start, and owned half the shares. As other directors left and died, Murphy became the
other director in 1974. He had no accountancy qualifications, but was an experienced bookkeeper. The
company earned profit through a 3.5% commission on the gross sale price of the fruit which was imported
through its agency. But the business was dropping because they lost business of a large Spanish exporter.
They made losses of 14K, 25K and 21K in 1981, 1982 and 1983, and a profit of 43 in 1984, by which
time there was a bank overdraft of 91K. The report for that year was that,
At the balance sheet date, the company was insolvent but the directors are confident that if the company
continues to trade, it will be able to meet its liabilities.
The auditor said the companys continuation depended on the banks continued facilities. Banco Exterior SA
took a secured debenture in 18 October 1983 on all property and assets, present and future, including good
will, book debts and uncalled capital (but fixed assets were only 5000). They also took a personal
guarantee from David for 30K. The draft accounts for 1984-6 were produced by auditors six months late in
January 1987. They showed a 55K loss and 29K loss, with liabilities over assets reaching 175K.
Auditors warned of insolvent trading, if the bank did not give more credit. The bank did oblige in March, but
less than before. The overdraft decreased, but debt to its most important Cypriot shipper increased to 175K.
The company was put in creditors voluntary liquidation on 2 October 1987, with debts of 317,694, half
owed to one Cypriot shipping firm, as a trade creditor that brought them fruit. In 1988 the liquidator asked
David and Murphy why there was trading while insolvent. David replied that they knew liquidation was
inevitable in February with the accounts, and trading was continued because there was perishable fruit in
cold store. The liquidator sought them to contribute 107,946 each, plus costs the court saw fit. The
liquidator argued that the right measure to contribute was the reduction in net assets caused by the wrongful
trading.
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Judgment: The Insolvency Act 1986 now has two separate provisions: s 213 dealing with fraudulent
trading to which the passages which I have quoted from the judgments of Maugham J and Buckley J no
doubt are still applicable and s. 214 which deals with what the side-note calls wrongful trading. It is
evident that Parliament intended to widen the scope of the legislation under which directors who trade on
when the company is insolvent may, in appropriate circumstances, be required to make a contribution to the
assets of the company which, in practical terms, means its creditors.

27

LECTURE #4 (week 6): CORPORATE CRIME


(CRIMINAL, TORTIOUS AND CONTRACTUAL LIABILITY)
A Reiteration of the Salomon Principle.
Can a company have mens rea or malice?
Two Methods at Common Law:
1) Vicarious Liability: when an employee (or agent) commits a tort, the employer (or principle),
whether an individual or a company, may be held vicariously liable. It is imposed where the
closeness of the connection between the nature of the employment and the particular tort, and
looking at the matter in the round, it is just and reasonable to hold the employer liable.
2) Identification doctrine (sometimes called the alter ego doctrine or doctrine of attribution):
Man civil law rights and liabilities attach only to persons who have requisite knowledge. To
make these concepts applicable to companies as separate persons it is necessary to attribute to
companies the knowledge of humans identified with them.
Lennards Carrying Co v Asiatic Petroleum Co Ltd [1915] [Identification Theory]: The companys state
of mind (its mens rea) is the state of mind of its directing mind and will . The shipowner (appellant)
argued that it should not be liable for fire damage to goods on board the ship which happened without his
actual fault or privity as set out in the Merchant Shipping Act 1894. The evidence showed that Mr.
Lennard, a director of the shipowning company, knew, or ought to have known, that the ship was
unseaworthy.
Held: If Mr Lennard was the directing mind of the company, then his action must, unless a corporation is
not to be liable at all, have been an action which was the action of the company itself within the meaning of
s. 502 [of the Merchant Shipping Act].

**Tesco v Natrass [1972] (Pg 637) [Directing Mind and Will Criminal Liability]: The directing mind
and will or the controlling mind of the company is limited to individual employees with some power of
control in the company including some discretion over the activities with which the offence is concerned.
HoL stated that board may delegate authority, which may make those delegated members part of the mind
(and operation) of the company.
(i.e.: the board of directors; the CEO or managing director and possibly other senior officers if they speak
and act as the company.)
Lord Reid: A living person has a mind which can have knowledge or intention or be negligent and he has
hands to carry out his intentions. A corporation has none of these: it must act through living persons, though
not always one or the same person. Then the person who acts is not speaking or acting for the company. He
is acting as the company and his mind which directs his acts is the mind of the company. There is no
question of the company being vicariously liable. He is not acting as a servant, representative, agent or
delegate. He is an embodiment of the company or, one could say, he hears and speaks through
the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is
a guilty mind then that guilt is the guilt of the company.
Stone and Rolls Ltd v Moore Stephens [2009] UKHL [Attribution Principle]: And individuals
knowledge of his or her own wrongdoing will be attributed to a company if the individual is the only person
28

beneficially interested in the companys shares (or if any other persons so interested are complicit in the
wrongdoing).
Facts: Mr. Stojevic, only individual interested in shares, defrauded bank of 90 million. Company tried to sue
auditor for negligence in not discovering the fraud, but doing so would assist the company to benefit from its
wrongdoing contrary to ex turpi causa (therefore attribution found for the purpose of upholding ex turpi
causa principle).
Attempts to Widen the Mind Concept:
1) Director General of Fair Trading v Pioneer Concrete [1995]: sometimes it is necessary to attribute
liability to a company the acts or thoughts of individuals who are not part of its directing mind and
will because otherwise the persons who formed its directing mind and will could insulate the
company from liability by delegating their functions.
An Order against Pioneer was disputed as the defendants argued that the employees (area manager
and plant manager) entered into contracts against the express prohibition of their employers. The
House of Lords rejected this argument and attributed liability.
2) EI Ajou v Dollar Land Holdings [1994]
Especially
3) Meridian Global Fund Management v Securities Commission [1995]: where a statutory offence is
involved the concept of a directing mind may vary depending on the interpretation of the statute.
Lord Hoffman emphasised that choosing whose thoughts and/or action will be attributed to a
company or the purpose of applying a rule of law to it depend on interpreting that rule
In the instant case the PC finds that the individual attributable for the wrongdoing was not a director
but they individual who had authority to acquire the securities for the company, regardless of
whether that individual was the companys directing mind and will.

Corporate Manslaughter:
It has been held that the identification theory can be used to make a company liable for criminal offences
requiring mens rea.
The bigger the company the easier it is to escape liability (pg 639). Less than 10 work-related death
prosecutions have been successful, and then only against small companies. Attribution is a key issue in this
area!:
1) R v Kite and OLL Ltd 144 NLJ 1735: An interesting case in that it identifies managements failure to
ensure a safe activity, leading to a conviction for gross negligence manslaughter, when evidence
showed that warnings about safety had been given.
The company, known as Active Learning and Leisure Limited and which operated as a leisure centre
at St Alban's Centre in Lyme Regis, was charged with corporate manslaughter and as a result of the
trial, convicted of that offence. The corporate structure was that Mr Kite was the managing director,
29

and Mr Stoddart was the manager. Therefore the company was a one man operation so the directing
mind was that of its managing director and the company's liability came from the 'directing
mind' having formed the mens rea. A company can only act and be criminally responsible through its
officers or those in a position of real responsibility in conducting the company's affairs. In other
words if it is proved that some person or persons who were the controlling minds of the company
were themselves in the case guilty of manslaughter then the company is likewise guilty.
2) R v P & O Ferries Ltd (1991): an example of a large company evading liability under the common
law test because a single directing mind could not be identified despite eight defendants being
brought to trial. It is arguable that theoretically the company would be held liable under the
CMCHA. However, it should be noted that this case was unique due to eight directing minds being
identified. Whether the CMCHA would remedy situations where less defendants were identifiable is
still questionable.
In Canada it has been held that a company on trial for a criminal offence cannot call evidence that it is of
good character: it is in the nature of the corporation that it does not have a character and the character of
humans associated with the corporation cannot be attributed to it.
Besides the identification theory there are two general principles of criminal law that can be used to
impose liability: (1) strict liability offences and (2) vicarious liability.
In relation to many vicarious-liability offences, Parliament has provided employers with a due
diligence defence that is, the employer is relieved of liability if it is shown that the employer had
exercised all due diligence to avoid commission of the offence.
As with strict liability, vicarious liability is a concept of criminal law not company law!

Corporate Manslaughter & Corporate Homicide Act 2007

Creates a single, new offence of corporate manslaughter. (S20 abolishes corporate manslaughter at
common law).

1 The offence
(1)An organisation to which this section applies is guilty of an offence if the way in which its activities are
managed or organised
(a)causes a person's death, and
(b)amounts to a gross breach of a relevant duty of care owed by the organisation to the deceased.
(2)The organisations to which this section applies are
(a)a corporation;
(b)a department or other body listed in Schedule 1;
(c)a police force;
(d)a partnership, or a trade union or employers' association, that is an employer.
(3)An organisation is guilty of an offence under this section only if the way in which its activities are
managed or organised by its senior management is a substantial element in the breach referred to in
subsection (1).
(4)For the purposes of this Act
30

(a)relevant duty of care has the meaning given by section 2, read with sections 3 to 7;
(b)a breach of a duty of care by an organisation is a gross breach if the conduct alleged to amount
to a breach of that duty falls far below what can reasonably be expected of the organisation in the
circumstances;
(c)senior management, in relation to an organisation, means the persons who play significant roles
in
(i)the making of decisions about how the whole or a substantial part of its activities are to be
managed or organised, or
(ii)the actual managing or organising of the whole or a substantial part of those activities.
2 Meaning of relevant duty of care
(1)A relevant duty of care, in relation to an organisation, means any of the following duties owed by it
under the law of negligence
(a)a duty owed to its employees or to other persons working for the organisation or performing
services for it;
(b)a duty owed as occupier of premises;
(c)a duty owed in connection with
(i)the supply by the organisation of goods or services (whether for consideration or not),
(ii)the carrying on by the organisation of any construction or maintenance operations,
(iii)the carrying on by the organisation of any other activity on a commercial basis, or
(iv)the use or keeping by the organisation of any plant, vehicle or other thing;
(d)a duty owed to a person who, by reason of being a person within subsection (2), is someone for
whose safety the organisation is responsible.

S8 if an organisation owed a duty of care

The jury must decide was there a gross breach of it

Was there evidence of a breach of H&S how serious was it and the risk of death posed

The attitudes, policies, systems, practices which encouraged the breach or toleration of it ( &
other matters considered relevant).

S9 : if Corp is convicted the court (usually will punish by imposing a fine) but additionally may
order corp to take remedial action within a specified time

AND supply evidence to authority that it has been done.

Failure to comply is an indictable offence.

S10 : the court may order Corp to publicise in a specific manner:

The conviction

Particulars

Terms of any remedial order.


31

(Time limit for compliance).

Liability for individuals who contributed to corporate offence not included in legislation but still
subject to common law
Recent Cases:
1) Cotswold Geotechnical Holdings Ltd 2011 [First case under 2007 Act]
The company was found guilty of corporate manslaughter and fined 385,000, where a
geologist working for the company was killed in a pit when its walls collapsed on him as he
was taking soil samples.
2) Lion Steel Ltd 2012

Lion Steel had pleaded guilty to the offence of corporate manslaughter arising from the death
of Stephen Berry at the companys premises in Hyde. Mr Berry fell some 30 metres to his
death through a skylight in a roof. He had gone onto the roof to repair a leak.

The company was fined 480,000 in relation to the offence. It was given an extended period
for payment of the fine and costs (up to three years).

3) MNS Mining 2013


4) Mobile Sweepers (Reading) Ltd 2014

The Company only had 12,000 left in the bank when Winchester Crown Court came to
sentence it for a breach of section 1 of the Corporate Manslaughter and Homicide Act 2007
last week (26 February 2014). However, His Honour Judge Boney noted that the corporate
failing was the "most serious of its kind the Court is ever likely to hear" and accordingly
fined the company all it had to pay. The Judge also required the company to publish details of
its failings (a "demonstrably unsafe" system of work) in two local papers and fined its sole
director 183,000 plus 8,000 costs for his admitted failing under s37 of the Health and
Safety at Work etc. Act 1974 as well as disqualifying him from being the director of another
company for the next five years.
Further offences charged initially including gross negligence manslaughter against Mr Owen
(the company director) were not pursued but left to lie on file.
The case related to an incident on 6 March 2002 when one of the company's employees,
Malcolm Hinton was crushed to death as he carried out repairs to a road sweeper. The
findings of the investigation were that a prop designed to support the weight of a hopper
when it was raised in the tipping position could not be used because of the poor condition of
the vehicle. As a result, when Mr Hinton had removed a hose being used, the hopper fell
backwards to the main chassis of the vehicle and crushed him as he worked underneath.
Mobile Sweepers (Reading) Limited ceased trading soon after the incident, a scenario that
has been seen all too often as the courts hear Corporate Manslaughter cases. What appears
clear from this latest case is that the investigating authorities will not be satisfied to simply
charge a 'shell' company and will pursue individuals where they consider evidence exists of
32

significant failings. Mr Owen, the company director, avoided a prison sentence in this case
but the fine and disqualification of him as a director of any company for five years seems
likely to have a significant punitive impact on him personally.
The Court is sometimes willing to stretch legal concepts to impose criminal liability on company directors,
eg. Brown v DPP (1998) in which the companys managing director was found liable for an offence even
though he did not take part in the actual act (which was the editing of a paper which released personal details
of a victim of sexual assault).

Health & Safety at Work Act 1974


Need to know this legislation exists, but do not need to know anything about this Act in detail just know it
operates in connection with a work-place death!

Sets out general duties re: health, safety and welfare in connection with work and control of
dangerous substances and emissions

Set up H&S Commission and Executive - including investigation and inquiry powers

Authorises H&S Regulations and Codes

Extensive provisions as to offences and prosecution.

Also Tortious Liability, eg, Chandler v Crane or VTB


Liability via various legislation, eg, Prest [Matrimonial Act] (Court suggests may attach liability by
other legislation as well!) Insolvency Act.

Contractual Liability
CA 2006 s.43(1), sets out two ways in which a company may become contractually bound: 1) written
contract to which the companys common seal is affixed or if a written contract is signed by two authorized
signatories, or by a director in the presence of two witnesses; or 2) where a person who was acting under the
express or implied authority of the company has made a contract on behalf of the company.
a) consider ultra vires doctrine: describes acts attempted by a corporation that are beyond the scope of
powers granted by the corporation's objects clause, articles of incorporation or in a clause in its Bylaws,
in the laws authorizing a corporation's formation, or similar founding documents. Acts attempted by a
corporation that are beyond the scope of its charter are void or voidable.
1. An ultra vires transaction cannot be ratified by shareholders, even if they wish it to be ratified.
2. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the
transaction was fully performed by one party.
3. A fortiori, a transaction which was fully performed by both parties could not be attacked.
4. If the contract was fully executory, the defense of ultra vires might be raised by either party.

33

5. If the contract was partially performed, and the performance was held to be insufficient to bring the
doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was
available.
6. If an agent of the corporation committed a tort within the scope of his or her employment, the
corporation could not defend on the ground the act was ultra vires.
*Important to distinguish ultra vires (going beyond objects of incorporation) v excess of authority (where
an employee of the company commits an act beyond the powers delegated to them.) The former cannot be
ratified by members whereas the latter may be!

Asbury Railway Corriage and Iron Co Ltd v Riche (1875): HoL decided that a registered company did not
have the contractual capacity to enter into contract outside its objects, which, at that time, had to be stated in
the companys memorandum. This came to be known as the ultra vires rule.
The fact that members of the company approve the transaction cannot cure the companys lack of capacity,
even if they approve it unanimously.
CA 1989 s. 108 nullified the ultra vires rule (except for charitable companies): The validity of an act done
by a company shall not be called into question on the ground of lack of capacity by reason of anything in the
companys constitution. The effect of this provision is that companies cannot refuse to honour a contract
simply because it is incapable within the companys objects.
*The memorandum no longer restricts the activities of a company. Since 1 October 2009, if a company's
constitution contains any restrictions on the objects at all, those restrictions will form part of the articles of
association.
Historically, a company's memorandum of association contained an objects clause, which limited its
capacity to act. When the first limited companies were incorporated, the objects clause had to be widely
drafted so as not to restrict the board of directors in their day to day trading. In the Companies Act 1989, the
term "General Commercial Company" was introduced which meant that companies could undertake "any
lawful or legal trade or business."
Freeman and Lockyer v Buckhurst Park Properties Ltd [1964]: The actual authority of an agent of a
company is the authority conferred on the agent by the contract governing the agency which has been agreed
between the agent and the company. Thus, if any person acting within the scope of his or her actual
authority makes a contract on behalf of a company then the company will be bound by it.
Doctrine of Ostensible Authority set out herein: principle is bound by an agents exercise of
ostensible authority even if that exceeds the agents actual authority. In the instant case it was said
that a contract made by an agent (or person represented to be an agent) of a company outside the
agents actual authority would be binding if:
a) the ostensible authority of the person acting as agent to make such a contract was represented to
the contractor;
b) representation made by person who had actual authority to manage business of company;
34

c) contract actually relied on the representation a reason for entering into contract;
d) under its constitution
i) company had capacity to enter into contract; and
ii) company was no precluded from authorizing person acting as agent to make contract in
question.
Hely Hutchinson v Brayhead Ltd [1968] [Agency]: Case demonstrated problem in showing how a
representation by conduct is made by the directors to the contractor:
Now there is not usually any direct communicationbetween board of directors and the outside
contractor. The actual communication is madeby the agentIt is, therefore, necessary in order to
make a case of ostensible authority to show in some way that such communication which is made
directly by the agent is made ultimately by the responsible parties, the board of directors. That may
be shown by inference from the conduct of the board(pg 611)
Royal British Bank v Turquand [1856]: case that held people transacting with companies are entitled to
assume that internal company rules are complied with, even if they are not. This "indoor management
rule" or the "Rule in Turquand's Case" is applicable in most of the common law world. It originally
mitigated the harshness of the constructive notice doctrine, and in the UK it is now supplemented by the
Companies Act 2006 sections 39-41.
Facts: Mr Turquand was the official manager (liquidator) of the insolvent Camerons Coalbrook Steam,
Coal, and Swansea and London Railway Company. It was incorporated under the Joint Stock Companies
Act 1844. The company had given a bond for 2000 to the Royal British Bank, which secured the
companys drawings on its current account. The bond was under the companys seal, signed by two directors
and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the
articles of association), directors only had power to borrow what had been authorised by a company
resolution. A resolution had been passed but not specifying how much the directors could borrow.
Cotman v Brougham [1918] AC 514 is UK company law case concerning the objects clause of a company,
and the problems involving the ultra vires doctrine. It held that a clause stipulating the courts should not
read long lists of objects as subordinate to one another was valid.
This case is now largely an historical artifact, given that new companies no longer have to register objects
under the Companies Act 2006 section 31, and that even if they do the ultra vires doctrine has been
abolished against third parties under section 39. It is only relevant in an action against a director for breach
of duty under section 171 for failure to observe the limits of their constitutional power.
b) Tracing
EU Contract Regulations (Pg 619 19.5.5)
1) Pre-Incorporation Contracts;
2) Abolition of ultra vires doctrine UK didnt abolish it but introduced remedy measures = goodfaith transaction. Ultra vires doctrine no longer a concern, however, as company able to opt into
35

unrestricted objects in addition to s.40 CA 2006 which precludes a company from relying on
constitution as means for arguing act ultra vires.

Companies Act 2006


Capacity of company and power of directors to bind it
39 A company's capacity
(1)The validity of an act done by a company shall not be called into question on the ground of lack of
capacity by reason of anything in the company's constitution.

40 Power of directors to bind the company


(1)In favour of a person dealing with a company in good faith, the power of the directors to bind the
company, or authorise others to do so, is deemed to be free of any limitation under the company's
constitution.
(2)For this purpose
(a)a person deals with a company if he is a party to any transaction or other act to which the
company is a party,
(b)a person dealing with a company
(i)is not bound to enquire as to any limitation on the powers of the directors to bind the
company or authorise others to do so,
(ii)is presumed to have acted in good faith unless the contrary is proved, and
(iii)is not to be regarded as acting in bad faith by reason only of his knowing that an act is
beyond the powers of the directors under the company's constitution.
(3)The references above to limitations on the directors' powers under the company's constitution include
limitations deriving
(a)from a resolution of the company or of any class of shareholders, or
(b)from any agreement between the members of the company or of any class of shareholders.
(4)This section does not affect any right of a member [shareholder] of the company to bring proceedings to
restrain the doing of an action that is beyond the powers of the directors.
But no such proceedings lie in respect of an act to be done in fulfilment of a legal obligation arising from a
previous act of the company.
(5)This section does not affect any liability incurred by the directors, or any other person, by reason of the
directors' exceeding their powers.
(6)This section has effect subject to
section 41 (transactions with directors or their associates), and
section 42 (companies that are charities).

41 Constitutional limitations: transactions involving directors or their associates [Actually an antifraud measure!]

36

(1)This section applies to a transaction if or to the extent that its validity depends on section 40 (power of
directors deemed to be free of limitations under company's constitution in favour of person dealing with
company in good faith).
Nothing in this section shall be read as excluding the operation of any other enactment or rule of law by
virtue of which the transaction may be called in question or any liability to the company may arise.
(2)Where
(a) a company enters into such a transaction, and
(b) the parties to the transaction include
(i) a director of the company or of its holding company, or
(ii) a person connected with any such director,
the transaction is voidable at the instance of the company.
(3)Whether or not it is avoided, any such party to the transaction as is mentioned in subsection (2)(b)(i) or
(ii), and any director of the company who authorised the transaction, is liable
(a)to account to the company for any gain he has made directly or indirectly by the transaction, and
(b)to indemnify the company for any loss or damage resulting from the transaction.
(4)The transaction ceases to be voidable if
(a)restitution of any money or other asset which was the subject matter of the transaction is no longer
possible, or
(b)the company is indemnified for any loss or damage resulting from the transaction, or
(c)rights acquired bona fide for value and without actual notice of the directors' exceeding their
powers by a person who is not party to the transaction would be affected by the avoidance, or
(d)the transaction is affirmed by the company.
(5)A person other than a director of the company is not liable under subsection (3) if he shows that at the
time the transaction was entered into he did not know that the directors were exceeding their powers.
(6)Nothing in the preceding provisions of this section affects the rights of any party to the transaction not
within subsection (2)(b)(i) or (ii).
But the court may, on the application of the company or any such party, make an order affirming, severing
or setting aside the transaction on such terms as appear to the court to be just.
(7)In this section
(a)transaction includes any act; and
(b)the reference to a person connected with a director has the same meaning as in Part 10 (company
directors).

10 November 2014
&
17 November 2014
DIVISION OF POWERS
37

LECTURE #5

1) Division of Powers, General Meeting v Board


a. These cases establish the modern separation of corporate powers!
General Meeting: a meeting (one required every year) that all the members of a company are entitled to
attend (whereas a meeting which only one class of members may attend is called a class meeting). If a
special resolution is sought, full details of resolution must be supplied in the notification.
Members (Shareholders): definition contained in s 112 of CA2006:
(1)The subscribers of a company's memorandum are deemed to have agreed to become members of the
company, and on its registration become members and must be entered as such in its register of members.
(2)Every other person who agrees to become a member of a company, and whose name is entered in its
register of members, is a member of the company.
*The CA 2006 calls a resolution (the decisions of members are embodied in statements known as
resolutions) which may be passed by a simple majority an ordinary resolution, but resolutions on many
important topics require special resolutions, for which a 75% majority is required (from those who are
Present & Voting) (s.283) (pg 372).
*You can vote by raising your hand, where the number of shares held is irrelevant (each persons vote
is worth the same amount), or by Poll, whereby number of shares is commensurate with voting
weight. You can also vote by Proxy (which is typically controlled by the Board!)
*CA 2006 does not require that the companys directors to manage its business, leaving matters of
management to be determined by the members in their articles of association
In corporate governance, a company's articles of association (called articles of incorporation in some
jurisdictions) is a document which, along with the memorandum of association (in cases where the
memorandum exists) form the company's constitution, defines the responsibilities of the directors, the kind
of business to be undertaken, and the means by which the shareholders exert control over the board of
directors.

*Isle of Wight Rly Co v Tahourdin (1883) 25 ChD 320: case on removing directors under the
old Companies Clauses Act 1845. In the modern Companies Act 2006, section 168 allows shareholders to
remove of directors by a majority vote on reasonable notice, regardless of what the company constitution
says. Before 1945, removal of directors depended on the constitution; however this case contains some
useful guidance on how to properly construe the provisions of a constitution.
*Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906] 2 Ch 34: The Court of
Appeal affirmed that directors were not agents of the shareholders and so were not bound to
implement shareholder resolutions, where special rules already provided for a different procedure.
There were 2700 shares and the plaintiff, Mr McDiarmid, owned 1202 of them. The company was in the
business of purifying and storing liquids. He wanted the company to sell its assets to another company. At a
meeting he got 1502 of the shares to vote in favour of such a resolution, with his friends. The directors were
38

opposed to it. They declined to comply with the resolution. So Mr McDiarmid brought this action in the
name of the company, against the company directors, including Mr Cuninghame.
The constitution stated that only a three quarter majority could remove the directors. It said the general
power of management was vested in the directors subject to such regulations as might from time to time be
made by extraordinary resolution (art 96). They were also explicitly allowed to sell company property (art
91). In this case the words regulations referred to the articles of association. So the articles could be
changed by a three quarter majority of votes. It did not say anything about issuing directions to the directors.
*Marshalls Valve Gear Co Ltd v Manning, Wade & Co Ltd [1909] 1 Ch 267 [Interested Directors Dual
Director/Shareholder]: Three out of the four company directors refused to sanction legal proceedings against
another company over a patent dispute. The fourth director, who owned a majority (but not three-quarters)
of the shares in the company, commenced an action in the name of the company. The other three, who were
interested in the rival patent (they were proprietors of the rival patent), moved to strike out the name of the
company as plaintiff and to dismiss the action on the ground that the companys name had been used
without authority. Neville J refused. On an interpretation of the management article, he decided that the
majority of the shareholders had the right to control the directors action in the matter. Neville J would not
interfere with the action initiated by the one director because it is brought with the approval of the majority
of the shareholders in the company, and, upon the decisions which I have referred to, they are the persons
who are entitled to say, aye or no, whether the litigation shall proceed. The key to the reconciliation of this
decision with those in the mainstream of non-interference cases is that here the directors who were trying
to stop the litigation were interested in the litigation: their duty and their interests are in direct conflict. In
such circumstances, on traditional theory, it would be a fraud on the minority for the controlling directors
to refuse to, sanction litigation when they were in such a position of breach of duty or fraud.

*Scott v Scott [1943] 1 All ER 582: The articles of association provide clearly defined boundaries of powers
to the directors which cannot be usurped by shareholders. In the instant case the court declared that a
resolution in general meeting requiring directors to exercise the powers in a particular fashion will be
inconsistent with the articles of association.

*Breckland Group Holdings Ltd v London & Suffolk Properties [1989] BCLC 100: Ryan: the
shareholders cannot interfere with the day-to-day operations of the Company. While articles of company
may specify that the general meeting can give direction to Board via special direction that does not relate
to dad-to-day business (operational management) of Company and cannot be used on everyday basis.
Held Since the company's articles of association adopted reg 80 of Table A of Sch 1 to the Companies Act
1948, the jurisdiction to conduct the business of the company was vested in the board of directors, and the
shareholders in general meeting could not intervene to adopt unauthorised proceedings. Accordingly it was
irrelevant that a majority of the shareholders of London and Suffolk might want to adopt the action which
had been commenced without authority since the only organ of the company which could do so was the
board of directors.

General Meeting as Last Resort [Power to Litigate]:

39

*General power to litigate in the name of registered company is one of the general powers of
management assigned to directors by Art 3 of the model articles (detailed below), so it cannot be exercised
by its members.
John Shaw & Sons Ltd v Shaw [1935]: Peter, John and Percy Shaw had a company together. They had an
argument over owing the company money, and the result was a settlement. Peter and John would resign as
governing directors, promised they would not take part in financial affairs, and independent directors would
be appointed and given control over the company's financial affairs. When the independent directors
required John and Peter to pay money to the company, John and Peter refused. The independent directors
resolved to bring a claim against them. Just before the hearing, an extraordinary general meeting was called,
whereas the majority shareholders Peter and John procured a resolution to discontinue the litigation. The
company, and Percy, contended the resolution was ineffective.
At first instance Du Parcq J disregarded the resolution and gave judgment for the company. John appealed.
Held: The Court of Appeal upheld the judge, so that the shareholders could not circumvent the company's
constitution and order the directors to discontinue litigation. Greer LJ said the following:
I am therefore of opinion that the learned judge was right in refusing to dismiss the action on the plea that
it was commenced without the authority of the plaintiff company. I think the judge was also right in
refusing to give effect to the resolution of the meeting of the shareholders requiring the chairman to
instruct the company's solicitors not to proceed further with the action. A company is an entity distinct
alike from its shareholders and its directors. Some of its powers may, according to its articles, be
exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If
powers of management are vested in the directors, they and they alone can exercise these powers. The
only way in which the general body of the shareholders can control the exercise of the powers vested by
the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by
refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the
powers which by the articles are vested in the directors any more than the directors can usurp the powers
vested by the articles in the general body of shareholders. The law on this subject is, I think, accurately
stated in Buckley on Companies as the effect of the decisions there mentioned: see 11th ed., p. 723.
For these reasons I am of opinion that the Court ought not to dismiss the action on the ground that it was
instituted and carried on without the authority of the plaintiff company

Companies (Model Articles) Regulations 2008 (s1 2008/3229) (Directors General Power of
Management)
Art (or Regulation) 3 Directors Powers & Responsibilities: Subject to the articles, the directors
are responsible for the management of the companys business, for which purpose they may exercise
all the powers of the company.
*Shareholders reserve powers: For both public and private companies, Art 4 provides that: 1)
shareholders [members of the company] may, by special resolution, direct the directors to take,
refrain from taking, specified action; 2) no such special resolution invalidates anything which the
directors have done before the passing of the resolution.

Re Halt Garages [1982] 3 All ER 1016 [The Benefit Rule]: Case concerning reduction of capital and
executive pay. It held that money can be ordered to be returned if a sum paid to a director is in substance a
40

reduction of capital, because the amounts cannot seriously be regarded as remuneration. (The proper
procedure for reduction of capital is now found in CA 2006 sections 641-653.)
Facts: The dispute was regarding Director compensation paid to the Wife who was ill and did no work but
was still compensated.

Question: Whether shareholders, when acting collectively (like when amending the Constitution), whether
they too (along with Directors) need to act in the benefit or interest of the company as a whole?! Objective
assessment.
Clemens v Clemens Brother [1976] [The Benefit Rule]: Generally, majority rule exists in decisions, but
courts have the power to restrict any shareholders right to vote if these shareholders are not acting in good
faith [or in the best interests (or to the benefit) of the company as a whole!].
Facts: One shareholder had 55% of the shares [the Aunt], and used the voting rights these held to pass a
resolution issuing new shares. The effect of this new issue was not proportional on existing shareholding,
and pushed the minority shareholding from 45% [the niece] down to below 25%. This therefore allowed the
majority shareholder to pass special resolutions. The court held that this issue of new shares was not needed
and reversed the resolution.
*The interest of the company (sometimes company benefit or commercial benefit) is a concept that
the board of directors in corporations are in most legal systems required to use their powers for the
commercial benefit of the company and its members. At common law, transactions which were not
ostensibly beneficial to the company were set aside as being void as against the company.
Companies Act 2006 - Ratification Power of the General Meeting
239 Ratification of acts of directors
(1)This section applies to the ratification by a company of conduct by a director amounting to negligence,
default, breach of duty or breach of trust in relation to the company.
(2)The decision of the company to ratify such conduct must be made by resolution of the members of the
company.
(3)Where the resolution is proposed as a written resolution neither the director (if a member of the company)
nor any member connected with him is an eligible member.
(4)Where the resolution is proposed at a meeting, it is passed only if the necessary majority is obtained
disregarding votes in favour of the resolution by the director (if a member of the company) and any member
connected with him.
This does not prevent the director or any such member from attending, being counted towards the quorum
and taking part in the proceedings at any meeting at which the decision is considered.
(5)For the purposes of this section
(a)conduct includes acts and omissions;
(b)director includes a former director;
(c)a shadow director is treated as a director; and
41

(d)in section 252 (meaning of connected person), subsection (3) does not apply (exclusion of
person who is himself a director).
(6)Nothing in this section affects
(a)the validity of a decision taken by unanimous consent of the members of the company, or
(b)any power of the directors to agree not to sue, or to settle or release a claim made by them on
behalf of the company.
(7)This section does not affect any other enactment or rule of law imposing additional requirements for valid
ratification or any rule of law as to acts that are incapable of being ratified by the company.
Re Horsley Weight Ltd [1982]: The members may ratify a contract which an individual director has entered
into when it should have been decided on by the entire board.

Directors:
Appointments/Qualifications: The companies Act 2006 does not prescribe who is to be responsible for
appointing the directors of a company though it requires the first directors to be appointed by a statement
signed by, or on behalf of, the subscribers of the memorandum, and it gives the companys members a right
to dismiss directors of the company. Provision for appointment is normally made in the companys articles.
In the absence of any provision, directors are to be appointed by the companys members. At least one
director must be a human being!
Section 157 sets a minimum age of 16 years for directors (The Marquis of Butes Case [1892]). This
revision came into effect under the 2006 Act.
Qualification: unlike the Company Secretary who is required to have qualifications, directors do not need
to have any qualifications. Having said that, you will find that in very large companies, the company expects
(or sets standards) for directors; so while no formal qualifications are needed, a certain level of experience
is mandatory. (Ryan)
Executive v Non-executive Directors: the UK Governance Code states that the board shall be
comprised of a combination of both executive and non-executive directors so that no individuals can
dominate the boards decision taking. The difference between the two are that the former works full
time typically under a service contract (contract of employment) and may occupy the role of a
managing director (eg CEO, COO, CFO), whereas the latter are part-time (pg 420) and act as a
supervisory board and monitor the Executive Directors.
Two-Tier Boards: non-executive and executive directors (in the UK and USA) of a company
participate in regular board meetings equally with the executive directors, though they meet
separately in the remuneration and audit committees from which executive directors are normally
excluded. Under EU law, the constitution must adopt either a one or two-tier system.
Types: 1) Shadow; 2) De Facto; 3) Alternate (pg 426)
Shadow: a person in accordance with whose directions or instructions the directors of the company are
accustomed to act (CA 2006, s 251(1)) but advice given in a professional capacity does not make the advisor
a shadow director (s. 251(2)). A body corporate is not to be regarded as a shadow director of any of its

42

subsidiary companiesby reason only that the directors of the subsidiary are accustomed to act in
accordance with its directions or instructions (s.251(3)).

Involvement has a cumulative effect. The imposition of conditions might not amount to control when
each condition is viewed in isolation but may when too many conditions are imposed together. This was
expressly recognised in the English case of Re Tasbian Limited (No. 3) [1992] BCC 358.

Secretary of State for Trade & Industry v Deverell [2000]: it was concluded that:
a. the term should not be narrowly construed [thereby widening the net whereby one may be
considered a shadow director this allows creditors to be better protected];
b. the giving of non-professional advice could result in a shadow directorship;
c. the concepts of direction and instruction also included advice, as the common feature these
terms all share is guidance;
d. it would be sufficient to show directors had subordinated themselves or surrendered their
discretion in the face of guidance from the shadow director (although this element may not always
be present);
e. such guidance did not need to stretch across the whole of the Companys activities;
f. the communication did not necessarily have to be understood or expected to constitute a
direction;
g. it was not necessary to show a degree of compulsion in excess of that implicit in the fact the
company was accustomed to act in accordance with them (although the most clear example of a
shadow directorship is where there is a penalty for not complying with the shadow directors
instructions); and
h. it is not necessary for the shadow director to lurk in the shadows, but this may often be the
case.
Following Deverell: a shadow director is a person involved in the internal management or external control
of companies affairs, despite the name shadow which connotes exerting influence from outside internal
management conditions.
Recent Cases on Shadow Directors:
**Ultraframe (UK) Ltd v Fielding [2005] EWHC [Shadow & De Facto Directors]:
considered the statutory definition of shadow director and expressed the view that a person at
whose direction a governing majority of the board is accustomed to act is capable of being a
shadow director, and that the mere fact that a person falls within the statutory definition of
shadow director is not enough to impose on him the same fiduciary duties as are owed by a
de jure or de facto director. In this case, however, it was held that the relevant individual had
not been a shadow director of either company in question, because the boards had not been
not "accustomed to act" on his instructions or directions at the relevant times: he was held to
have subsequently become a de facto director from the time when he had at least an equal
voice with the de jure directors in important business decisions and was part of the corporate
structure of governance. The High Court also considered the application of section 320 of the
Companies Act 1985 in relation to certain transactions and stated that in principle section 320
could apply to the sale of assets by an administrative receiver.

43

Re Coroin [2012] EWHC: Coroin Limited was established by a group of investors to acquire
four well-known hotels: The Savoy, Claridges, The Connaught and The Berkeley. One of the
investors, McKillen, who held 36 per cent of Coroin's shares, believed that two further
shareholders, the Barclay brothers, were trying to gain control of the company. McKillen
claimed that the Barclay brothers had appointed directors to the board purely to represent
their interests, which amounted to unfair prejudice against him. McKillen sought later to
amend this claim, alleging amongst other things that the Barclay brothers were in fact shadow
or de facto directors. The Barclay brothers responded by arguing that their influence did not
extend to the whole of the company; they could not, therefore, be shadow directors.
The court disagreed with the Barclay brothers on the first issue, holding that it was not fatal
to the argument that someone was acting as a shadow director if they had not
influenced the entire scope of the company activities, and that the fact that they had
only been involved in a narrow range of decisions was not something that would
contradict the argument that they were in fact shadow directors. It was held that it was
not necessary that all directors acted in accordance with the directions of a shadow
director; it was enough that a majority did. Nor was it necessary that a shadow director
exercise control through his instructions over all board matters.
On the question of de facto directorship, which had only been argued in relation to one
Barclay brother, the court found that the evidence was insufficient. The brother had never
held himself out as a director of Coroin and had never attended board meetings. In addition,
there was no suggestion that he had been involved in any decision of the board other than
those specifically pleaded, and it had not been suggested that he had been involved in more
than a few decisions.

Alford v Barton [2012] EWHC: gives a valuable contrast to the decision in Re Coroin on the
issue of de facto directorship. In Barton, an individual who had been disqualified as a
director, had a conviction for false accounting and for cheating the Revenue, was identified
by the court as a de facto director of an insolvent company in a claim by a creditor for
misapplication of funds.
On the face of it, the individual concerned was acting as a consultant to the insolvent
company but according to the court he had in fact been "involved in the company's day-today running, dealt with its financial and VAT affairs, communicated with the accountants,
and dealt with the receivers as if he were in sole charge. He was a signatory on the company's
bank account, had full power to act under the bank mandate and could withdraw money
without limit. There was no evidence of any delegation of powers by the sole shareholder to
the individual, as might be expected if he was truly a consultant; there was no evidence of
any consultancy appointment; the individual was unpaid; and he did most things that might
be expected of a director. In particular, he had made all the decisions about whether the
company should repay the sum due to the purchasers, stalling repayment, against the
accountants' advice, until the insolvency proceedings". The court found little difference
between the individual's actual role in the company and that of a director; hence he was a de
facto director.

Vivendi SA v Richards [2013] EWHC: The decision of Newey J in Vivendi SA v Richards


has important implications for shadow company directors. The authority which had been
regarded as the leading case on shadow directors duties, Ultraframe (UK) Ltd v Fielding was
44

held to understate the fiduciary duties owed by shadow directors. As a consequence shadow
directors will more commonly owe fiduciary duties. Furthermore, a breach of the duty of
good faith in common law in relation to insolvency situations will more likely be found
where directors fail to consider the interests of creditors.

Re UKCL Ltd v Chohan [2013] EWHC: has served as a reminder that those who act as
directors of companies cannot avoid the duties and liabilities imposed on directors just
because they are not formally appointed.
Facts: concerned a company, UKCL, that had offered two land banking schemes to investors.
The land was purchased on the speculation that planning permission might at some point be
granted on the land, thereby increasing its value. The schemes were unauthorised and
prohibitive investment schemes under the Financial Services and Markets Act 2000 and the
Secretary of State sought to disqualify the directors for unlawful operation of the schemes.
Action was also brought against

**Holland v Revenue & Customs (Paycheque) [2010] UKSC: Lord Hope, Lord Collins and
Lord Saville held that because the parent company and Holland were separate legal persons,
simply acting as a director of a corporate director was not enough to make Holland a de
facto director. Holland needed to have assumed responsibility in relation to the subject
companies, but he had only discharged his duties as director. If he was the "guiding mind"
then that would be true in all cases of corporate directors.
Lord Walker and Lord Clarke dissented and would have held that if Holland deliberately
procured dividend payments he was a de facto director of the composite companies and owed
them a fiduciary duty
Ryan: the structure was designed so that each of the 42 companies paid tax at the small
companys rate this didnt work and they went into insolvency, where Customs then
sought unpaid taxes. Court allowed claim against Mr Holland and dismissed against
Mrs Holland. The majority held that Mr Holland was doing no more than fulfilling his
role as director of the company, and not been a de facto director of the other 42
companies. Its an important distinction, looking at the IA, where lifting the veil applied
to both shadow and de facto directors whereas the CA liability does not apply to shadow
directors.

De Jure: (a) if the person has been appointed to the office of director in accordance with the rules
governing such appointment; (b) person agreed to hold office; (c) person is not disqualified from
holding that position; and (d) the person has not vacated office.
De Facto: a person who acts as a director of a company but is not a de jure director of it is called a
de facto director. More recently, the term has been used to describe people whom the courts have
treats as directors despite never being appointed as such at all. They have the same liabilities as
legally appointed directors, and also have fiduciary duties.

45

Equal Footing Test: the de facto director is identifiable if they are the sole person running
the company, or acting with others, all equally acting without legal appointment, and running
the company.
In re Hydrodam (Corby) Limited ChD 1994: ET plc wholly owned MCP Ltd which wholly
owned Landsaver MCP Limited, which wholly owned Hydrodam (Corby) Limited (HCL).
The only de jure directors of HCL were two Channel Island companies. HCL went into
compulsory liquidation and its liquidator brought claims under section 214 of the 1986 Act
for wrongful trading against 14 defendants, including ET, one of its subsidiaries and all its
directors. Two of those directors were Mr Thomas and Dr Hardwick, who applied for the
proceedings against them to be struck out.
Held: The liquidator had failed to plead or adduce any evidence to support the allegation that
the directors of Eagle Trust were at any material time directors of Hydrodam, and the
proceedings were struck out.
A shadow director does not purport or claim to be a director. On the contrary, he claims
not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are
the only directors of the company to the exclusion of himself. He is not held out as a director
by the company.
Directors may be of three kinds: de jure directors, that is to say those who have been validly
appointed to the office; de facto directors, that is to say, directors who assume to act as
directors without having been appointed validly or at all; and shadow directors who are
persons falling within the definition I have read ['a person in accordance with whose
directions or instructions the directors of the company are accustomed to act']. Millett J then
explained that liability under section 214 extended to de facto as well as to de jure and
shadow directors, but the statutory liability was imposed exclusively upon directors of one or
other of the three kinds that I have mentioned. That meant that the liquidator had to plead
and prove against each defendant that he was such a director of HCL. He explained the
difference between a shadow and a de facto director, saying that the latter is one who
claims to act and purports to act as a director, although not validly appointed as such.
A shadow director does not so claim or purport. HCL had two titular directors, namely the
two Channel Island companies, a fact that might itself justify the inference that they were
accustomed to act in accordance with the directions of others, in which case those others
would be shadow directors. But no such case was pleaded. Millett J said: The liquidator
submitted that where a body corporate is a director of a company, whether it be a de jure, de
facto or shadow director, its own directors must ipso facto be shadow directors of the
company. In my judgment that simply does not follow. Attendance at board meetings and
voting, with others, may in certain limited circumstances expose a director to personal
liability to the company of which he is a director or its creditors. But it does not, without
more, constitute him a director of any company of which his company is a director.
46

Corporate Director: where a company has another company as their de jure director. It is possible
for a parent company to be a shadow director of a subsidiary company. Any action taken in
exercising the powers of a corporate director of company must be taken by a human being acting on
the corporate directors behalf.
Alternate: permits a director to appoint an alternate that is a person who can attend meetings that
the appointing director is unable to attend, and can generally act in place of the appointing director.
That alternate must be approved by resolution of the directors. (pg 433)

Powers: Model Articles 2008, Art. 2-15


Remuneration: a director does not have a right to be remunerated for any services performed for the
company except as provided by its constitution or approved by the companys members. (15.9 pg 448)
Service Contract: the fact that a person is a director of a company does not in itself make that person an
employee of the company. Being a director of a company is usually categorised as holding an office rather
than being an employee.
**Removal of Directors:
s.168-169 CA 2006
168 Resolution to remove director
(1)A company may by ordinary resolution at a meeting remove a director before the expiration of his period of office,
notwithstanding anything in any agreement between it and him.
(2)Special notice is required of a resolution to remove a director under this section or to appoint somebody instead of
a director so removed at the meeting at which he is removed.
(3)A vacancy created by the removal of a director under this section, if not filled at the meeting at which he is
removed, may be filled as a casual vacancy.
(4)A person appointed director in place of a person removed under this section is treated, for the purpose of
determining the time at which he or any other director is to retire, as if he had become director on the day on which the
person in whose place he is appointed was last appointed a director.
(5)This section is not to be taken
(a)as depriving a person removed under it of compensation or damages payable to him in respect of the termination of
his appointment as director or of any appointment terminating with that as director, or
(b)as derogating from any power to remove a director that may exist apart from this section.
169 Director's right to protest against removal
(1)On receipt of notice of an intended resolution to remove a director under section 168, the company must forthwith
send a copy of the notice to the director concerned.
(2)The director (whether or not a member of the company) is entitled to be heard on the resolution at the meeting.
(3)Where notice is given of an intended resolution to remove a director under that section, and the director concerned
makes with respect to it representations in writing to the company (not exceeding a reasonable length) and requests
their notification to members of the company, the company shall, unless the representations are received by it too late
for it to do so
(a)in any notice of the resolution given to members of the company state the fact of the representations having been
made; and

47

(b)send a copy of the representations to every member of the company to whom notice of the meeting is sent
(whether before or after receipt of the representations by the company).
(4)If a copy of the representations is not sent as required by subsection (3) because received too late or because of
the company's default, the director may (without prejudice to his right to be heard orally) require that the
representations shall be read out at the meeting.
(5)Copies of the representations need not be sent out and the representations need not be read out at the meeting if,
on the application either of the company or of any other person who claims to be aggrieved, the court is satisfied that
the rights conferred by this section are being abused.
(6)The court may order the company's costs (in Scotland, expenses) on an application under subsection (5) to be paid
in whole or in part by the director, notwithstanding that he is not a party to the application.

48

17 November 2014
Lecture #6
Lecture # 6 - Corporate Constitution #1: Internal Effect of the Articles and Alteration

Companies Act 2006:


17 A company's constitution
Unless the context otherwise requires, references in the Companies Acts to a company's constitution
include
(a) the company's articles, and
(b) any resolutions and agreements to which Chapter 3 applies (see section 29) [any special resolution
which has to be registered at Companies House and viewed by the public, along with the Articles of
Association]
18 Articles of association [Rules of Indoor Management]
(1) A company must have articles of association prescribing regulations for the company.
(2) Unless it is a company to which model articles apply by virtue of section 20 (default application of
model articles in case of limited company), it must register articles of association.
(3) Articles of association registered by a company must
(a) be contained in a single document, and
(b) be divided into paragraphs numbered consecutively.
(4) References in the Companies Acts to a company's articles are to its articles of association.
28 Existing companies: provisions of memorandum treated as provisions of articles
(1) Provisions that immediately before the commencement of this Part were contained in a company's
memorandum but are not provisions of the kind mentioned in section 8 (provisions of new-style
memorandum) are to be treated after the commencement of this Part as provisions of the company's articles.
(2) This applies not only to substantive provisions but also to provision for entrenchment (as defined in
section 22).
(3) The provisions of this Part about provision for entrenchment apply to such provision as they apply to
provision made on the company's formation, except that the duty under section 23(1)(a) to give notice to the
registrar does not apply.

Memorandum: external relations (pre-CA 2006).


Articles: internal relations
Now all relations are covered under the Articles! Hence, importance of s.28 above which deals with pre-CA
2006 and detailed memorandums.
Scope of Constitution:
33 Effect of company's constitution
(1)The provisions of a company's constitution bind the company and its members to the same extent as if
there were covenants on the part of the company and of each member to observe those provisions.
49

(2)Money payable by a member to the company under its constitution is a debt due from him to the
company.
In England and Wales and Northern Ireland it is of the nature of an ordinary contract debt.
The Constitution binds the company and each member. Though a constitution is a statutory contract it
differs from typical contracts insofar as an amendment to it only requires special resolution whereas in
usual contractual relationships, both parties must be in unanimous agreement.
AG of Belize v Belize Telecom Ltd [2009]: The court has no power to improve upon the instrument which
it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce
terms to make it fairer or more reasonable (78) Because articles of association are public, registered
with Companies House for anyone to inspect, the courts, when construing the articles, will not consider
matter known only to those who formed the company. For example, they will not exercise its power to
rectify a document to give effect to the true intent of those who made it [whereas they would if it were a
standard private contract].
That said when construing the words actually used in the articles of association of a company, it
should be regarded as a commercial or business document to which the maxim validate if possible
applies. Another way of putting this is to say that the articles should be construed so as to give them
reasonable business efficacy. The court must reject even the plain and obvious meaning of the words
if that meaning would be commercially absurd. (78)
**Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881 [Outsider rights']:
The question of whether a person who is not a member of the company has rights to sue on the statutory
contract' provided by what is now section 33 of the Companies Act 2006 was considered.
It was held that an outsider to whom rights are purportedly given by the company's articles in his capacity as
an outsider cannot sue in that capacity, whether he is also a member of the company or not.
*(1) Constitution is a contract between members and the company. (2) That contract is only for
membership rights. (3) S.33 contract is also a contract between members of the company, individually.
Beattie v E and F Beattie Ltd [1938] [only provisions relating to membership are contractual by virtue of s
33]: Greene MR: the contractual force given to the articles of association is to define the position of the
shareholder as shareholder, not to bind him in his capacity as an individual. (80)
Company brought proceedings against one of its directors, who was also a member of the company,
concerning his conduct as a director. He asked the court to stay the proceedings in favour of arbitration. He
claimed the proceedings were covered by a provision in the Articles that any dispute between the company
and member was to be referred to arbitration. The CoA held that the arbitration article was not enforceable
as the contract was only in relation to membership matters. [This case can be contrasted with Rayfield v
Hands]
**Eley v Positive Life [1876]: Articles stated that C [Eley] was to be the solicitor of Positive Life for life.
However after several years he was terminated from this position and sued for breach of the Articles that
he could not be removed. At time articles were created, C was not a member. However by time C brought
action, C was a member.
Held: C could not enforce the articles (lifelong employment) because the obligation to maintain him in that
position was one that did not affect the constitutional right of the shareholding body it was a contract for a
50

non-membership right (often called outsider rights, whereas membership rights are insider rights),
not available to any shareholder.
*It is important to note that although the article requiring the company to employ Mr Eley was a matter
between shareholders and directors, and not them and the plaintiff, it may also suggest that every member of
the company (including Mr Eley) had a membership right to prevent the directors appointing anyone else as
solicitor. (86)
Browne v La Trinidad (1887) (81): being a director is not a membership right it is outsider right and
therefore unenforceable by member!
If a non-membership provision in a companys articles states the terms of an agreement which was made
before the company was incorporated, the courts usually require very clear evidence that the company, after
incorporation, had made a new contract (novation) to make itself liable. The mere fact that the alleged
contractor has become a member of the company does not prove that a new contract has been made. (81)
It has been decided that the articles of association are a contract between the members of the company
inter se [between themselves]. That was settled finally by the case of Browne v Law Trinidad, if it was not
settled before. (89)
Mr Browne agreed with the promoters of a company that when the company was incorporated, he would sell
a mine in Mexico to it in return for fully paid shares and that he should become a director of the company
for a period of at least four years at least. The company was registered with Articles which provided that this
agreement was incorporated with and shall be construed as part of the articles. Browne was allotted his
shares and was appointed a director of the company, but, before the end of the four year period, the
companys members adopted an extraordinary resolution dismissing Browne as director. (The Articles
provided that any director could be removed by this measure). CoA refused injunction and held: Having
regard to the terms of CA 2006 s.33, that being a member, the contract which is referred to in the articles has
become binding between the company and him. Of course, there could be no contract between him and the
company until the shares were allotted to him
Salmon v Quin and Axtens Ltd [1909] [outsider rights injunction possible if sought by member]: It is
possible for a member of a company to obtain an injunction to prevent it acting in a way that is inconsistent
with a non-membership provision of the articles.
In the instant case a bulk of share in Quin and Axtens were owned by Raymond Axtens and Joseph Salmon,
who were also appointed as managing directors and the articles contained a provision that they could veto
any board decision on a range of matters. Salmon latter issued such a veto, but it was disregarded by the
Company who attempted to proceed with their resolution. The CoA granted an injunction as the company
was trying to bypass rules on decision-making contained in its constitution without following the procedure
therein contained. The court would prevent the company acting on a decision taking unconstitutionally.
Indirectly, Salmon enforced his outsider rights as a managing director to veto certain board decisions by
suing as a member for the enforcement of the relevant articles.
**Rayfield v Hands [1960] (90): it was held that in a quasi-partnership company, which is formed on the
basis that certain members shall be directors, provisions in the articles referring to directors can be
interpreted as referring to a class of member who are directors and therefore can be regarded as being
concerned with membership rights.
51

Mr. Rayfield was a member of a company whose articles of association provided that a member who
intended to transfer his shares had to inform the directors of the company who would take the shares equally
between them at a fair value. Mr Rayfield wanted to transfer his 725 shares but Mr Hands and his fellow
directors refused to take them. Vaisey J interpreted the reference to the directors in the article as a reference
to the class of members who were directors and so held that the article concerned membership and had
contractual force. He granted Mr Rayfield an order requiring the directors to take the shares but said:
The conclusion to which I have come may not be of so general application as to extend to the
articles of association of every company, for it is, I think, material to remember that this private
company is one of the class of companies which bears a close analogy to a partnership.
Exeter City Football v Football Conference [2004]
- Can a term in the articles, deny a member or shareholder a statutory right?

- if we take the hierarchy of regulation, at the top is statutory law (in the Companies Act)
- below that is the companys constitution - the articles of association.
- there are a hierarchy of rules with statutory law at the TOP
- In this case, there was a term in the articles, which was the same provision as in HICKMANS CASE
- That is what is called an arbitration clause
- if there is a dispute - member cannot go direct to court but instead submit the claim to arbitration.
- arbitration is also private which is the most important issue
- clause said if there was a dispute between member and company then it would have to go to
arbitration first

- said this was a denial of a statuary right that he had - referring to S995 of the companies act - which
is the unfair prejudice action

- can also apply to court on grounds that companies acting on way that is prejudicial to its members
- clearly any individual shareholder is given a right to go to court on basis that his rights are being
unfairly prejudiced by the way the company is being run /managed

- claim was that arbitration clause was denying member right to justice to go to court
- argument was that statute is superior to the articles which are subordinate to the statute - therefore he
should have statutory right that should not be denied.

- under s 995 could go directly to court and not have to go to arbitration


- same issue reappears in
****FULHAM FOOTBALL V RICHARDS [2011]

- shift towards American type attitude that companies are simply a nexus of contracts and that the
relationships between members and companies are governed by contract and therefore freedom of
contract must prevail, and therefore if shareholder freely signs up by buying shares in the company,
knowing that he was to go to arbitration if there is a dispute, then that should prevail.

- while the contract prevails in this case (Articles term which says you have to go to arbitration prevails
over a s 995 right, it does so only if there is no consequence to third parties)

- would supporting contractual effect have an effect on third parties? (creditors).


- This case has overturned Exter
- it would appear that a contract takes precedence subject to whether or not those rights would
be damaging to the creditors of the companies.
52

24 November 2014.
Lecture # 7 - CORPORATE CONSTITUTION #2: ALTERATION

Alteration of the Constitution


o (1) Procedure
o (2) Potential Limitations on alteration
o (3) Effect of an alteration on outsiders

(1) Procedure
Certain statutes that you need to be familiar with
o Start at 17 the constitution
S. 21 Amendment of Articles
(1) A company may amend its articles by special resolution [75% vote of members].
(2) In the case of a company that is a charity, this is subject to
o (a) In England and Wales, [sections 197 and 198 of the Charities Act 2011];
o (b) In Northern Ireland, Article 9 of the Charities (Northern Ireland) Order 1987 (S.I. 1987/2048
(N.I. 19)).
(3) In the case of a company that is registered in the Scottish Charity Register, this is subject to
o (a) Section 112 of the Companies Act 1989 (c. 40), and
o (b) Section 16 of the Charities and Trustee Investment (Scotland) Act 2005 (asp 10).
Trethowans case -> Court held that while a provision couldnt state that a statute could never be changed
in the future, it could make it very difficult for a future parliament to do so by imposing procedural
requirements.
S. 25 Effect of alteration of articles on companys members
(1) A member of a company is not bound by an alteration to its articles after the date on which he
became a member, if and so far as the alteration
o (a) Requires him to take or subscribe for more shares than the number held by him at the date on
which the alteration is made, or
o (b) In any way increases his liability as at that date to contribute to the company's share capital or
otherwise to pay money to the company.
(2) Subsection (1) does not apply in a case where the member agrees in writing, either before or after the
alteration is made, to be bound by the alteration.
S. 29 Resolutions and agreements affecting a companys constitution
(1) This Chapter applies to
o (a) Any special resolution;
o (b) Any resolution or agreement agreed to by all the members of a company that, if not so agreed
to, would not have been effective for its purpose unless passed as a special resolution;
o (c) Any resolution or agreement agreed to by all the members of a class of shareholders that, if
not so agreed to, would not have been effective for its purpose unless passed by some particular
majority or otherwise in some particular manner;
o (d) Any resolution or agreement that effectively binds all members of a class of shareholders
though not agreed to by all those members;
o (e) Any other resolution or agreement to which this Chapter applies by virtue of any enactment.
(2) References in subsection (1) to a member of a company, or of a class of members of a company, do
not include the company itself where it is such a member by virtue only of its holding shares as treasury
shares.
53

S. 30 Copies of resolutions or agreements to be forwarded to registrar


(1) A copy of every resolution or agreement to which this Chapter applies, or (in the case of a resolution
or agreement that is not in writing) a written memorandum setting out its terms, must be forwarded to
the registrar within 15 days after it is passed or made.
(2) If a company fails to comply with this section, an offence is committed by
o (a) The company, and
o (b) Every officer of it who is in default.
(3) A person guilty of an offence under this section is liable on summary conviction to a fine not
exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not
exceeding one-tenth of level 3 on the standard scale.
(4) For the purposes of this section, a liquidator of the company is treated as an officer of it.
S. 34 Notice to registrar where companys constitution altered by enactment
(1) This section applies where a company's constitution is altered by an enactment, other than an
enactment amending the general law.
(2) The company must give notice of the alteration to the registrar, specifying the enactment, not later
than 15 days after the enactment comes into force.
o In the case of a special enactment the notice must be accompanied by a copy of the enactment.
(3) If the enactment amends
o (a) The company's articles, or
o (b) A resolution or agreement to which Chapter 3 applies (resolutions and agreements affecting a
company's constitution),
The notice must be accompanied by a copy of the company's articles, or the resolution or agreement in
question, as amended.
(4) A special enactment means an enactment that is not a public general enactment, and includes
o (a) An Act for confirming a provisional order,
o (b) Any provision of a public general Act in relation to the passing of which any of the standing
orders of the House of Lords or the House of Commons relating to Private Business applied, or
o (c) Any enactment to the extent that it is incorporated in or applied for the purposes of a special
enactment.
(5) If a company fails to comply with this section an offence is committed by
o (a) The company, and
o (b) Every officer of the company who is in default.
(6) A person guilty of an offence under this section is liable on summary conviction to a fine not
exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not
exceeding one-tenth of level 3 on the standard scale
S. 35 Notice to registrar where companys constitution altered by order
(1) Where a company's constitution is altered by an order of a court or other authority, the company must
give notice to the registrar of the alteration not later than 15 days after the alteration takes effect.
(2) The notice must be accompanied by
o (a) A copy of the order, and
o (b) If the order amends
(i) The company's articles, or
(ii) A resolution or agreement to which Chapter 3 applies (resolutions and agreements
affecting the company's constitution),
o A copy of the company's articles, or the resolution or agreement in question, as amended.
(3) If a company fails to comply with this section an offence is committed by
o (a) The company, and
o (b) Every officer of the company who is in default.
54

(4) A person guilty of an offence under this section is liable on summary conviction to a fine not
exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not
exceeding one-tenth of level 3 on the standard scale.
(5) This section does not apply where provision is made by another enactment for the delivery to the
registrar of a copy of the order in question.

S 21(1) provides that, subject to any provision for entrenchment, articles can be amended by the members by
a 75% majority vote.

(2) Potential Limitations on alteration


(i) Entrenchment provisions

Companies Act 2006 s. 22-24

S. 22 Entrenched provisions of the articles


Just came about in the 2006 Act
Provisions may be amended and repealed only if conditions are met and procedures are compiled with
that are more restrictive than applicable procedures for special resolutions
o Allowing companies to have constitutions that are difficult to change
Important to note that subsection (2) and (3)
o (2) Provisions for entrenchment may only be made to the companies article on formation
o (3) Agreement of all members of the company or by orders of the court
o New provision which didnt exist before

Told by the Act that the company can alter its provisions unless there are entrenchment provisions
Prior to the 2006 Companies Act, it was possible to make the alteration of the articles and constitution of
the company very difficult
o The best example is contained in weighted voting provisions or weighted voting rights
o Case that established that weighing voting rights were permissible was Bushell v Faith (1970)

S.23 Notice to registrar of existence of restriction on amendment of articles


(1) Where a company's articles
o (a) On formation contain provision for entrenchment,
o (b) Are amended so as to include such provision, or
o (c) Are altered by order of a court or other authority so as to restrict or exclude the power of the
company to amend its articles,
The company must give notice of that fact to the registrar.
(2) Where a company's articles
o (a) Are amended so as to remove provision for entrenchment, or
o (b) Are altered by order of a court or other authority
(i) So as to remove such provision, or
(ii) So as to remove any other restriction on, or any exclusion of, the power of the
company to amend its articles,
o The company must give notice of that fact to the registrar.
S. 24 Statement of compliance where amendment of articles restricted
(1) This section applies where a company's articles are subject
55

o (a) To provision for entrenchment, or


o (b) To an order of a court or other authority restricting or excluding the company's power to
amend the articles.
(2) If the company
o (a) Amends its articles, and
o (b) Is required to send to the registrar a document making or evidencing the amendment,
The company must deliver with that document a statement of compliance.
(3) The statement of compliance required is a statement certifying that the amendment has been made in
accordance with the company's articles and, where relevant, any applicable order of a court or other
authority.
(4) The registrar may rely on the statement of compliance as sufficient evidence of the matters stated in
it.

(ii) Voting Power / Agreements:


Bushell v Faith (1970)
Facts: Small Company. Shareholders were family members, brothers and sisters. Each held 100 shares
in the company, but after a series of disagreement between them, an extraordinary meeting was called
and one of the proposed resolutions was to remove the brother from his directorship of the company. The
meeting was held and after the meeting, the sisters claimed that the brother had been validly removed by
a meeting which had 200 votes for dismissal versus 100 votes against this proposal majority should
prevail
o Brother disagreed on the basis that the articles included in the event of a resolution being
proposed at a general meeting of the company for the removal of the director, any shares held by
that director shall on a poll, carry the right of 3 votes per share
o The brother was claiming that he had won the vote bc he had 300 votes to the sisters 200
Decision: First instance judge said he was validly removed. Both the CoA and the HoL disagreed with
the first instance judge they overruled the trial judge and upheld the validity of art. 9 of the companies
constitution gave way to a weighted voting clause, Clause in question was solely concerned with the
allocations of the company voting rights and therefore it would be wrong for the courts to interfere with
that matter
Legal Principle: So a weighted voting clause (if one is included in a companys constitution) may have
the effect of restricting a company in respect of restricting a type of provision
o Weighted votes acted as a denial of their s21 rights
Cane v Jones (1980)
Facts: Two brothers, P and H, formed a company, of which they were the life directors; they were the
only directors. All of the shares were owned by close family members or on trust for such members. The
articles provided that the chairman of directors had a casting vote at directors and general meetings of
the company.
o In 1967, all of the then shareholders agreed that the chairman would not use his casting vote and
that, where the director-brothers could not agree, an independent chairmen (with a casting vote)
would be appointed.
o The two sides of the family fell out and Ps side claimed that P, as chairman, had a casting vote.
o Hs daughter, the claimant, who was not a party to the 1967 agreement (although trustees acting
for her were), sought to rely on that agreement and petitioned for a declaration that Ps casting
vote had disappeared and abrogated.
o Michael Wheeler QC determined that Ps casting vote had disappeared and held that the 1967
agreement was in essence, a general meeting, which was effective to override the articles.
Decision: Judge seemed to say that, where all the alteration of the articles, despite the failure to comply
with s.9 (meeting and special resolution required), because s.9 was merely a way, but not the only way,
of altering the articles
56

Legal Principle: Unanimous consent of the members


o The directors should elect Chairman and he should have a casting vote at board and general
meetings. Shareholders were divided into two factions. Agreement that the chairman was no
longer to have a casting vote was entered into between the two factions. The procedure laid down
by Section 9 was not followed. Agreement was a valid way of altering the articles
o S.9 is not the only method of servicing the companys articles, all it does is replace
unanimity as the requirement with a special majority requirement

Many cases about the constitution deal with rights of pre-emption usually standard in private companies
but not written into public companies.
Pre-emption provisions are terms in the articles of the company that allow the directors to ensure that
membership is consistent with the ethos of the company
Requires that anyone who wants to sell their shares must offer to pre-existing shareholders, BoD etc
(iii) Private companies only

Unless clause is entrenched, there can just be a resolution called to remove a provision
In relation to private companies only, you can now have a special procedure which is governed by
section 288 of Companies Act 2006
o Written resolutions of private company
A written resolution means a resolution of a private company proposed in accordance
with the Act
o In section 288, private companies are told that there are certain things they cannot do through
written resolution
They cannot remove a director from office by written resolution
Similarly with auditor
In effect, the company secretary send out written letters to the members with the proposed
resolution to the members with a proposed time for them to return the form

Written Resolution S. 288-300


A detailed new procedure is set out in the Act for the use of written resolutions [s 288 300]. One key
change is the removal of the need for written resolutions to be passed unanimously. Ordinary resolutions
still require a 50% majority [s 282] and special resolutions still require a 75% majority [s 283], but all
resolutions of a private company may be passed in general meeting or by written resolution [s 281]. A
written resolution will include a resolution circulated in electronic form and companies cannot exclude
the use of written resolutions in their articles [s 300].

Any written resolution may be proposed by the directors or members [s 288] and must be sent to all
eligible members in hard copy or electronic form or by website [s 291 or 293]. Where the resolution is to
be passed as a special

Resolution, this must be stated in the text and then can only be passed as a special resolution [s 283]. The
members may require that a 1000 word statement on the subject of the resolution accompany the
resolution [s 292] and there must be included a statement of the procedure for agreeing and a date by
which the resolution must be passed. A resolution will lapse if not passed by that date; if no date is
specified this period is 28 days from the circulation date [s 297]. Agreement may be sent in hard copy or
electronic form using the form of authentication specified by the company. Once sent the agreement
cannot be revoked and the resolution is passed when the required majority of eligible members have
signified their agreement [s 296].

57

(iv) Court imposed restrictions under statutory powers


S. 35 Notice to registrar where companys constitution altered by order
(1) Where a company's constitution is altered by an order of a court or other authority, the company must
give notice to the registrar of the alteration not later than 15 days after the alteration takes effect.
(2) The notice must be accompanied by
o (a) A copy of the order, and
o (b) If the order amends
(i) The company's articles, or
(ii) A resolution or agreement to which Chapter 3 applies (resolutions and agreements
affecting the company's constitution),
o A copy of the company's articles, or the resolution or agreement in question, as amended.
(3) If a company fails to comply with this section an offence is committed by
o (a) The company, and
o (b) Every officer of the company who is in default.
(4) A person guilty of an offence under this section is liable on summary conviction to a fine not
exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not
exceeding one-tenth of level 3 on the standard scale.
(5) This section does not apply where provision is made by another enactment for the delivery to the
registrar of a copy of the order in question.
(v) Companies Act 2006, s.25

Section 25 of the Companies Act is one to be aware of


o It does constitute a restriction on the alteration of the articles
o Prevents companies from altering their articles
S. 25 Effect of alteration of articles on companys members
(1) A member of a company is not bound by an alteration to its articles after the date on which he
became a member, if and so far as the alteration
o (a) Requires him to take or subscribe for more shares than the number held by him at the date on
which the alteration is made, or
o (b) In any way increases his liability as at that date to contribute to the company's share capital or
otherwise to pay money to the company.
(2) Subsection (1) does not apply in a case where the member agrees in writing, either before or after the
alteration is made, to be bound by the alteration.
o Without this consent, the company cant force an existing member to contribute more capital to
the company or take out more shares. Its not uncommon to have new issues of shares
(vi) The Common Law (bona fide in best interests of the company as a whole) Test
The intervention of the common law in the alteration process
o The common law (judges) back at the turn of the 20th century realized that Lord Atkins famous
statement could be useful in company law
Famous statement Power corrupts and absolute power corrupts absolutely
Judges realized that there was nothing that provided any protection for minorities
So judges decided to protect the minority by imposing additional requirements
This alteration must also be bona fide in the best interest of the company as a
whole
o Their way of providing protection for the company

All of the cases on the reading list from Allen v Gold Reefs to Dafen Timple Co v Llanley
58

**Allen v Gold Reefs of West Africa Ltd (1901)*


Facts: The Companys articles granted it a lien over partly paid shares. The articles were amended to
extend the lien to cover fully paid up shares
Legal Principle: An alteration to the articles will only be valid if it is bona fide for the benefit of the
company as a whole
**Shuttleworth v Cox Bros Ltd (1927)
Facts: The company wished to alter its articles in order to remove a director who had engaged in
financial irregularities
Decision: The Court held that the alteration was valid, as the other directors did believe that it was for
the companys benefit.
Legal Principle: The test imposed in Allen was primarily subjective, although an alteration would not be
valid if no reasonable man could consider it to be for the benefit of the company
Clemens v Clemens Bros
Facts: Small prosperous family company in which the claimant held 45% of the shares and her auntie
held 55% of the shares. The auntie was 1 of 5 directors at Clemens Brothers Limited. Under the aunts
influence, the directors proposed to issue more shares increasing the capital of the company. But, they
wanted to issue them in a way that they reduced the nieces holding from 45% to 25%.
o This was so that the niece could no longer block a special resolution with 45% she could block
a special resolution proposition
o Her negative control is taken away from her
o So the niece sought a declaration against the company and her aunt saying the proposed
resolution should be set aside because he showed a fraud on the minority namely herself
o Company argued that if there was a difference in provision the majority should prevail
Decision: Foster LJ said that the aunt could not exercise her majority vote in whatever way she pleased.
He said the right of a shareholders to exercise voting rights is subject to equitable circumstances
o Whether I say that these proposals are oppressive to the P or no one could honestly believe that
they are for her benefit or for the fraud of the minority, matters not
Basically saying it doesnt matter what you call the conduct, it all means the same thing.
If the conduct falls under any of those headings, the court can prevent the resolution from
taking place
Legal Principle: Not favorable viewed by many people because they said the aunts not doing anything
illegal so whats all the fuss about
Greenhalgh v Arderne Cinemas (1952)
Facts: The companys managing director and majority shareholder sought to alter the articles to remove
the members pre-emption rights, and allow them to sell shares to an outsider, without first offering them
to existing members
Decision: The alteration was deemed valid
o There was clear discrimination on Mr. Greenhalgh the provisions were bona fide in the best
interest of the company
Legal Principle: The phase the company as a whole refers to the shareholders as a body. The court
should ask whether or not the alteration was for the benefit of a hypothetical member
Brown v British Abrasive Wheel Co (1919)
Facts: British Abrasive Wheel Co needed to raise further capital. The 98% majority were willing to
provide this capital if they could buy up the 2% minority. Having failed to effect this buying agreement,
the 98% purposed to change the articles of association to give them the power to purchase the shares of
59

the minority. The proposed article provided for the compulsory purchase of the minoritys shares on
certain terms.
o However, the majority were prepared to insert a provision regarding price which stated that the
minority would get a price which the court thought was fair
Decision: Astbury J held that the alteration was not for the benefit of the company as a whole and could
not be made
o One reason for this was that there was no direct link between the provision of the extra capital
and the alteration of the articles
Legal Principle: Concerns the validity of an alteration to a companys constitution, which adversely
affect the interests of one of the shareholders

Sidebottom v Kershaw (1920)


Facts: Proposed alteration to the articles in the companies constitution that would allow the company
(the directors) to confiscate the members shares if he was involved in a business that was competing
with the business of another company
o There should not be any power to take someones shares away from them
o But you can impose special requirements on someone who wants to sell their shares and get out
Decision: Court didnt feel that this was bona fide in the best interest of the company
Dafen Timplate Co v Llanelly Iron & Steel Ltd (1920)
Facts: Find a similar proposed alteration as above giving the directors power to confiscate a members
shares
o The difference perhaps shows the weariness which your lordship uses
Shows in an extreme situation that it was mindful of the protection of the minority
interest and of the protection of any interest
o There is some difficulty in relation to the best interest of the company test
What does bona fide in the best interest of the company mean? Is it the company today?
Is it the members of the company? Should it take into account only short terms interests
Remember that the company has perpetual succession
Best interest of the company is the best interest of the current or future
shareholders
(vii) Class Rights
Class rights
o Private companies can at list issue different voting right from other classes of shares in the
company
o The provisions which deal with class rights are set out in the Companies Act s. 629 onwards (to
640)
S. 629 tells us that for the purposes of the companies act tells us that shares of one class
are in all respects uniform (the same)
Shares in the company all have the same rights attached to them making only on
class of shares
Where you have a number of classes, look at the provisions of 630 onwards
o Dont need to know the provisions in detail
60(2) right me only be carried in the provisions of the companies rights
o Subsection 5
Statutory protection provision together with the standard procedure to be followed
o Even if that procedure is followed the owner must follow too
o Statutory minority protection provision
Leaves it up to the court to decide whether or not to approve the variation
S. 629 640
60

o S. 629-640 of the CA 2006 restates and amends the provisions of the CA 1985 on variation of
class rights. They are simplified and include some changes of substance:
(a) Class rights will no longer be set out in the memorandum and there are only ordinary
or special resolutions. Extraordinary resolutions no longer exists
(b) The method required for variation is no longer dependent on the rights to be varied. In
all cases, rights may be varied in accordance with the companys articles or where the
articles make no provision for variation of class rights, by special resolution or written
consent of the holders of at least three-quarters in nominal value of the issued shares of
the class (s. 630). Thus, if the articles require a simple majority, this will suffice. In
addition, as s. 630(3) provides that the provisions are without prejudice to other
restrictions on variation, if the articles require a higher percentage, this must be fulfilled
or if the class rights are entrenched in the articles, that protection must be respected.
(c) Section 631 makes provision for variation of class rights in companies without share
capital
o Section 633 replaces the right to object to court previously in CA 1985, s.127 and s.634 gives a
similar right in respect of variation of class rights in companies without share capital.
Cumbrian Newspapers Group Ltd v Cumbria & Westmoreland Herald etc (1986)*
Facts: CNG published the Penrith Observer with a 5500 weekly circulation. The chairman Sir John
Burgess also had 10.67% of the share in CWHNP since 1968. Under the constitution CNG had
negotiated special rights which it had bargained for in return for closing down a competing paper, the
Cumberland Herald, when it had joined, and for acting as CWHNPs advertising agent. It had the right to
preferences on unissued shares (art 5) to not be subject to have a transfer of shares to it refused by the
directors (art 7) pre-emption rights (art 9) and the right to appoint a director if shareholding remained
above 10% (art 12). The CWHNP directors wanted to cancel CNGs special rights. CNG argued that
they were class rights that could only be varied with its consent.
Decision: Scott J held the CNGs rights as a shareholder could not be varied without its consent because
they were class rights when they were conferred special rights on one or more of its members in the
capacity of member or shareholder
Legal Principle: Case concerning variation of the class rights attached to shares.
o Scott J set out three main categories of special rights that might exist:
(1) Rights annexed o shares
(2) Rights for particular people under the constitution
(3) Rights unattached to particular shares but conferring a benefit on a group of members
White v Bristol Aeroplane Co Ltd (1953)
Facts: company's articles of association provided that the Rs attached to any class of shares may be
'affected, modified, varied, dealt with, or abrogated in any manner' with the approval of an
extraordinary resolution passed at a separate meeting of the members of that class. The preference
shareholders argued that an issue of additional shares, both preference and ordinary, 'affected' their
voting Rs and therefore fell within article 68. However, the company contended that the proposal did
not amount to a variation of class Rs but rather it was the effectiveness of the exercise of those Rs that
had been affected and therefore a separate meeting of the preference shareholders was not required.
Decision: CA rejected the preference shareholders contention. Romer LJ explained that the proposal
would not affect the Rs of the shareholders: the only result would be that the class of persons entitled
to exercise those Rs would be enlarged
John Smiths Tadcaster Brewery Ltd (1953)
Facts: Both this case and White v Bristol Aeorplane Co Lts (1953) were cases concerning new share
issues that diluted the voting power of the complaining preference shareholders and did but not change
the voting rights attached to the preference shares. In both cases, the courts drew a distinction between a
61

variation of rights and a variation in the enjoyment of those rights, and held that the share issues fell into
the latter category.
Greenhalgh v Arderne Cinemas (1952)
Facts: The companys managing director and majority shareholder sought to alter the articles to remove
the members pre-emption rights, and allow them to sell shares to an outsider, without first offering them
to existing members
Decision: The alteration was deemed valid
o There was clear discrimination on Mr. Greenhall the provisions were bona fide in the best
interest of the company
Legal Principle: The phase the company as a whole refers to the shareholders as a body. The court
should ask whether or not the alteration was for the benefit of a hypothetical member
Re House of Fraser (1987)*
Facts: A company registered in Scotland passed a special resolution at an EGM, attended by ordinary
shareholders only, reducing its capital by paying off the whole preference share capital of the
company. Its petition to the Court of Session for confirmation of reduction of the capital was opposed
by the holders of certain preference shares on the ground, inter alia, that the failure of the company to
hold a class meeting of preference shareholders was in breach of the requirement to that effect in art
12 of the company's articles of association wherever the special Rs attached to a class of shares where
'modified, commuted, affected or dealt with'. The Court of Session confirmed the reduction in capital.
The preference shareholders appealed.
Re Holders Investment Trust Ltd (1971)*
Legal Principle: At a class meeting, the majority must vote for the benefit of the class as whole

62

1 December 2014
Lecture # 8 - CORPORATE CONSTITUTION #3: AGREEMENTS OUTSIDE ARTICLES
Summary of Last Week:
*Bushell v Faith
*Entrenchment: makes alteration to Constitution more difficult, eg, by requiring special resolution (75%) or
higher number of votes.
*Courts intervene by adding additional requirement that amendment be in the bona fide interests of the
company. This was brought into effect (initially) by the court as a form of minority protection.
Eg: Shuttleswoth v Cox; Clemens v Clemens

AGREEMENTS OUTSIDE ARTICLES:


1. Shareholder Agreements:
Nowhere in the Act does it specify that there must be shareholder agreements just a constitution (articles
of association). In other jurisdictions, such as Canada, there is a statutory footing. This is important to
minority shareholders as well as directors, as it provides for a shifting of responsibilities of the director to
the shareholders. These unanimous shareholder agreements shift responsibility (of liability) as management
of the company is delegated to shareholders these are not required by statute, they are optional.
Weighted votes are a similar mechanism (as shareholder agreements) as the latter can block the statutory
right to alter its Constitution, eg, Bushell v Faith.
Shareholder Agreements: A private contract between some or all of the shareholders of a company.
Sometimes it includes the company as a party, itself. What this agreement is designed to do, is typically to
govern the relationship between parties concerned, and in particular may set out how the company is to be
managed and controlled. Essentially, it can be a very significant minority protection device; but, its not
just for that. Sometimes minority shareholders may want an agreement because they dont want to be
involved in the management of the company, but may be able to appoint members to the board instead.
Why would you enter?:
Certainty: disputes between parties are less likely to arise in circumstances where the conduct of and
relationship between the parties is clearly regulated by parties;
Shareholder agreements are confidential: unlike Articles of Association which are public so anyone
can see what the rules governing the relationship between shareholder and the company is, shareholder
agreements are PRIVATE;
Flexibility: agreements can be easily adapted to changing needs of the parties. Constitutional
documentation can only be varied by special resolution by its members which are later registered at the
Companies House.

63

Enhance Rights: the constitution provides BASIC RIGHTS for shareholders; an agreement can bolster
those rights or confer additional protections and entitlements. This is of course where the minority may
benefit (and sometimes the majority, as well);
Protective Provisions: can be contained in agreements and in the Constitution, eg:
Confidentiality agreements (which bind the company and shareholders);
Restrictive Covenants: so if people leave they wont start up a competing company for a certain
period of time or within a certain jurisdiction;
Non-solicitation clause so that former members/directors are unable to solicit employees;
Pre-Emption Provisions for selling shares to existing members. These are prohibitions or restrictions
on transfer of shares, eg:
First-buy provisions;
Right of first refusal;
Right of first offer;
Shotgun Provisions: right to set price or terms (or both) for selling shares. The invoking party
will have incentive to be fair when setting price as once theyve invoked shotgun provision
they can now be sold shares by other members at same price;
Drag along or tag-along provision: whereby majority shareholders have to make sure that the
potential buyer (of shares) buys the minority shares at same price.
Mechanisms for valuation;
Agreed exit roots and time scales (for key personnel);
Dividend proportions;
Levels of funding;
Voting restrictions (at meetings) [one of the most common agreements]

Not an exhaustive list of benefits of shareholder agreements. [Ryan suggests that we do


further reading on benefits of shareholder agreements].
Shareholders agreements wont be found within big public listed companies. However, they can be seen
between two large companies, entered into for joint ventures, when two companies engage in enormous
contracts (eg building bridges between islands). The companies enter into a shareholder agreement to create
a new company called NewCo, where the shares are held and the work carried out.
*Russell v Northern Bank Ltd [1992]: company enters into shareholder agreement with its four
shareholders. It stipulated that no further increase of share capital (or alteration of rights) was allowed
without written agreement of the parties. Provision also said agreement should also take precedence over
Constitution. A Company is entitled to raise capital if it follows the appropriate procedures, eg, ordinary
resolution. Mr. Russell, one of the shareholders, sought injunction restraining other shareholders from
considering resolution proposed by company to raise capital. The HoL said the agreement was invalid
64

because it unlawfully fettered on companies right to raise capital. However, the HoL went on to say that it
was invalid insofar as company was concerned. So they took out blue pencil and took out the company as a
party to the agreement. However, independent of that, having severed references to the company, the
agreement between the shareholders was binding (and so shareholders could not break contract, and
Russells injunction upheld). What this case shows is that you must be careful if drafting a shareholder
agreement using the Company as a party! Second, the signatories are bound contractually and can be
prevented of breaching the contract by injunction, and one can be compensated via damages.
A shareholders agreement not to increase the share capital of a company was enforceable against the
shareholders but not against the company. It could take effect only as a personal contract. Liability to the
conflicts rule for nominee directors representing outside interests can be limited by a companys
constitution or the unanimous approval of its shareholders. An agreement by a company to fetter its
statutory powers is unenforceable.
**Welton v Saffery [1897]: Lord Davey said: Of course, individual shareholders may deal with their own
interests by contract in such way as they may think fit. But such contracts, whether made by all or some only
of the shareholders, would create personal obligations, or an exceptio personalis against themselves only,
and would not become a regulation of the company, or be binding on the transferees of the parties to it, or
upon new or non-assenting shareholders.
*Shareholder agreements only bind the signatories to the contract! Unless you sign the contract, you
are not bound by it. There are also Deeds of adherence: short document for use where an individual
becomes a shareholder in a company. The deed is required to become a party to a shareholders'
agreement, entered into before he can obtain his shares.
*The case also made clear that any provision in the Articles that is inconsistent with the general law is
void. (77)
Re Peveril Gold Mines Ltd [1898] 1 Ch 122 [Articles cannot remove members statutory rights]: is a UK
insolvency law case concerning liquidation when a company is unable to repay its debts. It held that a
member cannot be prevented by a company constitution from bringing a winding up petition. It is, however,
possible for a member to make a shareholder agreement and thus contract out of the right to bring a winding
up petition outside of the company.
Facts: The articles of association of Peveril Gold Mines Ltd said no member should petition for winding up
unless two directors had consented or the general meeting had resolved or a petitioner held at least 20% of
issued capital. A member asked for winding up without satisfying any of these conditions.
Held: A provision in the articles of a company cannot limit a right given to the members by statute, that is
the members of a company cannot agree with the company to contract out of the statute.

2. Directors Service Contract:


Directors can be compensated by cash or other financial incentives (bonuses or shares) but not entitled, as
a right, to any remuneration unless they hold a service contract under which a level of remuneration is
specified. With a service contract the terms and conditions of that contract are determined in accordance
with the Articles, eg, typically by the Board of Directors. This is a dilemma insofar as the Board is setting
65

their own levels of remuneration. That said, the Director is precluded (from the quorum and voting on) their
own remuneration discussions. Terms of the remuneration package must be made available at the general
meeting (for review by shareholders). Since December 2002 listed companies must publish directors
remuneration report, and file this with the Companies House so this information is public.
CA 2006 ss227-230
Re New British Iron CO, ex parte Beckwith [1898] 1 ch 442: B was a director and a shareholder. The
company failed to pay its directors, who sued for their salary (since they had contractual rights to it).
However, they did not sue for a breach of the Articles, since there was no direct contract there. Their
employment contract did not give an indication of how much they should be paid; the Articles gave a figure
of 1000 per annum. The courts implied this sum into their employment contract.
*Remuneration is payable by virtue of the terms of the directors appointment which come into operation on
acceptance of that appointment, the terms being the relevant provisions from the articles. Hence, director
remuneration which are incorporated into the companys articles are in fact a separate contract between the
company and the director, which comes into effect on appointment. (84)
Directors Remuneration:
Re Halt Garages [1982] 3 All ER 1016 [The Benefit Rule]: Case concerning reduction of capital and
executive pay. It held that money can be ordered to be returned if a sum paid to a director is in substance a
reduction of capital, because the amounts cannot seriously be regarded as remuneration. (The proper
procedure for reduction of capital is now found in CA 2006 sections 641-653.)
Facts: The dispute was regarding Director compensation paid to the Wife who was ill and did no work but
was still compensated.

3. Effect of an alteration on outsiders:


Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 is an important English contract
law and company law case. In the field of contracts it is well known for MacKinnon LJ's decision in the
Court of Appeal, where he put forth the "officious bystander" formulation for determining what terms
should be implied into agreements by the courts. In the field of company law, it is known primarily to stand
for the principle that damages may be sought for breach of contract by a director even though a contract
may de facto constrain the exercise of powers to sack people found in the company's constitution.
Facts: Mr Shirlaw had been the managing director of Southern Foundries Ltd, which was in the business
of iron castings. But then another company called Federated Foundries Ltd took over the business. The
new owners had altered article 8 of Southern Foundries Ltd's constitution, empowering two directors and the
secretary (who were friends of Federated Foundries) to remove any director. Then they acted on it, by
sacking Mr Shirlaw. Mr Shirlaw's contract, signed in 1933 stated that he was to remain in post for ten years.
Mr Shirlaw sued the company for breach of contract, claiming for an injunction to stay in office or
substantial damages.
Re Horsley Weight Ltd [1982]: The members may ratify a contract which an individual director has entered
into when it should have been decided on by the entire board.
66

4. Removal of Directors: s.168-169 CA 2006


168 Resolution to remove director
(1)A company may by ordinary resolution at a meeting remove a director before the expiration of his period of
office, notwithstanding anything in any agreement between it and him.
(2)Special notice is required of a resolution to remove a director under this section or to appoint somebody instead
of a director so removed at the meeting at which he is removed.
(3)A vacancy created by the removal of a director under this section, if not filled at the meeting at which he is
removed, may be filled as a casual vacancy.

169 Director's right to protest against removal


(1)On receipt of notice of an intended resolution to remove a director under section 168, the company must
forthwith send a copy of the notice to the director concerned.
(2)The director (whether or not a member of the company) is entitled to be heard on the resolution at the meeting.

67

1 December 2014
Derivative Actions /Claims
Lecture #9

Consider the internal management rule that the company is the proper claimant in a matter concerning its
internal management. It is difficult to explain why, despite the internal management principle, a member of
a company can succeed in a case like Salmon v Quin and Axtenswe will suggest that the common feature
of the cases in which members are allowed to bring legal proceedings in respect of their companies internal
affairs, as an exception to the internal management principle, is that they are proceedings about decisions
taken unlawfully. (87)

a) Common law position


**Foss v Harbottle: reiteration of Salomon principle (which was decided after Harbottle) whereby any
wrong suffered by the company must be brought by the company, not the individual members. So in a legal
claim the named claimant will be the company therefore it is the company suing and the company who
will receive compensation.
NEED TO KNOW FOSS AND THE EXCEPTIONS TO IT. NEED TO KNOW THE RATIONALE AND
FOUR EXCEPTIONS: BUT ONLY ONE TRUE EXCEPTION AS THE OTHER EXCEPTIONS
WERE REALLY PERSONAL ACTIONS.
The real true exception is Fraud on the Minority!
Fraud on the Minority: refers to an improper exercise of voting power by the majority of members of a
company. It is the evidence of failure to cast votes for the benefit of the company as a whole. A majority in
control of a company perpetrates a fraud on the minority. A resolution passed upon such voting is voidable.
For example, a resolution for alteration of the articles of association to allow the compulsory purchase of
members' shares.
Fraud on the minority permits a derivative suit when the plaintiff sufficiently pleads that a majority who are
in control of a company perpetrated a fraud on the minority of the company. [Tomran, Inc. v. Passano, 159
Md. App. 706, 714 (Md. Ct. Spec. App. 2004)]
Fraud in the context of derivative action means abuse of power whereby the directors or majority, who are in
control of the company, secure a benefit at the expense of the company

Clemens v Clemens Brother [1976] [The Benefit Rule & Fraud on the Minority]: Generally, majority
rule exists in decisions, but courts have the power to restrict any shareholders right to vote if these
shareholders are not acting in good faith [or in the best interests (or to the benefit) of the company as a
whole!].
Facts: One shareholder had 55% of the shares [the Aunt], and used the voting rights these held to pass a
resolution issuing new shares. The effect of this new issue was not proportional on existing shareholding,
and pushed the minority shareholding from 45% [the niece] down to below 25%. This therefore allowed the
68

majority shareholder to pass special resolutions. The court held that this issue of new shares was not needed
and reversed the resolution.
b) Distinction between personal and derivative actions (the reflective loss principle):
What happens if the Directors are the ones responsible for damages? Why would they bring a suit in the
companys name against themselves? There must be an exception! Hence the derivative action at common
law whereby shareholders can bring derivative actions on behalf of the company (so it can have redress
against those wrongdoers who fail to bring an action).
It is a personal action if the members sue the company for breach of Articles (or service contract, et cetera).
Of course, any compensation is recoverable to the member, rather than the company as in the derivative
claim.
Reflective loss is a concept used in company law for losses of individual shareholders that are inseparable
from general losses of the company. The rule against recovery of reflective loss states that there should be
no double recovery, so a shareholder can only bring a derivative action for losses of the company, and may
not allege she has suffered a loss in her personal capacity for a personal right.
These claims usually arise where members consider Directors actions to be wrong when their share
valuation drops

Johnson v Gore Wood & Co [2000] UKHL 65 is a leading UK company law decision of the House of Lords
concerning (1) abuse of process relating to litigating issues which have already been determined in prior
litigation or by way of settlement, (2) estoppel by convention, and (3) reflective loss of a shareholder with
respect to damage which was done to the company in which he holds shares.
Held: In relation to the issue of reflective loss, Lord Bingham summarised the existing case law in three key
propositions:
1. Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in
respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to
make good a diminution in the value of the shareholder's shareholding where that merely reflects the
loss suffered by the company.
2. Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder
in the company may sue in respect of it.
3. Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss
separate and distinct from that suffered by the company caused by breach of a duty independently
owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to
it but neither may recover loss caused to the other by breach of the duty owed to that other.
Applying these tests, the House of Lords held that one of Mr Johnson's claimed heads of loss should be
struck-out (diminution in the value of his shareholding in WWH, and amounts which WWH would
otherwise have paid into his pension), and the remaining claims were allowed to proceed (these included the
cost of personal borrowing by Mr Johnson to fund his outgoings and those of his business, the value of
shares lost when the bank foreclosed upon security which he provided, and additional tax liability). The
court held that the claims for cost of borrowing would need to be scrutinised carefully at trial to ensure that
they were not merely claims for lost dividends (which were not allowable) in disguise. The court also
69

allowed a claim for losses on other investments which Mr Johnson made based upon advice from Gore
Wood. The court also struck out claims for mental distress and aggravated damages on other grounds.

8 December 2014
Derivative Actions/Claims Cont
REVIEW:
*Any remedy obtained in a derivative action is returned to the Company (who is the proper plaintiff),
whereas in a personal claim (fraud on the minority), the remedy is returned to the shareholder member(s).
*CA 2006 ss.260-264 Derivative Action details the procedure (which requires permission from a judge to
proceed) for a derivative action/claim. We need to know this!
*At common law there are four exceptions to Foss v Harbottle (which was before Soloman v Soloman and
confirmed the separate entity principle), but the fraud on the minority is the only true exception.
Fraud used in this respect includes both criminal, eg, Clemens v Clemens, and inequitable actions
(equity in action), eg, Pavladays v Jetson (where the Directors undervalued the sale of company
assets) which makes the concept somewhat controversial. Now, under the 2006 Act, negligence
also falls under fraud on the minority where Directors favour their friends or family.
*Business Judgement Rule: courts are unwilling to impose remedies for negligence claims as directors
have been selected by the shareholders and the most appropriate remedy for a breach is removal of that
director. Moreover, courts are not a suitable body to review actions of directors who are supposedly business
experts.

c. Multiple Derivate Claims/Actions


Re Fort Gilkicker Ltd [2013] EWHC: multiple actions had not been abolished by 2006 Act therefore
procedural devices created at common law still existed: In a recent decision the High Court has held that the
old common law still permits a member of a parent entity of a wronged subsidiary company to bring a
derivative action on the subsidiary companys behalf a so-called multiple derivative action where the
wrongdoer is also in control of the parent entity

d. Statutory Derivate Claim CA 2006 ss.260-264 (which replaces common law derivative
action)
Notes: CA 2006
Including negligence in the Act has not resulted in a flood of litigation and, according to Ryan, likely
will not he says its nonsense to conclude otherwise.
s.260(3) allows a shareholder to make a claim against a director or another party in the company
responsible for the wrongdoing.
Permission to leave from the courts is required under s.261 which details the procedure.
70

Permission must be rejected if a person acting in accordance with s.172 would not seek to
continue the claim (we will return to this section next term statutory duty of directors).
DERIVATIVE CLAIMS IN ENGLAND AND W ALES OR NORTHERN IRELAND
260 Derivative claims
(1)This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of
a company
(a)in respect of a cause of action vested in the company, and
(b)seeking relief on behalf of the company.
This is referred to in this Chapter as a derivative claim.
(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 994 (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.
(5)For the purposes of this Chapter
(a)director includes a former director;
(b)a shadow director is treated as a director; and
(c)references to a member of a company include a person who is not a member but to whom
shares in the company have been transferred or transmitted by operation of law.
261 Application for permission to continue derivative claim
(1)A member of a company who brings a derivative claim under this Chapter must apply to the
court for permission (in Northern Ireland, leave) to continue it.
(2)If it appears to the court that the application and the evidence filed by the applicant in support of
it do not disclose a prima facie case for giving permission (or leave), the court
(a)must dismiss the application, and
(b)may make any consequential order it considers appropriate.
(3)If the application is not dismissed under subsection (2), the court
(a)may give directions as to the evidence to be provided by the company, and
(b)may adjourn the proceedings to enable the evidence to be obtained.
(4)On hearing the application, the court may
(a)give permission (or leave) to continue the claim on such terms as it thinks fit,
(b)refuse permission (or leave) and dismiss the claim, or
(c)adjourn the proceedings on the application and give such directions as it thinks fit.
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262 Application for permission to continue claim as a derivative claim


(1)This section applies where
(a)a company has brought a claim, and
(b)the cause of action on which the claim is based could be pursued as a derivative claim under
this Chapter.
(2)A member of the company may apply to the court for permission (in Northern Ireland, leave) to
continue the claim as a derivative claim on the ground that
(a)the manner in which the company commenced or continued the claim amounts to an abuse of
the process of the court,
(b)the company has failed to prosecute the claim diligently, and
(c)it is appropriate for the member to continue the claim as a derivative claim.
(3)If it appears to the court that the application and the evidence filed by the applicant in support of
it do not disclose a prima facie case for giving permission (or leave), the court
(a)must dismiss the application, and
(b)may make any consequential order it considers appropriate.
(4)If the application is not dismissed under subsection (3), the court
(a)may give directions as to the evidence to be provided by the company, and
(b)may adjourn the proceedings to enable the evidence to be obtained.
(5)On hearing the application, the court may
(a)give permission (or leave) to continue the claim as a derivative claim on such terms as it thinks
fit,
(b)refuse permission (or leave) and dismiss the application, or
(c)adjourn the proceedings on the application and give such directions as it thinks fit.
263 Whether permission to be given
(1)The following provisions have effect where a member of a company applies for permission (in
Northern Ireland, leave) under section 261 or 262.
(2)Permission (or leave) must be refused if the court is satisfied
(a)that a person acting in accordance with section 172 (duty to promote the success of the
company) would not seek to continue the claim, or
(b)where the cause of action arises from an act or omission that is yet to occur, that the act or
omission has been authorised by the company, or
(c)where the cause of action arises from an act or omission that has already occurred, that the act
or omission
(i)was authorised by the company before it occurred, or
(ii)has been ratified by the company since it occurred.
(3)In considering whether to give permission (or leave) the court must take into account, in
particular
(a)whether the member is acting in good faith in seeking to continue the claim;
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(b)the importance that a person acting in accordance with section 172 (duty to promote the
success of the company) would attach to continuing it;
(c)where the cause of action results from an act or omission that is yet to occur, whether the act or
omission could be, and in the circumstances would be likely to be
(i)authorised by the company before it occurs, or
(ii)ratified by the company after it occurs;
(d)where the cause of action arises from an act or omission that has already occurred, whether the
act or omission could be, and in the circumstances would be likely to be, ratified by the company;
(e)whether the company has decided not to pursue the claim;
(f)whether the act or omission in respect of which the claim is brought gives rise to a cause of
action that the member could pursue in his own right rather than on behalf of the company.
(4)In considering whether to give permission (or leave) the court shall have particular regard to
any evidence before it as to the views of members of the company who have no personal interest,
direct or indirect, in the matter.
(5)The Secretary of State may by regulations
(a)amend subsection (2) so as to alter or add to the circumstances in which permission (or leave)
is to be refused;
(b)amend subsection (3) so as to alter or add to the matters that the court is required to take into
account in considering whether to give permission (or leave).
(6)Before making any such regulations the Secretary of State shall consult such persons as he
considers appropriate.
(7)Regulations under this section are subject to affirmative resolution procedure.
264 Application for permission to continue derivative claim brought by another member
(1)This section applies where a member of a company (the claimant)
(a)has brought a derivative claim,
(b)has continued as a derivative claim a claim brought by the company, or
(c)has continued a derivative claim under this section.
(2)Another member of the company (the applicant) may apply to the court for permission (in
Northern Ireland, leave) to continue the claim on the ground that
(a)the manner in which the proceedings have been commenced or continued by the claimant
amounts to an abuse of the process of the court,
(b)the claimant has failed to prosecute the claim diligently, and
(c)it is appropriate for the applicant to continue the claim as a derivative claim.
(3)If it appears to the court that the application and the evidence filed by the applicant in support of
it do not disclose a prima facie case for giving permission (or leave), the court
(a)must dismiss the application, and
(b)may make any consequential order it considers appropriate.
(4)If the application is not dismissed under subsection (3), the court
(a)may give directions as to the evidence to be provided by the company, and
(b)may adjourn the proceedings to enable the evidence to be obtained.
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(5)On hearing the application, the court may


(a)give permission (or leave) to continue the claim on such terms as it thinks fit,
(b)refuse permission (or leave) and dismiss the application, or
(c)adjourn the proceedings on the application and give such directions as it thinks fit.
Weddenburns theory is that the ratifiability principles applies both where the company could be a
claimant and where it could be a defendant: a member cannot complain to a court about an act that is
ratifiable by a simple majority of members, but there is a class of acts which cannot be raitified by a simple
majority, and a member can complain to a court about any act of that class. So he says: there is, after all,
one rule in Foss v Harbottle; and the limits of that rule lie along the boundaries of majority rule (548).

Kleanthous v Paphitis & Ors [2011] EWHC: [Unsuccessful Action under CA 2006]
In short, the facts of the case are as follows. Mr Paphitis was a director and shareholder of Ryman Group
Limited (Ryman Group). In early 1998 Ryman Group considered the acquisition of lingerie chain, La
Senza, but for various reasons it did not proceed with the purchase. Mr Paphitis and a number of his codirectors saw potential in the lingerie business and, with the approval of his fellow Ryman Group directors,
acquired shares in La Senza themselves.
Ryman Group lent significant sums of money to finance the acquisition of La Senza. This was successful
resulting in La Senza declaring dividends in favour of Mr Paphitis of 4 million in 2006. In the same year
90% of the shares in La Senza were sold to a private equity group for an estimated 100 million. Following
the sale, a Ryman Group shareholder claimed that Mr Paphitis had committed fraudulent breaches of his
fiduciary duties owed as a director by diverting a substantial business opportunity from Ryman Group to
develop for his own benefit, using assets of the Ryman Group to do so.
The High Court refused to allow the shareholder to bring a derivative claim as the transaction had been
approved by the directors of Ryman Group and there was nothing to show that the decision to approve the
transaction was done on anything but proper grounds. In this case it was key that Ryman Group had kept
detailed records of the decisions it was making. This action was discussed at a number of Ryman Group
board meetings, which approved this proposal. These showed the reasons the directors gave for not wanting
to acquire La Senza but being prepared to support Mr Paphitis` acquisition of it. The minutes also showed
that Mr Paphitis had the interests of Ryman Group in mind, had notified Ryman Group of his plans and had
essentially obtained its blessing for the acquisition. This proved invaluable to defend the action by the
shareholder.
*One thing, in the common law that was clear, that the company COULD NOT RATIFY a fraud on
the minority. It could ratify excess of power (of the director) but not if that exceeding constituted a
fraud on the minority. Section 239 CA 2006 - ratification of acts giving rise to liability conduct of
director including negligence and breach of duty: contains same words as s.260. At common law, if
the wrongful conduct constituted a fraud on the minority it could not be ratified. Section 239
ratification must be made by resolution of members of the company. Where it is proposed by written
resolution, directors cannot vote on that resolution (even if they are a member). If proposed at a
meeting, it will be passed if there is a majority vote, disregarding the directors votes. That said, they
can still attend the quorum and be counted as having attended. This section does not affect the Cane
v Jones principle: unanimous consent of company is binding. Still unclear looks to be saying that
any wrongdoing can be ratified but this cannot be so. For example, ultra vires (and criminal) acts
cannot be ratified under section 239.
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Lecture 10: Unfair Prejudice and Other Minority Remedies


*Need to know successful actions made under s.994 reiterated twice in class!!
1) Unfair Prejudice Action
Section 994 CA 2006: section endows any member in a company against prejudicial actions by the company
against that member or members.
Protection of Members Against Unfair Prejudice
994 Petition by company member
(1)A member of a company may apply to the court by petition for an order under this Part on the
ground
(a)that the company's affairs are being or have been conducted in a manner that is unfairly
prejudicial to the interests of members generally or of some part of its members (including at least
himself), or
(b)that an actual or proposed act or omission of the company (including an act or omission on its
behalf) is or would be so prejudicial.
[F1(1A)For the purposes of subsection (1)(a), a removal of the company's auditor from office
(a)on grounds of divergence of opinions on accounting treatments or audit procedures, or
(b)on any other improper grounds,
shall be treated as being unfairly prejudicial to the interests of some part of the company's
members.]
(2)The provisions of this Part apply to a person who is not a member of a company but to whom
shares in the company have been transferred or transmitted by operation of law as they apply to a
member of a company.

*This has become the pre-eminent form of claim against the Company as the derivative
action is for the company, not the member bringing the claim, and the procedure is too
cumbersome. In this claim, the remedy goes to the shareholder member.

If the Courts is satisfied that claim is well-founded, the Court may make any such order as it deems fit to
satisfy the claimant:
996 Powers of the court under this Part
(1)If the court is satisfied that a petition under this Part is well founded, it may make such order as
it thinks fit for giving relief in respect of the matters complained of.
(2)Without prejudice to the generality of subsection (1), the court's order may
(a)regulate the conduct of the company's affairs in the future;
(b)require the company
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(i)to refrain from doing or continuing an act complained of, or


(ii)to do an act that the petitioner has complained it has omitted to do;
(c)authorise civil proceedings to be brought in the name and on behalf of the company by such
person or persons and on such terms as the court may direct;
(d)require the company not to make any, or any specified, alterations in its articles without the
leave of the court;
(e)provide for the purchase of the shares of any members of the company by other members or by
the company itself and, in the case of a purchase by the company itself, the reduction of the
company's capital accordingly.

Examples of unfair prejudice: exclusion from management; mismanagement; breach of a directors


fiduciary duties; paying directors remuneration at the expense of shareholder dividends; where a parent
company cuts of supply to a subsidiary.
*Must show that conduct complained of is both unfair & prejudicial. These words in general are flexible,
prejudice must cause harm (to relevant interest) and/or unfairly so. Conduct can be one or the other, but
must be both! Harm, as laid down in Saul, means harm in a commercial sense and not a personal one.

Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, [1994] BCC 475: Action for unfair prejudice under
s.459 Companies Act 1985 (now s.994 Companies Act 2006). It was decided in the Court of Appeal and
deals with the concept of members of a business having their "legitimate expectations" disappointed.
Vinelott J at first instance had denied the petition, and the Hoffmann LJ, Neill LJ and Waite LJ in the Court
of Appeal upheld the judgment.
Facts: Saul D Harrison & Sons plc ran a business that was established in 1891 by the petitioner's great
grandfather. It made industrial cleaning and wiping cloths, made from waste textiles. It operated from West
Ham and after 1989 from Hackney. The petitioner had "class C" shares, which gave her rights to dividends
and capital distribution in a liquidation. But she had no entitlement to vote, and the company had been
running at a loss. She alleged that the directors (who were her cousins) had unfairly kept running the
business just so they could pay themselves cushy salaries. Instead, she said, they should have closed down
the business and distributed the assets to the shareholders.
Held: On the facts, there was no unfairly prejudicial conduct. The board of directors were bound to manage
the company in accordance with their fiduciary obligations, the articles of association and the Companies
Act. The unfair prejudice action does protect certain legitimate expectations, akin to those which may affect
one's conscience in equity, from being disappointed. But here there was no legitimate expectation for more
than the duties discharged, and so no obligations had been breached.

***ONeill and another v Phillips [1992]: Mr Phillips owned a company called Pectel Ltd. It specialised in
stripping asbestos from buildings. Mr O'Neill started to work for the company in 1983. In 1985, Phillips was
so impressed with O'Neill's work that he made him a director and gave him 25% of the shares. They had an
informal chat in May 1985, and Mr Phillips said that one day, he hoped Mr O'Neill could take over the
whole management, and would then be allowed to draw 50% of the company's profits. This happened,
Phillips retired and O'Neill took over management. There were further talks about increasing O'Neill's actual
shareholding to 50%, but this did not happen. After five years the construction industry went into decline,
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and so did the company. Phillips came back in and took business control. He demoted O'Neill to be a branch
manager of the German operations and withdrew O'Neill's share of the profits. O'Neill was miffed. He
started up his own competing company in Germany in 1990 and then he filed a petition for unfairly
prejudicial conduct against Phillips, firstly, for the termination of equal profit-sharing and, secondly, for
repudiating the alleged agreement for the allotment of more shares.
The judge rejected the petition on both grounds. There had been no firm agreement for an increase in
shareholding, and it was not unfair for Phillips to keep a majority of company shares. Also, it was held that
O'Neill suffered nothing in his capacity as a member of the company. His shares were unaffected. It was
merely a dispute about his status as an employee. He had been well rewarded. In the Court of Appeal,
Nourse LJ (with whom Potter and Mummery LLJ agreed) O'Neill won his appeal. Nourse LJ said that in fact
Phillips had created a legitimate expectation for the shares in future. Moreover a global view of the
relationship should be taken, and so O'Neill did suffer as a member. On further appeal to the House of
Lords, the Court of Appeal was overturned, and Phillips won.
Held: The most important feature of the case was that Mr Phillips had never actually agreed to transfer Mr
O'Neill the shares of the company, so it could not be unfair that he had decided not to, because he had never
decided to actually do so. Lord Hoffmann also recanted on his previous use of the terminology of
"legitimate expectations" [which he used in Saul]. "I meant that it could exist only when equitable principles...
would make it unfair for a party to exercise rights under the articles." As to capacity, although irrelevant
after deciding that there had been no agreement, disagreeing with the first instance judge, Lord Hoffmann
pointed out that O'Neill may have had a claim in his capacity of shareholder (rather than just an employee)
because he had invested his money and his time into the company.
Notes: HoL held that unfairness had to be established, and it had not been in this situation. There was no
evidence of a breach of an agreed term. The majority shareholder never agreed that he would be entitled to
50% shareholding, and it had not been agreed that he would remain a 50% shareholder for an indefinite
period but only while acting as a managing director. Hence, when he was removed from that position, the
majority shareholder was entitled to revoke his shares. Moreover, his entitlement to shares was only assured
under an employment contract, and not as a member of the company and so the relevant statutory provision
was not applicable. The members of a company were entitled only to such protection as offered under
the Constitution, or between some fundamental understanding between the members which formed
the basis of their association in other words, no longer general notions of unfairness; there must be
an actual breach of the constitution or agreement. What had transpired was simply an oral discussion
about the sharing of profits and possibility of increase in shareholder profits. Lord Hoffman also makes
clear that there is no concept of no fault divorce, it does not exist! He went on to say is that solicitors in
drafting articles or shareholders agreements should include exist provisions in addition to pre-emption
clauses. Also, you must sensible have valuation provisions; otherwise courts become flooded with claims as
to correct valuation of shares now that company is being forced to buy-out shares. This suggestion has been
followed through as the number of unfair prejudice cases have fallen dramatically.

Nicholas v Soundcraft Electronics Ltd [1993]

2) Just and Equitable Winding Up Remedy:


IA 1986 s.122(1) & s.125(2)
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**Ebramhimi v Westbourne Gallaries Ltd [1972]: revolved around the fall out between two business
partners based in London. They had decided to incorporate their rug business due to its continued success.
Owning 50% shares each Mr Ebrahimi and Mr Nazar were the sole shareholders in the company and took a
director's salary rather than dividends for tax reasons. The profits from the business went only to the
directors and there were restrictions in place to prevent Mr Enrahimi from selling his shares. In due course
Mr. Nazar's son joined the business, appointed to the board of directors and allocated 10% of the company
shares.
After a falling out between the directors Mr Nazr and his son voted to remove Mr Ebrahimi as a director and
excluded him from the management of the business. Mr Ebrahimi decided to petition the court for relief.
The judgement: The House of Lords held that parties who are bound by contractual agreements in a
company (i.e. shareholders agreements and/or the articles of association) can also rely on a pre-existing
situation for equitable purposes. The Lords believed that because the company was so similar in its
operation as it was when it was a partnership, they created what is now known as a quasi-partnership.
Outcomes of the judgement: Based on the close personal relationship between the parties involved, the
Lords decided it would be inequitable to allow Mr Nazar and his son to use their rights to force Mr Ebrahimi
out of the company. It was deemed just and equitable to wind the company up and give Mr. Ebrahimi his
money.
The case identified the factors which the court should consider when determining if there is a quasipartnership. These include:
An association formed or continued on the basis of a personal relationship involving mutual confidence
An agreement that all or some (there may be sleeping members) of the shareholders will be involved in
the conduct of the business
Restrictions on the transfer of a member's interest (i.e. on disposal of shares)
Companies Act 2006: According to this act when the court is satisfied there has been unfair prejudice
towards a shareholder, the court may make such order as it thinks fit for giving relief in respect of the
matters complained of.

Yenidje Tabacco Co Ltd [1916]: falling out between brothers who were directors or a successful tobacco
company.
*Winding up is an important remedy (of last resort) for small and quasi-partnership companies.

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09.Feb.2015
TUTORIAL 4 Derivative Claims and Other Minority Protection Remedies
The rule in Foss v Harbottle is used to describe the policy of the courts of not hearing a claim concerning
the affairs of a company brought by a member or members of the company. (546) When a wrong is
suffered by a company the proper claimant to pursue the claim is the company and not the member
shareholders who may or may not have also suffered a damage. In a derivative claim the member
shareholder pursues a claim adjoining the company as co-claimant, and the company recovers and
compensation, whereas in a section 994 petition or in a personal action, the member shareholder recovers
compensation. This is one reason why derivative actions are so rare. Additionally, the costs are borne by the
member shareholder advancing the claim, and those in a position of power in the company are unlikely to
take legal actions against the wrongdoers as they are the ones who have typically perpetrated the act and are
unlikely to want to sue themselves.
Jenkings J referred to the rule in Foss v Harbottle as applying only where a wrong had been done to the
company as a separate person and said that is had two elements: 1) the proper claimant principle and the
proper claimant aspect of the internal management principles, and (2) a principle that if a wrong is done to a
company is ratifiable by a simple majority of members then a member cannot sue in respect of it because
when it has been ratified it no longer is a wrong and if member decide against ratification there is no valid
reason why the company itself should not sue (Ratification Principle). (546-7)
Proper Claimant Principle: If a wrong is done to a company (as a person separate from its
members), only the company can sue for redress. Section 260 permits derivative claims as an
exception to this principle. Whether or not a company sues to enforce its legal rights must be decided
by the persons who, under the companys constitution, have authority to institute legal proceedings
in the companys name. This will normally be the directors.
Internal Management Principle: The court will not interfere with the internal management of
companies acting within their powers. The internal management principle has a proper claimant
aspect, which is that the court will not determine a questions concerning what it regards as the
internal management of a company except in proceedings brought by the company itself.
Irregularity Principle: A member cannot sue to rectify a mere informality or irregularity if the act
when done regularly would be within the powers of the company and if the intention of the majority
of members is clear. In Browne v La Trinidad, at first instance it was found that the directors
meeting had been improperly convened due to inadequate notice to one of the directors, Mr Browne,
who was removed from office. The CoA doubted that the notice provided was inadequate but were
unwilling to overturn the finding of the judge below on this ground. The CoA refused to rule that the
proceedings have been invalidated by the irregularity, seeing how if the meeting was held again, the
resolution would pass.
Four exceptions to the rule in Foss v Harbottle, but the only actual/true exception is Fraud on the Minority
which allows member shareholders to bring a derivative action under CA 2006 s.260-264. A derivative
action is when a member shareholder commences litigation in the name of the company, and accordingly, is
a right derived from the company. The other three exceptions contain personal actions, eg. (s.33); s.39
(ultra vires/illegality).

79

The ultra vires or decision not taken by special majority are permitted as exceptions to the proper
claimant aspect of the internal management principle. This is an example of the court permitting a
claim in respect of a members interest in having the affairs of the company conducted
constitutionally and it seems that such a claim should not be classified as a derivative claim. (563)

A derivative claim is defined at s260(1) as a proceeding by a member of a company: a) in respect of a cause


of action vested in the company; and (b) seeking relief on behalf of the company.
A member of a company may bring a statutory derivative claim under s.260 only in respect of a cause of
action specified under s260. The cause of action must be vested in the company. It must arise from a
proposed act or omission which involves negligence, default, breach of duty or breach of trust by a director,
former director or shadow director of the company. The cause of action may be against the direct of another
person or both. It may have arisen before the claimant became a member of the company: this rule arises
from the principle that it is the companys claim which is being pursued, not the members. (553)
*Anything that is a fraud on the minority cannot be ratified by shareholders in general meeting.
Three reasons for the rule in Foss v Harbottle:
1) refusal to be involved in disputes over business policy;
2) disputes among members should be settled by the members themselves in general meeting where
the majority should prevail;
3) a fear of multiplicity of claims.
2. (a) Shareholder bringing derivative action (typically) bears the costs. Denning J. in Wallersteiner
suggested the company should be liable for costs, and allows for a pre-emptive costs order now
(Wallersteiner orders) (557). And, any monies recovered will go to the company itself, rather than the
shareholder member bringing the claim.
(b) Derivative (compensation paid to company) v Personal (s.33) (s.994) (compensation paid to individual
private litigant). A person is not debarred from obtaining damages or other compensation from a company
by reason only of holding or having held shares in a company. In Prudential Assurance Co Ltd v Newman
Industries (No 2) [1982] the CoA gave the following example:
if directors convene a meeting on the basis of fraudulent circular, a shareholder will have a right of
action to recover any loss which he has been personally caused in consequence of the fraudulent circular;
this might include the expense of attending the meeting.
If a claim brought by a member of the company is not in respect of the companys rights (so the member is
not pursuing a derivative claim), it must be enforcing the legal rights of the member. Accordingly, the cases
in which members of companies are allowed to bring proceedings in respect of their companies internal
affairs are often regarded as being concerned with the personal right of the members. (see page 561-2).
We suggest that the common factor in the personal rights cases is that a member is alleging that a decision
is unlawful in the sense that it fails to comply with the general law or with the constitution of the company
or with the Companies Acts. We suggest that a member of a company has standing to challenge the
lawfulness of any decision of the member or the directors or the chairman of a meeting of members, subject
only to the irregularity principle.
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3. CA 2006 260-264: bringing a derivative claim. Keep in mind that s.260 gives the grounds for a derivative
claims (where before it was fraud on the minority, now it is any alleged fraud, breach of duty, breach of
trust, default.)

4. Breach of Fiduciary Duty Common law v Statutory Claim


Under the common law negligence was not a cause for a derivative action, but in Statute, it is:
Pavlides v Jensen: negligence did not ground derivative claim (negligence by director which did not
benefit director personally (555)) BUT in Daniels v Daniels: equitable considerations came into play
for sale by Director to family member.

5. Section 944(1) a petition for relief of unfairly prejudicial conduct of a companys affairs may be
presented by a member of the company in respect of conduct which unfairly prejudices the interests of (a):
the members generally, or (b) a section of the membership which includes at least the petitioner. (568) The
most common complaint is that a controlling majority of members have unfairly prejudiced the minority,
and the most common remedy sought is an order that the majority must purchase the minoritys shares at a
price which reflects their proportion of the companys value. **ONiell v Phillips [1999]: significance is
that (1) it led to the reduction in the unfair prejudicial claim: action must be both unfair and prejudicial; (2)
only judgement by the highest court related to unfair prejudice; (3) Lord Hoffman is the only judgement,
legitimate expectation is limited. (Whereas in the past oral agreements may have led to legitimate
expectations. Now, the members of a company are entitled only to such protection as offered under the
Constitution, or between some fundamental understanding between the members which formed the basis of
their association in other words, no longer general notions of unfairness; there must be an actual breach
of the constitution or agreement). (4) Hoffman introduces concept of No-Fault Divorce exit clause for
disgruntled shareholders, and mechanism for ensuring proper and fair value is paid for shares.

6. Insolvency Act 1986 s.122(1)(g) A company may be wound up if the court is of the opinion that it is
just and equitable that the company should be wound up. (584) Unless the article of association of a
company provides otherwise, a member cannot make it wind up voluntarily other than by obtaining a three
quarters majority at a general meeting. (584) Examples of just and equitable winding up orders:
a) company was promoted fraudulently
b) cases where there is a deadlock;
c) serious breach of mutual understandings; etc
In order to succeed with a petition for the relief of unfairly prejudicial conduct of a companys affairs it is
not necessary to show that the circumstances justify winding up the company. (569).
7. Insolvency Act winding up is a last resort remedy usually courts will refer claimants to s.994: The
winding up under s.994 is a drastic remedy and often what is sought is being bought out for fair value.
Ebramhimi v Westbourne Gallaries Ltd [1972].

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8. Confidential Investigation: informal unpublicised inquiry usually conducted by CIB officials


(Companies Investigations Branch). Power is derived under CA 1985 s447.
Public Investigations: investigation by inspectors and is a much more serious affair. Appointments are
public and the result of the investigation made public in a published report. Power is derived from CA 1985
s431
9. Shareholder Protection: Section 33 shareholder personal rights; Common law alteration to constitution
must be bona fide in the best interest of the company; derivative claims and unfair prejudice claims; etc.

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26 January 2015
LECTURE 11: DIRECTORS DUTIES
Review: Must know difference between executive and non-executive directors, as well as shadow directors
and the repercussions/effects of being labelled as one: Section 161 CA and the case of Morris v Kanssen
[1946].
Power (of management and control) is allocated by the shareholders/members to the Directors under the
Constitution. Harmar 1959: Romer J: members of shareholders are entitled to expect that the board will
perform its functions as a board, and entitled to benefit from the collective experience of those directors
Public Listed Companies must meet regularly and monitor executive management. Gilfillen v ASIC (2012)
provides guidance on how board meetings should be conducted. If what the judge sets out is followed by
directors, than they will have protection against breach of duty. Directors at board meetings must actively
vote for or against or abstention on propositions in front of the members, who should have been
provided all necessary information in advance, and these votes must be recorded in the minutes.

Directors seven general duties:


1) Duty to act within powers;
2) Duty to promote the success of the company;
3) Duty to exercise independent judgement;
4) Duty to exercise reasonable care, skill and diligence;
5) Duty to avoid conflicts of interest
6) Duty not to accept benefits from third parties;
7) Duty to declare interest in proposed transaction or arrangement.
Bristol and West Building Society v Mothew [1998]: The word Fiduciary refers to trust and confidence.
A fiduciary is someone who acts for, or on behalf of, another person, in a relationship of trust and
confidence, which equity protects by imposing on the fiduciary a duty of loyalty.

Do Directors Owe Duties to the Following: Shareholders, Employees, and Creditors?


Members/Shareholder:
**Percival v Wright [1902]: (General Rule: Directors only owe duties of loyalty to the company, and not
to individual shareholders. This is now codified in the United Kingdom's Companies Act of 2006 section
170.)
Facts: Mr Percival owned shares per value of 10 in a company whose shares neither had a market price nor
were they quoted on the stock exchange and were only transferable with the director's approval. Mr Percival
through his solicitors inquired from the company if anybody was willing to purchase their shares 12.55 a
priced based on independent valuation. Mr Wright who was the chairman of a company, with two other
directors, agreed to buy shares from Mr Percival at 12.10 each. Mr Percival then found out the directors
had been negotiating with another person for the sale of the whole company at far more than 12.10 a share.
The directors had not told Percival. Percival claimed breach of fiduciary duty.
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Percival v Wright is still considered to be good law, and was followed by the House of Lords in Johnson v
Gore Wood & Co [2000] UKHL 65. However, it has been distinguished in at least two subsequent cases.
In Coleman v Myers [1977] 2 NZLR 225 and Peskin v Anderson [2001] BCLC 372 the court described this
as being the general rule, but one which may be subject to exceptions where the circumstances are such that
a director may owe a greater duty to an individual shareholder, such as when that shareholder is known to be
relying upon the director for guidance, or where the shareholder is a vulnerable person. In that scenario the
director is acting as an agent!

Allen v Hyatt (1914): (Directors are not agent of members, but it is possible in particular circumstances that
the director of a company may be acting as agent of members of the company). In the instant case the
directors made an undisclosed profit from selling the shares of the members of the company and were made
liable to them.

Coleman v Myers [1977]: (Exception to general rule) small family company; one brother with main
control; similar to Allen v Hyatt, sisters wanted to sell shares under constitution, which he could buy, but he
did not disclose information which would substantially affect the price of the shares as they were only
shareholders he believed he wasnt obligated to tell them anything. Judge held that in this structure a
fiduciary relationship arises and it was inequitable for him not to disclose information.

Gething v Kilner [1972]: (Takeover of a Target Company) duty to keep shareholders advised about
whether or not takeover should be accepted!
Facts: minority shareholders in a company facing a takeover bid (the offeree) objected on the basis that the
offer document and the board's recommendation of acceptance of the bid were misleading. The offer
document did not disclose that the offeree company's financial advisers recommended rejection of the offer.
The board did not provide any rational explanation for its refusal to accept the advice. The minority
shareholders sought an interlocutory injunction to restrain the offeror company from declaring the offer
unconditional, thereby relieving any assenting shareholder of the offeree from any assent that had already
been given. Brightman J refused to grant the relief. He considered that the evidence demonstrated that the
offeree's board honestly believed the offer to be advantageous, and that it was a reasonable view to adopt.
He referred to 'other remedies' available to the claimants should a wrong have been committed. However, he
continued by saying:
'I accept that the directors of an offeree company have a duty towards their own shareholders, which
in my view clearly includes a duty to be honest and a duty not to mislead. I also accept that a
shareholder in an offeree company may be prejudiced if his co-shareholders are misled into
accepting the offer. I express this view because as soon as the appropriate percentage of shareholders
have been misled and have assented, the minority become subject under section 209 [of the
Companies Act 1948] to statutory powers of compulsory purchase. It therefore seems to me that a
minority could complain if they were being wrongfully subjected to that power of compulsory
purchase as a result of a breach of duty on the part of the board of the offeree company.'

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Employees: CA s 172(1)(b)

Parke v The Daily News [1962]: The company which had sold its business, through its Board of Directors,
had resolved to pay 1 million to its former workers and the widows of such former workers. A shareholder
sought to prevent this happening on the ground that such a payment went beyond the articles of association
of the company, and such payment to ex-employees was not reasonably incidental to the carrying on of the
business of the company.
Held: The application succeeded. The making of an ex gratia payment as the company intended to do, and
in the circumstances where that company no longer operated, was not reasonably incidental to the conduct
of its business and was therefore ultra vires the companys memorandum and articles. In such circumstances
a shareholder has the right to bring the action which the plaintiff in Parkes case did.
172

Duty to promote the success of the company

(1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of
the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the company.
(2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its
members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its
members were to achieving those purposes.
(3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain
circumstances, to consider or act in the interests of creditors of the company.

Creditors:
(Once directors know the company is in financial distress they owe a duty of care to creditors: Insolvency
Act 1986)
Multinational Gas Case [1983]:
Liquidator of the Property of West Mercia Safetywear Ltd v Dodd [1988]: general duty owed by directors to
creditors once they realize the company is in financial difficulty.

Directors Role & Avoidance of Breach of Duty:


The board of any company listed on the Stock Exchange should meet regularly, retain full and effective
control over the company and monitor the executive management. (There is no reason why, as a matter of
best practice, this principle should not apply to private companies). See also Gilfillin v ASIC [2013]
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170

Scope and nature of general duties

(1)The general duties specified in sections 171 to 177 are owed by a director of a company to the company.
(2)A person who ceases to be a director continues to be subject
(a)to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or
opportunity of which he became aware at a time when he was a director, and
(b)to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him
before he ceased to be a director.
To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.
(3)The general duties are based on certain common law rules and equitable principles as they apply in relation to directors
and have effect in place of those rules and principles as regards the duties owed to a company by a director.
(4)The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and
regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general
duties.
(5)The general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or
equitable principles so apply.

*Silent as to whether this list is exhaustive or non-exhaustive! Seems to Professor Ryan there are other common
law duties which exist outside of this section, eg, directors duty to creditors, and not to do things unfairly
prejudicial to members of the company. Pre-2006 Statutory duties did impose a lot on directors, backed up by
criminal sanctions and fines and imprisonment. Post-2006 does not alter those duties, and has incorporated most
everything. What is new is the introduction is the codified duties of directors.

Directors General Duties: s.170-177


Substantive Duties: Duty of Care and Skill; Fiduciary Duties;
Duty of Care and Skill
174

Duty to exercise reasonable care, skill and diligence

(1)A director of a company must exercise reasonable care, skill and diligence.
(2)This means the care, skill and diligence that would be exercised by a reasonably diligent person with
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions
carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has.

Marquis of Butes Case: a baby could be a directorso expectations in courts was quite low
Re City Equitably Fire Insurance: (Superseded, to some extent) can director delegate his duties, or not?
Romer J holds that directors duties were intermittent, and not expected to attend every board meeting
standard expected was that of reasonable person, and could delegate if reasonably thought them able to
handle that responsibility.
Howevermove to CA 2006 combined objective-subjective approach!
Dorchester Finance Co v Stebbings:
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Bishopsgate Investment Management v Maxwell:


Impact of s.214 IA 1986
Impact of Company Director Disqualification Act 1986

Fiduciary Duties
Duty to act bona fide in the interests of the company CA 2006 s.171. It includes the obligation to disclose
misconduct (including your own): on this point see Item Software v Fassihi [2004] EWCA
171 Duty to act within powers
A director of a company must
(a)act in accordance with the company's constitution, and
(b)only exercise powers for the purposes for which they are conferred.

Hence, directors should not favour some members over others; or act out of self-interest.
Proper Purpose Doctrine: Directors must exercise their powers for a proper purpose. While in many
instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or
divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty
to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a
purpose that is not regarded by the law as proper.
The seminal authority in relation to what amounts to a proper purpose is the Privy Council decision
of **Howard Smith Ltd v e Ltd [1974] AC 821**. The case concerned the power of the directors to issue
new shares. It was alleged that the directors had issued a large number of new shares purely to deprive a
particular shareholder of his voting majority. An argument that the power to issue shares could only be
properly exercised to raise new capital was rejected as too narrow, and it was held that it would be a proper
exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the
company, or as part of an agreement to exploit mineral rights owned by the company. If so, the mere fact
that an incidental result (even if it was a desired consequence) was that a shareholder lost his majority, or a
takeover bid was defeated, this would not itself make the share issue improper. But if the sole purpose was
to destroy a voting majority, or block a takeover bid, that would be an improper purpose.
Not all jurisdictions recognised the "proper purpose" duty as separate from the "good faith" duty however.

Tech Corp v Millar (1972): unlike Ampol, they had found that the Directors had acted in good faith and
with proper purpose. Demonstrates that if directors can demonstrate they have the companys best interest at
heart, then their decision making is proper.
This is a decision on a corporate director's fiduciary duty in the context of a takeover bid. Justice Berger of
the British Columbia Supreme Court held that a director may resist a hostile take-over so long as they are
acting in good faith, and they have reasonable grounds to believe that the take-over will cause substantial
harm to the interests of the shareholders collective. The case was viewed as a shift away from the standard
87

set in the English case of Hogg v. Cramphorn Ltd. (1963). Recent scholarship has made the following
observation:
The decision in Teck v Millar, a seminal case on directors' duties, is consistent with the duty to protect
shareholder interests from harm. Teck Corporation, a senior mining company, had acquired a majority
of voting shares in Afton Mines Ltd., a junior mining company that owned an interest in a valuable
copper deposit. In doing so, Teck sought to ensure procurement of a contract with Afton to develop the
copper property. Before Teck could exercise its majority voting control to replace the board of directors
with its own nominees, the Afton board signed a contract with another company that effectively ended
Tecks control position in Afton. In evaluating the evidence, Justice Berger was satisfied that Teck, the
majority shareholder, "would cause substantial damage to the interests of Afton and its shareholders." In
determining that the directors had not breached their fiduciary duty to the corporation, shareholder
interests were distinguished from control interests. Drawing this distinction is key, "because once Teck's
interest in acquiring control is put to one side, its interest, like that of the other shareholders, was in
seeing Afton make the best deal available." Accordingly, the directors had made a decision that, despite
affecting the control interests of the majority shareholder, had protected the shareholder interests of all
shareholders (including Teck's) from harm. This concern for the collective interests of shareholders,
rather than strict adherence to majority rule, is consistent with the tripartite fiduciary duty.

Fiduciary Duties: Duty to Promote the Success of the Company


Detailed under s.172 CA 2006, enclosed above. Must take into account not just current, but future
shareholders best interests remember perpetual succession! (long term v short term gains). If directors act
honestly in what they genuinely believe, and have considered interests considered in s.172, then their
decision will not be queried or overturned by the courts, not matter how badly those decisions end up being
(justiciability).

Fiduciary Duties: Fettering Discretion Nominee Directors


Fulham Football Club v Cabra Estates CA [1992]: directors should not place themselves in position where
they cannot exercise independent discretion. The directors in the instant case signed an agreement to develop
the football ground and gave an undertaking that Fulham Football Club Ltd would not oppose the
development at a later date or support a compulsory purchase order. It was held that the directors had not
improperly restricted the future exercise of their discretion.

Fiduciary Duties: Duty not to act where conflict of duty and self-interest (lecture leads seamlessly into
secret profits!)
Section 175 (detailed above) duty to avoid conflicts of interest. This section is based on two equitable
principles: 1) the no-conflict and the no-profit rules. One of the common most instances of the application of
these rules is excluded by s.175(3) and the other provisions of the Act such as ss.177 and 182 and ss.190214 (discussed next lecture).
Keech v Sandford:
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Bray v Ford: inflexible rule person in fiduciary position is not entitled to make a profit. Not entitled to put
himself in a position where duty and interests conflict.
Boardman v Phipps:

Regal Hasting v Gulliver: HoL director must take account of any profit obtained through a transaction of
which the company is a party, or is not a party, but is obtained in the role of the fiduciary relationship (secret
profit). Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company
whose board they form (468).
Regal owned a cinema in Hastings. They took out leases on two more, through a new subsidiary, to make
the whole lot an attractive sale package. However, the landlord first wanted them to give personal
guarantees. They did not want to do that. Instead the landlord said they could up share capital to 5,000.
Regal itself put in 2,000, but could not afford more (though it could have got a loan). Four directors each
put in 500, the Chairman, Mr Gulliver, got outside subscribers to put in 500 and the board asked the
company solicitor, Mr Garten, to put in the last 500. They sold the business and made a profit of nearly 3
per share. But then the buyers brought an action against the directors, saying that this profit was in breach of
their fiduciary duty to the company. They had not gained fully informed consent from the shareholders.
The House of Lords, reversing the High Court and the Court of Appeal, held that the defendants had made
their profits by reason of the fact that they were directors of Regal and in the course of the execution of that
office. They therefore had to account for their profits to the company.

Industrial Developments v Cooley: Mr Cooley was an architect employed as managing director of


Industrial Development Consultants Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative
project pending, to design a depot in Letchworth. Mr. Cooley was told that the gas board did not want to
contract with a firm, but directly with him. Mr. Cooley then told the board of IDC Group that he was unwell
and requested he be allowed to resign from his job on early notice. They acquiesced and accepted his
resignation. He then undertook the Letchworth design work for the gas board on his own account. Industrial
Development Consultants found out and sued him for breach of his duty of loyalty.
Roskill J held that even though there was no chance of IDC getting the contract, if they had been told they
would not have released him. So he was held accountable for the benefits he received. He rejected the
argument that because he made it clear in his discussions with the Gas Board that he was speaking in a
private capacity, Mr. Cooley was under no fiduciary duty. He had one capacity and one capacity only in
which he was carrying on business at that time. That capacity was as managing director of the plaintiffs. All
information which came to him should have been passed on.
*Canadian Aero Services v OMalley; Peso Silver Mines v Cropper; Queensland v Hudson: Canadian and
an Australian case, respectively, allowed directors to profit when company could not take up contract,
therefore not in breach of duty!

FHR European Ventures v Cedar Capital Partners [2014]: overturns Sinclair v Versailles and uphold
AG for Hong Kong v Reid: bribes and secret commissions are held on proprietary constructive trust on
behalf of the company.
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16 Feb 2015
TUTORIAL 5: Directors Duties

1) Distinguishing Shadow and De Facto Directors: are they liable under the CA 2006?
a. Ultraframe v Fielding: members of the board whose instructions are accustom to act
b. Section 251(1) & (2) CA 2006 Shadow Director
c. **Holland v Revenue & Customs
d. Deverell
Not all duties and liabilities apply to shadow directors! As such, it may be advantageous to establish that the
individual is a de facto director.
2) Section 174: Duty to exercise reasonable care, skill and diligence
(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the
functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has.

a. Re DJan of London Ltd


b. Gilfillen v ASIC (2012)
Standard is much lower under common law but now has objective and subjective element, and so takes
into account skills and experience of actual person who is the director in question.
*Business Judgement Rule: courts are unwilling to impose remedies for negligence claims as directors
have been selected by the shareholders and the most appropriate remedy for a breach is removal of that
director. Moreover, courts are not a suitable body to review actions of directors who are supposedly business
experts.
Grey Area Corporate (companies as) Directors: potential defendants could incorporate and claim the
company was the director and not the individual themselves.
3) Can a director profit from their position as director: Bray v Ford; Boardman v Phipps; Queensland v
Hudson; Peso Silver Mines v Cropper; Section 175 (duty to avoid conflicts of interest; Section 177
(duty to declare interest in proposed transaction); Section 182 (interest in existing transactions);
Regal Hastings v Gulliver full disclosure can be ratified by Board.
4) Directors issuing new shares to prevent takeover? Section 171 proper purpose doctrine:
Directors must exercise their powers for a proper purpose. While in many instances an improper
purpose is readily evident, such as a director looking to feather his or her own nest or divert an
investment opportunity to a relative, such breaches usually involve a breach of the director's duty to
act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a
purpose that is not regarded by the law as proper.
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a. **Howard Smith Ltd v Ampol Ltd [1974] AC 821** (Lord Wilberforce) The case
concerned the power of the directors to issue new shares. It was alleged that the directors had
issued a large number of new shares purely to deprive a particular shareholder of his voting
majority. An argument that the power to issue shares could only be properly exercised to
raise new capital was rejected as too narrow, and it was held that it would be a proper
exercise of the director's powers to issue shares to a larger company to ensure the financial
stability of the company, or as part of an agreement to exploit mineral rights owned by the
company. If so, the mere fact that an incidental result (even if it was a desired consequence)
was that a shareholder lost his majority, or a takeover bid was defeated, this would not itself
make the share issue improper. But if the sole purpose was to destroy a voting majority, or
block a takeover bid, that would be an improper purpose.
b. Tech Corp v Millar (1972)
5) Directors signing shareholder agreements: section 173 Duty to exercise independent judgement
Russell v Northern Bank
6) Section 176 benefits from third parties; 178 civil consequences of breach & Bribery Act (maybe);
proprietary constructive trust: FHR

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09 Feb. 2015
LECTURE 12: Directors Liabilities and Protections

232 Provisions protecting directors from liability


(1)Any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach
to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void.
(2)Any provision by which a company directly or indirectly provides an indemnity (to any extent) for a director of the
company, or of an associated company, against any liability attaching to him in connection with any negligence, default,
breach of duty or breach of trust in relation to the company of which he is a director is void, except as permitted by
(a)section 233 (provision of insurance),
(b)section 234 (qualifying third party indemnity provision), or
(c)section 235 (qualifying pension scheme indemnity provision).
(3)This section applies to any provision, whether contained in a company's articles or in any contract with the company or
otherwise.
(4)Nothing in this section prevents a company's articles from making such provision as has previously been lawful for
dealing with conflicts of interest.

175 Duty to avoid conflicts of interest


(1)A director of a company 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.
(2)This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the
company could take advantage of the property, information or opportunity).
(3)This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.
(4)This duty is not infringed
(a)if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b)if the matter has been authorised by the directors.
(5)Authorisation may be given by the directors
(a)where the company is a private company and nothing in the company's constitution invalidates such authorisation, by the
matter being proposed to and authorised by the directors; or
(b)where the company is a public company and its constitution includes provision enabling the directors to authorise the
matter, by the matter being proposed to and authorised by them in accordance with the constitution.
(6)The authorisation is effective only if
(a)any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in
question or any other interested director, and
(b)the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
(7)Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.

Prior to 2006 you required shareholder agreement in general meeting; now you can have Director approval
at a Board meeting, to what would otherwise be a conflict of interest. In larger companies directors will find
92

it easier to comply with s.180 approval from board rather than by obtaining majority shareholder
authorization.

180 Consent, approval or authorisation by members


(1)In a case where
(a)section 175 (duty to avoid conflicts of interest) is complied with by authorisation by the directors, or
(b)section 177 (duty to declare interest in proposed transaction or arrangement) is complied with,
the transaction or arrangement is not liable to be set aside by virtue of any common law rule or equitable principle requiring
the consent or approval of the members of the company.
This is without prejudice to any enactment, or provision of the company's constitution, requiring such consent or approval.
(2)The application of the general duties is not affected by the fact that the case also falls within Chapter 4 (transactions
requiring approval of members), except that where that Chapter applies and
(a)approval is given under that Chapter, or
(b)the matter is one as to which it is provided that approval is not needed,
it is not necessary also to comply with section 175 (duty to avoid conflicts of interest) or section 176 (duty not to accept
benefits from third parties).
(3)Compliance with the general duties does not remove the need for approval under any applicable provision of Chapter 4
(transactions requiring approval of members).
(4)The general duties
(a)have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be
done (or omitted) by the directors, or any of them, that would otherwise be a breach of duty, and
(b)where the company's articles contain provisions for dealing with conflicts of interest, are not infringed by anything done
(or omitted) by the directors, or any of them, in accordance with those provisions.
(5)Otherwise, the general duties have effect (except as otherwise provided or the context otherwise requires)
notwithstanding any enactment or rule of law.

1. Prohibitions and Liabilities:


Civil Consequences of Breach of General Duties: CA 2006 ss.178-180 Conflicts of Interest

- It is not unusual for Directors to dis-apply general rules in relation to specific transactions, as long as
there is disclosure and authorisation.

- If they breach their fiduciary duty, the most common remedy is an account for profit whereby the
director is required to disgorge (give-up) any profits obtained through breach.

Disclosure: Declaration of Interest in Existing Transactions: CA 2006 ss.182-187

- Where a director engages upon or proposes to engage an activity in which he has a direct or indirect
interest, he must disclose the nature and extent of interest to other directors

- It is a criminal offence not to disclose (under 182) under s.183, liable to a fine.
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Transactions with Directors Requiring Members Approval: ss.188-230

- Directors service contracts must be approved by resolution of members of the company if the contract is
longer than 2 years.

- If company engages in contract in contravention of s.188, to that extent it is void. Moreover, the contract
is void and can be terminated at any time upon reasonable notice.
a) Substantial property transactions: (s.190-196)

- Under ss 177 and 182, a company directors interests in a company transaction need be disclosed
on to the other directors. Section 190 goes further and requires approval by resolution of the
members for certain transactions, which the title of the section calls substantial property
transactions. The remedies in s 195 for failure to obtain approval are rescission and account of
profits. (502)

- May not enter into agreement where director is set to acquire a non-cash asset. (Prohibition unless
arrangement has been approved by resolution of the members, or is conditional upon such approval being
obtained).

- 192 must be aware there are exemptions, eg, transactions with members; at winding up; etc.
- 195 sets out civil consequences transaction is voidable, unless bona fide purchaser for value.
- 196 ratification where transaction is without requisite approval, but within reasonable period affirmed,
then the transaction may no longer be avoided.
b) Contracts for loans of guarantees (s.197-214)

- s.197(1) requires approval by resolution of members of any company for a loan to a director of the
company or of its holding company. A loan by a company to a director of its holding company
requires the approval by resolution of the members of both the company (unless it is a wholly
owned subsidiary) and the holding company (s 197(2) and (5)(b)). The same applies to guaranteeing
or giving security in connection with a loan made by any other person (s 197(1)). Approval may be
given within a reasonable period after a transaction or arrangement is entered into (s 214). (pg
504)

- Contracts for loans of guarantees are not allowed unless approved by resolution of the company.
c) Prohibitions for Relevant Companies (s.198 onwards)

- Quasi-loans (s198) while companies act applies to all, it sometimes makes provisions (additional
prohibitions) for one category, as in the instant case, which is limited to public companies or a company
associated with a public company.

S.199 details quasi-loans: where one party, the creditor, agrees to pay a sum for another.
S.200 extends this prohibition to people connected with the Director
S.201 credit transactions in public companies require member approval
S.204-209 Exceptions, eg, for loans and quasi-loans for less than 10,000 GBP
S.213 civil consequences for breach: contract is voidable at instance of the company provided there
has not been some intervening event which makes return of the monies impossible. (The remedies
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for failure to obtain approval are statutory versions of the equitable remedies of rescission and
account of profits. (pg 504)).

- Rescission of a transaction involves each party returning to the other what was transferred
in the transaction.

- S.214 there can be affirmation by shareholders (ratification doctrine).


d) Directors Loss of Office: (s.215-222)

- Payment made to a director or past director by way of compensation for loss of office.
- See this in relation to s.168 removal of director by ordinary resolution which the shareholders have at
general meeting. Need to know s.168 & 169, because although they have that power, it becomes more
difficult in larger companies to pass a resolution! No real way to communicate with other shareholders,
and directors will circulate to shareholders whether they want the resolution to pass or not. So,
procedurally, youre at a disadvantage (if an activist shareholder). Last, if the vote is successful, then it is
likely that the directors contract will be breached, and the company will have to pay remuneration for
damages for breach of contract. However, if they do remove the director, then you have to comply with
provisions under s215-222 approving payoff.

2. Common Law Liabilities:


a) Tortious Liability for Directors:
*Williams v Natural Life Health Food Ltd. [1998] [Negligent Misrepresentation]: It held that for there
to be an effective assumption of responsibility, there must be some direct or indirect conveyance that a
director had done so, and that a claimant had relied on the information. Otherwise only a company itself, as
a separate legal person, would be liable for negligent information.
Facts: Mr Williams and his partner approached Natural Life Health Foods Ltd with a proposal. They wanted
to get a franchise for a health food shop in Rugby (i.e. they wanted to use the Natural Life brand to run a
new store and pay Natural Life Ltd a fixed fee). Mr Williams was given a brochure with financial
projections. They entered the scheme. They failed, and lost money. So Mr Williams sued the company,
alleging that the advice they got was negligent. However, before the suit could be completed, Natural Life
Health Foods Ltd went into liquidation. So Mr Williams sought to hold the company's managing director
and main shareholder personally liable. This was Mr Mistlin, who in the brochure had been held out as
having a lot of expertise. Mr Mistlin had made the brochure projections, but had not been in any of the
negotiations with Mr Williams.
The High Court allowed Mr Williams claim, and so did the Court of Appeal by a majority. The company
and Mr Mistlin appealed to the House of Lords. The House of Lords allowed the appeal and found Mr.
Mistlin was a stranger that that particular relationship and he cannot therefore be liable as a joint tortfeasor
with the company. If he is to be held liable to the respondents, it could only be on the basis of a special
relationship between himself and the respondents.

*Standard Chartered Bank v Pakistan Shipping Co (No 2) [2003] [Fraudulent Representation]: The
House of Lords considered two issues. First, can a person (such as a company director) escape liability for
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deceit, where he commits a fraud while acting on behalf of another person (such as the company) who is
also liable for the fraud? Second, is contributory negligence a defence to a claim in fraud?
The tort of deceit involves a false representation made by the defendant, who knows it to be untrue, or who
has no belief in its truth, or who is reckless as to its truth. If the defendant intended that the plaintiff should
act in reliance on such representation and the plaintiff in fact does so, the defendant will be liable in deceit
for the damage caused.
Different considerations applied to a claim for negligent misstatement. As the House of Lords made clear in
Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577, liability in such a case depends on an
assumption of responsibility by the defendant. As with contractual liability, an agent (such as a company
director) can assume responsibility on behalf of another person (such as the company) without assuming
personal responsibility. This reasoning cannot apply to fraud. Mr Mehra was not liable by virtue of his
position as a director, but because he had himself carried out the acts of deceit. As with the criminal law (see
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 All ER 918), a director
cannot escape liability simply because his own acts are also sufficient to fix the company with liability.

b) Constructive Trusteeship (MFR 16.17)


Guinness v Saunders: directors of the company, chairman was Saunders, in the course of a takeover bid the
directors wanted a strategy to avoid the takeover, thereby hiring an American lawyer (to implement a
poison pill strategy). The strategy, was in effect, an illegal one, for Mr Saunders to call on his comrades
and get them to purchase shares in Guinness, raising/inflating the price of the shares and making it more
difficult to takeover/purchase shares. The lawyer, Mr Ward, was paid over 2 million pounds, which was
awarded by committee of the board. Mr Ward was found to be a constructive trustee seeing that the advice
was bad/illegal.
Regal Hasting v Gulliver: Sankey: The rule of equity which insists on those who by use of a fiduciary
position make a profit, being liable to account for that profit, in no way depends on fraud, or absence
of bona fides; or upon such questions or considerations as whether the profit would or should otherwise
have gone to the Plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the
Plaintiff, or whether he took a risk, or acted as he did for the benefit of the Plaintiff, or whether the Plaintiff
has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit
having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot
escape the risk of being called upon to account.
If a company has actually suffered a loss from a directors breach of duty, it may claim equitable
compensation for that loss in addition to confiscation of the profits made by the director. (508)

c) Directors Personal Liability to Contribute


Personal Undertakings;
Pre-Incorporation Contracts, Deeds and Obligations: CA 2006 s.51
(1) A contract that purports to be made by or on behalf of a company at a time when the company
has not been formed has effect, subject to any agreement to the contrary, as one made with the
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person purporting to act for the company or as agent for it, and he is personally liable on the contract
accordingly.
CA 2006 s. 1187: The Secretary of State may find a director of a company personally liable for the debts of
the company
Insolvency Act 1986:
s.212 Misfeasance Proceedings
s.213 Fraudulent Trading also enforceable under s.993 Criminal Liability Petition.
s.214 Wrongful Trading when director knows or ought to have known company was becoming
insolvent, director under duty to minimize losses (to creditors) and to cease trading.
s.216 & 217 using company name after liquidation.

3. Provisions Protecting Directors from Liability:


In the UK some protection from liability is provided by:
a) Majority rule or business judgement rule
b) Insurance and Indemnity: CA 2006 ss232-238
c) Ratification; CA 2006 s239
a. Not clear how far ratification can go.
b. Derivative Actions require fraud on the minority that conduct was something that
could not be ratified. It is unclear under s.239 if that is still the case. Ryan suggests that
he thinks it is: conduct which amounts to fraud on the minority cannot be ratified. Same
as criminal conduct. Can ratify excess of authority. Look at Regal Hastings v Gulliver:
had they held a meeting and ratified transaction they would not have been liable to
account.
c. Cook v Deeks and Hind [1919] AC (Canadian Case decided at the PC) [Ratification
Limitations]: Deeks and Hinds were the directors of a construction company. They
negotiated a lucrative construction contract with the Canadian Pacific Railway. During
the negotiations, they decided to enter into the contract personally, on their own behalves,
and incorporated a new company, the Dominion Construction Company to carry out the
work. The contract appeared to be taken over by this company, by whom the work was
carried out and the profits made. A shareholder in the Toronto Construction Company
brought a derivative action against the directors and the Dominion Construction
Company. Because this was a derivative action, the Toronto Construction Company was
also joined as a defendant.
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Held: Deeks and Hinds were guilty of a breach of duty in the course they took to secure
the contract, and were to be regarded as holding it for the benefit of the Toronto
Construction Company: while entrusted with the conduct of the affairs of the company
they deliberately designed to exclude, and used their influence and position to exclude,
the company whose interest it was their first duty to protect. This led to the legal
conclusion that: men who assume the complete control of a companys business must
remember that they are not at liberty to sacrifice the interests which they are bound to
protect, and, while ostensibly acting for the company, divert in their own favour business
which should properly belong to the company they represent.
d. There exists a common law principle, known as the Duomatic principle, which provides
for decision-making by shareholders by way of informal unanimous consent: Where it
can be shown that all shareholders who have a right to attend and vote at a general
meeting of the company assent to some matter which a general meeting of the company
could carry into effect, that assent is as binding as a resolution in general meeting would
be." (Re Duomatic, Buckley J)
d) Relief by Court (MFR 16.16.6): CA 2006 s.1157
An officer [if] it appears to the court hearing the case that the officer or person is or may be liable but
that he acted honestly and reasonably, and that having regard to all the circumstances of the case
(including those connected with his appointment) he ought fairly to be excused, the court may relieve him,
either wholly or in part, from his liability on such terms as it thinks fit.

Re DJan of London Ltd [1994] 1 BCLC: Concerning a director's duty of care and skill, whose main
precedent is now codified under s 174 of the Companies Act 2006. The case was decided under the
older Companies Act 1985.
Facts: Without reading it, Mr D'Jan signed a change to an insurance policy which was erroneously filled out
by his insurance broker, a Mr Tarik Shenyuz. He did not read it before he signed, and it contained a mistake,
which was that the answer 'no' was given to the question of whether in the past he had 'been director of any
company which went into liquidation'. This meant the insurance company, Guardian Royal Exchange
Assurance plc, could refuse to pay up when a fire at the companys Cornwall premises destroyed 174,000
of stock. The company had gone into insolvent liquidation by the time Mr D'Jan realised that the form had
been incorrectly completed. The liquidators sued Mr D'Jan to recoup the lost funds on behalf of the
company's creditors (who together were owed 500,000). They alleged both negligence and misfeasance
under s 212 of the Insolvency Act 1986.

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12 Feb 2015
LECTURE 13: Protection of Investors and the Market
Investor protections are provided by the following:
1) BY DISCLOSURE
ACCOUNTS AND REPORTS Requirements
Companies have to provide certain information about the company on an annual basis, twice annually, to
shareholders and that can also mean to potential shareholders. These documents are filed at the Companies
House and become a part of the public record. Criminal penalty imposed on the directors for failing to
abide by the rules under s 451 & and also civil penalty s 458. Duty imposed by the statute on the directors
to lay the annual accounts before the AGM. Something goes wrong, accounts not true, they might lose their
position and their reputation. Explains vast increase in responsibilities and liabilities, and why they want to
be remunerated at a very high level. At the end of their contract, it might not be renewed, another reason
they want higher remuneration.
S. 386 Duty to keep accounting records. Directors duty to make sure the accounts are presented to the
AGM.
S. 387, 389 Impose criminal penalties for contraventions for various accounting requirements.
Indication of purpose of accounts to provide true and fair information of those things. Gives options to
investors whether they want to stay in or if its time they get out.
s. 423 424 duty to circulate account of annual reports, to every member, do also finish up being
recorded at Companies House
s. 425 default in sending out copies is a defence, officers and directors who could have criminal penalty
often a small fine but conviction can be from indictment in which fine will be unlimited
s. 394 Duty on directors regarding accounts
s. 396 regarding contents of the accounts
s. 409 onwards information relating to undertakings, what is required here is disclosure that is significant
in relation to s. 172 general duties, info relating to undertakings, compliance, information about off
balance sheet arrangements s. 410(a)
s. 411 info about employees, numbers and costs
also requirements to diclose how many disabled ppl are employed
s. 412 disclosure of benefits and remuneration for directors
s. 413
s. 414 approval and signing of the accts, signature must be on companies balance sheet.
**s. 417 - Contents of directors' report: business review
(1)Unless the company is [F1entitled to the small companies exemption], the directors' report must
contain a business review.
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(2)The purpose of the business review is to inform members of the company and help them assess
how the directors have performed their duty under section 172 (duty to promote the success of the
company).

ENRON CASE - Anderson had two contracts with Enron, 1 to audit accounts, 1 for consultancy. Anderson, like all
other big accounting firms was making a lot of money on both of these contracts. What would appear to happen is
their auditors did discover that things that were happening were not proper, did not disclose that to shareholders,
fearful if they did, they would lose both contracts.
Now requires off balance sheet information is disclosed as a requirement under the accounts. Effect devastating for
Andersons, no longer a worldwide accounting firm. It ruined that companys reputation and all of the partners in this
company would have suffered as well as the shareholders of Enron and the employees.
2) BY AUDIT backs up, supposed to guarantee to shareholders the information that company providing you is
true and fair. Damages awarded by jury in negligence actions that the amount be awarded for negligence
particularly by accounting firms was heading up towards a billion $. Effect of that, was global accounting
firms lobbied for introduction of limited liability partnership, gave in and agreed to it, why we have LLPs.
They needed to give their partners for their personal assets. Partners in accounting and lawfirms can protect
their assets.
s. 532 Auditors liability any provision that tries to prevent them from liability is void. However, similar sort of
exemptions in relation to indemnity of costs relating to proceedings.
s. 534-538 - New introduction, only applies to auditors Limitation agreements. Has to be approved by the members of
the company. Shows the power of the lobbying of the international accounting firms that they could get this into the
Companies Act that limits their liabilities for negligence accounting.
3) INSIDER DEALING
a) Market rigging at common law
R v de Berenger & Others coffee shops in City of London where trading took place. de Berenger and friends went
to coffee shop and spread rumour that Napoleon Bonaparte was dead, stocks rose dramatically, great relief, no longer
have to worry about threats imposed by Bonaparte. This was a lie, it was untrue. And de Beregner and friends made a
lot of money. They had rigged the market by giving false information to investors, false info that causes the value to
go up or down. Death of Bonaparte would have driven the value of assets and stocks upwards. So thats the first
recorded instance of someone being convicted of a fraud through rigging the market.
Conspiracy to defraud leading case Scott v Metropolitan Police Commissioner common law conspiracy, still is,
charge that can still be brought today in relation to people who conspire together to do what de Berenger and his
friends did to rig the market. That would be a conspiracy to defraud.

b) The Fraud Act 2006 relevance to the fact that fraud can be by false representation, by failing to
disclose information or by abusive position. Relevance that people who are selling investments, shares,
companies when raising capital, have to provide information to potential investors. Using in the form of
the prospectus that is the advertisement for shares.
Civil consequences that can result from false representation and failure to disclose information - *refer to knowledge
from contract, criminal, tort and equity law.
c) Insider dealing: criminal offences
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Tipping off Unlawfully disclosing


People that act on information knowing that it is inside information might not be able to avoid liability.
Insider dealing Act gaps discovered, Act taken away.
R v Fisher Mr. Fisher had a control of a private company, he held all shares in it, and he wanted to make a takeover
bid for another company. He approaches a merchant bank. Mr Fisher phones the merchant bank and asks for a specific
employee with whom he was intimate with, phoned and asked her how his Companys bid was progressing. She
replied, but Company Cs bid is going to be accepted and your bid is going to fail. Mr. Fisher, immediately went out,
bought shares in Company C, and B, and sold shares in Company A. He was making money both ways, saving on the
loss that would occur in his company and making money on the strength of this inside information that was
confidential, non-public information at that time. Legislation under which he was prosecuted, offence was the tipping
offence obtaining confidential information and then acting on it. Whole case taken up with argument Oxford
English dictionary about what obtained means, how it has been used in novels of Dickens, Shakespeare, whole day of
argument in court, all about meaning of the word obtained. Judge decided Mr Fisher had not committed an offence.
Mr Fishers argument that he never actively sought (obtaining means) he had simply received it unwillingly. Judge
accepted that. Parliament was furious, because that made enormous loophole in what was the new insider dealing
legislation.
d) Market Abuse and insider dealing: civil wrongs
s. 118- investments on stock exchange and falls within one of or more of the categories in subsection 2 onwards.
Repeats the offences of insider dealing, market abuse under that provision. Insider dealing is a market abuse, other
things that can also constitute a market abuse. 8 subsections. These are civil. Insider dealing Act is Criminal.
Criminal need mens rea of intention explains why we have very few insider dealing convictions. To get round that,
Parliament introduced market abuse, civil wrong. Dont have to worry about mens rea as much.
e) Civil liability: Percival v Wright; Boardman v Phipps; Regal Hastings, Allan v Hyatt; Chez Nico
Insider dealing under the Act does not apply to private companies. All of these cases, the directors were privy to
information about the prospects of the company, knew there was going to be a transaction that was going to take place
that would boost companies shares.
Dont have to fall back on Misrepresentation Act, in relation to false statements in advertisements offering shares for
sale because you have a statutory provision that provides compensation if you bought shares on the basis of a false
statement. s. 90
f) Investigation and consequences
g) FSA Listing Rules, continuing obligations; the Combined Code restricting directors purchases or sales of
shares in the company
h) Disclosure

4) DISQUALIFICATION ORDERS
Separate piece of legislation 6 pages long Company Directors Disqualification Act 1986 introduced, is a good
deterrent to directors potential misconduct.
Company Directors Disqualification Act 1986, s. 1 a court may, s. 6-9 a court MUST make a qualification order
and that order shall be for a time specified in the order prohibiting a person from being a director of the company.
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Discretionary situation court has ability to disqualify if it wants for persistent breaches of company registration.
Carecraft Procedures director can hold his hand up today and say I should be disqualified. By undertaking, the
court will simply agree to an undertaking that the director is disqualified for a period of time. Usually be more if he
doesnt do it voluntarily as court will have to impose it via court order.
A Carecraft agreement is an agreement whereby the defendant admits to the allegations made against him, and
reaches agreement with the SoS on a period of disqualification. This, like an undertaking, will usually involve some
form of reduced period of disqualification as an incentive to settle. It stems from the 1994 case.
Re Carecraft Construction Co Ltd [1993] 4 All ER 499 at 507
The Carecraft agreement, however, is a much bigger document than an undertaking, as it will set out the entire case
against the defendant and all agreed mitigation from the defendant. If the defendant is able to provide evidence to
convince the SoS that part of the allegations are unfounded, this fact may be recorded in the Carecraft agreement
and will be a matter of record along with agreed mitigation.
For this reason, a Carecraft agreement may still be the preferred option of a defendant who feels it important for his
future that certain allegations or parts of allegation are not admitted to in order to settle, and that his mitigation
statement is a matter of public record.
Effect of Breach s 13 criminal; s 15 civil

02 Mar. 2015
TUTORIAL #6 Directors Liabilities and Protection of Investors and the Market
1. Transparency accounting disclosure and reports (eg, supply chain diligence) backed up by
auditing (to ensure accounting accuracy) both interim and at general meeting. In particular,
accounting disclosure provides for profits, debts, liabilities, etc. Cost of the company expenses
increase due to reporting and accounting responsibilities, for example, having to hire human rights or
environmental specialists.
Criminal and civil sanctions for breach of fiduciary duties protecting investors by requiring
directors to act in companys best interest. Tito v Wadell (self-dealing); proprietary constructive
trusts. Target (Holdings) v Redferns. Also, Bribery Act which deters bad practice by those in
control of the company. If they are deterred, it should provide better protection and therefore better
investment.
Disqualification Orders deters bad practice by directors (Carecraft procedures)
Shareholder Ratification required on certain company transactions
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S 168 have ability to remove directors


*Corporate Governance investors feel confident and therefore invest in the company and remain
invested in company. More sophisticated investors are conscience if the companys reputation for
good governance is high or not, and this can be a determinative factor. (Safer investment vehicle)
2. Insider trading/dealing, Criminal Justice Act 1993, is criminalized and those found guilty can face up
to 7 years in prison this provides confidence to investors, especially those from abroad. In
addition, profits obtained are held on proprietary constructive trust. There are also in-house policies,
such as Chinese walls on a need to know basis only.
Insider trading is hard to prove using knowledge for improper reasons. Also, because a criminal
offence, difficult to establish mens rea: must prove alleged offender intended or knowingly engaged
in insider dealing or in way of the ways akin to it.
Common law Conspiracy to defraud is another criminal offence that can be used against
insiders/
Market Abuse (Civil Offences) s. 118 Financial Services and Markets Act shift insider dealing
from being a criminal offence to a civil wrong. Both insider/individual and company can be fined!
3. There is discretionary and mandatory disqualification of directors under the Company Directors
Disqualification Act 1986 (CDDA). Mandatory is where the director is unfit s 6-9 due to company
becoming insolvent. Section 9 sets out how to determine unfitness, referring to schedule 1 of the
Act which includes reference to breach of fiduciary duty including part 10 of CA; failure in
accounting records; entering into transaction likely to be set aside; extent of directors responsibility
in complying with various provisions of CA. Important deterrent due to section 1 because it
prevents you from running a company for the period of the disqualification order. Unlike removal of
director, they dont get paid out as they have breached the contract, and therefore not entitled to
remuneration/damages!
4. Encouraging investors by ensuring good directors, and deterring directors from making poor
decisions and using capital wrongly. Maximum 15 year ban, minimum of 2 year. Re Sevenoakes
Stationers Ltd [1991]: The court gave guidelines for the periods of disqualification to be applied for
company directors under the Act. The maximum period of ten years should be reserved for only the
most serious of cases. Periods of two to five years should apply to cases at the bottom end, and the
middle bracket of 6 to 10 years for serious cases. The period should be fixed by the allegations made
in the charge, not in the evidence coming out later. Non-payment of crown debts was to be treated
more seriously than for other debts, though non-payment of Crown debts is not per se evidence of
unfitness: it is necessary to look more closely in each case to see what the significance, if any, of the
non-payment of the Crown debt is. (i) the top bracket of disqualification for periods over ten years
should be reserved for particularly serious cases. These may include cases where a director who has
already had one period of disqualification imposed on him falls to be disqualified yet again. (ii) the
minimum bracket of two to five years disqualification should be applied where, though
disqualification is mandatory, the case is, relatively, not very serious. (iii) the middle bracket of

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disqualification for from six to 10 years should apply for serious cases which do not merit the top
category.
As to the words of section 6 of the 1986 Act, these were ordinary words of the English language,
and, then referring to earlier judicial statements, Dillon LJ said: Such statements may be helpful in
identifying particular circumstances in which a person would clearly be unfit. But there seems to
have been a tendency, which I deplore, on the part of the Bar, and possibly also on the part of the
official receivers department, to treat the statements as judicial paraphrases of the words of the
statute, which fall to be construed as a matter of law in lieu of the words of the statute. The result is
to obscure that the true question to be tried is a question of fact what used to be pejoratively
described in the Chancery Division as a jury question.

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16 Feb 2015
LECTURE 14: Corporate Governance (Public Companies)
This lecture focuses predominately on directors and links the previous lectures on separation of powers and
directors duties.
Who guards the guards eg, who controls or supervises the Directors? What legal mechanisms are in
place?
America: Post-Enron a topic discussed last week - American corporate governance really picks up.
Sarbanes-Oxley Act is implemented (largely a reaction to Enron).
England: 1980s industrial unrest; Thatcher government (Conservative) attempts to break-up monopolies
De-Nationalization (privatization) of British companies (railway; telephone; airlines). The former managers
(who were civil-servants and receiving payment in kind) were appointed directors of these newly privatized
companies, and in turn, sought directors remuneration, looking at their American counterparts; salaries
were jumping from $70,000 - $400,000.
Shareholders had rights of participation in smaller companies, often they were partnerships rather than the
full-blown companies we now have. As they grew into these larger companies, shareholder participation
became more impractical, resulting in a divorce of ownership and control, shifting from the shareholders
into the hands of directors.
Voting - now, shareholder powers (which include removal of directors) are not exercised as easily as
attendance at shareholder meetings (general meetings) can be quite difficult, either geographically or cost or
otherwise. That is why a proxy vote has become popularized. Originally the voting procedure only allowed
for a yes vote. That has been changed and now includes yes or no or abstain. It is common for
shareholders to vote yes in favour of the directors.
Disclosure shareholders should have sufficient information as to whether or not to remain invested in the
company or not. However, the shareholder reports are dense, legalistic and unreadable to most.
Auditing is introduced an outside body to review corporate activity and accounts but we see that this can
fail, eg, the Dailymail or Enron or BCCI and so on.
Yet, we have still failed to obtain true Transparency and Accountability and Disclosure
*Need a summary of the main points that came out of the various Reports: Cadbury; Greenbury; Hampel;
Combined Code located in the readings.

Current Position:
s.994 claims & derivative actions & fiduciary duties (which often form the basis for these actions); UK
Governance Code.
Non-executive directors: (executive directors have employment contracts) whereas non-executives are
meant to be independent and monitor (guard the guards) (Greenbury Report), so they do not have
remuneration determined by the executive board members (but it is usually quite low, eg, $30,000).

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Need to know the Code, generally, for the exam!


Combined Code 2014: Art 4 non-executive: role is to constructively challenge and contribute to strategy,
and to monitor performance and ensure accuracy in accounting. One non-executive director should be
appointed the senior independent director. Chairman should hold meetings with non-executives without the
executives present, and an annual meeting led by senior independent director to review the Chairmans
performance.
(We need to go through the Code)!
Second main feature of Code is on pg 4: **Comply or Explain**: trademark of corporate governance in
UK, and strongly supported by both companies and government, alike. It means that all listed companies
have mandatory compliance with the code, but, some dont. If the company cant comply then they must
explain why to the public (shareholders), and disclose in their reports and accounts. There must be clear
explanation as to why they have violated certain provisions of the code this is a self-name and shame
directive.
Code is a set of principles, and not a set of rigid rules. The principles are the core of the code. Good
governance can be achieved by other means alternative means are allowed to be implemented, but it would
need to be disclosed when explaining. In response to explanations the shareholders should take account
of the size of the company and risks with the companies ventures. Correspondingly, the shareholders should
be flexible when deciding whether or not to accept explanation.
There should be a link between remuneration and performance result of Greenbury and Hampel Reports

UK Stewardship Code: The Code is a set of principles or guidelines released in 2010 by the Financial
Reporting Council directed at institutional investors who hold voting rights in United Kingdom companies.
Its principal aim is to make institutional investors (eg Teachers Pension Fund), who manage other people's
money, be active and engage in corporate governance in the interests of their beneficiaries (the
shareholders).
The Code applies to "firms who manage assets on behalf of institutional shareholders such as pension funds,
insurance companies, investment trusts and other collective investment vehicles." This means fund
managers, but the Code also "strongly encourages" institutional investors to disclose their own level of
compliance with the code's principles.
The Code adopts the same "comply or explain" approach used in the UK Corporate Governance
Code. This means, it does not require compliance with principles. But if fund managers and institutional
investors do not comply with any of the principles set out, they must explain why they have not done so on
their websites. The information is also sent to the Financial Reporting Council, which links to the
information provided to it.
The compulsion to, at the very least, explain non-compliance with the Code follows from the Financial
Services and Markets Act 2000 section 2(4) and the Listing Rules.
The seven principles of the code are as follows. Institutional investors should,

publicly disclose their policy on how they will discharge their stewardship responsibilities.
have a robust policy on managing conflicts of interest in relation to stewardship and this policy should
be publicly disclosed.
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monitor their investee companies.


establish clear guidelines on when and how they will escalate their activities as a method of protecting
and enhancing shareholder value.
be willing to act collectively with other investors where appropriate.
have a clear policy on voting and disclosure of voting activity.
report periodically on their stewardship and voting activities.

Companies Act 2006 s.1269-1273


1269.Corporate governance rules
1270.Liability for false or misleading statements in certain publications
1271.Exercise of powers where UK is host member State
1272.Transparency obligations and related matters: minor and consequential amendments
1273.Corporate governance regulations
The Higgs Non Executive Directors Review 2000
Current revised UK, Combined Code 2014 in The FCAs Application for Listing/Listing Rules
***UK Corporate Governance Code Review Report
Women on Boards
Alan Yarrow Corporate Governance:
good corporate governance can accelerate the development of a healthy market economy,
persuading governments and business that investment is a good idea. It can be the decisive factor in whether
a company opens a new office or factory, or whether a sovereign wealth fund invests in an ambitious
infrastructure opportunity. A McKinsey study showed that institutional investors are willing to pay a
premium of 22% for investments in well-governed companies and markets.

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23 Feb. 2015
LECTURE 15 Corporate Social Responsibility
S.172: requires directors to take into account a list of considerations when they are making board decisions.
Duty to promote the success of the company
(1)A director of a company must act in the way he considers, in good faith, would be most likely to promote
the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst
other matters) to
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business conduct,
and
(f)the need to act fairly as between members of the company.
(2)Where or to the extent that the purposes of the company consist of or include purposes other than the
benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company
for the benefit of its members were to achieving those purposes.
(3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in
certain circumstances, to consider or act in the interests of creditors of the company.

Corporate Social Responsibility (CSR): is significant in numerous respects, including M & As studies
indicate that companies with good CSR and corporate governance are less likely to be involved in or be the
target of (hostile) M & As.
Also connected with this is what can be termed ethical investing this can impact the shareholding body
and its bottom line. A companys reputation and longevity requires more than financial prosperity. Highly
publicized corporate scandals are a threat to long term sustainability.
Defn: CSR has a variety of elements, but generally, it is an organization committing to adopt ethical
behaviour and to enhance economic development with the objective of improving the quality of life of its
employees, surrounding community, and society at large.
CSR is a concept that evolves with society. A superficial definition is giving back to society.
Good CSR practices may encourage people to work/invest/do business with that company and in turn have a
positive economic return. Workers, for example, have a higher retention rate, work harder, and a generally
happier, so there are benefits in this aspect, as well.
(ESCG) Environmental social and good corporate governance activities: here is growing evidence that
suggests that ESG factors, when integrated into investment analysis and decision making, may offer
investors potential long-term performance advantages. ESG has become shorthand for investment
methodologies that embrace ESG or sustainability factors as a means of helping to identify companies with
superior business models.
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Area of focus
Environment

Activity

Social

Resource management and pollution


prevention
Reduced emissions and climate impact
Environmental reporting/disclosure

Potential impact on financial performance

Workplace

Workplace

Diversity
Health and safety
Labor-Management relations
Human rights
Product Integrity
Safety
Product quality
Emerging technology issues
Community Impact
Community relations
Responsible lending
Corporate philanthropy

Improved productivity and morale


Reduce turnover and absenteeism
Openness to new ideas and innovation
Reduce potential for litigation and reputational risk
Product Integrity
Create brand loyalty
Increase sales based on products safety and excellence
Reduce potential for litigation
Reduce reputational risk
Community Impact
Improve brand loyalty
Protect license to operate

1.
2.
3.
4.

Executive compensation
Board accountability
Shareholder rights
Reporting and disclosure

Align interests of shareowners and management


Avoid negative financial surprises or blow-ups
Reduce reputational risk

Corporate
Governance

Avoid or minimize environmental liabilities


Lower costs/increase profitability through energy and other
efficiencies
Reduce regulatory, litigation and reputational risk
Indicator of well-governed company

Traditional view: Park v Daily News companies act for shareholder who are the owners of the company,
therefore only ones entitled to a return on their investment.
NO MECHANISM PROVIDED FOR THE ENFORCEMENT OF BAD CSR PRACTICES!
Derivative actions can be launched for breach/failure to enforce/practice good CSR, but this is an indirect
measure that can only be advanced by shareholders. But s.172 entails considerations of other stakeholders,
not limited to shareholders. When, for instance, the environment is harmed, who can enforce/commence an
action on their behalf?
Community Interest Company: is a new type of company introduced by the United Kingdom government
in 2005 under the Companies (Audit, Investigations and Community Enterprise) Act 2004, designed
for social enterprises that want to use their profits and assets for the public good. CICs are intended to be
easy to set up, with all the flexibility and certainty of the company form, but with some special features to
ensure they are working for the benefit of the community.
Institutional Investors: A non-bank person or organization that trades securities in large enough share
quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional
investors face fewer protective regulations because it is assumed that they are more knowledgeable and
better able to protect themselves (eg. pension and life insurance companies).
-Large investors can have an impact on stakeholder/legislative programs advancing CSR practices.
For example, an institutional non-denominational religious investor group lobbied hotel companies
as regards human trafficking during major sports events where trafficking becomes prolific. They
refused to fund/invest in any hotel company not supporting the reduction/regulation of human
trafficking. What there were doing was influencing the company to adopt practices that advance the
reduction of human trafficking practices eg staff policy; contact/support lines; company policy.
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Supply Chains (Transparency) Act California: certain companies must disclose/audit retailers, sellers or
manufacturers, and disclose risks such as slavery and human trafficking that may exist within their supply
chain. They must maintain internal accountability standards. Provide company employees with training as
regards slavery and human trafficking, specifically how to mitigate these issues.
Eg: Apple and Foxcomm scandal where workers protested against slavery like (concentration type)
conditions. Under the Act, Apple needs to report on their supply chains.

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02 Mar. 2015
LECTURE 16 Corporate Funding Methods: Capital (Equity and Loan and Capital Maintenance) &
Company Securities
Funding Overview:
Particularly Relevant to Start-ups
1. Love Money (The three Fs): Family; Friends; Fools
2. Commercial Lenders (private lending companies; banks must have security);
i.

Lender will not be entitled to profits; sole requirement is that you pay back loan in
accordance with the loan. The disadvantage is that the business may be committed to large
monthly cash payments, and may lose payments if unable to meet repayment requirements.

3. Government Grants of Loans (rare);


i.

Bureaucratic process, but less onerous repayment than commercial lenders, typically.

4. Peer-to-Peer and Peer-to-business lending;


5. Crowdfunding;
i.

Typically sourced through online portal, eg, kickstarter

ii.

Fast access to capital; however, most campaigns struggle to meet financial goals and projects
may become inflexible due to fact of changing terms of crowdfunding agreement is very
difficult: need to obtain permission from every investor.

6. Equipment Financing (Leasing);


i.

Extended rental agreement which allows the user (the company) use of equipment in return
for lease payments. 80% of all companies lease at least some of their equipment. It allows
companies to have access to equipment without tying up capital, as well as tax advantages.

ii.

Sometimes can cost more in the long run then purchasing agreement outright. Agreement can
be complex and difficult to manage.

7. Accounts Receivable Financing;


i.

Business sells outstanding receivables or invoices at a discount to a financing/factoring


company who buy, at a discount the invoices, who assume risk of collecting in return for upfront-cash. Frees up working capital, quick method of cash injection; frees up company
resources.

ii.

Discount often exceeds interest payable on commercial loan.

8. Private Investors;
i.

Angels: (also known as a business angel or informal investor or angel funder) is an affluent
individual who provides capital for a business start-up, usually in exchange for convertible
debt or ownership equity.

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ii.

Venture Capitalists/private Equity: is financial capital provided to early-stage, high-potential,


growth startup companies. The venture capital fund earns money by owning equity in the
companies it invests in, which usually have a novel technology or business model in high
technology industries, such as biotechnology and IT.

iii.

Business Incubators: is a company that helps new and startup companies to develop by
providing services such as management training or office space. Business incubators differ
from research and technology parks in their dedication to startup and early-stage companies.

Financial Services Act 2012: implements a new regulatory framework for the financial
system and financial services in the UK. It replaces the Financial Services Authority with two new
regulators, namely the Financial Conduct Authority and the Prudential Regulation Authority, and creates
the Financial Policy Committee of the Bank of England. This framework went into effect on April 1, 2013.
Under the Act, the administration of Libor becomes a regulated activity overseen by the Financial Conduct
Authority. Knowingly or deliberately making false or misleading statements in relation to benchmark-setting
becomes a criminal offence.

Equity/Share Capital
Particularly Relevant to established and larger companies

Issuing of securities; debt financing (borrowing money)


o Company can use borrowed money to purchase increasing assets
o Interest paid on loan is typically tax deductible
o Lender only gets return of capital and interest payments, and not equity in the company

Issuing shares: members of the public invest in the company in return for an interest in the company;
shares are also called equity.
o Debt and equity levels
o Tax benefit of interest can lower the overall capital

Too much debt may interfere with business credit and ability to raise money in future (dont want to
over borrow); high levels of debt are desirable in some situations.

In an adverse economic climate, companies are vulnerable if they have high exposure to debt.

The Legal Nature of Shares (CA 2006 Part 17 ss.540-610)

Shares are personal property s 541 (they are categorised as things in action because they confer
entitlements to rights, benefits and privileges.

Issued and allotted share capital s 546

Issued by the directors s 549-551


o Directors can issue shares to purchase smaller company.
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o Allotment of shares must be registered at Company House

Types of share Ordinary/equity shares (remember there may be different classes of ordinary shares)
o Preference: terms on which they are allotted (or issued) will define rights of holder, eg,
dividend is paid in priority to ordinary share holders

Company stock with dividends that are paid to shareholders before common stock
dividends are paid out. In the event of a company bankruptcy, preferred stock
shareholders have a right to be paid company assets first. Preference shares typically
pay a fixed dividend, whereas common stocks do not. And unlike common
shareholders, preference share shareholders usually do not have voting rights.

There are four types of preference shares: Cumulative preferred, for which dividends
must be paid including skipped dividends; non-cumulative preferred, for which
skipped dividends are not included; participating preferred, which give the holder
dividends plus extra earnings based on certain conditions; and convertible, which can
be exchanged for a specified number of shares of common stock

o Deferred (dont need to worry about these)


o Non-voting ordinary (dont need to worry about these)
o Voting ordinary/equity shares (varying classes [class rights], differentiating rights between
classes) (Most common form of share)
o Redeemable s 684

Statement of capital on registration s 9-10


o 1 GBP required on registration

Alteration of share capital s 617 (allotment and reduction) (Dont need to know details, but need to
be aware that when companies want to raise capital, they must alter capital structure, meaning
allotting more shares under a formal process.

Maintenance of Capital:
Provisions to prevent watering down of capital coming into the company:

No commissions (subject to exceptions) s 553

No discount s 580

Public Companies no undertakings to do work or perform services s 585

Penalty s 590

Public Companies valuation for non-cash consideration required s 593 (remember Salomons
case! Where some argued that he had over-valued his company as independent valuation was not a
requirement and Salomon himself valued the company.)
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Penalty s 607

Provisions to prevent capital going out of the company:

Reduction s 641

No purchase of own share s 658-676 and 690-708: The rule in Trevor v Whitworth 1887 the
prohibition (buy-back of share provisions were ultra vires) is now subject to exceptions set out in the
statute.

Distributions (i.e. Dividends) s 736 and s 829 853:


o Must ONLY be paid out of profit (not capital or reserves)
o Subject to the overriding condition of solvency

The Consequences of an unlawful (ultra vires) Distribution:


*Any shareholder who receives a dividend payment they know to be wrongly paid out of capital must be
returned!
Progress Property Co Ltd v Moorgarth Group Ltd [2010] UKSC: There had been no knowledge or
intention that the sale of shares by one company to another had been below their market value and no reason
to doubt the genuineness of the transaction as a commercial sale, even though the sale price had been
calculated on the basis of a misunderstanding by all concerned, the share sale had been genuine, lawful and
intra vires, even if it was at an undervalue.
The Supreme Court again dismissed the appeal and held that the transaction was sound because even though
it was an extremely bad bargain in hindsight, it was negotiated in good faith and at arm's length. The court's
task is to inquire into the true purpose and substance of the impugned transaction by investigating all the
relevant facts, including the states of mind of the people acting on the company's behalf, though it is always
possible that transactions can be unlawful regardless of the directors' state of mind. Accordingly the
transaction was neither ultra vires nor an unlawful reduction of capital. Lord Walker gave the leading
judgment.
Power to purchase own shares: Exception to Trevor v Whitworth s 659
*Once it buys-back shares, they cannot hold them = required to dissolve or eliminate shares;
*Can purchase own shares out of capital - s 709 723 Public Companies MUST NOT!
Prohibition on giving financial assistance to purchase own shares

Public companies are prohibited from providing such assistance s 678 (remember Guinness v
Saunders purchasing shares to push up share price and make takeover more difficult
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Meaning of financial assistance set out in s 677


o Brady v Brady: T. Brady & Sons Ltd and its subsidiaries went through restructuring after the
two brothers that owned the majority of shares fell out and wished to divide the companys
assets. One part of the process involved paying financial assistance to reduce liability on the
company buying some of the shares. The fact that it was financial assistance was accepted,
but it was argued that this was not the main purpose, relying on what is now the CA
2006 section 678(4) exception.
o Lord Oliver held the requirement is the assistance is given in good faith and in the best
interests of the company, a subjective standard. He rejected that a larger purpose of freeing
deadlock would suffice for almost anything, and so on this ground the exemption was not
fulfilled: The acquisition was not a mere incident of the scheme devised to break the
deadlock. It was the essence of the scheme itself and the object which the scheme set out to
achieve.

Types of Security:
a) Mortgages
b) The fixed Charge
c) The Floating Charge
i.

Crystallisation

ii.

Charges over Book Debts


a. Use book debts as security to get loan from bank

d) Priority Rights
i.

Date of registration is crucial!

e) Distinguishing fixed and floating charges


f) Registration
g) Insolvency Act provisions
Company Securities:
*Dont need to know details, but whats important is the Private Companies are prohibited from offering
shares for sale to public. There are exceptions, but they are very limited. If a public company wants to issue
shares they must have a sponsor, merchant bank, as a form of investor protection. Methods of public issues
are either 1) direct offer or offer by subscription; or 2) more commonly, offer for sale, which means issuing
house/merchant bank takes over offering process, acting as agent raising money for company. This is where
issue of commissions and brokerage because, obviously, issuing house is going to need to make profit. Also,
another important reason, is issuing house will act as underwriter, guaranteeing that they will purchase any
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shares not sold to public. They will also sub-underwrite that liability. In this way, the company is guaranteed
to get all money they wanted from the issue of shares!
Public Offers for shares:
Private Companies:
Methods of Public Issues:
Official Listing of Securities:

16 Mar. 2015
Tutorial #7 - Raising Capital
*Divide between public and private companies pre-emption rights (first buy rights; sell to existing
members) only exist in private companies! These provisions can be drafted in many different ways, for
example, requiring Directors to purchase (Rayfield v Hands), or only requiring permission from Directors to
sell. In public companies, pre-emption takes on different forms. Under the statute (statutory pre-emption, s
561), when company issuing new shares, it must first offer shares to current/existing members. The reason
for including this is to prevent diluting of certain types of shares (Clemens v Clemens derivative action).
Rights to take up new issue become valuable and can be traded on stock exchange (right to purchase new
shares can be sold).
561

Existing shareholders' right of pre-emption

(1)A company must not allot equity securities to a person on any terms unless
(a)it has made an offer to each person who holds ordinary shares in the company to allot to him on the same
or more favourable terms a proportion of those securities that is as nearly as practicable equal to the
proportion in nominal value held by him of the ordinary share capital of the company, and
(b)the period during which any such offer may be accepted has expired or the company has received notice
of the acceptance or refusal of every offer so made.
Share Premium Account: Usually found on the balance sheet, this is the account to which the amount of
money paid (or promised to be paid) by a shareholder for a share is credited to, only if the shareholder paid
more than the cost of the share.
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Excess value goes into this account. The importance is this account is treated as capital, and all the rules of
capital maintenance apply to it. Labelling them as a capital means they cannot be used to pay dividends!
(Bairstow v Queens Moat House unlawful dividends). That said, these could be used to issue bonus
shares where company gives existing members free shares. Money (for these shares) are taken out of this
account and put into the capital of the company. Bonus shares are worth nothing unless the company can
maintain its dividend.
Shares Raising Capital:
1) Company issues shares to public in order to raise capital;
2) Then the company (directors) can issue new shares and sell to existing members in order to
raise more money;
3) Excess capital is then put into the share premium account, and can be transformed into bonus
shares.
Keep in mind: when shares are issued, normally, to be listed on stock exchange, they have to just be of one
type ordinary shares. That said, some companies are permitted to have different shares. But these are more
common in unlisted public/private companies, eg, preference shares.

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16 Mar. 2015
Lecture # 17 - Takeovers and Mergers
Introduction: The process of Private M & A is largely contractual; whereas public company takeovers are
regulated by statute. Part 28 CA 2006 Takeovers - S 942-991
Soft law: Codes of conduct (takeovers, stewardship), etc - these are not laws, per se, and cannot be enforced in
the courts.
Prior to CA 2006 and Takeover Dir this soft law has been converted into hard law. Public takeovers were very
rare. Only until recently, for example Vodaphone, was first company takeover of that type, and explains why the
Britain could rely on Code without need for hard law. Now, however, this code is embodied in the CA 2006.
Panel still exists, but is legally designated regulatory, but same structure and panel that existed prior to legislation
and Dir. And, much of the content of the Code has been regulated not only in the UK, but across Europe.
Takeovers were not popular in European because shareholders could hold barer shares which are not registered
shares (meaning the names of the holders do not show up in the register). This was problematic as tax avoidance
and evasion was much easier. That said, theft was much easier because no name was on the certificate. These
have now been abolished in the UK. With registered shares, the takeover company can know who the
shareholders are and target them directly. With the barer shares, the company would be unable to target these
shareholders because they were not registered.
DONT FORGET LAW OF CONTRACT!
Two ways to acquire target company: 1) buy company shares (usually referred to as share purchase); 2)
purchase the assets which makes up the business (referred to as business or assets purchase).
If you purchase shares then all its assets and liabilities and obligations are acquired, including all of them that the
buyer doesnt know about. In essence, youre buying the whole company. On the other hand, if simply buying
assets, its only buying those specific items and liabilities arising therefrom.
In the share purchase shares are transferred to buyer via stock transfer form. Where assets are changing hands
then assets need to be identified and transferred by specific form of transfer. Real property must be transferred by
conveyance. In the latter, more consents are typically required for each piece of transferrable property. In the
share transfer there may be provision for change of control; but otherwise, rarely need for third party consents.
Of course, what the buyer is purchasing is quite different in the two methods. In the share purchase the buyer is
acquiring a business. With the assets purchase the seller will not automatically transfer trading arrangements to
the buyer, so negotiations may have to transpire is purchaser would like those.
Finding out about liabilities; tax concerns (different objectives between buyer and seller with tax advantages); if
only partial sale, its usually best done by asset sale, otherwise, its a sale by shares, which will require setting up
of a new company, and the transferring or division of old company. Weve already touched on consents, and
third party consent in transfer. And of course, must be aware of Financial Services and Markets Act 2000
any share transactions may be restricted by financial promotions provisions (section 21). Last, conducting due
diligence is the most important thing to do as a solicitor. This is simply information gathering finding out about
what youre buying and whether vendor representations are in fact true.

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Contractually speaking, youll want warranties and indemnities in order to avoid future liabilities. Buyers want
to see these warranties and indemnities in the sale agreement, and the reason for it is that the buyer usually isnt
going to have complete knowledge of target company and its business before committing to purchase. These
provision protect the buying party by re-allocating risks between seller and buyer. In effect, they are price
adjusters. A buyer is likely willing to pay a higher price if these protections are in place as any hidden risks will
be fall onto the seller.
Valuation (which also takes place in due diligence) buyer is purchasing based on net assets, and will want
warranty which states that companys assets are valued at a certain price. There will be disclosure letters
exchanged. The sellers advisors must therefore have understanding of all material aspects of the company (and
explains why advisors, accountants, bankers, etc are involved in the transaction process). This financial due
diligence usually leads whole process. That said, there will be lawyers handling the legal due diligence aspects of
the M&A, and will be in discussion with the accountants and so on, conducting questionnaires, seeking answers
on a wide-range of questions including status of IP, major contracts, tax structure.

Cadbury Deal How it Changed Takeovers:

The takeover of Cadbury by US based Kraft in 2010 prompted a revamp of the rules governing how foreign
firms buy UK companies.
Many in the world of mergers and acquisitions felt that it had become too easy for foreign firms to buy UK
rivals and the process had become a little murky.
The Panel of Takeovers and Mergers, which regulates this area reviewed the laws and in September 2011
changes were made to the Takeover Code.
Broadly it strengthened the hand of target companies, and demanded more information from bidders about
their intentions after the purchase, particularly on areas like job cuts.
That became a big issue when Kraft bought Cadbury.
Just a week after promising to keep Cadbury's Somerdale factory, near Bristol open, Kraft backtracked and
said it would close the plant.
Kraft later defended itself by saying that when it had more information it realised it was not "feasible to keep
Somerdale open".
So changes to the takeover code mean Pfizer has given more detail about its intentions for AstraZeneca if
the deal were to happen.
Here are some of the key areas of the takeover process that were amended after the Cadbury deal.
Under 2011 changes to the takeover code, bidding firms are required to give more information about their
intentions towards the firm after the takeover.
That includes potential repercussions for jobs and assets like factories. The bidder also has to offer
information about the locations of company headquarters.
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Pfizer has pledged that if the deal went ahead, 20% of the combined company's R&D workforce would be
based in the UK.
The US firm said its commitments would be valid for five years, unless circumstances changed significantly.
Salmaan Khawaja is a corporate finance director, at Grant Thornton and worked at the takeover panel for
two years. "The way Pfizer is conducting itself is very different from the way Kraft was perceived to have
operated," he said.
He says Pfizer's behaviour is not just about complying with the revised rules.
"They don't want to be seen as a predator going after a UK brand aggressively".
Changes in 2011 also gave greater prominence to the views of employees. Representatives of the staff of the
target company can give their views on the takeover.
Changes to the Takeover Code require target companies to name who is interested.
Previously bidding companies could hide behind anonymity, which strengthened their position.
This is not a particularly big issue in the current Pfizer bid.
Although Mr Khawaja notes that Pfizer has offered a lot of detail about its possible bid.
"They could have put out a few sentences and stopped there, it shows they have put in a lot more
groundwork," he says.
Mr Khwaja thinks that kind of detail could serve a purpose.
"It could be helpful in conversations with shareholders... it could flush out their thoughts," he said.
"Though, of course, the shareholders would get the opportunity to decide on the merits of the bid if and
when a formal offer is made," he added.
In 2011 deal protection measures were banned. Previously bidding companies could insist on an inducement
fee - a payment which would be lost if the deal fell through.
It would typically be 1% of the offer value and were a feature of most big deals.
The banning of those payments, boosts the position of target companies and in this case AstraZeneca.

CA 2006 Part 28 Takeovers:


S 942 (2): The Panel may do anything that it considers necessary or expedient for the purposes of, or in
connection with, its functions.
-this includes making rules (s 943)
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s. 944 (1): Rules may


(a)make different provision for different purposes;
(b)make provision subject to exceptions or exemptions;
(c)contain incidental, supplemental, consequential or transitional provision;
(d)authorise the Panel to dispense with or modify the application of rules in particular cases and by reference
to any circumstances.
-very flexible rules; the rules can give directions (s 946) including restraining a person from doing
something
Re Bugle Press (1961) [Compulsory purchase sell out provision]: Two shareholders held more than 90%
of the issued shares of the company. To get rid of the holder of the remaining shares, they incorporated
another company for the purpose of acquiring all the shares of the company. The acquiring company offered
to purchase the companys shares at a proper value. The majority shareholders accepted the offer but it was
refused by the minority shareholder. The acquiring company gave notice of intention to exercise the
statutory power of compulsory acquisition under the section. The minority shareholder applied that the
transferee company was neither entitled nor bound to acquire his shares on the terms offered
notwithstanding the approval of 9/10ths of the shareholders. The minority said the offer undervalued his
shares. The majority shareholders did not file any evidence verifying their valuation.
Held: The court made the declarations sought. In circumstances where the assenting 90% majority were
unconnected with the offeror the normal burden of proof rested on the dissenting minority to show grounds
why the court should order otherwise, but that did not apply where there was a connection between the
assenting majority and the offeror, in particular, where the acquiring company was simply the alter ego of
the assenting majority. As to a submission that the respondents use of section 209 was contrary to the
purpose of the section: I am bound to say that I see very great force in that argument. Whether, in such a
case, if the court were fully satisfied that the price offered to the minority shareholders was a fair price to be
offered for their shares, the section ought to be allowed to operate according to its tenor is, I think, a matter
which it is unnecessary for me to decide today because, in my view, on the facts of this particular case, at
any rate, the onus must rest on Mr Instones clients [the majority shareholders] to satisfy the court that the
price offered is a fair price. In the ordinary case of an offer under this section, where the 90 % majority who
accept the offer are unconnected with the persons who are concerned with making the offer, the court pays
the greatest attention to the views of that majority.
This case, however, seems to me to be quite the reverse of that, because here, although as a matter of law the
body making the offer must be regarded as distinct from the persons who hold shares in that body,
nevertheless as a matter of substance the persons who are putting forward this offer are the majority
shareholders. In a case of this kind it seems to me that the onus must clearly be on the other side, and that it
must be incumbent on the majority shareholders to satisfy the court that the scheme is one with which the
minority shareholder ought reasonably to be compelled to fall in with. The acquiring company had not
discharged that burden.

*Major significance of Code is in textbook general principles: all offerees be treated fairly, minorities
protected in takeover, and no abuse of market, and timetable adhered to so as to ensure target companys
business is not unduly burdened, and particular, that the target company protects their shareholders and they
do not breach their fiduciary duties (s170-177). Also, insider dealing is a large concern in M&As, and this
is in breach s52 of the Criminal Justice Act.

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23 Mar. 2015
Lecture #18 - Winding Up and tidying up topics (Chapter 20)

When a company is insolvent (s. 123 IA 1986) the directors may be displaced by a qualified insolvency
practitioner (s. 390 IA 1986) (or in restricted instances by an official receiver) under one of the insolvency
procedures.
s.122(1)(f) Insolvency Act most common winding up provision for when company becomes insolvent
(unable to pay debts of the company). For as little as 750 debt (s 123) you can seek an order from the courts
requesting winding up.
s.122(1)(g) just and equitable winding up. Shareholders/minority shareholders claim it is just and
equitable to wind up company because of how they have been treated. Of course, this is a very drastic
measure: **Ebramhimi v Westbourne Gallaries Ltd [1972] (pg 76 my notes).
Parke v The Daily News [1962]: payments set aside upon insolvency to be paid to redundant employees.
Mr Parke, a shareholder, went to the courts arguing this was ultra vires and that money belonged to the
shareholders.
These are: administrative receivership, administration, voluntary arrangement, creditors voluntary winding
up, winding up by the court and the appointment of a provisional liquidator.
(A members voluntary winding up is a procedure for the liquidation of a solvent company).
Liquidation or winding up is the process of removing a company from all its legal relationships prior to
bringing the company to an end and removal from the register by dissolution. A dissolved company is dead
and buried!
A. Administrative Receiver. Acts to take control of company property, to sell it, in order to pay one
creditor who is secured by a floating charge. (They are being gradually replaced in practice by
administrators see below).
B. Administrator (Administration Orders IMPORTANT PROCEDURE Rescuing Device)
Some of the most important aspects of insolvency law are those designed to rescue a company in
financial difficulty and save it from being wound up (liquidated).
Aim to put company back on a profitable basis, if possible, or disposed of more profitably than if put
into liquidation. See IA 1986 s. 8 and Sch. B1.
An administrator (insolvency practitioner powers supersede those of the board of directors) of a
company likely to go into insolvency may be appointed by:

A floating charge holder (only companies can have this type of charge mortgages, for
example, are fixed charges. Mortgagees are therefore the secured creditors. Floating
charges are subservient to fixed charges. Floating charges cover all those assets not covered
by the fixed charge. Debentures are debt instruments).
The company itself
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The companys directors


The court

Purpose devising a plan within 8 weeks to prevent the company going into insolvency and to have
it approved by the unsecured creditors. See Sch. B1 paras 1 & 3.
Powers: IA 1986 Sch. B1 para 59 to do anything necessary or expedient for the management of
the affairs, business and property of the company. Sch. B1, para 60 lists specific powers.
Pre-pack(s): Post appointment and pre-approval of a proposal the administrator may exercise all the
powers in Sch. B1 para 59 60 including the power to sell the companys property. If speed is
important he can act without the approval of creditors or the court if he considers a sale to be in the
best interest of the creditors: Re Transbus International Ltd [2004] EWHC 932
In reality the sale is often negotiated prior to the appointment but on the advice of insolvency
practitioner who becomes the administrator this is a pre-packaged sale.
Problems? Pros & Cons? (see paras 7 9 Sch. 1B) may be best opportunity to obtain highest
price; but there is concerns as to connivance. Courts addressed the issue last in 2012, but failed to
intervene. Pre-packs must be justified, but often the administrator claims it was the best price that
could have ever been obtained.
Effect on Directors of Administration: Sch. 1B paras 60 64. Administrator can remove a director
and replace them. Overall, the administrator takes over and supersedes (the powers of) directors
while the administration lasts.
Moratorium: Sch. 1B paras 42 44. No resolution (or Order) may be passed for the winding up of
the company. No steps may be taken to enforce any security over the property (or repossess) without
consent of the administrator. Important provision in giving the administrator change to get company
back into good standing, as during this time creditors are held at bay prevented from exercising
their legal rights of forcing company to sell assets.
End of Administration: Sch. 1B para 76
1) After 12 months unless extended by creditor consent or court order.
2) At any time by the administrator if he thinks the purpose has been sufficiently achieved.
3) By a creditor see Sch. 1B para. 81.
4) The administrator may, if secured creditors are paid and there is money to distribute, put the
company into a creditors voluntary winding up: (para 83). If nothing to distribute he must have
the company dissolved. (para 84).
C. Company Voluntary Arrangements (CVA)
Insolvency Act 1986 ss. 1 7 available to the directors to initiate prior to the commencement of a
winding up or administration (or by an administrator or liquidator once either of those processes
have commenced).

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The process is similar to a compromise with creditors in a reconstruction (see ss. 895 - 899 C.A.
2006), but simpler.
The Proposal: s.1
Appointment of a nominee (or insolvency practitioner): s.2.
- Investigates the scheme and reports to the court within 28 days of its mobility
- Meetings of members and creditors called to approve: s.3 & 4.
Approval & Effect: s.4A - 5 by simple majority of members and by 75% majority of creditors.
- Become binding on all ordinary creditors but not on preferred or secured creditors.
Re Cancol [1996] 1 BCLC 100 a CVA will bind all the creditors, including unknown creditors.
Landmark case that established that a debtor could legitimately offer a different deal under a CVA to
those landlords of premises it wished to continue to occupy for its future business and those whose
premises it wished to vacate. This line of reasoning has been refined and, in more recent times, has
been adopted with considerable success by retail chains overburdened by long-term, onerous,
solvency-busting leases. These debtors have used CVAs as a way of retaining leases at profitable
sites (perhaps on varied terms) and escaping from unprofitable sites by leaving landlords to claim a
dividend calculated in accordance with a specified formula from a pot of money reserved for them.
JJB Sports is one of the most highprofile companies to have used a CVA to this effectand not
once, but twice. There has, however, been no challenge made to any of these CVAs.
Offence for an officer of the company to try to obtain approvals to a CVA by false representations or
fraudulently doing or failing to do anything: IA ss.5-6 A: Sch. 2 paras 8 & 12.
Dissenting members and creditors may apply to the court within 28 days to set aside the CVA on
grounds of unfair prejudice or material irregularity: IA ss.5-6: If the CVA proceeds the nominee
becomes the supervisor and implements the scheme.
Small companies CVA plus a moratorium: IA s.1 A:
Allows directors to apply for a 28 day moratorium (which can be extended).
Effect no decision to wind up can commence. No steps can be taken to enforce any security or
repossess any goods or commence any other legal proceedings.
Any provision in a floating charge is invalid if the charge is to crystallise on the obtaining of, or any
action taken to obtain, a moratorium.
D. Voluntary Winding Up
a. Members voluntary winding up by special resolution of the members following a statutory
declaration of solvency by the majority of the directors: (See IA 1986 s.89). Members appoint the
liquidator and control the solvent liquidation of the company, court involvement not required at all.
b. Creditors voluntary winding up by special resolution of the members without a solvency
declaration. This entitles the unsecured creditors to appoint the liquidator and a liquidation
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committee to be appointed with up to 5 representatives of creditors to assist and supervise the


liquidator.
Declaration of Solvency: within the 5 week period preceding the adoption of the resolution a
majority of directors at a board meeting must have made a statutory declaration that the company,
after inquiry, is solvent (able to pay its debts in full within a maximum of 1 year of the
commencement of winding-up) otherwise the liquidation becomes a creditors voluntary winding-up:
s.90. It must include a statement of the companys assets and liabilities as at the last practical day
before making the declaration.
To make a declaration without good grounds is an offence: s 89(5).
The significance of the type of winding up lies in who (members or creditors) appoint the liquidator
and whether or not a liquidation committee containing creditors must be appointed to assist and
monitor the liquidator.
E. Winding up by the Court ( aka compulsory liquidation)
The court orders the company to be wound up on one of the grounds listed in IA 1986 s.122 (1)
(today only grounds f and g are relied on).
They are:
i)

The company is unable to pay its debts ( this ground is very wide and flexible so as to
include failure to pay one debt in excess of 750 after a written demand but see s.123 for the
full scope of inability to pay its debts!).

Or
ii)

The court is of the opinion that it is just and equitable that the company should be wound
up.

Petition: Application on either ground must be made by petition under s 124 and in a long list
includes : a creditor or creditors; the company itself; its directors; a liquidator inter alia ...
THE NEXT HEADINGS REFER YOU TO UNPLEASANT POSSIBLE CONSEQUENCES
OF BEING INVOLVED AS A DIRECTOR IN YOUR COMPANYS INSOLVENCY:
F. Relevant to all insolvency or liquidation proceedings(except CVAs): Duties:
Duty of persons connected with the company (directors, officers etc) to provide the insolvency
practitioner with information, to deliver up documents and to attend as reasonably required. Such
persons can also be required to answer questions, provide affidavits by court order back by warrants
for arrest and search and seizure: see IA 1986 ss 234- 235.
In relation to the purpose of such powers see MF&R 20.9.5.3 and the interesting cases referred to
there.

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G. Liability for Fraudulent Trading: s 213 previously discussed in the programme.


H. Wrongful Trading: s 214 also previously discussed in detail. See also the Articles referred to in
MF&R 20.12.7.
I. Directors Disqualification: see again the CDDA 1986 and the reading for directors liabilities.
Refresh your memories on the effect and duration of disqualification and especially the grounds that
specify mandatory disqualification in relation insolvency of a company namely unfitness. Also see
disqualification undertakings. See the interesting material in MF&R 20.13.6.1- 20.13.6.9.
J. Use of Insolvent Companys Name : IA 1986 s. 216 (Phoenix Provision)
K. Order of Application of Assets in Liquidation: Ss. 143, 148, 175,386, 387.
L. Contracting out (subordination of debt)
M. Malpractice before and during liquidation: IA 1986 ch. 10 ss206 (fraud in anticipation, 12 months
prior, of winding up) - 219 (including ss212, 213,214,216).
See also:
Transactions at an undervalue - s 238
Preferences- s 239 (selecting certain creditors for payment over others, eg, director who has provided
loan to company)
Extortionate credit transactions s244
Avoidance of certain floating charges s 245
Preferential debts s386 Insolvency Act (employees are preferential creditors)

*Sections 213, 214, and 217 are the statutory lifting (of the veil) provisions that impose liability on
directors (to contribute to debts).

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EXAM DRAFT ESSAYS


(1)
Essay # 1 Lifting and Piercing the Corporate Veil (and Parent-Subsidiary Liability)
At the end of the civil war (1865) in the United States, and passing of the 14th Amendment, corporate
lawyers took what was supposed to be a protective measure for newly freed slaves, and transformed it to
apply to corporations. To do so, they would have to convince the Supreme Court that the corporation was a
person. Of the approximately 300 cases to follow, 90% of them were brought by corporations.
Similarly, in the UK, one of the fundamental principles of company law, as set out in Salomon v. Salomon
[1896], is that a lawfully incorporated company has a legal personality or identity that is separate from its
controllers. Therefore any liability incurred by the company is limited to the company and does not extend
to its shareholders and directors, hence limited liability. Similarly, any liability incurred by its controllers is
limited to them and does not extend to the company. The veil of incorporation, accordingly, is the legal
concept that describes this separation of personalities. In circumstances where the corporate veil is used as a
faade or sham, the courts may be willing to find the shareholders personally liable under the doctrines of
lifting and piercing the corporate veil, respectively.
Lord Sumpton in Prest [2013] is critical of references to a faade or sham, instead preferring the
principles that lay behind these protean terms: the concealment and evasion principles. The former is not a
piercing, simply a lifting, identifying the true individuals responsible when a company has been interposed
in order to conceal ones identity in order to avoid liability. The former, however, is a piercing, and is where
the courts disregard the corporate veil if there is a legal right against the person in control of it which exists
independently of the companys involvement, and a company is interposed so that the separate legal
personality of the company will defeat the right or frustrate its enforcement. Sumpton acknowledges that
many cases will fall into both categories, but the differences are critical.
Sumpton also identifies four other scenarios where the advantages of the corporate veil may be lost: (1)
statute for example, ss. 213&214 Insolvency Act; Companies Act s 933; and the Matrimonial Act; (2)
contract; (3) agency; and (4) trustee. Often there will be overlap between these scenarios and doctrines,
Prest being a salient example. The following will thus broach the subject of veil piercing from two distinct
perspectives: shareholder & director liability and parent-subsidiary liability.
Shareholder/Director Liability
Gilford Motor v Horne is a leading example of using the corporate personality as a faade. In order to evade
a non-compete covenant upon termination of this contract, Mr Horne incorporated a new company using his
wifes name and a friend and entered into activities in contravention to the covenant. The CoA granted an
injunction against Mr Horne and the company from engaging in further activities in breach of covenant.
Similarly, in Jones v Lipman, the defendant attempted to avoid a contract for sale to Mr Jones by
transferring land to a company of which he and nominee were sole shareholders and directors. Russell J
ordered specific performance against both Mr Lipman and the company on the basis that the company was
a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of
equity.
It is important to recognize that in both Gilford and Jones the court made order against the individual and
company, thus recognizing rather the ignoring the companys separate personality.
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In that vein, the doctrine of piercing the veil usually cannot be used to usurp the principle of privity of
contract. Although in Gramsci the claimants successfully argued the corporate veil be pierced so as to treat
the defendants as party to agreements entered into with various companies, the Supreme Court in VTB
[2013] declined to follow it, refusing to extend veil piercing to a controller of a company who was not a
party to the contract. Lord Neuberger also suggested the court can only lift the veil of incorporation when
more conventional remedies proved to be of no assistance.
Parent (-Subsidiary) Liability
Another way the courts have circumvented the separate personality of the corporation is through the concept
of agency. Agency exists between two parties, known as parent and agent, whereby acts and agreements of
the agent can (legally) bind the principle. In essence, the obstacle of privity of contract is avoided and make
the principle liable for contracts entered into with third parties.
Whether a person is an agent is a question of fact and can be inferred from circumstances, but can only be
established by consent of the principle (Garnac Grain v Fairclough). This is significant within the context
of the parent-subsidiary relationship where the parent exercises sufficient control (Smith Stone Knight). It
is not an uncommon strategic tactic to place risky investments on the books of the subsidiary. If these
investments become volatile the parent company can dissolve the subsidiary without harming the parent.
Although the subsidiary is a separate legal person (if incorporated), the parent is typically not found liable
for its acts, debts and obligations. That said, the trend in modern Europe and in the continental law is to
make the parent company liable for the debts of the wholly-owned subsidiary (Schmitthoff "The WhollyOwned and the Controlled Company").
DNH v London Tower Hamlets was anomalous insofar as it established the group entity doctrine.
Denning concluded that a group of companies was in reality a single economic entity and should be treated
as one. Thus, if the subsidiary is injured, so is the parent. Dobson (Lifting the Veil in Four Countries) argues
that some courts in Europe use the unity of direction test to assess the control relationship, which is
roughly the same relationship as that assessed by Dennings group entity doctrine.
The HoL in Woolfson disapproved of Dennings group entity theory, finding the veil of incorporation
should be upheld unless a faade. Although expressly disapproved, Dennings views still had considerable
influence in the case of Re a Company (1985), where the CoA stated the court will use its power to pierce
the veil if it is necessary to achieve justice, irrespective of the corporate structure.
The CoA in Adams v Cape narrowed the way in which courts could lift the veil in the future. At issue was
whether Cape was present in the US jurisdiction by virtue of its US subsidiaries. The only way the court
could attach liability would be either by treating Cape group as one single entity, or finding the subsidiaries
were a mere faade, or the subsidiaries were agents for Cape. Slade categorically rejected these three
arguments. Speaking to Dennings group entity argument, he held the court was not free to disregard the
principle of Salomon, and although subsidiary companies were creatures of the parent company, under the
law they are to be treated as separate legal entities. Moreover, structuring a corporation to avoid
unfavourable tax regimes was not an abuse of the corporate personality. Ultimately, the three veil-lifting
categories argued failed because Cape was found not to be present in the US through its subsidiaries.
This restrictive approach was followed in Bank of Montreal v Canadian Westgrove and Yukong Line
which held that one would need pretty clear possibly overwhelming evidence of agency in order to
satisfy the courts. However, the courts in Creasey v Breachwood were willing to substitute the name of one
company for another in order to satisfy a default judgement for a wrongfully dismissed manager. The judge
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in the case deliberately ignored Adams due to the idiosyncrasies of the case which justified its departure. It
is perhaps for this same reason that Creasey was overruled in Ord v Belhaven, because the financial
restructuring was legitimate and not merely a faade. Ultimately, if the court takes the view that the veil
should be lifted, then liability can flow to the parent company.
In Chandler v Cape the CoA was able to avoid the veil lifting controversies by examining the issue as a
tortious matter, with the standard duty of care requirements being applicable. The Court was satisfied that
Cape, as parent company, owed a direct duty to Mr Chandler though employed through the subsidiary. In
doing so, the Court analyzed the circumstances and found four grounds that satisfied there being a sufficient
proximity (neighbourhood) to find a duty of care requirement.
Conclusion:
While in Daimler v Bauman (American) the courts declined to extend liability to the parent company,
thereby overruling the Ninth Circuits agency theory, Canada has taken a different principled approach. In
Choc v HudBay Minerals the Superior Court held that the parent company can potentially be held
responsible for actions of its subsidiary (in another jurisdiction).
In Prest Lord Sumpton concluded that the principle of piercing the corporate veil is only to be invoked to
prevent the abuse of a corporate legal personality. As we have seen, whether the court will pierce the veil is
not as much dependent upon precedent as it is on the circumstances which give rise to the case. Moreover,
the doctrines of concealment and evasion are not the only grounds for veil lifting and piercing. In the case of
insolvency (IA ss 213 & 214) or fraud (CA s 993) the courts have a statutory basis for attaching personal
responsibility. This does not disregard the corporate personality, but simply holds an individual responsible,
as in Gilford and Jones.
Gallagher and Zeigler (Lifting the Corporate Veil in the Pursuit of Justice ) in an examination of veil
piercing cases concluded that the doctrine can have negative impacts on directors duty to the company,
individual taxation principles and the rule in Foss v Harbottle. While this may be true, the ability to hold
individuals accountable for their actions remains a fundamental principle in the common law world. In that
vein, the courts will not (and ought not) allow a statute to be used as an instrument of fraud (Rochefoucauld
in Boustead).

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(2)
Essay # 2 Minority Shareholder Protection
Minority shareholders hold a precarious position within large corporations because the company simply
requires a majority vote for ordinary resolutions. This procedure can thus result in minority interests being
disregarded. In the event the company takes action which is unfairly prejudicial to the minority shareholder
the Companies Act 2006 (CA) provides for a cause of action and remedy under ss. 994 & 996, respectively.
A minority shareholder can also protect their rights through a variety of statutory, common law and
contractual provisions, including: s.260 derivative actions; s.122 Insolvency Act 1986 (IA); s.33 directors
duties; alteration of the constitution; and shareholder agreements. This will focus on ex post statutory
provisions. Also, I should note that a derivative action is not a prototypical minority protection device for
reasons detailed below.
Derivative Actions s 260
The rule in Foss v Harbottle is used to describe the policy of the courts of not hearing a claim concerning
the affairs of a company brought by a member or members of the company. When a wrong is suffered by a
company the proper claimant is the company and not the members who may have also suffered damage.
Though argued there are four exceptions to the rule in Foss, the only true exception is fraud on the minority
because it is an exception to both the proper claimant and internal management principles the other
three exceptions are personal actions (eg ultra vires/illegality). Jenkings J adds a third dimension ratification principle - in Edwards v Halliwell: the principle that if a wrong is done to a company and is
ratifiable by a simple majority then a member cannot sue because when it has been ratified it no longer is a
wrong. Weddenburns theory in Shareholders rights and the rule in Foss v Harbottle suggests there are a
class of acts which cannot be ratified by simple majority and a member is entitled to litigate an act of that
class. What that class of actions are is unclear; presumably, however, fraud on the minority clearly falls
within it.
In An Analysis of Foss v Harbottle Beck argues that majority rule is the foundation of Foss because the
internal management principle is based on the idea that matters are determined by majority decision and so
not reviewable by the courts. Accordingly, he states, the proper plaintiff principle is based on the common
law rule that the majority in a general meeting have the right to decide whether to litigate in the companys
name. The paradox of the proper plaintiff principle is of course those who determine whether or not to
litigate are (often) those who have committed the wrongdoing. Thus strict adherence to The Rule will
preclude potentially meritorious actions which would otherwise be successful.
In a derivative action the member shareholder pursues a claim adjoining the company as co-claimant, and
the company recovers compensation, unlike a section 994 petition or a personal action where the member
shareholder recovers the award.
Actions must be both unfair and prejudicial s 994
Section 944 petitions for relief of unfairly prejudicial conduct of a companys affairs may be presented by a
member of the company, personally, in respect of conduct which unfairly prejudices the interests of its
members. The most common complaint is that a controlling majority of members have unfairly prejudiced
the minority, and the most common remedy sought is an order that the majority must purchase the
minoritys shares at a price which reflects their proportion of the companys value.
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In ONeill v Phillips [1999] a disgruntled former director, ONeill, owning 25% of shares in a company was
demoted and denied a conditional 50% share ownership. He claimed that he had a legitimate expectation (as
a member) to receive these shares and that denying him this allocation was unfairly prejudicial. Lord
Hoffman, delivering the leading judgement, scrutinized four important aspects of the remedys operation,
ultimately finding that ONeills expectation was not legitimate in the Hoffman sense.
1)
2)
3)
4)

Concept of unfairness and equitable considerations;


Nature of legitimate expectations and scope (in quasi-partnership companies);
Concept of a no-fault divorce; and
The remedy of offers to buy the petitioners shares at fair value.

In doing so, he restricted the application of legitimate expectation noting that his previous use of the term
(in Saul) was perhaps a mistake as it had unduly broadened the ambit of successful redress under what is
now a s 994 petition.. Therefore, the conditional agreement to increase the directors shareholdings was not
sufficient as only an unconditional agreement (presumably) or an express provision in the constitution would
have given rise to a legitimate expectation in the Hoffman sense.
It is relevant to note that curtailing legitimate expectation properly reflects the distinction that ought to be
made in s. 944 between an employee and member. While a person may simultaneously occupy both roles, it
is only detriments suffered in the capacity as a member which gives rise to the petition. Consequently, in
Hoffman, because his share-value and holdings were unaffected, whatever grievances he had were in his
capacity as employee and thus governed by an employment contract.
Just and Equitable Winding up Remedy s 122 IA
A dissatisfied minority shareholder, who is unable to obtain the requisite majority vote necessary for a
special resolution for voluntary winding-up can apply to the courts for an order of winding up under s 122
Insolvency Act. For this order it must be shown that one of the circumstances listed therein have been met,
the most common ground being ss g): the court is of the opinion that it is just and equitable.
This order is a last resort remedy as it results in the dissolution of the company. Wilberforce L.
acknowledged in Cumberland Holdings that winding up a successful company that is properly managed is
an extreme step and requires a strong case. Accordingly, it is more likely to arise in a small private
companies or quasi-partnerships, as in Ebramhimi v Westbourne or Yenidje Tabacco Co Ltd.
In Tabacco, the company had two shareholders, both holding equal voting shares, and both directors for life.
Although they had a falling out and were not on speaking terms, the company remained largely successful.
However, the CoA upheld an order for winding up, finding the company was in a state no longer
contemplated by the parties.
Ebramhimi, similarly, had two shareholders who were both directors. Sometime later the one shareholders
son joined the business as director and acquired 10% of the shares. After a falling out, the son and father
voted to remove Mr Ebramhimi as director and precluded his involvement in management. Although the
company was still profitable, the HoL believed the company was analogous to a partnership, and based on
this, it was inequitable for the parties involved to force Mr Ebrahimi out of the company.
Conclusion:
The provisions listed above are not an exhaustive list of minority protection devices. As noted, s 213 and s
994 of the CA and s 122 of the IA are ex post statutory remedies. It was feared that derivative actions would
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flood the courts with litigation. To date, this has not been empirically supported. That said, there are some
reasonable concerns regarding the justiciability of business decisions made in absence of procedural defect.
The business judgement rule states that courts are (or ought to be) unwilling to impose remedies for
negligence claims as directors have been selected by the shareholders and the most appropriate remedy for a
breach is removal of that director.
The personal actions available under ss 944 and 122 do not carry this same concern as it is the member in
their capacity as such that claims the affairs of the company have been conducted in a manner that is
unfairly prejudicial to the shareholder. The question therefore is not whether the directors have been in
breach of their duties towards the corporation, instead whether the companys affairs have been unlawfully
conducted against the member or class of members.
The obvious paradox in these remedies is the directors duties towards the corporation as a whole (s 172) on
one end, and the courts deference to the business judgement, majority vote, and rule in Foss v Harbottle.
Presumably these concepts should not come into conflict, but in reality, the minority shareholder may, at
times, have their interests subordinated to that of the majority, and even more rarely, when the majority
interest is subordinated to that of the minority as in the Canadian case of Tech Corp v Millar.

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(3)
Essay # 3 Corporate Governance
Why Corporate Governance:
The Sarbanes Oxley Act 2002 (SOX) was an American legislative response to a number of scandals that
resulted in the collapse of major publicly held companies including Enron, Tyco, Worldcom and Arthur
Anderson. Enron, in particular, was able to hide financial losses through a series of creative and morally
hazardous practices, including putting projected profits on financial reports as realized profits and placing
debts on the books in shell (special purpose entities) corporations. Once it was exposed, it caused the share
value to plummet from almost $100 to mere pennies. The CEO, Jeffrey Skilling was imprisoned.
SOX, in response, attempts to strengthen corporate oversight and improve internal corporate controls in
order to prevent further abuses. Its main purpose is to protect shareholders from fraudulent representations in
corporate financial statements, and to criminalize or sanction violations thereof. One way to ensure the
accuracy of these financial reports is to implement independent 3rd party verification.
The Companies Act 2006 has implemented similar legislative provisions under Part 15 Accounts and
Reports, Chapters 2 7. Companies are required to keep accounting records (386 & 7) which give true and
fair view (393), including off-balance sheet arrangements (410A). These reports require approval and
signing by the directors and carry both civil and criminal sanctions. A director may also be held liable for
false or misleading statements (463). Auditors in both private and public companies can be appointed by
directors during a specified time frame, but can also be appointed by members through ordinary resolution
(485 & 9).
The legislative initiatives are meant to instill investor confidence and, in turn, attract investment. The
thinking is when investors are informed and can safely rely on financial information they are more likely to
invest. Accordingly, good corporate governance practices will incentive investors to invest in their company
because those investments will be safer. Conversely, companies with bad corporate governance reputations
will deter investment.
Often there is confusion between corporate governance (CG) practices and corporate social responsibility
(CSR), both of which influence investor attitudes and corporate financial stability. Nevertheless, while
complimentary issues, they are conceptually distinct.
Corporate Governance v Corporate Social Responsibility: an overview
The Cadbury Committee provides the classic definition of CG: it is the system by which companies are
directed and controlled. Boards of directors are responsible for the governance of the companies. The
shareholders role in governance is to appoint the directors and the auditors and to satisfy themselves that an
appropriate governance structure is in place. The boards actions are subject to law, regulations and the
shareholders in general meeting. An example of corporate governance practices includes the structuring of
the Board and division of powers.
Under the UK Corporate Governance Code the board should include a combination of executive and nonexecutive directors in order to disperse power the non-executive acting to oversee the executive board and
act independently therefrom. It also states that there should be a clear division between running of the board
and the executive responsibility of running of the companys business. Thus, the chairman and chief
executive should not be exercised by the same person. While in the UK 90% of companies follow a dual
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strategic leadership pattern, in the US, by contrast, in 80% of US companies, the CEO is also the Chairman
of the board, and consequently, this concentration of power likely inhibits effective monitoring (Aguilera
Corporate Governance and Social Responsibility: a comparative analysis of the UK and the US).
CSR, on the other hand, refers to those practices and policies within the company that are committed to
ethical behaviour and the objective of improving the quality of life of its employees, community, and society
at large. One topical CSR policy is effective and transparent supply chain management in order to reduce the
prevalence of slave labour and environmentally degrading practices. The Modern Slavery Bill currently in
UK Parliament and the Lacey Act (US) attempt to address these respective issues. Statutory provisions
under the Companies Act 2006 directors duties, s 170-177 also account for socially responsibly
governance, as does Article 3(3) of the Treaty on European Union which treats economic and
environmental growth as equally significant purposes of the Union. These statutory provisions also
demonstrate the overlap between CG and CSR practices as often the former influences the latter, and vice
versa.
Shareholder voting rights Appointment of Directors:
Ryan et al in Company Law (2015) note that the only group actually in a position to ensure that the
company is managed for their own benefit are the directors and the only group who have the opportunity to
control the directors are the members. (419) Aguilera notes that largest equity investors in both the UK and
US are institutional investors. These groups have significant powers in corporate behaviour because their
investment capacities are enormous. The pension funds and insurance companies that dominate in the UK
have long-term payout stewardship obligations and consequently will invest within companies looking for
long term growth, not short term immediate gains at the expense of losses in the future. This is akin to the
enlightened shareholder value approach to corporate governance (Cabrelli, The Reform of the law of
Directors Duties in UY Company Law).
The Stewardship Code directly responds to this, its aim to enhance the relationship between institutional
investors and companies to improve long-term returns. Moreover, under the Pensions Act 1995, pension
schemes are required to disclose the extent to which social, environmental and ethical considerations are
taken into account when developing their investment portfolio. This requirement in turn signals for the
development of coordinated CG and CSR standards (Aguilera).
Shareholder democracy is thus an important feature of company law in the UK and US. Not only does it
have the ability, through capital investment, to encourage responsible standards, but they can also directly
control the company by selecting, dismissing and replacing its directors (s 168) and voting on important
strategic decisions. In that vein, it is possible for large institutional shareholders to control enough shares to
overcome the separation of ownership and control in large public companies and have a direct influence on
their management (Ryan et al).
We should acknowledge the obvious paradox in the common law principle that directors should manage the
company unfettered by the shareholder. While we can accept this extraordinary activity in investors with
long-term sustainable gains, the question arises when an investor is able to control/influence the activities of
the company negatively, such as a shareholder-centric perspective whereby the member exhausts all of the
resources of the company for short term immediate gains, only to leave with the fruits of this abuse?
Directors Duties s 170 & 172:

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Two key statutory provisions are ss 170(1) and 172 CA. The former states that general duties owed by a
director are owed to the company whereas the later states that a director must act in the way he considers, in
good faith, would be most likely to promote the success of the company for the members as a whole, and in
doing so have regard for certain matters including: long term consequences; interests of companys
employees; business relationships; impact on the community and environment; reputation; and the need to
act fairly between members of the company. (Under 172(3) a director may consider the interests of creditors
of the company).
Section 170 codifies the general rule detailed in Percival v Wright while s 172 expands on this rule by
suggesting the company is more than a nexus of contract between members, and duties are owed to a
larger stakeholder body. This does not correlate with a departure from the law and economics movement
advocated for by proponents such as Posner, but simply reconceptualises the traditional paradigm of profitmaximizing activity. In that vein, the triple bottom line accounts for benefits or losses that goes beyond
direct monetary calculations. This type of ethical direction has garnered more attraction in the wake of the
American Financial Crisis, and as the media has focused attention on corporate abuses and irresponsibility.
In addition to the CA the UK has soft law codes unenforceable in the courts, but which still influence
directors. Both the Corporate Governance Code and UK Stewardship Code are more akin to selfregulation guidelines, lacking teeth of legal enforcement. That said, failure to comply with the Codes
requires public disclosure, hence the aptly named comply or explain approach. Failure to comply with the
Code does not necessarily mean there has been a fundamental or unethical breach. It has been recognized
that an alternative provision may be justified in particular circumstances if good governance can be achieved
by other means. The advantage of the code is thus its flexibility. That said, the Financial Reporting Council
have noted that explanations for non-compliance range considerably in scope, some of which comply only in
procedure but not in substance.
A fundamental distinction, however, is the Governance Code is directed at the corporate structure whereas
the Stewardship Code is directed at institutional investors.
Art 3(3) Treaty on European Union:
Prof. de Sadeleer at a recent conference Public Interest Environmental Law noted Art 3(3) of the TEU
explicitly supports placing economic growth and improvement of the quality of the environment at the same
level. However, there are two competing paradigms that have hampered its development: liberalization v
environmental degradation and free trade v neo-protectionist policies. The issue is thus in establishing
effective criteria for assessing pareto optimal activities.
It is worth noting the ECJ has influenced environmental control mechanisms by allowing member states to
pursue MEQRs (Dassonville - measures having equivalent effect to quantitative restrictions) that have a
non-financial aim. Therefore environmental protection policies which influence product use and thus market
penetration may be lawful.
Supply Chain Management Modern Slavery Bill (UK) and Lacey Act (US):
Supply chain management is a salient example of the collision between CG and CSR. Simply defined, SCM
is the regulation and transparency of the operations of suppliers, manufactures and all other stakeholders
who become engaged with the company. A controversial supply chain exposed in recent years was that of
Apples manufacturing by China-based Foxcomm.
The Modern Slavery Bill currently in UK Parliament will require public companies, including the FTSE
350, to report on supply chains. At a recent conference, CORE, a UK NGO network specializing on
corporate accountability and transparency, submitted its recommendations on amendments to the MSB to
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include all large corporations, including those not publically listed. This goes beyond what is required in the
EU Dir on non-financial disclosure.
Alternatively, the LA criminalizes trade of substances that have been illegally taken, possessed, transported
or sold in violation of any foreign law, which makes it unique in character as few other jurisdictions attempt
to regulate extra-jurisdictionally. Similarly, as more environmental legislation is enacted internationally
(such as CITES and COTES) the further the reach of the Act.
Conclusion:
CG and CSR practices are regulated through both hard and soft law, such as the Corporate Governance,
and Stewardship Codes; by domestic and international legislation such as the Companies Act 2006,
Modern Slavery Bill and s. 3(3) of the TEU; by primary and secondary legislation such as CITES and
COTES; and through shareholder activism.
Events like Bhopal and, more recently, the collapse of the Rana Plaza factory in Bangledash have mobilized
parliamentarians and civil society alike to push for more transparency in supply chain management and
better corporate governance regimes. The MSB is a positive step in the right direction. Without domestic
regulation, transparency and ethical institutional investors, or a fundamental cultural shift in the selfregulation of directors (power corrupts and absolute power corrupts absolutely), victims of poor CG and
CSR practices will remain without effective ex ante measures. Ex post, access to justice is a matter
deserving of more attention and beyond the scope of this paper. That said, our focus should be on prevention
rather than compensation.

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(4)
Essay # 4 Articles and Shareholder Agreements
Under the Joint Stock Companies Act 1844, the Memorandum and Articles of Association made up the
companys constitution, the former covering external relations and the latter internal. Post 2006 Companies
Act, the constitution is comprised of the Articles and any special resolutions registered at Companies House
(s 17). The constitution provides the rules governing decision-making in the company. It is the framework
within which the company operates, and provides a mechanism for deciding questions: day-to-day
management being determined by the Directors while the fundamental matters decided by members.
Section 33:
It goes without saying that every company must have articles. Under s 33, the companys constitution bind
the company and its members to the same extent as if there were covenants on the part of the company and
of each member to observe those provisions. In other words, a member enters into a statutory contractual
relationship with the company in his capacity as such, and between the members inter se. Consequently, the
company is a separate person in this contract. Accordingly, the traditional restraints of privity are applicable.
Issues arise therefore when a member occupies multiple roles within the corporate structure and when
determining whether a right is contractually binding or enforceable as a member (insider rights), or in a
different capacity (outsider rights) discussed below.
Last, the issue of pre-incorporation contracts can be quickly dismissed with. Unless through novation a new
contract is made with the company, a party cannot (save for some exceptional circumstances) enforce a
contract made with the company before lawfully incorporated: Browne v La Trinidad.
Statutory v Standard Contracts:
A significant distinguishing feature of the statutory contract entered into with the company is an amendment
to it only requires a special resolution whereas in a usual contractual relationship both parties must be in
unanimous agreement.
Moreover, the Contract (Rights of Third Parties) Act 1999 doesnt apply to terms in the companys
articles by s 6(2) of the 1999 Act
Furthermore, courts are reluctant to rectify articles unless the outcome would be commercially absurd,
whereas they would not be so with a standard contract. AG of Belize v Belize, for example, Lord Hoffman
sided with the Government, holding that rules of construction would not read in provisions left silent in the
articles. That said, Common intentions which are not reflected in the wording of the articles may be taken
into account when providing relief for unfairly prejudicial conduct of the affairs of a quasi-partnership
company.
Last, weighted voting shares provided for in the constitution provides members with rights that may be
disproportionate with their shareholding. For example, a person holding 100 shares (out of 500) may be able
to prevent a resolution depending on the share and voting rights attributed to it. In Bushell v Faith the HoL
upheld the weighted voting provision in the articles which prevented the majority shareholders from passing
a special resolution because they lacked the requisite 75% vote. Consequently, weighted votes are a similar
mechanism as shareholder agreements as the latter can block the statutory right to alter its Constitution.

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Unanimous Shareholder Agreements (USA):


Members may enter into (private) unanimous shareholder agreements. These supplement the articles but do
not form part of it. The question is whether they should be filed with the Companies House if they modify
the articles. I would argue they should not for two reasons: (1) it does not form the constitution as set out in
s 17 and must therefore fall outside the constitution; and (2) because it does not form the constitution it is
merely a private contract and enforceable in the capacity as a traditional contract. That said, it would seem
more fittingly described as a hybrid agreement enforceable under both contract and statute (under s 29(b)).
And revolutionary in nature, able to override the common law rule that shareholders, even when acting
unanimously, could not fetter the discretion of directors
Insider v Outsider Rights:
Authorities suggests that distinguishing between insider and outsider rights is somewhat arbitrary. A
member-director, for instance, who is being dismissed contrary to the Articles, can enforce said right as a
member rather than director depending on how they phrase the argument. If they attempt to enforce the
articles as a director to maintain their position as such, presumably this will and ought to fail. If, however, he
insists that he as a director not be dismissed based on his rights as a member to enforce a provision in the
articles providing for said resistance, he is perfectly within his rights to do so. Hence, the argument is
superficially constructed to avoid grounds for dispute.
In Eley v Positive Government, for example, the articles provided that My Eley be appointed the companys
solicitor and should not be removed other than for misconduct. Some years later he became a member and
was removed from his office. Instead of relying on his right in the capacity as a member, he attempted to
obtain remedy through a supposed contract entered into between the company and himself before
incorporated. As noted above, unless there was novation, this is arguable legally unsustainable. That said, it
is important to note that although the article requiring the company to employ Mr Eley was a matter between
shareholders and directors, and not them and the plaintiff (outsider rights), it may also suggest that every
member of the company (including Mr Eley) had a membership right to prevent the directors appointing
anyone else as solicitor (insider rights).
In that vein, Hickman v Kent Sheep is clear that an outsider whom rights are purportedly given by the
articles as an outsider, whether a member later on, cannot sue on those articles treating them as contracts
between himself and the company. In Hickman, the arbitration clause was upheld as being an insider right,
therefore staying the action.
In Salmon v Quin and Axten, Salmon enforced his outsider rights as a managing director to veto certain
board decisions by suing as a member for the enforcement of the relevant articles.
In Rayfield v Hands, Mr Rayfield wanted to transfer his shares but Mr Hands and his fellow directors
refused to take them in contravention to the articles. Vaisey J interpreted the reference to the directors in the
article as a reference to the class of members who were directors and so held that the article concerned
membership and had contractual force. He granted Mr Rayfield an order requiring the directors to take the
shares but said this conclusion was based on the fact the company was analogous to a partnership.
By contrast, in Beattie v Beattie, Greene MR held: the contractual force given to the articles of association
is to define the position of the shareholder as shareholder, not to bind him in his capacity as an individual.
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In this case, the company brought proceedings against a director-member concerning his conduct as a
director. The CoA held the arbitration article was not enforceable because it was only in relation to
membership matters, whereas this concerned his personal activities as a director. (This arbitration clause can
be contrasted with Exeter Football Club v Football and Fulham Football Club v Richards where the
claimant argued the arbitration clause in the articles violated their statutory rights, as members).
Reconciling Enforcement of Articles and the Internal Management Principle:
The concept that the company is the proper claimant in a matter concerning its internal management causes
friction in cases like Edwards v Halliwell or Salmon v Quin and Axtens where the court compels directors
to act or refrain from acting in a certain way. Wedderburn in Shareholders Rights and the Rule in Foss
and Harbottle rightly points to the attack on Harbottle (which was completely swept aside in Salmon), but
acknowledges that Salmon was enforcing a (personal) contractual right stemming from the articles, thereby
allowing the courts to bypass the internal management principle. That said, he notes that there is a clash
between the outmoded rule against internal interference and the simple principle that contracts are
enforceable. If the articles were unenforceable it would render the companys constitution as little more
than guidelines which may or may not be followed.
Contracting out of Statutory Rights:
In Peveril Gold Mines it was held that the articles cannot limit a right given to members by statute. In other
words, contract out of statutory rights. This principle was endorsed as late as 2004 in Exeter football Club
the arbitration clause was avoided in favour of the claimants rights exercisable under a s 994 petition. The
same issue was returned to in Fulham Football v Richards. This time, however, the CoA held the
arbitration clause was enforceable. The leading judgment held the clause as enforceable because the
remedies sought under the s 994 petition were similarly available through direct arbitration with the Football
Association. The caveat being, in obiter, that if the rights of third parties, such as creditors, were effected
then the arbitration clause would unlikely be unenforceable for the same reason above, unless the remedy
sought could be granted through arbitration.
This case does not expressly overrule the judgement in Peveril, but it would certainly seem to limit its
persuasiveness moving forwards. Whether the courts will uphold the contents of the articles in favour
of statute will presumably depend on policy considerations and tension between the contract and
statute. For example, in Peveril the winding-up petition sought could not be prevented by provisions in
the constitution requiring satisfaction of certain conditions before authorization would be granted.
The tension arises when the petitioner is unable to acquire the requisite authorization which precludes
action pursuant to what is now statutory rights under s 122 IA. In Fulham, however, after arbitration,
if unsatisfactory, the claimant could pursue action under s .994 petition.
That said, it is possible for a member to make a shareholder agreement and thus contract out of the right to
bring a winding up petition outside of the company. This would be consistent with the American nexus of
contracts perspective. While in both arrangements articles limiting statutory rights or by ordinary
contract the fundamental paradigm that statute is superior to contract is challenged. Why one approach is
favoured over the other may be as simplistic as that in the UK USAs more frequently arise in small
companies. Accordingly, this is a legitimate way to curtail an abuse of statutory rights that would not
otherwise arise in a similar business structure, eg, partnership.

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Conclusion:
The articles are not intended to be a complete statement of terms to borrow from the traditional contractual
vernacular. Instead, they provide a procedure for deciding questions as they arise. For instance, whether a
resolution is to be decided specially or ordinarily; what rights shares have, and so on. Unless stated
otherwise a constitution can me amended by a 75% majority. Entrenchment provisions which require more
restrictive condition than a special resolution s 22(1) CA 2006 - can make it difficult but not impossible to
amend the constitution. The raison detre being that a constitution ought not to be easily amended so that the
shareholders are confident that their rights are protected. This in turn spurs investment. Hence the wise
policy decision in Russell v Northern Bank that held a contract made by a company that it will not exercise
its statutory power to amend its articles is unenforceable.
In the past, articles contained restricted objects which limited the activities a company could lawfully
engage in. Chartered companies, for example, were limited both in scope and frequency, and were gifted
by the people when required for the construction of large industrial projects. Now, with unrestricted objects,
companies can engage in activities unfettered by their constitution. While conducive towards profitmaximizing activities, it limits members actionable causes to essentially procedural irregularities.

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