Bitter bill to swallow
24 July 2006
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11 September 2006
2 November 2006
28 June 2004
3 December 2001
They look like unlikely crusaders. If you were putting together a campaign team, a Herbert Smith partner, a Freshfields Bruckhaus Deringer partner and the general counsel of Scottish & Newcastle (S&N) would not immediately come to mind. But James Palmer, Vanessa Knapp and Peter Kennerley respectively have been spearheading a rare and high-profile campaign to stop the forthcoming Companies Bill from imposing more burdens on UK business.
They make a formidable trio. Herbert Smith partner James Palmer chairs the company law committee of the City of London Law Society and Freshfields partner Vanessa Knapp chaired the Law Society's consultation committee for the bill until August 2005. The two private practice lawyers have joined forces with the increasingly influential General Counsel 100 (GC100) in their lobbying efforts.
The GC100 was launched in March 2005 by general counsel at FTSE100 companies to share best practice in relation to the law, risk management and compliance. Since its inception, the group, which now has 69 members, has become a strong voice within the business community, not least on the controversial topic of extradition.
S&N company secretary and general counsel Peter Kennerley joined the GC100 some eight months ago and immediately set to work. The GC100 has subsequently slammed the provisions relating to directors' duties and shareholder remedies.
The GC100 warns that the proposals to make it easier for shareholders to bring lawsuits against company directors could be abused by disgruntled shareholders and used to block takeovers.
The bill will simplify the procedures for shareholders to bring derivative claims against directors by replacing the restrictive 'wrongdoer control' and the 'fraud on the minority' precondiitions with a general discretion for the courts to allow such claims to proceed. It is therefore likely that more cases will get beyond the preliminary stage.
Palmer has been equally critical of the clauses relating to directors' duties and shareholder remedies. In a perfectly timed move, he wrote to the Financial Times in May (when the bill was being debated in the House of Lords) expressing serious concerns that the bill threatened to make English law incompatible with running campaigns. He tells The Lawyer: "I do anticipate we may see derivative claims starting to be used by hedge funds and other activist shareholders in takeovers in particular."
Kennerley echoes these concerns. "Although there are safeguards, frankly, the increased ease in being able to bring derivative actions is likely to worry directors," he says. "If you couple that with the new directors' duties, it will amount to considerable risk on directors' decision-making."
That said, Palmer and Knapp both argue that some of the comparisons with the US have been overstated.
"A lot of what's been written in the papers is somewhat over the top, because people have compared [derivative claims] with class actions in the US. In the UK people bring actions on behalf of the company and not the individual," says Knapp.
"It won't become like the US overnight," adds Palmer.
The Department of Trade & Industry (DTI) argues that, as the bill made its way through Parliament, a number of tweaks have been made to claw back the provision relating to shareholder remedies. A DTI spokesperson says: "The basic duty is still owed to the company as a whole. But shareholders wanting to bring an action [under the exemption] must start off by persuading the judge that they have a prima facie case."
The codification of directors' duties has also raised major concerns in the business community. The purpose of the new provision was to make directors' responsibilities clearer and more up to date. But the proposal has had the reverse effect. "The business community isn't completely convinced that the drafting is completely consistent with this principle," claims Palmer.
Under the the new law directors will still owe their duties to members as a whole and not to other stakeholders. However, in fulfilling this duty, directors must have regard, among other things, to six factors: the interests of employees; long-term consequences of the decision; community and environmental impact; fairness between members; relationships with others; and reputation.
A director will be required to give regard to all of these factors in every decision, even if a factor is simply irrelevant and even if it would be outweighed by other considerations.
Kennerley says the GC100 does not have a problem with the principle of enlightened shareholder value, but argues that the six factors companies need to consider, coupled with the increased derivative actions, will make decision-making more "burdensome."
Knapp agrees. She warns that the increased burden on company directors could slow down decision-making and "make things more bureaucratic".
Indeed, the clauses relating to directors' responsibilities pose a number of questions. For instance, what does it mean to 'have regard' to a particular factor? Can a director 'have regard' to a factor without full and proper investigation? Do directors have to keep paper records of these investigations?
Knapp argues: "It's the list of factors that provoked all the worry. If you were a director, does that mean you have to get someone in to work out what's in the best interests of the company or is it good enough just to think about things you already know about?"
Kennerley also claims that there may be times when there simply is not enough time to examine all the factors in any depth or for papers to go to the board.
Worryingly for business lawyers, the Government insists that these arguments are not persuasive. When the House of Lords debated the bill, the Attorney General Lord Goldsmith said that "there's nothing in the bill that says there's a need for a paper trail", adding that such a suggestion is "excessively cautious".
However, Palmer disagrees vehemently. "The fact that the legislation says overtly that you don't have to keep a paper trail is irrelevant. A practice will emerge whereby more recordings of these considerations will go on than before," he argues.
The Companies Bill is expected to enter the statute books in the autumn and will herald the biggest shake-up of company legislation since the Companies Act 1985 came into force more than two decades ago.
Palmer, Knapp and Kennerley are already playing a crucial role in trying to moderate the Government's stance. But just as importantly, the trio is helping to educate the City, which is frankly in denial about the sweeping changes that are just around the corner. It looks like they will have their work cut out.
Knapp argues: "This is the biggest bill that has gone through Parliament and is very technical. The number of days allocated to the Commons don't allow MPs to consider the bill in its entirety.
"The whole process isn't suited to the way Parliament works. Parliament is all about point scoring, so I'm not sure whether it's the best way to deal with technical legislation."
The DTI, however, says the Government has responded to these criticisms by allowing more time for the bill to be debated during the committee stage. Addtionally, it has allocated two extra days for the report stage and third reading.