Kill the bill
8 November 2006
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22 September 2014
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 Peter Kennerley, Vanessa Knapp and James Palmer 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 Palmer chairs the company law committee of the City of London Law Society and Freshfields partner Knapp chaired the Law Societys consultation committee for the bill until August 2005. The two private practice lawyers have joined forces with the increasingly influential General Counsel 100 (GC100) group 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. 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 Kennerley joined the GC100 some 10 months ago. The GC100 has 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 preconditions 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 this year (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 says: 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 whats 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 wont 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. The purpose of the new provision was to update directors responsibilities and make them clearer. But the proposal has had the reverse effect. The business community isnt completely convinced that the drafting is consistent with this principle, says Palmer.
Under 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 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 irrelevant or 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 that companies need to consider, coupled with the increased derivative actions, will make decision-making more burdensome.
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 says: Its 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 whats in the best interests of the company or is it good enough just to think about things you already know about?
Kennerley claims that there also may be occasions when there is not enough time to examine all the factors in any depth or for papers to go to the board.
The Government insists that these arguments are not persuasive. When the bill was debated in the Lords, the Attorney General Lord Goldsmith said that theres nothing in the bill that says theres a need for a paper trail, adding that such a suggestion is excessively cautious.
Palmer disagrees vehemently. The fact that the legislation says overtly that you dont 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 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.