The statement of directors’ general duties proposed by the Government will make it virtually impossible for a board to use the defence tactic used by Manchester United during Malcolm Glazer’s successful takeover of the Premiership football club.
In its recent response to the white paper on the Company Law Reform Bill, the Law Society said it generally supports the emphasis in the Government’s proposals on reducing burdens for companies. However, it argues that the changes will make it more difficult for directors of a company facing a hostile takeover or competing bids to balance the interests of the company against those of its selling shareholders. This is because the draft statement imposes a duty on directors to promote the success of the company for the benefit of its shareholders, rather than to act in the best interests of the company.
Law Society company law committee chair Vanessa Knapp said: “At the moment, directors have to act in the best interests of the company. However, the new wording tips the balance of power to the current shareholders, who want to get the best price for their shares.”
Even though Manchester United’s board admitted that the price offered by Glazer to the club’s shareholders was “fair”, the directors consistently rejected the bid as not being in the best interests of the company, as it would have imposed undue financial strain on it.
Freshfields Bruckhaus Deringer corporate partner Mark Rawlinson, who led the team advising Manchester United, argued that there is legal precedent in the Scottish case Dawson International v Coats Patton (1991), which says directors’ duties to act in the best interests of the company have wider meaning than simply acting in the interests of shareholders.
In that case, Lord Cullen said: “What is in the best interests of current shareholders who are sellers of those shares may not necessarily coincide with what is in the best interests of the company.”
Rawlinson therefore claimed that directors’ fiduciary duties encompass employees, customers and other stakeholders as well; and if the interests of shareholders and those of the company conflict, then the company’s interest should prevail.
“In a period where all the pressure is to consider the wider stakeholders in a company such as employees, suppliers, customers, the local community etc, it would be a pity if the codified statement was a retrograde step,” said Rawlinson.
The Law Society said it is also concerned that the statement may adversely affect the recruitment of non-executive directors, because it could make it very difficult for a director of more than one company to reconcile the duties they owe to each company.
“We’re particularly concerned that, unless these difficulties are addressed, directors will be uncertain about their general duties and may incur costs in taking advice on their position,” added Knapp.
The Company Law Reform Bill is expected to be introduced in Parliament in October.