Stefan Enchelmaier – Company Law SYLLABUS AND READING LIST FOR THE COMPANY LAW COURSE- SCHOOL OF ENGLISH LAW, KRAKOW Lesson 1: Introduction to the Law of Business Organisations; Law of Partnerships Relevant statutory provisions: Partnership Act 1890; Limited Partnership Act 1907; Limited Liability Partnerships Act 2000; Limited Liability Partnerships Regulations 2001 (SI 2001 No. 1090); The Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 (SI 2009 No. 1804 Cases: Tann v Herrington [2009] EWHC 445 (Ch) Cobbetts LLP and Lee Crowder (a firm) v Hodge [2009] EWHC 786 (Ch) Hammonds (a firm) v Danilunas et al. [2009] EWHC 216 (Ch) Protectacoat Firthglow Ltd v Szilagyi [2009] ICR 835 Textbooks and articles: Kraakman et al., Anatomy of Corporate Law ch 1; Cheffins, Theory ch 1, 2, 5; Dignam & Lowry ch 1; Davies, Principles Part 1; Mayson, French & Ryan ch 1; Boyle & Birds ch 1; Pettet ch 1. J Rickford, Fundamentals, developments and trends in British company law, [2004] ECFR 391–415; E Ferran, Corporate law, 1
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Stefan Enchelmaier – Company Law
SYLLABUS AND READING LIST FOR THE COMPANY LAW COURSE-
SCHOOL OF ENGLISH LAW, KRAKOW
Lesson 1: Introduction to the Law of Business Organisations; Law
A Keay, Section 172(1) of the Companies Act 2006, [2007] Comp. Law.
106–110
A Keay, The duty of directors to exercise independent judgment, [2008]
Comp. Law. 290–296
R Davidson, The Companies Act 2006: directors' duties and promoting
the company's success, (2007) 11 JIBFL 631
J Lowry/J Sloszar, Judicial pragmatism: directors’ duties and post-
resignation conflicts of duty, [2008] JBL 83–91
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P Koh, The director’s fiduciary obligations, [2003] CLJ 42–45
D Prentice/J Payne, The corporate opportunity doctrine, (2004) 120
LQR 198–202
Practice case for the session:
Lawbook Ltd’s business is developing well, and the directors see a need to take on additional personnel. Paul has, therefore, hired Marius as commissioning editor. This enables Paul to continue in his private studies which he much prefers over attending board meetings. He also uses the company jet frequently to attend academic conferences.
Marius commissions Prof. Peter Shwindle, a renowned expert in the field, to write a book on legal theory. Marius pays Shwindle an advance of £2.000 on the expected sales revenues. Such payments require approval by the board of directors, which Marius has not obtained beforehand.
After the book is published and half of the edition already sold, it transpires that Shwindle’s research assistant has written large parts of the book. Those parts of the manuscript are in a style very different from the rest. Also, the parts written by Shwindle are all plagiarised from works by his former PhD-students. The unsold copies have to be destroyed, and some purchasers demand reimbursement.
It has also come to light that many of the orders that Derek has made of printing machinery were placed with a company in which he has substantial share holdings. For each sale, he secretly received a commission. He has invested part of these monies in shares which have since appreciated considerably; with the remainder, he has bought a sports car for his wife.
At the same time Edwin Elgin Ltd, a well-established family publishing business, becomes available for purchase as the founder’s children have lost interest in the firm after their father’s death. Brenda is in favour of a takeover, but she is outvoted by the other directors. The atmosphere has become so poisoned that Paul, Derek, and Susan at the same meeting decide to remove Brenda from her directorship. Brenda proceeds to buy Edwin Elgin Ltd and successfully extends the company’s business into e-book publishing. This is a market niche which she had spotted while still at Lawbook Ltd. She earns £100.000 in the first year of running Edwin Elgin Ltd. What if the Elgin children would not have sold to Derek or to any company in which he was involved because there had once been an acrimonious business dispute between him and Elgin? What if Brenda were not a shareholder but had been appointed, under the terms of a debenture, by Edwin Elgin Ltd?
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Learning outcomes
- Delegation of directors’ tasks and authority
Directors may delegate tasks, art5 Model Articles/Ltd. Must not, however,
put themselves in a position where they cannot fulfil their role as
provided for in the articles and thus breach their duties towards the
company. Permanent supervision and direction of delegatees is therefore
necessary.
- Authority of delgatees
The authority of the delegatee is circumscribed by the the conferral.
Nevertheless, third parties may rely on ostensible authority of delegatee
to deal with outsiders; follows not from s40 CA 2006 (only for directors),
but from Turquand’s case.
- Negligence by delegatee – imputable to director because of insufficient
supervision?
Yes, director cannot be delegating task escape responsibility, particularly
not in matters that are important for the business of the company, such
as here maintaining the academic standards of the company’s
publications – Paul is specifically the “academic director”. Re Barings
(No. 5) 1999, Parker J, CA.
- Use of company jet to attend academic conferences – misapplication of
company property?
Question of fact; here, attendance at conferences broadly within the remit
of Paul’s responsibilities.
- Directors: conflicts of interest
-- Directors’ position
Directors are in a position similar to a ‘fiduciary’ [students may use
untechnical language], i.e. they must not personally benefit from the
fulfilment of their duties, unless the company has assented to such
private benefit in full knowledge of the relevant facts.
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-- Derek’s shareholdings in other company
Investment in other companies not prohibited, but commission indicates
that considerations alien to the interest of Lawbook have influenced the
decision to place orders with that company rather than with any other.
Here, no substantial property transaction, ss190 ff, nor loan to Derek,
ss197 ff, but breach of disclosure obligation under s177 (before order)
s182 (if ongoing business relationship) CA 2006. S175(1), (3).
-- Derek’s commission on sales to Lawbook
Kickbacks are held on constructive trust (AG v Jonathan Cape), Derek
must account to company.
-- Appreciation of shares – Derek’s to keep, or Lawbook’s?
The trust money and any assets into which it can be traced, belong in
equity to the company (Knatchbull v Hallett), and so does the
appreciation in value. Equally so if appreciation due to illicit transactions,
i.e. Derek’s efforts.
-- Sports car
Tracing of funds acquired as consequence of breach of trust – sports car
to be made over to the company; no competing equity in the wife because
car was a gift, or because knowing receipt of trust property/derivatives
from trust property.
- Removal of directors – conditions and procedures
S168 CA 2006 – any time and for any reason; but may be oppressive (see
now s994 CA 2006).
- Post-removal duties of directors
No non-compete obligation unless expressly stipulated; even more if Elgin
would not have dealt with Derek or associated company.
- Spotted market while still with LB – ‘corporate opportunity’
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Former directors under a duty not to exploit confidential information that
came to their knowledge while in service, but fellow directors have here
declined to take the opportunity in full knowledge of the facts. Peso Silver
Mines 1965, Queensland Mines Ltd. v Hudson. S170(2)(a)
- Legal position of directors appointed by creditors
No lesser obligations vis-à-vis company, must not let conflict of interest
arise and if arisen, prefer interests of the company rather than the
appointor’s.
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Lesson 4: Corporate Governance
Relevant material for the class:
Financial Reporting Council: the Combined Code on Corporate
Governance, June 2010 http://www.frc.org.uk/corporate/ukcgcode.cfm -
also for previous versions.
Cases:
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)
Grant v UK Switchback Railways Co (1888) 40 Ch D 135 (CA)
Automatic Self Cleansing v Cuninghame [1906] 2 Ch 34
Salmon v Quin & Axtens Ltd [1909] 1 Ch 311 (CA)
Barron v Potter [1914] 1 Ch 895
Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154 (CA)
In re Express Engineering Works, Ltd [1920] 1 Ch 466
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA) (not the
1946 case of the same name!)
In re Duomatic Ltd. [1969] 2 Ch 365
Bushell v Faith [1969] 2 Ch 438 (HL)
Guiness Plc v Saunders [1990] 2 AC 663 (HL)
Lexi Holdings Plc (in admin) v Luqman [2009] 2 BCLC 1
Textbooks and articles:
Kraakman et al., Anatomy of Corporate Law ch 2, 3; Cheffins, Theory ch
Principles Part 4; Mayson, French & Ryan ch 18; Hannigan ch 17–8;
Pettet ch 11–2;
A Keay/J Loughrey, Something old, something new, something borrowed:
an analysis of the new derivative action under the Companies Act 2006,
[2008] JBL 469–500
M Almadani, Derivative actions: does the Companies Act 2006 offer a way
forward?, [2009] Comp. Law. 131–140
R Cheung, Corporate wrongs litigated in the context of unfair prejudice
claims, [2008] Comp. Law. 98–104
Practice case for the session:
Richard has sold half his shares in Lawbook plc to Janet. She is disappointed to learn that the company will not be able to pay any dividends for the foreseeable future because of its crippling liabilities in directors’ remuneration. She has also found out that Derek has recently ordered inappropriate printing machinery from a company in financial difficulty because he wanted to help a friend. Janet is outraged that Richard, Paul, and Derek have agreed to keep the matter out of court and to ‘work something out’ instead. Susan consented to this when later heard about it on the telephone.
One proposal to repair Lawbook’s finances is to ask all shareholders for a one-off contribution of £20.000 each; another, to offer preference shares worth £100.000 in total to all officers of the company. What if the latter course is pursued as decided at a meeting attended by Richard, Paul, and Derek, and the next dividend goes entirely to the holders of the preference shares, of which Janet wanted to buy some but was not offered any?
Learning outcomes
- No dividends because of directors’ remuneration: right to
dividends? Unfairly prejudicial? Misappropriation of company
property by directors?
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There is no right to dividends – they have to be declared at the
suggestion of the directors, but depending on the circumstances,
failure so to suggest may be unfairly prejudicial, particularly in a quasi-
partnership. Here, there is no indication that the company has this
character. Conversely, there is no misappropriation (only) if the
directors’ remuneration is not excessive – here it is “crippling”, which
indicates that it is out of proportion to the profitability of the company,
which also reflects badly on the directors’ achievements. Incompetent
management, however, is not ‘unduly prejudicial’ but a risk every
shareholder incurs. This being a plc, she can always sell her shares.
- Breach of duty by Derek? (How) could the others bar Janet decide
to release him from liability? Is Susan’s consent on the telephone
valid? What is the correct procedure? CA 2006 / Model Articles?
Derek’s purchase of the equipment from that specific firm is informed
by motives alien to the business of Lawbook; he has not acted to
promote the success of the company, but to help a friend. He has, thus,
breached his duty. The members of the company can ratify this breach
under s239 CA 2006. In a plc, resolutions have to be adopted at
meetings (see s288). There appears to have been no meeting, and if
there was, Janet was apparently not invited. Susan’s consent, not
having been given at the meeting (if there was one), is irrelevant.
- One-off contribution beyond/other than injecting new capital
lawful? Binding on all if adopted?
Members are not bound by alterations subsequent to their joining if the
alteration requires subscription for more shares or other payments of
money to the company.
- Preference shares: meaning? How created? Correct procedure
followed? Who has to be offered new shares? Any kind of share?
Are there other bases on which Susan should have been offered?
What remedies does Susan have?
Preference shares receive a guaranteed share of the dividends declared; the are commonly non-voting. Preference shares are issued like all other shares but in the conditions of their issue, the preference is stipulated. Because they are not part of the ‘equity’ share capital, ss548, 560, shareholders do not have a right of pre-emption, s561(1).
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Directors must ‘have regard to … the need to act fairly as between members of the company’, s172(1)(f), but the rules on pre-emption are special provisions for this particular question, and thus take precedence over the more general rule on directors’ duties. If the action by the company is motivated specifically by a desire to put Janet at a disadvantage (this would be required in view of the clear wording of the law which makes the present course legal), she would be unfairly prejudiced.
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Lesson 6: Shares and the Formation of Share Capital
Cases:
In re Baglan Hall Colliery Co (1870) LR Ch App 346 (CA)
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)
Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 (definition of a
share)
Re Discoverers Finance Corp Ltd, Lindlar’s case [1910] 1 Ch 312 (CA)
In re National Telephone Co [1914] 1 Ch 755
In re Roberts and Cooper, Ltd [1929] 2 Ch 383
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 51 (CA) (note that
there is a different, 1951 case with these parties!)
Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland
Newspaper and Printing Co Ltd [1987] Ch 1
Hogg v Cramphorn Ltd [1967] 1 Ch 254
Bamford v Bamford [1970] 1 Ch 212 (CA)
McCarthy Surfacing Ltd, Re, also known as Hecquet v McCarthy [2006]