CORPORATE MANAGEMENT

WK3 Takeovers and Mergers Where a company acquires control over another by buying all or a majority holding of its shares this is termed a takeover. A general offer to buy addressed to all shareholders of a company is called a takeover bid. Takeover bid or tender offers are for the most part common methods used to merge one corporate business with another. The companies are usually referred to as the offeror company and/or the target of the offeree. Re Chez Nico (Restaurants) Ltd Chez Nico (restaurants) ltd had previously been Chez Nico (Restaurant) plc which had been set up in 1985. The public company had not been a great success, and by 1989, the chef (L), around whom the venture had been centered, wanted to buy out the other shareholders and convert the company to the status of a private one. On 30 June 1990 L and his wife wrote to the petitioner, a shareholder in the company, repeating an invitation which had been made before to all shareholders, that the petitioner offer his shares to them for purchase and stating that thee invitation would remain open until 31 July 1990. the date within which shareholders could take up the invitation was subsequently extended to 7 august. The petitioner was served with a notice under s 429 of the Companies Act 1985 to buy out his shares at 40p. the s 429 notice sent to the petitioner was not signed by L and his wife but it was signed by their solicitor and the statutory declaration under s 429(4) was not made until two weeks after the first notice had been given under s 429. The petitioner applied for an order under s 430c that he should not be under a duty to sell his shares to l and his wife. The court considered that there were five issues raised by the petition: (a) was the offer of L and his wife a takeover offer as defined by s 429 of the Act? (b) were the shares purchased by L and his wife to be treated as being in response to the original offer so that there was a 90% acceptance of the offer by 30 June? (c) should the s 429 notice have been signed by L and his wife personally? (d) was there compliance with s 429? (e) assuming the issue arose, was this a situation where the court should exercise its discretion under s 430c? Held (1)The method adopted by L and his wife to acquire the shares in the company did not constitute an offer within the meaning of s 428 of the act, the offer in fact being made by the shareholders whose shares L and his wife wished to acquire. (2) The shares acquired between 31 July and 7 August, the period for which the offer had been extended, were not part of the original offer but were connected with a new offer because l and his wife did not reserve the power to alter the terms of the offer and thus rely on s 428(7). (3)Section 429(5) did not require that the declaration provided for in that subsection had to be signed by the director personally but the signature could be by an authorised agent such as the solicitor in the present case. (4) section 429(4) required the statutory declaration to be given at or about the same time as the first s 429 notice was served but the provision was directory and not

mandatory. Accordingly, failure to comply with s 429(4) was not intended to nullify the whole procedure and on the facts the failure to comply with the procedure for 14 days would not be fatal to the right to acquire the petitioners shares. (5) This was a case where the court (if it had been necessary) would exercise its discretion in favour of the petitioner under s 430c since L and his wife did not make the type of disclosure that was required by the city code on takeovers and mergers and, where there was substantial failure by the bidder to comply with the code, the court could take this into consideration when exercising its discretion. In addition, this was not a bid by an outsider. It was a bid by insiders who were directors and major shareholders with all relevant i9nformation, something which they had failed to do. Also, the circulars sent to the shareholders of the company were investment advertisements within the meaning of s 57 of the financial Services Act 1986 and there had been non-compliance with that section since they had not been sent by an authorized person. Significance of TOs in the corporate control market 1. The maintenance of balance between managerial and ownership interests within companies which are the target of TO attempts. 2. The maintenance of balance between the interest of predators and shareholders in the target company. 3. Protection of the public interest. It is the belief of many commentators that the most significant constraint on corporate managerial power is the market for corporate control and the threat of displacement which it poses to corporate management. The threat of a TO is a powerful spur towards efficiency in the management of companies. Inefficient managers can be removed by its shareholders accepting the TO bid induced by poor performance and a consequent reduction in stock value. Classification 1. Horizontal TO: This involves the acquisition of another company which is a direct competitor operating in the same market. Operation in the same sphere of business. 2. Vertical TO: This arises out of efforts by a corporation to achieve vertical integration and involves one firm acquiring another firm at a different stage in the production process. 3. Conglomerate mergers/TOs: This extends a companys product range or geographical reach. TOs may be hostile or consensual. The duty of directors 1. To act honestly and in good faith in the best interest of the company.

2. To act with the care, diligence and skill of prudent man operating within the same circumstances. Directors are placed in a difficult position by a TO bid. There is a reasonable chance that the directors will be removed from office if their company is acquired. As soon as a tender bid is made an offeree director is placed in a position of potential conflict between his duty and his personal interest. A fundamental problem is that the rubric in the interest of the company is unclear. No duty is owed to the employees. Briess and Others v Woolley and Others Under the terms of a licence granted by the Ministry of Food under the Food Substitutes (Control) Order, 1941, NP Ltd were authorised to manufacture synthetic cream in accordance with a formula approved by the Ministry. It was a condition of the licence that no change should be made in the composition of the synthetic cream without the Ministrys written consent, but, from 1945 onwards, R, the managing director of NP Ltd without the knowledge of his co-directors and fellow shareholders, by the introduction of water and disregarding the formula, increased the amount of synthetic cream manufactured and sold, thus producing substantial profits which could not have been made by lawful means. In 1948 NP Ltd began to lose money, and R approached the appellants, who were also engaged in the food trade, with a view to their acquiring the shares in NP Ltd He told them that NP Ltd had a licence and an allocation of raw materials, and showed them accounts which were accurate, but he concealed the fact that he had been acting illegally. The negotiations reached a point where the appellants had provisionally agreed to a price if all the shares in NP Ltd were transferred to them and R then put the matter before his co-directors. On 14 October 1948, the shareholders of NP Ltd in general meeting resolved that R should take the matter up further with [the appellants] with a view to completing the transaction on the above basis. The shares were subsequently sold to the appellants at the suggested price. The appellants later discovered the fraud, and commenced the present action against R and the chairman of NP Ltd claiming damages for fraudulent misrepresentations made by R on behalf of himself and the other defendant. The latter had died, and the present respondents were his executors. Held: It could not be said that the shareholders ratified Rs agency up to 14 October 1948, as it was not proved that they had full knowledge of all the facts or that they intended to ratify whatever he had done; but, on the true interpretation of the minute of the general meeting, it was clear that R was appointed on 14 October agent on behalf of all the shareholders of the company to negotiate the sale of their shares, and in those circumstances the shareholders were responsible for any fraudulent representations he made in the course of those negotiations; even assuming that all the relevant representations were made by R before 14 October a principal could not disclaim responsibility for fraudulent misrepresentations made by his agent which though made before the agency commenced, to the agents knowledge continued to influence the other party after his appointment as agent and finally induced the other party to enter into the contract which the agent had been authorised to make, and did make, on behalf of his principal; it was the agents duty, having made false representations, to correct

them before the other party acted on them to his detriment, but R continued to conceal the true facts, and so the representations were continuing representations; and, therefore, the appellants were entitled to recover. Decision of the Court Of Appeal, reversed. TO defensive strategies Corporations may seek to defend themselves from an unwelcomed TO by resorting to a number of defensive measures. Defensive tactics are varied and will usually be considered so as to gain time. Litigation is frequently used as a TO defensive measure tying up the matter in court. The media (dirty campaigning) is also used. In 1993 CLICO attempted to acquire a controlling interest in T. Geddes Grant, a company listed on the stock exchange of T&T. CLICO was a significant shareholder in T. Geddes Grant. White Knight is where the target company exchanges shares with other friendly companies who are invited to assume a major ownership position in the target company. A certain amount of risk is involved, however, as friendly companies have been found to be less friendly than at first believed. Diluting or watering down the overall shareholding of the raider. The difficulty is that the power to issue shares must not be used for an improper purpose. Lock up stock options. The grant of an option to acquire a block of stock. Such a right is triggered on the acquisition of a percentage of the target company. NB A lock up option gives an option holder the possibility of control whereas a leg up stock option merely gives him an advantage.

Manipulation of the articles or memorandum to prevent the acquisition of the shares. Termination clauses or break up fees. Fees enacted by the white knight from the target company if the transaction is not consummated. Share repellent provisions. These take a variety of forms such as special classes of voting stock and staggered terms for directors. Bear hugs. To over attempt that consists of a proposal made to the directors. Grey Knights. A bidder who has not been solicited by a target but who tries to take advantage of the resistance of the target. Golden parachute. These protect the directors and managers from the consequences of a hostile bid. They usually take the form of service agreements or pension plans. Stand still agreements. A kind of treaty between a company and one or more of its major investors. By entering into such an agreement the directors ensure an element of stability but usually it is at the cost of providing certain advantages to the investor.

Trimac Ltd v. CIL

SUMMARY: T.M. and C each held 50% interest in T.C. and were required to give other partner first refusal in event of proposed sale of their interest. Shareholders agreement also contained "shotgun" buy out clause. T.M. agreed to sell 100% of T.C. shares to L if T.M. acquired C's shares through shotgun clause. C resisted enforcement of shotgun buy out claiming that T.M.'s agreement with L was breach of first refusal clause; that agreement was in breach of provision forbidding encumbrance of T.C. shares by either shareholder; that T.M. was in breach of fiduciary duties to C; and that there was oppression which entitled it to remedy under Canada Business Corporations Act s. 241. Held: T.M.'s negotiations with L were not in breach of first refusal clause as there was no sale of shares to L or any present intention by T.M. to dispose of its interest. Agreements specifically provided for possible sale of T.M.'s shares to C. Provision that T.M. acquire 100% interest in T.C. before sale to L was condition precedent so that contract was not fully constituted unless and until C accepted T.M.'s offer to purchase its interest. In context of shareholders agreement, "encumbrance" meant grant of security for loan. L agreement was not "encumbrance" in this sense and was not therefore in breach of shareholders agreement. There was no fiduciary relationship between corporate shareholders holding equal shares in company. Fiduciary relationship was not necessary to give business efficacy to their shareholders agreement and conduct of T.M. and C had not created any fiduciary obligations. In situation of deadlock company ownership where both owners acted fairly throughout dealings leading to buy out of one by other, application of s. 241 oppression remedy was inappropriate. C was ordered to convey its shares in T.C. to T.M. in accordance with shareholders agreement. The response of management Stena Finance BV and Another v Sea Containers Ltd and Others Although section 39 of the Companies Act 1981 prohibits the giving of financial assistance by a company to any person in connection with the purchase of its shares, neither it nor the rule in Trevor v Whitworth (1887) 12 App Cas 409 precludes a subsidiary from purchasing shares in its parent company. The distribution of rights to existing shareholders in anticipation of a possible hostile take-over bid (a poison pill) is not unlawful, provided that the directors have the requisite powers under the companys bye-laws to issue such rights, that they exercise those powers bona fide (ie not for the purpose of entrenching the existing management of the company) and fairly as between shareholders. Where a plaintiff has personal claims against defendants he can also pursue in the same action representative claims where there is a common interest, a common grievance and the relief sought could be beneficial to all (even though not in equal degree). In proceedings instituted by Stena Finance BV and Temple Holdings Ltd (suing personally and on behalf of themselves and all other shareholders in Sea Containers Ltd (the first defendant), save for any such shareholder who was also a defendant to the proceedings, and on behalf of the first defendant as the person entitled (by itself or nominees) to the entire issued share capital of each of the defendant subsidiaries) in the Supreme Court of Bermuda (civil action 178 of 1989) against the first

defendant, Sea Containers House Ltd (the second defendant) (sued on behalf of itself and each of the subsidiaries of the first defendant, except the third and fourth defendants), Marine Container Insurance Co Ltd (the third defendant), Strider 8 Ltd (the fourth defendant), James Sherwood (the fifth defendant) and Templeton, Galbraith & Hansberger Ltd (the sixth defendant), the court by consent ordered three matters to be tried as preliminary issues (these are set out in the judgment of Sir James Astwood CJ). On the occasion of hearing the summons for determining the preliminary issues, the court also heard summonses by the first, second, third and fourth defendants to strike out the proceedings. Sir James Astwood CJ. The statement of claim as filed on 25 May 1989 contained (as paragraph 25) the following provision: Such matters as are described in paragraph 24 (a), (b) and (c) above raise the following matters of law which, if answered in the negative sense in each case would be determinative of the validity of the transaction to which they respectively relate: (a) whether the poison pill purportedly adopted by the board of directors of [the first defendant] on 8th May 1988 and/or the issue of rights purportedly by way of dividend to holders of record of outstanding common shares in the capital of [the first defendant] pursuant thereto could as a matter of law be valid and/or constitute a proper and constitutional exercise of (i) the fiduciary power to declare dividends vested in the directors by bye-law 34 of the bye-laws of [the first defendant] or (ii) any other power vested in such directors; (b) whether as a matter of Bermudian law it is lawful for a subsidiary to purchase for its own account shares in its parent; (c) whether, if the answer to question (b) is that such a purchase could be lawful, such a purchase by Sea House was nevertheless, as a matter of construction of its memorandum of association, ultra vires. On 1 June 1989, the court made an order by consent of the parties that: 1. The following issues shall be determined as preliminary issues at a hearing to commence on 3rd July 1989: (i) whether the shareholder rights plan purportedly adopted by the board of directors of [the first defendant] on 8th May 1988 purportedly for the reasons stated in a letter to shareholders dated 9th May 1988 and/or the issue of rights purportedly by way of dividend to holders of record of outstanding common shares in the capital of [the first defendant] pursuant thereto could as a matter of law be valid and/or constitute a proper and constitutional exercise of (a) the fiduciary power to declare dividends vested in the directors by bye-law 34 of the bye-laws of [the first defendant] and/or (b) any other power vested in such directors; (ii) whether as a matter of Bermudian law it is lawful for a subsidiary to purchase for its own account shares in its parent; (iii) whether, if the answer to question (ii) is that such a purchase could be lawful, such a purchase by [the second defendant] was nevertheless, as a matter of construction of its memorandum of association, ultra vires. 2. That the costs of this application be reserved. On 11 July 1989, having dismissed the plaintiffs summons seeking a representation order against the sixth defendants and having made the order sought by the sixth defendants that the plaintiffs be not allowed to continue the action against the sixth defendants in a representative capacity, it became necessary for the plaintiffs to amend their statement of claim. In subsequent days, after discussion and

submissions by counsel for the plaintiffs and counsel for the first to fourth defendants, the plaintiffs produced a working definition of the word subsidiary to be used when interpreting their amended statement of claim and this definition was referred to when the plaintiffs made their submissions on the preliminary issues. On 19 July 1989, the plaintiffs served an amended statement of claim on the defendants containing the definition as a schedule to the amended statement of claim. The pure passivity rule This is a rule advocated by Easterbrook & Fischel who contend that target directors should refrain from defensive tactics and leave it to the shareholder to decide whether to sell. The modified passivity rule According to Bedchuck & Gibson target directors should be allowed to solicit rival bids as wells as engage in propaganda but do nothing more. The differential regulation principle The more complex the defence the more complex the rule, i.e. different defences are to be governed by different rules The primary purpose rule This is distinct from the business judgment rule which operates in the United States. The proper purpose rule This is the dominant approach in the Commonwealth Caribbean where if the target management can establish that a particular response was pursued for the primary purpose of implementing a legitimate corporate object, the action cannot be challenged. This approach is based on the fiduciary duties of management: Directors must act bona fide in the best interest of the company They must exercise the powers for the particular purpose for which they were conferred and not for some extraneous purpose They must not fetter their discretion They must not without the consent of the company place themselves in a position in which there is a conflict between their duties and their personal interest Application of the Proper Purpose test:

Teck Corporation Ltd. V. Millar Where shareholder complain of the conduct of the directors of a company, and a majority of the shareholders vote to approve the complaint, the rule in Foss v. Harbottle does not apply and the action need not be brought in the name of the company. Damages can be awarded to a company even though it is joined as defendant to the action. The directors of a company have absolute power to manage its affairs even if their decisions contravene the expressed wishes of the majority shareholder. The shareholders can give effect to their wishes only by altering the articles of the company or by replacing the directors.

Where directors of a company seek, by entering into an agreement to issue new shares, to prevent a majority shareholder from exercising control of the company, they will not be held to have failed in their fiduciary duty to the company if they act in good faith in what they believed, on reasonable grounds, to be the interest of the company. If the directors primary purpose is to act in the interest of the company, they are acting in good faith even though they also benefit as a result. Afton Mines Ltd. (N.P.L.) was incorporated on December 14, 1965. the companys article of association provide that the board of directors shall have the power to manage the affairs of the company. The defendants Chester Millar. Are the directors of the company. The law says that the directors of a company, in exercising their powers, must act bona fide in what they consider to be the best interest of the company. So the directors can issue shares when they decide that it is in the best interest of the company to do so. But their purpose must be one countenanced by the law. They cannot exercise their power for an extraneous purpose. Earlier this year the plaintiff Teck Corporation Ltd. sought to gain control of Afton by acquiring a majority of the shares of the company. Teck alleges that on June 1st, the defendant directors signed a contract on behalf of the company, providing for the issuance of 1,167,437 shares to the defendant Canadian Corporation Ltd.(Canex). Teck say that the directors were actuated by improper purpose. They were not seeking to serve the best interest of the company. Their purpose, it is said, was to frustrate the attempt by the plaintiff to obtain control of the company, and the contract was a colourable device made for that purpose. That the purpose was an extraneous one and, it is said, Canex knew of it. Therefore, the plaintiff says, the contract should be declared null and void. If the contract were declared null and void, the allotment of the shares would fall with it. There Justice Berger upheld the validity of an agreement conferring exclusive exploitation rights on a white knight. Note: In the US directors must be able to sustain the burden of proof: That they acted in good faith having perceived a threat to the corporation They acted after proper investigation The means adopted to oppose the take over were reason in relation to the threat posed The remedy is applicable where the powers of the directors of the corporation are/have been exercised in a manner that is oppressive or unfairly prejudicial to or unfairly disregards the interest of any security holder.

Heron International Ltd v. Lord Grade The eleventh defendant, Associated Communications Corp (ACC) had a share capital of 54,272,000 non-voting shares which were quoted on the stock exchange and 150,000 voting shares. More than 50% of the voting shares were held by the ACC directors and

were not quoted on the stock exchange. An Australian, Mr Holmes a Court, had acquired through a company he controlled, TVW Enterprises (TVW) 51% of the nonvoting shares in ACC and had been appointed a director of ACC. ACC carried on business in many branches of the entertainment industry and, as part of this activity, it had obtained through a subsidiary, Central, a licence from the Independent Broadcasting Authority (IBA) to operate a television franchise. The IBA supervised independent television and, among other things, it had a responsibility to ensure that disqualified persons (as defined in the relevant legislation) did not obtain a licence to operate a television franchise or did not obtain control of a company which had such a licence. Where a disqualified person did acquire control of such a programme contractor, the IBA was empowered to remove the contractors licence. ACC was in financial difficulties and Mr. Holmes a Court agreed to provide ACC with assistance provided he acquired control of ACC and through one of his Australian companies, Bell, made a takeover bid for the ACC shares. The takeover bid was virtually guaranteed of success by the fact that the directors of ACC, who controlled 53% of the companys voting shares, agreed to sell their shares to Bell and to register the transfer. Bell, being a foreign company, was a disqualified person as regards the holding of a television franchise and therefore it was not entitled to exercise any control over ACCs subsidiary company, Central. An agreement was entered into between the IBA and the parties to the ACC takeover by Bell, whereby it was agreed that the bid could go through and Centrals licence would not be terminated provided steps were taken to ensure that ACC in no way controlled or exercised influence over central. Heron International Ltd (Heron) also made a bid for the ACC shares and its bid placed a greater value on ACC than the Bell bid, although in light of the ACC directors acceptance of the Bell offer there was no way in which the Heron offer could succeed. Even if the directors of ACC had refused to sell their shares to Bell, the Heron bid would have failed as it was conditional on acceptance by TVW for its non-voting shares which TVW was unwilling to sell. After the Heron offer was made Bell made a 2nd offer matching Herons and Heron in turn made a 2nd increasing its terms. The plaintiff, who sued as representatives of the shareholders in the defendant company, sought an interlocutory injunction to prevent the transfer of the ACC shares to Bell. Held: (1) On the facts, the agreement by the directors of ACC to transfer their voting shares to Bell infringed the articles of association of ACC and, since Bell had knowledge of this, the agreement could not be enforced by or against the directors (2) Because of the proportionately higher price the directors of were to receive for their voting shares, they could not vote in their capacity as directors on the takeover bid by Bell, or enter into the arrangement with the IBA, since they had an interest in the transaction and, under ACCs articles of association, directors were debarred from voting in respect of any transaction in which they were interested. Since Bell had notice of this irregularity it could not enforce its agreement against the directors. (3) On the assumption that the directors of ACC in accepting the Bell offer had acted in a matter in which no reasonable board could have acted and as a result the shares of ACC would command a lower price because the assets of ACC were depreciated by the agreement with the IBA concerning the management of Central, then, if the bid had been implemented, the company could have sued the directors for the depreciation in the value of its Central shares and the former shareholders of ACC could have sued

them for the decline in the value of their shares. However, as the loss which ACC would suffer if the takeover bid were implemented was possibly insignificant and not quantified it would be wrong to grant an injunction in favour of plaintiffs suing on behalf of ACC. (4) The directors, when exercising their power under the articles to register a proposed transfer, were under a fiduciary obligation to exercise the power in the interests of both the company and the shareholders, irrespective of the fact that as individuals they held a majority of the voting shares. Furthermore, the directors of ACC could not advise the shareholders to refuse Bells offer and at the same time, as directors, allow their own voting shares to be transferred to Bell. Where directors in the exercise of their powers had to consider rival bidders, the interest of the company were the interest of the current shareholders. On the facts, the directors of ACC had not behaved unreasonably in securing the first bid of Bell as it was clear to them that for reasons outside their control the conditions on which the Heron bid was made could not be satisfied and therefore they acted reasonably in accepting the Bell offer. Legislation Common Residual Companies Legislation Securities Legislation The Fair Competition Act regulates mergers and takeovers which arises where there is a possibility that it will result in the creation of 40% market share of that corporation. Ss185-7 of the Companies Act of Barbados and s153 of Trinidad and Tobago The legislation aims to secure fair and equal treatment of all shareholders. Where acceptance is by not less than 10 percent of any class. The tendering of an offer By providing notice to dissenting shareholders Notice of adverse claims to the offeree company Rules with respect to the delivery of a certificate and the payment for shares Note: A dissenting offeree has the right to apply to the court to fix the fair value of the shares. The specific provision, however, does not protect predatory shareholders and the thrust is the protection of dissenting or minority shareholders.

Re Bugle Press There were three shareholders in a private company two of which held 45 % shareholding each and the plaintiff held 10%. After an unsuccessful attempt to purchase the Plaintiffs shares, the first and second directors incorporated a second company which made a tender offer to all the shareholders of the company and the third shareholder refused to sell. Shareholders One and Two applied under the Compulsory Acquisition provision, similar to s186 of the Barbados Act (acquisition of 90% shares then automatic takeover). On application by the Plaintiff, Justice Buckley held that the acquirer, the offeror, was not truly independent and that while the onus of proof normally rested on the Plaintiff to prove that the offer was unfair, on the facts the onus had shifted by virtue of the lack of independence.

Nominee directors These have been defined as persons who, independent of the method of appointment but who, in relation to their office, are expected to act in accordance with some understanding or arrangement which creates an obligation or mutual expectation of loyalty to some person or persons other than the company as a whole (1999 Companies and Securities Law Review Committee of Australia). A director is placed in a difficult legal position when he is appointed by a special class of shareholders, debenture holders or the holding company to represent its interest on the board. The law insists that the director disregard his special interest to which he owes his appointment in favour of the company as a whole.

Scottish Co-Operative Wholesale Society Ltd v Meyer and Another The appellants, owners of a weaving mill, and the respondents, who formerly were German nationals, started in 1947 the manufacture of rayon cloth, which the appellants had not previously manufactured. The respondents, who provided the formulae, knowledge and experience, had extensive connexions in Europe in the trade and obtained licences for the purchase of yarn and the manufacture of rayon cloth, which was then subject to control. A private company, a subsidiary of the appellants, was formed for the purpose. The issued share capital of this company was 7,900 1 shares, of which 4,000 were held by the appellants and 3,900 by the respondents; the company had five directors of whom the respondents were two and three were nominees, and directors, of the appellants. The respondents obtained supplies of yarn, for which the appellants paid, and the cloth was woven and processed at the appellants mill, and was then sold to and re-sold by the company. The company was successful. The appellants desired to acquire further shares at par, the value of a 1 share being then 6 odd. A proposal by the respondents for the issue of shares to the appellants at valuation was not accepted and from that time hostility on the part of the appellants and their nominees on the board of the company to the respondents developed. The appellants formed a department that carried on a business of purchasing materials and dyeing, finishing and processing them for sale. After the end of cotton control in June, 1952, the appellants were free to obtain yarn without licence. They then adopted a policy of starving the company of supplies of rayon cloth from the mill, on which the company was dependent. Early in 1953 the board of the appellants refused an offer of the respondents to sell their shares at a negotiated price (about 4 16s per share), recording in the minutes, though the respondents were not so informed, that the company had served its purpose and should be liquidated, if possible. The nominee directors of the company adopted a policy of passive support of the appellants by inactivity, allowing the companys trading activities to decline or vanish. On petition by the respondents under s 210 of the Companies Act, 1948a, on the ground that the affairs of the company were being conducted in a manner oppressive to some part of the members, viz, the respondents, the appellants were ordered to purchase the respondents shares at 3 15s each. It was common ground that it was just and equitable that the company should be wound up. Held on appeal The conduct of the appellants was oppressive and, in view of the facts that the company was a subsidiary of the appellants and that the appellants

nominees on the board of the company were participating in the policy of the appellants, was also oppressive conduct of the affairs of the company within s 210 of the Companies Act, 1948, although the misconduct of the nominee directors was negative, being passive neglect of the companys interests. Per Viscount Simonds: the truth is that, whenever a subsidiary is formed as in this case with an independent minority of shareholders, the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation so to conduct what are in a sense its own affairs as to deal fairly with the subsidiary. Appeal dismissed. Boulting and Another v Association of Cinematograph Television and Allied Technicians Since 1939 the plaintiffs had been managing directors of Charter, a film production company. They had contracts of service with Charter under which part of their duties was the production and direction of films and the writing of stories and scripts for films. In 1941 they became members of the defendant association, which was a registered trade union. In view of difficulties and inconsistencies between their positions as members of the union and as managing directors of Charter, the plaintiffs membership of the union was by arrangement held in suspense between 23 March 1953, and 4 March 1960. The union having made it clear that they required the plaintiffs to be full members of the union, if the plaintiffs did a job within the scope of the union, the plaintiffs brought an action claiming, among other declarations, a declaration of their ineligibility for membership of the union whilst producing or directing films as managing directors of Charter and claiming an injunction to restrain the union from taking action compelling them to hold current membership cards. Rule 7 (a)a of the rules of the union provided, at the date of the issue of the writ, that the defendant union should consist of all employees engaged on the technical side of film production including film directors, employee producers script-writers . Held: (Lord Denning MR dissenting): the plaintiffs were eligible for membership under r 7 (a) of the unions rules, and that rule was a valid rule, for the following reasons: (i) the plaintiffs were employees engaged on the technical side of film production within the scope of the word employees in the context of r 7, since r 7 was a rule concerned with eligibility and as such should be given a wide construction and the plaintiffs fell fairly and squarely within the literal meaning of the words used. (ii) the principle that no person who had a duty to perform should place himself in a position where he had interests that conflicted with the performance of the duty was a principle for the protection of the person to whom the duty was owed, who could relax it if he thought fit, and thus the principle did not entitle the plaintiffs (who owed a duty to Charter), as distinct from Charter which was not party to the action, to have set aside or declared void as illegal the contract of membership with the union, even if it would or might lead to a conflict of interests. Appeal dismissed.

Therefore, since directors exercise powers held by them in trust for the company, they may not fetter their future discretion by contracting as to how they will vote in the future. Consequently, any agreement to vote on behalf of a special interest will be invalid.

Levin v Clarke A vendor of shares who had not yet received consideration for the shares obtained security over the shares as part of the sale agreement. Prior to the sale, two of the companys directors were required to retire from active participation in the affairs of the company only to resume their powers as directors in the event of default in the payment of the purchase price. Justice Jacobs found that although two of the directors acted primarily in the interest of the mortgagee, that it was permissible to so act thus adopting a lenient approach. Further, it may be in the companys best interest if the nominee directors represent and advocate only the interest of their patron. In so doing Justice Jacobs recognises the commercial reality of the situation and in determining the nature of the fiduciary duty owed he took into account the terms of the corporate constitution any expressed or implied authority of the directors and any waver of their duties by those to whom the duty is owed. His judgment indicates that fiduciary duties are neither absolute nor inflexible. Re Broadcasting Station The appointment of nominees to the board was secured largely by the use of the voting power of a shareholder. It was alleged that the minority shareholders were being oppressed by the majority. Jacobs did not regard as significant the fact that the directors were expected to act in accordance with the holding companys wishes. Two approaches New Zealand and UK narrow approach in Scottish Cooperative Wholesale Society v Meyer Interlocking Directors Individuals who are directors of more than one company are significant as an indicator of inter-corporate cohesion and interdependence. Note: Reasons for the interlock in public sector. The round table of the role of the board of directors of public sector organisations in the Caribbean of the 1980s: The small size of territories has led to intense social relationship which limit much of the impersonality generally associated with organisational life The legacy of slavery and colonisation which has bred in the society an attitude of low identification within the workplace and a reluctance to accept responsibility for actions taken. A difficulty separating political from personal considerations An acute scarcity of human resources Pronounced dependence on the outside world for technology, capital and markets which influences corporate strategy to a greater degree

London & Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd Justice Chity held that a director would not be restrained from acting as a director of a rival company except where there is a prohibition in the articles or where the director is about to disclose confidential information.

Abbey Glen Property Corp v Stumbury Justice McDonald thought that the dicta above was too widely expressed and that there might well be the case in which a director breaches his fiduciary duties to company A merely by acting as a director of company B either where there is no question of passing on confidential information.

The matter was considered in: Berlei Hestia (NZ) Ltd v Fernyhough Justice Mahon thought that there was a wide distinction between asking a director to account for a profit made out of his fiduciary relationship and asking a director not to join a board of a competing organisation in case he should at some time in the future decide to act in breach of his fiduciary duty. Only the former was regulated.

It is admitted that the law in this area is in an unsatisfactory state. Apart from the marked absence of West Indian case law, the Australian decisions we are forced to consider are of little guidance. In the decision of Berlei Hestia (NZ) Ltd v Fernyhough Justice Mahon appears to overlook the point that the making of a profit is only one facet of the conflict of interest rule. This rule can apply to render a director in breach of his fiduciary duty even where he makes no profit. Note: In certain circumstances interlocking directorships may give rise to petition of unfair or prejudicial conduct. In the US in the decision of Remillard Brick Co v Remillard Dandini Co Judge Peters explained the nature and scope of interlocking directorships in the following terms: The law zealously regards contracts between corporations with interlocking directorates and will carefully scrutinise all such transactions and in the case of unfair dealing to the detriment of minority stock holders, will grant appropriate relief. The reasons given for nominee and interlocking directorships are unconvincing reasons when balanced against their potential for conflict of interest and breach of regulation. Disadvantages 1. Results in the elimination of competition between two companies. 2. Where the companies are in a supplier- purchaser position it may result in preferential treatment and restrictive trade practices. 3. An interlock between manufacturing corporations, banks and insurance companies may establish community of interest that would assure adequate credit to a favourite company and the withholding of credit and capital from disfavoured competitors.

4. Where a director serves on boards of different corporations he owes fiduciary duties and obligations to more than one company. There is a narrow problem that the interest of stock holders may be subordinated to the opportunity for personal gain. 5. It may result in the deterioration of service on the boards of companies. Are these regulations practical? Can we check and verify every transaction to ensure that they are in accordance with the regulations? Do we have the resources to determine whether these linkages are present? Shareholders In the leading case of Percival v Wright the director was charged with using insider information of an impending takeover bid to purchase the shares at a price below that offered by a prospective purchaser. The plaintiff himself approached the director seeking to sell his shares at a quoted price. The director accepted his offer without disclosing information about the impending takeover. It was held that the director had no duty to the shareholder to disclose this information. This decision is generally taken to mean that directors are permitted to use inside information for their own investment purposes and as such it has been attacked as being in conflict and inconsistent with the directors fiduciary duty not to use the property or confidential information of the company for personal profit. See the decision of Coleman v Myers where the CA found that Percival v Wright was correctly decided in relation to its particular facts. Here it was the directors who solicited and not the shareholder. Allen v Hyatt The directors were found to be agents of individual shareholders. In Allen v Hyatt we are concerned with a small quasi partnership. The smaller the company the greater the control over the shareholders. There may be a fiduciary relationship.

In Peskin v Anderson, Nurembugh J stated: I am satisfied that in appropriate circumstances a director can be under a fiduciary duty to a shareholder. It seems to me that as a general proposition a directors primary fiduciary duty is to the company. To hold that he has some sort of general fiduciary duty to shareholders: 1. Would involve placing an unfair, unrealistic and uncertain burden on a director. 2. Would present him frequently with a position where his two competing duties, namely his undoubted fiduciary duty to the company and his alleged fiduciary duty to shareholders would be in conflict. Percival is the law. The directors owe fiduciary duty to the company. Obligations and to whom they are owed -the company -ordinary shareholders -preference shareholders- can have cumulative or non-redeemable By whom is a duty owed

While it goes without saying that directors owe a fiduciary duty to the company there is evidence to suggest that officers and shareholders are also capable of owing fiduciary obligations to the company. Thus s95(1) of the BCA, s99 T&T, expressly confers statutory fiduciary duties on directors and officers. Moreover s58 bestows managerial powers on the board of directors to manage the business and affairs of the company and it commences subject to a unanimous shareholders agreement. Logically therefore shareholders agreements can deprive directors of their powers to manage business and affairs of the company and consequently such a shareholder would be catapulted into a fiduciary position by virtue thereof and to the extent to which those powers are curtailed by the agreement. There has also been a broadening of the forum of directorial liability beyond directors properly called because they have been validly appointed to shadow directors and de facto directors. Shadow directors The concept of shadow directors is introduced in the JCA 2004. Here a shadow director means a person in accordance with whose directions or instructions the directors of the company are accustomed to act, so however, that a person is not deemed a shadow director by reason only that the director act on advice given by him. In the English decision of Hydrodam ( Corby) Ltd Millett LJ reviewed the key elements in the UK equivalent. To establish that a defendant is a shadow director of a company it is necessary to allege and prove: 1. Who are the directors of the company, whether they are de facto or de jure 2. that the defendant directed those directors in how to act in relation to the company or that he was one of the persons who did so 3. That those directors acted in accordance with such directions 4. That they were accustomed to so acting A number a implications arise: 1. A controlling shareholder, creditor and or banker is at risk of being classified as a shadow director 2. The relationship of parent-subsidiary may also give rise to a finding that the parent is operating as a shadow director of the subsidiary company 3. The relevance to shareholders is that the expansion of the category of directors to include shadow directors extends the platform on which minority shareholder action can be mounted. In Hydrodam Millett LJ distinguished a shadow director from a less technical term de facto director. A de facto director is a person who assumes to act as a director, he is held out as a director by the company and claims and purports to be a director although never actually or validly appointed as such. Note: This concept is not unfamiliar to Barbados, T&T or the OECS as it is contemplated by the legislation. Nature of directors duties

De facto or de jure appointment Nature of the fiduciary duty: to act honestly and in good faith with a view to the best interest of the company Duty of care diligence and skill - Re City Equitable Fire Insurance Romer J: Three criteria- of an intermittent nature to be performed at board meeting; need not exhibit in the performance of his duties a greater degree of skill than is normally associated with someone in his position; the are under are entitled to rely on information and advice provided by officers. Uncertain as to whether it is a subjective or objective test Brazilian Rubber Neville J introduced an objective test. If you possess special skills the company should benefit from it. Dovey; Mills - Directors can rely on advice if there is no suspicion of officers Directors Duties Employees S95 Barbados states: A director must have regard to the interest of the companys employees in general as well as to the interest of its shareholders. This provision, the creation of social and political considerations, is reflective of perhaps the stake holder theory (posits that the shareholders are not the only constituents that the company has regard. This is also the basis of consumer legislation. Trade obligations environment etc) and it is of uncertain ambit and effect. Manual p23: It has been suggested that s95 creates a duty between the directors and the employees. The response to this position suggests that you cannot equate the consideration of an interest with the creation of fiduciary duties. Weaknesses 1. The interpretation of the interests of the companys employees in general. Possible interpretation: Interest extends only to those who could reasonably be expected to be affected by the acts of directors themselves acting in their capacity as directors. This would absolve the directors from considering trivial matters. 2. The presence of the word in general. Does this provision mean the directors interest in general or the companys employees? In other words does it relate to the scope of the duty or to those who would benefit from the result? The former meaning is fairly restrictive whilst the latter is indicative of a wider class of interest. It is suggested that perhaps the solution is to assume that the effect of the words in general when juxtaposed to employees is to require the directors to refrain from preferring the interest of any one class of employees and necessitate the taking of an average view of employees interest. Advantages 1. The policy underlying s95 is the notion that the company must now develop a social conscience and it may be the first step towards the new company law concept of the company as a whole.

Duties and liabilities An employee has a number of duties at common law including the duty to obey lawful commands and to show due care in the performance of their duties. Breach of these duties would render the employee liable for damages to the employer Lister v Romford Ice & Cold Storage [1957] 1 All ER 120. Another duty is that of fidelity and confidentiality. See the decision of Robb v Green [1895] 2 QB 315 where an employee compiled a list of customers from the order book of his employer, left his employment and set up his own business using these names was held liable to the employer for damages and required to return the list. See also Canadian Aero Service v OMally Note: The duty owed by a high ranking employee can be placed at a much higher level and indeed the obligation may be fiduciary. The relevance of employees in the corporate structure In conventional corporate law employees have a very limited role to play in the overall management and deal structure of the company. Traditional company law is concerned only with the relationship between directors, shareholders and creditors. In the decision of Parke v Daily News Ltd the court decided that where a major part of the business had closed down and only a small part continued the directors had no powers to make large ex gratia payments to its former employees. Hence, payments to the employees were ultra vires the company so that the gratuitous payments were void. There is evidence, however, that we are moving towards industrial democracy. Apart from the platform evident in s95(2) there is evidence of positive partnership arrangements between management and workers. Impetus for a more realistic approach 1. Role of trade unions 2. Employee share schemes where there is increased employee share ownership 3. Employee participation on boards including trade union representation on boards 4. Creation of two-tiered boards and sub-committees. This increases the profile of the employee in the workplace. Creditors The laws protection of the creditor against acts of the corporate directors is beset with uncertainty. The uncertainties are emphasised by the basic legal duties of directors and their obligation to act in good faith in the interest of the company. In a solvent company the shareholders interest dominate although the law does attempt to safeguard creditors interest in some respects and hence recognises the importance of their role in the company. T&T Part 4, St Kitts Part 13 s126, Grenada Part2 ss250-265, BARB part2 ss237 & 252, JA part ss93 -100. These sections require all charges to be registered and also relate to the maintenance of capital.

The orthodox position was stated by Dillan LJ in Multinational Gas & Petrochemical v Multinational Gas & Petrochemical where he said, Directors owe fiduciary duties to the company though not to creditors present or future or to individual shareholders. The crucial question is whether there is any qualification on the nature of directors duties. In Winkworth the HL decision indicate that there may e a change form the traditional view. Lord Templeman stated: A company owes a duty to its creditors present and future. The company owes a duty to its creditors to keep its property inviolate and available for repayments of its debts. The conscience of the company as wells as its management is confined to its directors. A duty is owed by the directors to the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of directors themselves to the prejudice of the creditor. There is no clear indication of the point at which directors duties may be transformed in favour of creditors interests. Further there is no clear definition of the scope of creditors interest in this situation. The rule is that a director must act in the interest of the company and despite the separate personality of the company it is clear that directors are not expected to act in the basis on what is for the economic advantage of the corporate entity disregarding the interest of members. As was stated in Greenhagh v Ordern Cinemas the phrase the company as a whole does not mean the company as a commercial entity distinct from its incorporators. The case law illustrates that the inset of insolvency heightens the creditors legal status Brady v Brady which involved a complicated corporate division arrangement involving a companys provision of financial assistance for the acquisition of its own shares. The CA had to consider whether the transaction was contrary to s151 of CA (UK) 1985. The CA held that the transaction did not fall within s153(1) which provides an exception where the assistance is given in good faith and in the interest of the company. Te HL subsequently reversed that decision finding that the interest of the creditors had not been considered and Lord Oliver went on to observe that the portion of the asset being removed was so large as to make it essential for the question of creditors interest be considered. Re WelFab Engineering The question was raised what obligations directors owed to company creditors. In this case the creditors did not suffer but rather they could have got a better deal. The engineers had a profitable business up until 1979. Thereafter they started to decline and decided to sell a freehold property which was subject to a bank charge. The directors considered two options and they accepted the option which offered a sum below the stipulated bank charge but which provided for the employment of all employees and directors. On the subsequent winding up of the company the liquidator alleged that the boards acceptance of the offer constituted a breach of the director fiduciary duty and that aggressive marketing could have achieved a higher sum. Justice Hoffmann, while accepting the liquidators argument that the directors were influenced by a consideration of the impact on employees, refused to find the directors in breach thereby dispelling the notion that the fulfilment of the directors duty towards creditors necessitates a consideration of those interests in a vacuum. The court found that the board of directors had aced reasonably and honestly.

Summary

1. The director owes no fiduciary duty to creditors, however, in exercising his duties he must have due regard to the interest of creditors 2. The boards duty extends only to avoiding action which would cause loss to creditors. This duty is essentially proscriptive (outside protection of the law) and one would not necessarily require the directors to give creditors interest the sort of positive consideration they would receive in liquidation. Thus at the pre-insolvency stage directors are not compelled to actively advance creditors interests 3. The key element in directors duties hinges on the fundamental requirement that a director must act in good faith in what he believes is in the interest of the company. See the case of Nickleson v Permakraft where Cooke J held that directors, in taking account of the interest of creditors, must consider whether what they do will prejudice the companys practical ability to discharge its debts promptly. Note: A similar view was also held by the CA in Winkworth v Edward Baron Development Co Ltd. See also Brady v Brady which postulates a subjective test for the determination of good faith. 4. Once insolvency confronts the company the creditors interests become relevant. Their status at this stage means that the directors are no longer able to deal freely with the companys assets 5. In construing good faith the knowledge of directors of the impending insolvency is relevant Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical 6. If the directors embark upon a course of action which is reckless in commercial terms and prejudicial to creditors interest the question of directors liability arises and complainant action in new law jurisdictions. 7. One must be cognisant of the power of the company in general meeting to authorise and ratify a directors action 8. In the HL decision of Lonrho Ltd v Shell Petroleum which concerned alleged conspiracy to breach sanctions by Shell Lord Diplock said that the best interest of the company are not necessarily those of the shareholders but may include those of creditors. On the other hand, in the CA decision of Re Horsely & Weight Ltd the court held that a pension policy was intra vires and Buckley LJ held: Although it may be somewhat loosely said that directors owe an indirect duty to creditors not to permit any unlawful reduction of capital to occur it was in fact more accurate to say that the directors owe a duty to the company in this respect and if the company went into winding up the liquidators owe a duty to enforce the right to repayment. The law, therefore, is unsettled. Creditors problem defined 1. Corporate law regards creditors as contractual claimants and shareholders as owners of the corporation. Consequently, creditors are treated as not being entitled to ant more than what has been agreed to under a particular debt-sale service agreement and shareholders as being entitled to unlimited claims on the remaining assets of the corporation. 2. As both shareholders and creditors are competing for a slice of the pie competition is intense. It may be argues that creditors ought to ensure primacy of their interest by express contract. Note however, that such express contractual stipulation is

generally not possible in normal trade service agreements and difficulties are presented in debt contracts. For example, costs, documentation, difficulty in monitoring breaches and the time factor involved in enforcing rights where breaches are detectable 3. The greater the restrictions imposed on the corporations freedom of action the greater the cost and corporations will inevitably spend time trying to avoid such restrictions with the lender. The potential for conflict is recognised by the law which seek to confer priority on creditors interests in the event of bankruptcy See Insolvency and Bankruptcy legislation Note: Practical perspective. Harmful managerial action. This may take many forms. Managerial inaction can be just as harmful. 4. Managerial sherking or under-investments. This is where gains or profits from a particular venture are required to be paid to the lender. Management may be tempted to invest less effort in this venture and concentrate on opportunities that do not require their rewards to be shared with the creditor 5. Underinvestment. This is a variation of sherking, especially where a substantial part of the value of the corporation is composed of intangible assets, For example, future investment opportunities. Management may reject projects which have a positive net present value if the benefits of developing these projects will accrue to debenture holders whose claims mature over a long period of time. 6. Asset substitution. This is where the company makes the business venture for which the loan was advanced riskier. Where the additional risk pays off and the project succeeds the market value of the firm increases but the shareholders pick most of the gain. Conversely, if the project fails the market value of the firm decreases but the bond holders bare the loss.