Analysis of the Development of Shareholders Activism in the UK - Essay Example

? As the al shareholders and the public grow angrier and angrier over the almost unimaginable riches that FTSE bosses are ranking in…it felt like the ‘shareholder spring’ had finally sprung’ Introduction Despite the fact that action of a director cannot be interfered by the shareholder, under UK Companies Act, a minority shareholder can initiate prejudice action where he can sue the majority shareholders who manage the company or can initiate a derivative action where the shareholder can sue the directors on behalf of the company. Thus, the Companies Act 2006 of UK offers more duties on directors mingled with a right to initiate sue the directors for any misfeasance by shareholders. In earlier days, in the absence of clear provisions in the Companies Act, directors’ duties were evolved through case laws and now, the UK Companies Act 2006 contains explicit provisions regarding the duties of directors through sections 170 to 177 and chiefly mirrors the equity and common law principles. However, the section 172 of CA 2006 is itself a novelty which includes an explicit duty to promote the growth of the company successfully. Further, it also contains a new notion of “open-minded or enlightened shareholder value”. Whether a director of a company can be held accountable for any fiscal losses to the company due to their wrong decisions by the shareholders of the company? Under the UK Companies Act, shareholders including minority and institutional shareholders can now initiate legal action against erring directors or directors to whom hefty pay packages are being offered without relevance to their performance through derivative actions or through unfair prejudice clause. As the Institutional shareholders and the public grow angrier and angrier over the almost unimaginable riches that FTSE bosses are ranking in, the sudden spurt in shareholders’ activism in UK in recent days is being felt like the ‘shareholder spring’ had finally sprung’. This research essay will make a deep analysis the development of shareholders activism in UK and how the institutional shareholders and other minority shareholders now occupy a common platform to initiate action against hefty packages to directors or voting against the re-appointment of those director’s whose performance was not up to the standard. Institutional Investors and Minority Shareholder’s Activism in UK-An Analysis Under section 173 & 174 of the Companies Act 2006, though the directors of a company are appointed and ousted by shareholders, but the directors do not have any duty of care to any individual shareholder. It is to be observed that the duty of care by the directors is to the whole of the company’s stakeholders and is not applicable to a shareholder only to the magnitude of their investment held in the company, and thus the director’s duty of care is confined to the capital and not to any individual per se. Further, earlier, the shareholders are having every right to pass resolutions at a general meeting to restraint directors of a company but such resolutions are not binding on company directors, and it is advisory in nature only. For company directors, maximising the wealth of the shareholders is not a legal mandate but only an idealised norm of conduct. The directors are not expected to answer only to the shareholders but also accountable for other stakeholders of the company like creditors, customers, employees, local community and suppliers. (Haynes, Murray & Dillard: 57). Under UK corporate law, there exist no explicit defence or business judgment rule as a safe harbour provision for commercial decisions taken by the directors of a company. However, the absence of any explicit provision in this regard does not leave the corporate directors in UK in the lurch. Thus, as per Justice Austin, in the absence of any explicit provisions under the UK Companies Act as regards to the business judgement rule, but the shareholders may avail safe harbour provisions through the ratification of director’s decisions by the shareholders. Thus, shareholders’ ratification acts like a panacea what might otherwise will be regarded as a breach of duty or other legal infirmity by directors. Under UK Companies Act, legislative authorisation has been offered for the endorsement by a company as regards to conduct of a director which may be tantamount to default, negligent, breach of trust or breach of duty as regards to the company. Thus, ratification of director’s conduct can be accomplished by passing a resolution with the accent of the majority of the shareholders of the company who have no connection or affiliation to the directors whose conduct is being endorsed. (Horrigan 2010:250). Now, under section 417 of the Companies Act 2006of UK, there should be a business review section in the annual report of a company which will make a fair assessment the business of the company by directors, and it also contains a brief note on the major uncertainties and risks witnessed by the company. Thus , the above statutory rationale for this “ business review “ connect it directly to the duty of loyalty to be shown by the directors, and the shareholders may make use of the “ business review “ section in evaluating how best the company directors are executing their obligation in this regard. (Horrigan 2010: 251). An aggrieved shareholder can initiate a derivative claim under CA 2006 against a director. Before the introduction of CA 2006, derivative actions were never auctioned but often threatened. Under Foss v Harbottle, if directors have done any wrong to the company, the action can be taken against the director by the company itself and not by the shareholders. In other words, the shareholders do not have any rights to implement any action against directors who involved in misfeasance. However, if a shareholder wants to initiate an action against the director before the era of CA 2006, he has to fit into the exemptions explained under the Foss v Harbottle rule viz. a) the actions of the majority shareholders were ultra vires, b) the affairs of the company were managed by offenders thereby incurring fiscal losses and constituted a fraud on the minority, c) the personal privileges of shareholders had been breached and that the infringement could be approved by a simple majority vote. A derivative claim cannot be made under the erstwhile CA before 2006 as the actions of directors can be ratified by the majority shareholder which was a bar to initiate a derivative action. Sections 260 to 264 of CA 2006 contain the provisions relating to derivative action (DA) by the shareholders against the directors of a company. Under this, a shareholder can make a claim against the company for the negligence, omissions, acts, breach or default of duty by a director or by a third party. There is no time limit which bars the initiation of action under DA and such claim can be made by a single member or group of members despite the fact of membership status at the juncture of the said infringement. Thus, CA 2006 can be said to be a trendsetter as a shareholder can initiate a DA action against the directors irrespective of the fact that he had become a shareholder after the infringement had taken place. DA under CA 2006 involves two stages – at the first stage, the claimant makes an application to the court about the alleged infringement, and the court will see whether there is any merit in the application without the participation from the said company. If the court finds that application is unsuccessful, the claimant still has the option to present his claim before the court orally and at this juncture, the claimant had to prove that he has a crystal clear case against the directors. If the court is satisfied that the claimant has a prima facie case, then company will be summoned by the court to reply or counter the allegations made by the claimant. After hearing both the sides, the court will come to a final conclusion whether to proceed or not. Under s 263(2), a court may refuse its permission if: There has been authorisation of the said alleged act. The alleged claim does not kindle the success of the business. The omission or the act is probable or has been to be approved by the company. “Important case laws “ In Franbar Holdings Ltd v Patel and ors (2008), a DA was initiated under s261 of CA 2006, and the High Court did not give its assent to initiate a derivative claim against the company. It was claimed by the claimants that the nominated directors had diverted the business to Casualty Plus from Medicenters and also offered inadequate financial information. The judge was of the opinion that under section 263(3) (b), a director will give least importance to continuing the derivative claim as he expected to concentrate to work for the success of the company. While evaluating the significance of the continuation of claim, a director would take into account various features like the panorama of the success of the claim , the distraction that would be witnessed by the company to concentrate to success of the business while paying attention to the DA claim, the capability of the company to recoup from any levy of damages, the aggregate cost to the company, if the proceedings were not successful ,then the injury to the company’s prestige and reputation. In this case , the court was of the opinion that a director would offer less significance to the complaints made as it were raised as of acts of unfair prejudice or as an infringement of shareholders’ agreement, which were already formed the main topic of the DA proceedings. (Vries 2010:133). In Kiani v Cooper, both were directors of Woodlands, and the claimant alleged that the defendant had contracted further debts to the company and also misappropriated ?1.4million of the funds of the company. The court was of the opinion that the claimant had strong evidence to proceed against the defendant. It also found that Kiani performed in good faith, and Cooper had obstructed Kiani to persue new projects. The court was finally was of the opinion that the claim could not be struck off since Kiani could have initiated a prejudicial conduct claim, and this case illustrates that the courts are never declined to employ the new derivate claim proceedings but impose stringent conditions before employing the DA provisions. In Kiani case, there was an award of indemnity but not against any adverse costs’ orders and Stainer v Lee also, the court considered the uncertainty as to probability of recover and restricted the indemnity to 40,000 with an authorisation to apply for an extension of indemnity later. (Hannigan 2012:437). In Mission Capital v Sinclair, the court turned down the permission for continuing the derivative action under s.261 of the CA 2006 as the notional director was not likely to more significance to such a claim and further, the said alleged damage was more speculative in nature. If a member or minority member or institutional investors are of the opinion that if directive action could not produce a positive result, then they can claim redressal of their grievances under the unfair prejudice under s 994 -996 of CA 2006. Under this, a member or a group of members can apply to the court under the unfair prejudice if the affairs of the company are being carried over in an unfairly prejudicial to the interest of some members or to a single member. Institutional and Minority Shareholder’s Activism in UK A study conducted over 300 AGM voting outcomes of FTSE companies in the first two financial quarters of 2012 found that the mean vote against the executive remuneration package increased to 7.64% from that of 6.1% in 2011. Cairn Energy, Aviva, Central Rand Gold, Centamin, WPP and Pendragon were the UK FTSE companies where executive hefty pay packages were voted down by institutional investors. About 1.8% of re-election of directors in 2012 as compared to 1.7% was opposed by the institutional and other investors in FTSE companies. Four directors of EasyJet received 42% votes against their reappointment. Further, if the company receives opposition votes for the increase of the pay package, such companies also witness large opposition votes against reappointment of directors like Barclays, Pendragon, UTV and WPP. Aviva PLC is not an exception to this shareholder’s rejuvenation as it investors like pensions advisory group and other institutional shareholders voted against its board of directors pay package proposal. (Mindfulmoney 2012). In UK, there is no binding for the shareholders vote opposing the executive pay. However, such objection can forward a vibrant signal to the management and board members of a company. Investor’s animosity for the steep rise in pay pockets of FTSE-listed companies in recent years has made the executive of AstraZeneca PLC, Aviva PLC & Trinity Mirror to quit their jobs. The institutional shareholders and other small shareholders aligned together and voted against about 60% of increase in executive compensation package for 2011 in WPP Company’s annual general meeting. These trends show that there is a new round of investor’s outrage against hefty CEO’s pay package increase. (Hodgson & Sonne 2012). Practical Tips to Avoid Derivative Action If a shareholder makes a request for any contentious board papers, they should deal with the same more carefully and should arrange to cover insurance policies to make sure that defence of derivative claims can be covered as a precautionary measure. As per one study carried over by Georgeson Shareholder Ltd that 25 institutional investors casted votes against the company at one FTSE 100 company’s AGM, and it discovered about 4.9% was lost. (Sykes & Gregory 2012). Conclusion CA 2006 can be termed as a land mark legislation as it has offered for the first time in the corporate law history in UK with much powers to the shareholders to initiate DA and under the unfair prejudice against the erring directors, and also it imposes a new responsibility on the directors of a company to work for the success of the company. Thus, under CA 2006, claims against directors can be made if they act negligently and also if they indulged in breach of duty. However, in earlier days, it is very difficult to prove negligence against a director under common law provisions. Further, under CA 2006, even if the alleged wrong has been approved by the majority of shareholders, a claimant can still initiate DA against the company. Thus, CA 2006 has made dramatic changes in the directors’ duties towards shareholders, also highlights “enlightened shareholder value “and a moral obligation imposed on directors to take care of interest and welfare of the shareholders in the long run and to work for the success of the business which has imposed more duties and responsibilities on the directors of the companies in UK. Though, shareholders can initiate action under DA, yet UK courts are not much interested to sanction the same and there are very less succeeded cases of DA in UK as compared to other jurisdictions. Investor’s animosity for the steep rise in pay pockets of FTSE-listed companies in recent years has made the executive of AstraZeneca PLC, Aviva PLC & Trinity Mirror to quit their jobs. The institutional shareholders and other small shareholders aligned together and voted against about 60% of the increase in executive compensation package for 2011 in WPP Company’s annual general meeting. These trends show that there is a new round of investor’s outrage against hefty CEO’s pay package increase in recent years in UK. List of References Hannigan, B. (2012). Company Law. Oxford: Oxford University Press. Haynes K, Murray A & Dillard. (2012). Corporate Social Responsibility: A Research Handbook. London: Routledge. Hodgson, J & Sonne. (2012).Shareholders Unrest grows in England, now hits WPP. [online] available from < http://online.wsj.com/article/SB10001424052702303822204577464264>063241178.html> [accessed 12 November 2012] Horrigan, B. (2010).Corporate Social Responsibility in the 21st Century. Sydney: Edward Elgar Publishing. Mindfulmoney. (2012). Activists Target Aviva –Again. [online] available from [accessed 12 November 2012] Sykes, J & Gregory, L. (2012). Shareholders Actions in England & Wales - New Rules but Little Action. [online] available from< www.alfainternational.com> accessed 12 November 2012] Vries, PP. (2010). Exit Rights of Minority Shareholders in a Private Limited Company. London: Kluwer Law International. Read More