Wednesday, November 15, 2006

U.K. Enacts New Directors’ Duties Law

On November 8, 2006, a sweeping bill affecting U.K. companies went into affect when the Companies Bill, which at 696 pages is Britain’s longest piece of legislation, received royal approval. (The House of Lords site reflecting all information pertaining to the Bill may be found here.) The Bill contains a statutory statement of directors’ general duties and extended authority for shareholders to sue directors for negligence, default, breach of duty or breach of trust – a broader range of conduct than under prior law.

The Bill’s statutory statement of directors’ general duties sets out seven duties:
  • The duty to act within the company’s powers;
  • The duty to promote the success of the company;
  • The duty to exercise independent judgment;
  • The duty to exercise reasonable care, skill and diligence;
  • The duty to avoid conflicts of interest;
  • The duty not to accept benefits from third parties; and
  • The duty to declare any interest in any proposed transaction or arrangement with the company.

The new general statutory duty to "promote the success of the company" is the most controversial clause in the Bill, and includes many considerations of which directors must now take into account – not only the long term business consequences of any decision, but also "the impact of the company’s operations on the community and the environment." This new statutory duty requires directors to consider wider social responsibility factors when making decisions. The various statutory requirements may create obligations that conflict. But the decision of what constitutes the company’s best interests will not be set aside if made in good faith and the directors have exercised reasonable care, diligence and skill.

The Bill extends existing shareholder rights to bring derivative claims. The new statutory procedure enables a shareholder to bring a claim with respect to any actual or alleged negligence, default, breach of duty (including the new statutorily codified duties) or breach of trust. A shareholder seeking to bring a claim must petition the court for the right to proceed, based upon a showing of good faith and taking into account whether the company decided not to pursue the claim. If leave to continue is granted, the company must reimburse the shareholder for brining the action; if not, the shareholder bears his or her own costs.

According to a detailed review (here) of the Bill by the Norton Rose law firm, the absence of the risk of costs if leave to pursue the derivative claim is granted "may make shareholders more likely to bring an action under the new procedure." The new right to bring an action for breach of any duty, including the new statutory duties, "provides another tool for use by activist shareholders to push for change at underperforming companies." But how useful this tool will be depends on "the court’s willingness to exercise its discretion to intervene in what, in many cases, will be simply commercial decision making by the company, its directors and majority shareholders." In light of these considerations, the Norton Rose firm’s memo suggests that "boards should review the wording of their D & O policies to ensure that defending derivative claims is covered."

A summary of other aspects of the Bill may be found at the CorporateCounsel.net, here.

A Private Conspiracy?: According to a November 15, 2006 Bloomberg.com article entitled "KKR, Carlyle, 11 Other Accused of Rigging Buyouts" (here), the law of Wolf, Haldenstein, Adler, Freeman & Herz has brought a purported class action accusing 13 private equity firms of rigging the market to take companies private. The complaint purportedly alleges that investors did not receive full value for their shares because of a conspiracy that violated antitrust laws. The purported class potentially represents tens of thousands of shareholders in dozens of deals in which public companies were taken private. Among the specific transactions named are deals involving Univision, HCA and Harrah's Entertainment. The list of defendants reads like a who's who in the world of private equity, including KKR, Carlyle, Thomas H. Lee Partners, Blackstone Group, Bain Capital, Apollo Management, Texas Pacific Group, and others.

Prior press reports had disclosed that the antitrust division of the U.S. Deparment of Justice in Manhattan is examing potential antitrust violations by private equity firms engaged in "club deals" to acquire public companies. An October 11, 2006 Wall Street Journal article entitled "Probe Brings 'Club Deals' to the Fore" can be found here (subscription required.)

Best Commercial Ever?: You decide. Roll the tape, here.

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