Review, explain and compare the legal aspects of Directors’ duties in the context of M&A activities with reference to English and U.S (federal and state levels as appropriate) Laws.
A. INTRODUCTION
Industrialisation and globalisation has resulted in the massive expansion of companies and the number of its owners which has in turn led to a separation of ownership and control and the dependence on directors to run the affairs of the company. Corporate decisions affecting the existence of companies are also placed in the hands of these few. This essay seeks to review the duties of directors under UK and US laws in takeover situations and how the courts interpret the decisions taken by directors to determine whether or not the interests of the company and its shareholders was paramount in arriving at their decision.
B. ENGLISH LAW
Under English Law, directors’ duties were traditionally governed by common law and equity and recently, have been codified under Part 10, Chapter 2 of Companies Act (CA 2006). These duties are based on the law of trusts and agency and can be broadly categorised as directors’ fiduciary duties and the duty of care and skill. The four fiduciary duties of directors are the duty to act bona fide; duty to exercise powers for a proper purpose; duty not to fetter discretion in the exercise of powers; and duty not to place oneself in a position where personal interests conflict with the duties of office. In addition, the City Code on Takeovers and Mergers (Takeover Code) also contain provisions which outline the conduct to be observed in takeover and merger transactions in listed and unlisted public companies resident in the UK.
It is a general rule of common law that directors’ fiduciary duties are owed to the company and not to individual shareholders based on the act of incorporation and the effect of the distinct legal character of a company. S. 172 CA 2006 has somewhat extended this duty by stating that directors have a duty to promote the success of the company ‘for the benefit of its members as a whole’ and taking into consideration the interests of other stakeholders. In Peskin v Anderson, the court held
Industrialisation and globalisation has resulted in the massive expansion of companies and the number of its owners which has in turn led to a separation of ownership and control and the dependence on directors to run the affairs of the company. Corporate decisions affecting the existence of companies are also placed in the hands of these few. This essay seeks to review the duties of directors under UK and US laws in takeover situations and how the courts interpret the decisions taken by directors to determine whether or not the interests of the company and its shareholders was paramount in arriving at their decision.
B. ENGLISH LAW
Under English Law, directors’ duties were traditionally governed by common law and equity and recently, have been codified under Part 10, Chapter 2 of Companies Act (CA 2006). These duties are based on the law of trusts and agency and can be broadly categorised as directors’ fiduciary duties and the duty of care and skill. The four fiduciary duties of directors are the duty to act bona fide; duty to exercise powers for a proper purpose; duty not to fetter discretion in the exercise of powers; and duty not to place oneself in a position where personal interests conflict with the duties of office. In addition, the City Code on Takeovers and Mergers (Takeover Code) also contain provisions which outline the conduct to be observed in takeover and merger transactions in listed and unlisted public companies resident in the UK.
It is a general rule of common law that directors’ fiduciary duties are owed to the company and not to individual shareholders based on the act of incorporation and the effect of the distinct legal character of a company. S. 172 CA 2006 has somewhat extended this duty by stating that directors have a duty to promote the success of the company ‘for the benefit of its members as a whole’ and taking into consideration the interests of other stakeholders. In Peskin v Anderson, the court held
Bibliography: 2. Cleaver, C., (2009) United Kingdom – Takeover Guides, Slaughter and May,UK. 8. Kreider, G. P., (1986) Corporate Takeovers and the Business Judgement Rule: An Update, The Journal of Corporation Law..., 633-650 9. Lamb, D., (1994) United States of America: Directors’ Duties under Delaware Takeover Law, Company Lawyer, vol 12. Wachtell, Lipton, Rosen & Katz, (2007) Takeover Law and Practice 2006, PLI 's Sixth Annual Institute on Securities Regulation in Europe: A Contrast in EU & US Provisions Books 13. Davis, Prof. (ed.), (1997) Gower’s Principles of Modern Company Law, 6th ed., Sweet and Maxwell 14. Kenyon-Slade, S., (2004), Mergers and Takeovers in the US and UK Law and Practice, Oxford University Press, New York. UK Cases 1. Bamford v Bamford (1970) Ch. 212 2. Bishopsgate Investment Management Ltd v Maxwell (1993) B.C.C 3. Bristol & West Building Society v Mothew (1998) Ch. 1 at 18 4. Hogg v Cramphorn Ltd (1967) Ch 5. Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 6. Percival v Wright (1902) 2 Ch 7. Peskin v Anderson, (2000) B.C.C. 1110 8. Regal (Hastings) Ltd v 9. Regentcrest Ltd v Cohen (2001) 2 B.C.L.C. 266 10. Smith v 2. Cede & Co. v. Technicolor Inc., 636 A.2d 956 (Del. 1994) 3. Cinerama, Inc 4. Citron v. Fairchild Camera, 569 A. 2d 53 (Del. 1989) 5. Gimbel v 6. Guth v. Loft, Inc., 5 A. 2d 503, 510 (Del. 1939) 7. In Re Abbott Labs 8. In Re Walt Disney Co. Derivative Litigation, C. A. No. 15452 (Del. Ch. May 28, 2003) 9. Kahn v 10. Kahn v. Tremont Corp., A.2d 422 (De. 1997) 11. Minzer v 12. Paramount Communications Inc. V. Time, Inc., A. 2d 1140 (Del. 1989) 13. Parnes v 14. Re Anderson Clayton Shareholders’ Litigation, 519 A. 2d 669 (Del. Ch. 1986) 15. RJR Nabisco, C.A 16. Smith V. Van Gorkom, 488 A. 2d 858, 873 (Del. 1985) 17. Unitrin Inc 18. Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) 19. Revlon, Inc UK Statutes 1. FSA Code of Market Conduct 2001 at http://www.fsa.gov.uk/pubs/policy/ps59_76.pdf visited 9 April, 2010 2. Financial Services and Market Act, 2000 3. Part V, Criminal Justice Act, 1993 (c.36) Other sources 1. FSA, Enforcing the Code of Market Conduct, FSA at http://www.fsa.gov.uk/pages/doing/regulated/law/focus/conduct.shtml visited 9 April, 2010 2. The Guardian news article ‘Cleaning up murky markets’ by Nils Pratley, dated 15 March, 2010 at http://www.guardian.co.uk/business/2010/mar/15/viewpoint-fsa-takeovers-insider-dealing, visited 9 April, 2010