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Posts Tagged ‘Fiduciary duties’

Corporate Governance Challenges in Controlled companies. USA versus EU

March 30, 2017 2 comments

Corporate Governance Challenges in Controlled companies. USA versus EU

María Gutiérrez and Maribel Saéz have recently published an enlightening article on this aspect of Corporate Governance, traditionally much more connected with the European reality than with the US case. (1)

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Their analysis covers the three mechanisms with which shareholders may react to underperforming companies, (exit, voice and loyalty or liability (2)), with an innovative approach; they understand their respective effectiveness depends on the type of controlling insider and on the nature of the outsider.  Controlling shareholders have been more common on Europe and other areas than in the US, although in recent times both the reduction of public firms and certain governance practices (dual-class shares…) have made them also more frequent in the US. Even if reality appears to converge, nevertheless governance practices differ as for the treatment that controlling shareholders receive, so that tunneling, self dealing and other rent-extraction methods by them against the minority shareholders or investors is still much more limited in the US than in Europe, (perhaps one of the reasons for the much more limited role of capital markets there). Read more…

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The Duty of Loyalty

February 19, 2017 Leave a comment

The Duty of Loyalty is established in the Spanish Corporate Law (1) in articles 227 until 232. According to it directors need to act with good faith and in the best interest of the corporation; a breach would entail restitution of the damage suffered by the corporation plus the return of the profit the director could have made.

The legislator wanted to further explain the extent of the obligations:

a) Directors must use their powers with the aim they were granted to them.
b) They must keep confidentiality.
c) They must refrain from deliberation and vote when they face a conflict of interest. They also need to adopt measures not to incur in situations where their interests (or those of related parties) face those of the corporation.
d) They need to act free from instructions and criteria established by third people.

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Referring to the conflict of interest, the legislator further explains that it can appear when a director does a transaction with the corporation, when he uses the name of the corporation or its assets in its own interest, when he takes a business opportunity from the corporation, when he/she is paid by a third-party or acts in business as a competitor of the company.

The prohibitions to act may be relaxed if the shareholders general meeting (or in some cases the rest of directors if they are independent with regard to the affected director)) so decides. In general the approval can only be granted if no damage is produced to the company or if it is somehow compensated.

In connection with the Duty of Loyalty, some questions arise in all legal frameworks: Read more…

The Business Judgement Rule

January 29, 2017 4 comments

The last Spanish Corporate Governance reform introduced the Business Judgement Rule (BJR) concept, stemming basically from the US courts in Delaware.

We will make an effort to give a broad and modern vision on the BJR in this post, given its prevalence in modern Corporate law or practice. In this effort we will primarily follow D. Gordon Smith`s article on “The Modern Business Judgement Rule”, (1).

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An initial BJR formulation by courts is recognized in 1927 Delaware court´s decision in the Bodell vs. General Gas & Electric Corporation case. A first approach would outline the BJR protects directors from liabilities stemming from “honest mistakes”either as to law or fact, somehow recognizing the human fallability, but also the fact that it reduces legal costs as directors find it difficult to please every shareholder, as S. Samuel Arsht stated in 1979 (2). Read more…

Work and Pensions and Business, Innovation and Skills Committees: The BHS Report

The inquiry (1 and 2) has tried to shed light into the reasons why some 11.000 BHS workers may be considered direct losers, up to 20.000 when pensioneers are included, many more if we consider eventual job losses in BHS providers, and up to 11 million when current and future pensioneers in other firms, (all of them contributors to the Pension Protection Fund that will afford part of the damage) are counted.

The big numbers also point to some winners: the company was bought in 2000 for £200 million; in the period 2002-04 some £423 million were given in dividends, (more than the £208m in Net Profit), £307m paid to the Green family. Goodwill and some real estate transactions allowed to pay these amounts, but also reduced the firm capacity to fulfill its pension obligations, invest or later afford the loss-making period until 2009, so that in 2014 the company had negative equity and was largely financed  by debt, (part of it granted by Green`s other companies). Operations didn`t really go well, as sales remained flat and profits might have increased mainly as a result of cost cuts. Read more…

Overview of the main Corporate Governance topics

Included as a preface in their forthcoming book “Understanding the company: Corporate Governance and Theory”, Barnali Choudhury and Martin Petrin offer a brief summary (1) of academic debates on the topic, mainly regarding:

  • The nature of the firm. A debate that started at the Roman times and gained intensity in the XIXth century. Although scholars and courts have given up in their effort to define the “nature of the firm”, two opposite views dominate the debate; on the one hand, the nexus of contracts model describes the firm as a set of contracts between different constituencies which so aim to produce goods and services, and thus constitute a firm. The Director Primacy theory extends this view, defining the firm not as a nexus of contracts but having a central nexus, the board of directors. Corporate law consequently intends to reduce the cost of negotiating, settling the concepts and basis for it. The nexus of contracts theory is connected with the Shareholder Primacy theory and the idea that shareholders´ interest should precede other constituencies´ones, and that corporations have no social or moral duties. (A recent decision by Google based on moral or social reasons recently generated some criticism as for the possibility that shareholders could sue directors for having breached their fiduciary duties, (2)).

Read more…

The ecoDa/AIG Guide to Directors’ Duties and Liabilities

October 12, 2015 Leave a comment

Ecoda (www.ecoda.org) and AIG have jointly published a Guide to Directors regarding risks they face when acting as such. Both entities have published press releases, (1) and the guide itself, (2). We strongly recommend directors to read the guide. (3)

The landscape remains similar although several changes appear: regulators will be less permissive; fiduciary duties are better defined so that compliance will also be better and more easily demanded; companies (even SME`s) are becoming global, so that directors should assess their liability landscape in geographies in which the company operates.

Directors need to keep themselves out of the firing line by: (i) proactively fulfilling their duties, requiring to receive all necessary information, etc.,  (ii) asking their position to be noted in the minutes and taking private notes, (iii) being wise in procedures to be sure the Business Judgement rule will be applied, (iv) having a goog D&O insurance, etc.

(1) See them here (http://www.aig.co.uk/insights/guide-to-directors-duties-and-liabilities?cmpid=SMC-TWITTER-AIGemea-EMEADirectorsDuties-20151012110500) and here (http://ecoda.org/news-details/article/press-release-report-on-european-directors-duties-and-liabilities-published-by-ecoda-and-aig-1/),

(2) See it here: http://ecoda.org/all-publications/publication/article/report-on-european-directors-duties-and-liabilities-published-by-ecoda-and-aig/

(3) I thank @excellencia_ltd for tweeting the report, which made me aware of its existence.

 

Is shareholder activism in controlled firms possible?

July 16, 2015 1 comment

We recently refered to this in our recent post (1), when analyzing the evolution of activism and particularly in Europe where controlled companies are common.

This is the question to which Kobi Kastiel, (a Fellow of the Program on Corporate Governance, and Terence M. Considine Fellow at the Center for Law, Economics and Business, Harvard Law School), tries to answer in a paper published in 2015 (it received The Victor Brudney Prize for June 2015) under the title “Against all Odds: Shareholder Activism, in Controlled Companies”, (1).

The author refers to the New York Times Company and its engagement with shareholders after a 2008 activist campaign led by Harbinger Capital Partners, Firebrand Partners, and Morgan Stanley. The company ended hiring two directors named by activists, selling non-core assets, reducing its Capex, lowering its operational costs, etc. But this company was not the typical target of such a campaign as it remained controlled by the founding family, which according to the broadest opinion should have prevented an activist campaign to succeed, (it would have needed a dispersed stock ownership). Read more…