Developments in Corporate Governance and Stewardship

Yesterday, the Financial Reporting Council published its latest report on Developments in Corporate Governance and Stewardship. This report, which marks the 25th anniversary of the publication of the Cadbury Report, has four key aims:

  1. to give an assessment of corporate governance and stewardship in the UK;
  2. to report on the quality of compliance with the UK Corporate Governance Code and the UK Stewardship Code;
  3. to set out the FRC’s findings on the quality of engagement between companies and shareholders, and;
  4. to indicate changes in corporate governance and behaviour that the FRC would like to see occur.

The report notes that compliance with the UK Corporate Governance Code continues to be high, with 62% of FTSE 350 companies reporting full compliance with the UK Corporate Governance Code. 90% of FTSE 350 companies reported compliance with all, or all but one or two, of the Code’s provisions. However, there were some notable areas where compliance could be improved, with the provision least complied with being the recommendation that at least half the board consist of independent NEDs (26 FTSE 350 companies did not report compliance with this provision, although this was down from the 42 non-compliant companies in 2015).

Given the debate surrounding directors’ remuneration, it is unsurprising that the report notes that the 2016 AGM season saw reduced shareholder support for remuneration resolutions, with particular concern noted regarding the lack of transparency between executive pay and performance. The report notes a 24% increase in the number of resolutions with a significant minority vote against the recommendation of the board. The 2014 updated to the Code introduced new recommendations regarding the ability of companies to withhold or clawback variable pay from directors. The report notes that 91% of FTSE 350 companies have put in place a clawback provision on the annual bonus, and 78% allow for clawback of long-term plans.

Concerning amendments to the Code, the FRC has committed to not amending the Code again until 2019 at the earliest. However,it would appear that the FRC is moving away from this commitment. In the Foreword to the report, Sir Winn Bischoff, Chairman of the FRC, stated that ‘[t]he FRC stands ready to revise the UK Corporate Governance Code and its associated guidance.’ In a statement accompanying the report, Paul George, Executive Director of the FRC’s Corporate Governance and Reporting Department stated that ‘The FRC stands ready to revise the UK Corporate Governance Code and associated guidance in 2017.’The report itself states that ‘[t]his year we will review our Guidance on Board Effectiveness as part of our consultation on the UK Corporate Governance Code and associated guidance…’ This apparent change in position is likely a response to the government’s Corporate Governance Review (which I blogged about here), the results of which would likely necessitate amendments to the Code.

As regards stewardship, perhaps the most noteworthy piece of information is that the report states that the FRC will possibly revise the UK Stewardship Code in 2018. The Code is in dire need of updating, given that it is still largely based on the 2009 ISC Code (which was not regarded as overly effective in the first place), and the fact that the UK Stewardship Code itself was last updated in 2012 (and this update was relatively minor). The UK Corporate Governance Code has received regular updates (in 2012, 2014, and 2016) and it is notable that updates to the UK Stewardship Code have been much less frequent.

The Corporate Governance Review

Today, the Department for Business, Energy & Industrial Strategy launched a corporate governance review, accompanied by a Green Paper on corporate governance reform. The need for a review was set out by the Prime Minister in the Green Paper’s introduction:

‘for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. Where this social contract breaks down and individual businesses decide to play by their own rules, faith in the business community as a whole diminishes – to the detriment of all. It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change.’

Although the title of the Green Paper (‘Corporate Governance Reform’) indicates a broad, wide-ranging discussion, the Paper does not provide a review of corporate governance in general, and instead focuses on three specific issues, with a very brief ‘other issues’ category at the end of the Paper. The Paper does stress that the Paper is designed to ‘stimulate a debate on a range of options for strengthening the UK’s corporate governance framework’ and that ‘[t]he Government does not have preferred options at this stage.’ Accordingly, this Paper is merely the first step on what may prove to be a lengthy reform process (especially as large parts of the government and civil service will be preoccupied with Brexit). These areas and the suggested potential reforms will be set out.

Executive pay

The first governance issue discussed is one of the more controversial, namely executive remuneration. The Paper notes that ‘there is a widespread perception that executive pay has become increasingly disconnected from both the pay of ordinary working people and the underlying long-term performance of companies.’ The Paper discusses five areas where the regulation of executive remuneration in quoted companies could be reformed:

  1. Shareholder voting and other rights: The Paper puts forward a number of possible options for reform, namely (i) increasing the scope of the binding vote; (ii) introduce stronger consequences for a company losing the advisory vote; (iii) requiring or encouraging quoted companies to set an upper threshold for annual pay and requiring a binding vote if pay exceeds that threshold; (iv) requiring the binding vote to be held more frequently than the current three-year period, and; (v) strengthening the UK Corporate Governance Code to provide greater specificity on how companies should engage with shareholders on pay.
  2. Shareholder engagement on pay: The Paper discusses several reforms aimed at improving shareholder engagement on pay issues, namely (i) mandatory disclosure of fund managers’ voting records at AGMs and the extent to which they made use of proxy voting; (ii) establishing a senior shareholder committee to engage with executive remuneration arrangements, and; (iii) considering ways to facilitate or encourage individual retail shareholders to exercise their rights to vote on pay and other corporate decisions.
  3. The remuneration committee: The Paper notes the existence of concerns that ‘remuneration committees are not sufficiently or visibly pro-active in consulting formally with shareholders and with the company’s workforce. There are concerns too, that some lack the authority or inclination to take positions that may not align with the CEO or wider executive team’s expectations.’ Accordingly, the Paper suggests potential reforms, namely (i) requiring the remuneration committee to consult shareholders and the wider company workforce in advance of preparing its pay policy, and; (ii) requiring the chairs of remuneration committees to have served for at least 12 months on the remuneration committee before taking up the role.
  4. Transparency: The Paper states that ‘[t]he Government wants to explore whether there is additional information which companies could provide which would make shareholders more effective in holding boards to account on their executive pay arrangements.’ The suggested potential reforms are (i) requiring companies to publish ratios comparing CEO pay to that of the wider workforce, and; (ii) whether existing requirements regarding the disclosure of performance targets that trigger bonuses need to be strengthened.
  5. Long-term executive pay incentives: The Paper looks at possible reforms either replacing or amending practice regarding long-term incentive plans.

Strengthening stakeholder voice

The second major issue the Paper focuses on is strengthening the employee, customer, and wider stakeholder voice. The Paper notes that ‘[m]any companies and their boards recognise clearly the wider societal responsibilities they have and the enormous benefit they gain through wider engagement around their business activities.’ However, it then goes on to state that ‘some have said that companies need to do more to reassure the public that they are being run, not just with an eye to the interests of the board and the shareholders, but with a recognition of their responsibilities to employees, customers, suppliers and wider society.’ To that end, suggested potential reforms include (i) creating stakeholder advisory panels; (ii) designating existing non-executive directors to ensure that the voices of key interested groups, especially that of employees, is being heard at board level; (iii) appointing individual stakeholder representatives to company boards, and; (iv) strengthening the reporting requirements relating to stakeholder engagement.

Corporate governance in private companies

The recent BHS scandal has focused attention on corporate governance and private companies (see blog post here on this). The Paper notes that private companies ‘are not expected or required to meet the same formal corporate governance and reporting standards as publicly listed companies, yet the consequences when things go wrong can be equally severe for other stakeholders.’ Accordingly, several suggested reforms include (i) extending the UK Corporate Governance Code to private companies, or developing a new Code aimed at such companies, and; (ii) extending the scope of certain reporting requirements to cover certain private companies.

Other issues

The final major section of the Paper is entitled ‘other issues’, but it only really focuses on one issue, namely whether the UK’s comply or explain system remains effective in providing the right combination of high standards and low burdens.


The Green Paper is a welcome development and it contains a raft of reforms that deserve wider discussion. However, it does only focus on a few specific areas of corporate governance (admittedly those that have drawn most ire in recent years). Governments and businesses will regularly talk of the importance of having strong governance standards, but reforms in this areas have tended to be rather tepid. It will be interesting to see how committed the government is to governance reform, especially if Brexit does cause the UK to become a more unattractive place to do business.

The Next Stage in Boardroom Gender Diversity

November has been a busy month for the issue of boardroom diversity. Earlier, this month, the Parker Review on ethnic diversity in the boardroom was published (discussed here), and now the Hampton-Alexander Review have published its first report on FTSE Women Leaders.

The Hampton-Alexander Review succeeds the review led by Lord Davies that took place between 2011 and 2015. There can be no doubt that notable progress was made in that period. In 2011, women accounted for 12.5% of FTSE 100 directors, but this had risen to 26.1% by the end of 2015. In 2010, there were 21 FTSE 100 companies with no female directors at all, whereas today, there are no all-male boards in the FTSE 100. However, it is also acknowledged that the Davies Review was not an unqualified success:

  • The gains made in the FTSE 250 were less modest than in the FTSE 100. By the end of 2015, women accounted for 19.6% of FTSE 250 directors, and there was 15 companies in the FTSE 250 that did not have any female directors.
  • The most notable failure of the Davies Review was the poor increase in the number of female executive directors. In 2011, there were only 18 female directors in the FTSE 100 (accounting for 5.5% of the total number of directors). By 2015, this had only risen to 26 (9.6% of the total).

The Hampton-Alexander Review aims to combat these issues in two ways. First, whereas the Davies Review largely focused on FTSE 100 companies, the Hampton-Alexander Review focuses on FTSE 350 companies. The principal goal set by the Hampton-Alexander Review is that FTSE 350 companies should aim for a minimum of 33% female representation by the end of 2020. The Hampton-Alexander Review notes that, as of November 2016, the figure is stands at 23%.

Second, the Hampton-Alexander Review focuses much more strongly on the ‘executive pipeline challenge’ and all CEOs of FTSE 350 companies should take action to improve the under-representation of women on the Executive Committee and in the layer immediately below. Unfortunately, the Review then goes on to recommend that FTSE 100 companies should aim for a minimum of 33% women’s representation across their Executive Committee by 2020. It is disappointing that no goal has been set for FTSE 250 companies, but the Review does note that it did not obtain enough data to set a goal for FTSE 250 companies, and it hopes to acquire more data in 2017.

The Davies Review established a firm foundation, but much more work needs to be done. It is hoped that the recommendations of the Hampton-Alexander Review will improve female representation in those ares where progress was weak, In particular, if the benefits of boardroom diversity are to be realised, it is important that women are placed in positions of leadership, and not confined to relatively powerless non-executive director positions. FTSE 350 companies will undoubtedly commit to the Hampton-Alexander Review, but it is hoped that they commit to the spirit of the Review, and not just the letter.

Boardroom Diversity: Diversifying the Debate

Since the publication in 2011 of Lord Davies’s Women on Boards Report, boardroom diversity has been a prominent governance topic. However, the debate has focused almost exclusively on one type of boardroom diversity, namely gender diversity. This was not always the case. The 2003 Higgs Review on the effectiveness of non-executive directors stated that ‘it is the range of skills and attributes acquired through a diversity of experiences and backgrounds that combine to create a cohesive and effective board.’ In the same year, the overlooked Tyson Report stated that ‘[d]iversity in the backgrounds, skills, and experiences of NEDs enhances board effectiveness by bringing a wider range of perspectives and knowledge to bear on issues of company performance, strategy and risk.’ Both of these reports recognised that boardroom diversity is not just about gender, and that numerous forms of diversity should be encouraged. Despite this, as noted, the debate has almost exclusively focused on gender diversity. Indeed, this emphasis is evident from the UK Corporate Governance Code, which states that ‘[t]he search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.’ Although diversity in general is noted, the express reference to gender indicates that gender diversity is currently dominant.

In other words, the diversity debate has, itself, lacked diversity. Fortunately, a recent report has been published which seeks to broaden the debate by examining ethnic diversity in the boardroom. The Parker Review into the Ethnic Diversity of UK Boards was published in November 2016, and like Lord Davies’s 2011 report, it begins by setting out a bleak picture of diversity. Amongst the FTSE 100, UK citizen directors of colour only account for around 8% of total director population. Of the 1,087 directors holding board positions in the FTSE 100, only 90 are persons of colour. 53% of FTSE 100 companies do not have any directors of colour at all, and only 9 people of colour hold the position of chairman or CEO.

Like the Davies Reports, the Parker Review rejected the introduction of quotas, and instead proposed a series of recommendations, of which the principal ones are:

  • Each FTSE 100 board should have at least one director of colour by 2021, and each FTSE 250 board should have at least one director of colour by 2024.
  • Nomination committees of FTSE 350 companies should require their human resources teams or search firms to identify and present qualified people of colour to be considered by the board when vacancies occur.
  • A description of the board’s policy on diversity should be set out in the company’s annual report. Companies that do not meet the board composition targets should explain in the annual report why they were not met.

It is hoped that the Parker Review gains the same level of traction and support that Lord Davies’s review garnered. Whilst Lord Davies’s review has not been entirely successful (namely the increase in female executive directors has been poor), it has improved the gender makeup of boards in a notable manner, and the goals set by Lord Davies were broadly met (notably the 25% by 2015 goal). Hopefully, the Parker Review can have a similar effect on UK boards in relation to ethnic diversity, and begin the process of widening the boardroom diversity debate.

Corporate governance and private companies

In a recent blog post, I discussed how the recent BHS scandal has ignited the debate surrounding corporate governance and private companies. Recently, the Institute for Chartered Secretaries and Administrators (ICSA) has suggested two reforms that aim to improve governance among private companies. This blog post is focusing on the first (a later post will focus on the second), namely that ‘private companies required under the [CA 2006] to have audited accounts and to produce a directors’ report should be required to disclose in their annual report the extent to which they comply with the UK Corporate Governance Code.’ ICSA has wisely decided not to suggest that all private companies should be required to report against the Code, and by focusing on private companies that require audited accounts, a significant number of private companies would be excluded from the requirement to report (largely via the small company exemption). However, even requiring these companies to report may be problematic for several reasons.

First, the specified private companies would be ‘required’ to report their compliance with the Code. In relation to listed companies, the requirement to comply or explain is found in the Listing Rules (see LR 9.8.6R(5) and (6)), and the requirement to include a corporate governance statement is found in the Disclosure and Transparency Rules. As these rules do not apply to private companies, requiring private companies to report on compliance would require legislation, likely an amendment to the CA 2006 or the subordinate legislation that fleshes out the reporting requirements. This problem this creates is that, currently, only listed companies are required to comply or explain against the Code, meaning that unlisted public companies are not so required. If ICSA’s suggested reform was implemented, it would result in private companies being subject to a stricter requirement than public companies, which runs counter to the ‘think small first’ philosophy found in the CA 2006. If private companies are to be required to report, then surely public companies should be too?

Within ICSA, this view appears to exist. A blog post by Peter Swabey, ICSA’s Policy & Research Director, stated that ‘we advocate that all organisations large enough to require audited accounts, whether listed companies or not, should be required to indicate in their annual report where they have not complied with the UK Corporate Governance Code …’ Clearly, Peter Swabey believes that the requirement to report against the Code should not just be limited to private companies, but to all companies that require audited accounts. It would be useful for ICSA to officially clarify whether it believes that unlisted public companies should be required to report against the Code too.

The second criticism is that ICSA states that private companies should be required to report their compliance with the Code, but it does not expressly state whether they should be required to explain non-compliance (as listed companies are required to do). Again, Peter Swabey’s blog provides more information, stating that ‘we advocate that all organisations large enough to require audited accounts, whether listed companies or not, should be required to indicate in their annual report where they have not complied with the UK Corporate Governance Code and the reasons why they have chosen not to do so‘ (italics added). This indicates that the relevant private companies would be required to comply and explain against the Code. The issue that arises here is that the Code was written with listed companies in mind, and many of the Code’s recommendations will likely be unsuitable for private companies. Indeed, Peter Swabey acknowledges this stating that ‘[p]rivate companies should simply be expected to have more areas where they depart from the existing UK Corporate Governance Code.’ The problem that arises is that private companies would therefore have to spend more time explaining non-compliance than other companies, as they would be departing from more of the Code’s recommendations. For some private companies, this could prove unnecessarily burdensome. Further, given that the quality of explanations for non-compliance offered by listed companies has been criticised, one might wonder at how useful explanations from smaller companies would be.

In my opinion, legislatively requiring private companies to report against the UK Corporate Governance Code would be misguided. If private companies are to be subject to a corporate governance code, then it should be one that is designed for private companies. The CA 2006 recognises that public and private companies must be regulated differently and the same is true as regards corporate governance. I am also of the opinion that, if such a specific code were created, we should, initially at least, encourage private companies to report against it, rather than compelling them. This could be done by amending the model articles to provide that the directors will prepare a report setting out how the company has complied with the code. If the directors or members feel that such reporting is unwarranted, the relevant provision could be removed. If, in time, such reporting became more commonplace, the case for mandatory reporting might be stronger. Whatever solution is implemented, ICSA are absolutely correct to note that governance in private companies is just as important as governance in listed companies, and the time has come to act.

Update (14/02/2017)

Yesterday, the House of Commons Work and Pensions Committee published its response to the government’s Corporate Governance Review. The Committee has recommended that large private companies or those that have over 5,000 defined benefit pension scheme members should be made subject to the UK Corporate Governance Code on a comply or explain basis.

A corporate governance code for unlisted companies?

The recent scandal involving Sir Philip Green and BHS Ltd has once again brought into focus the value of good corporate governance, but what is unusual about this case is that BHS is a private company. When corporate governance is discussed, it is usually discussed in relation to large listed companies–indeed, the UK Corporate Governance Code ‘applies to all companies with a Premium listing of equity shares’ and it is widely acknowledged that many of the recommendations contained in the Code would not be appropriate for smaller companies. But the BHS incident demonstrates that governance is also important for unquoted companies (who generate the bulk of a country’s GDP). When Sir Philip Green purchased British Home Stores plc in 2000 for £200 million, one of the first things he did was to convert it into a private company. Over the next few years, BHS Ltd paid out hundreds of millions in dividend payments (most of which went to Monaco-based companies controlled by Green’s wife) which were often in excess of the company’s profits. A parliamentary inquiry concluded that ‘the Green family became incredibly wealthy … but in doing so reduced the capacity of the company to invest and succeed.’ This resulted in BHS being unable to compete and it started sustaining losses. Desperate to offload the company, Green sold it to Retail Acquisitions Ltd (‘RAL’) in 2015 for £1. However, Dominic Chappell, the owner of RAL, was described as a ‘manifestly unsuitable purchaser’ who had a record of corporate failure. Unsurprisingly, he was unable to rescue BHS and in April 2016, it was placed into administration. It was revealed that BHS’s pension fund deficit stood at £571 million. 11,000 BHS jobs, the majority of which are low paid, are now at risk.

A parliamentary inquiry into BHS called into question the governance of the various companies involved. The inquiry noted that, whilst most of BHS’s competitors were subject to the Code, BHS was not as it was a private company. The inquiry concluded:

Sir Philip chose to run these companies as his own personal empire, with boards taking decisions with reference to a shared understanding of his wishes rather than the interests of each individual company. Boards had overlapping memberships and independent non-executive directors did not participate in key decisions. We saw meagre evidence of the type of constructive challenge that a good board should provide. These weak governance arrangements allowed the overarching interests of the Green family to prevail and facilitated the flow of money off shore to the ultimate beneficial owner of the parent company, Lady Green…. These weaknesses in corporate governance contributed substantially to the ultimate demise of BHS.

The co-chair of the Parliamentary inquiry, Frank Field MP, subsequently stated that ‘[s]afeguards for important private companies may need to be reviewed’, leading us to ask whether some sort of governance Code might be suitable for companies not generally subject to the UK Corporate Governance Code. Unlisted companies constitute the vast majority of companies. Of the 3.508 million companies on the register in the UK, only 6,240 are public (and the majority of those are not listed). The 3.5 million unlisted companies are incredibly diverse, ranging from single person private companies with low turnovers to massive companies that rival listed companies in scale. Any Code designed for such companies would need to take this breadth into account and be suitably broad.

One approach is to encourage unlisted companies to comply with existing Codes, but recognise that such Codes will have limited applicability. This is the view taken by the Institute of Chartered Secretaries and Administrators, who do not feel that a new Code is necessary and have stated that ‘[p]rivate companies should simply be expected to have more areas where they depart from the existing UK Corporate Governance Code.’ A similar approach is taken by the G20/OECD Principles of Corporate Governance. These Principles focus on listed companies, but they also state that ‘they might also be a useful tool to improve corporate governance in companies whose shares are not publicly traded. While some of the Principles may be more appropriate for larger than for smaller companies, policymakers may wish to raise awareness of good corporate governance for all companies, including smaller and unlisted companies.’

However, the above Codes were not designed with unlisted companies in mind and many are of the view that a specific Code needs to be established that caters for unlisted companies. In fact, such a Code already exists.

The Corporate Governance Guidance and Principles for Unlisted Companies in Europe were established by the European Confederation of Directors’ Associations in March 2010. In November 2010, this guidance was amended by the Institute of Directors to apply more specifically to UK companies and released as the Corporate Governance Guidance and Principles for Unlisted Companies in the UK (a copy can be obtained by contacting the Institute of Directors). The Guidance sets out nine Principles that apply to all unlisted companies, and a further five Principles that apply to large and more complex unlisted companies. The Guidance provides an extremely useful discussion of why governance is so important for unlisted companies, and goes into considerably more detail than the UK Corporate Governance Code. Unfortunately, it has never gained the foothold that the UK Corporate Governance Code has (likely because it has no formal backing from any regulators) and it is in need of an update. There are indications that the IoD is considering updating the Guidance and, if it does, it is to be hoped that use of the Guidance will become more widespread.


Featured image: Image used under Creative Commons Attribution Share-Alike International 4.0 licence. Image created by MStott4 and was obtained from Wikimedia Commons.

A week is a long time in politics: ARM Holdings plc (Part 2)

In the first part of this blog post, I looked a the takeover of ARM Holdings plc and how the Prime Minister welcoming the takeover appeared to run counter to her comments a week before in which she indicated that the government should have more powers to block takeovers. In the second part of this blog post, I will look at the ability of government and the regulators to prevent takeovers, and previous attempts by government to acquire greater powers to prevent takeovers.

The government’s ability to intervene

The government’s ability to intervene in takeovers is very limited. The dominant piece of legislation in this area is the Enterprise Act 2002. Sections 22 and 33 of the 2002 Act empower the Competition and Markets Authority (‘CMA’) to initiate investigations where a merger (the Act’s definition of ‘merger’ includes takeovers) has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services. If the CMA is of the opinion that a merger would lessen competition, it has a range of remedies available to it, including prohibiting the merger. The Secretary of State has the power to refer a merger to the CMA for investigation, but has no general power to intervene in mergers and the result of any investigation is a matter for the CMA alone.

The Secretary of State does, however, have the ability to intervene in a merger in several specific circumstances specified in s 58 of the 2002 Act. Originally, s 58 only allowed the Secretary of State to intervene in cases where a merger involved national security concerns. In 2003, the power in s 58 was expanded to include situations where a merger could affect accurate presentation of news or free expression of opinion in the newspaper industry, or where a merger could jeopardize sufficient plurality of persons who control the media – this was what permitted the government to become involved in NewsCorp’s bid to take over BSkyB. In 2008, the power in s 58 was expanded again to cover mergers that could affect the stability of the UK’s financial system – this permitted the government to intervene in Lloyds TSB’s takeover of HBOS.

Attempts to increase powers

Whilst the government’s powers to intervene in takeovers have increased over the years, its ability to intervene is still extremely limited. Attempts have been made over the years to increase the government’s powers of intervention. In 2008,there were rumours that the Russian state-owned utility company Gazprom was planning a takeover bid of Centrica. The bid never happened, but an amendment to the 2002 Act was tabled that would have allowed the government to intervene where a merger threatened the UK’s energy security. This amendment was not accepted on the ground that energy security would come within the national security exception noted above.

In 2010, the US company Kraft Foods took over Cadbury. Given that Kraft intended to embark on a closure programme of a number of Cadbury’s factories, MPs became concerned about predatory takeovers and a number of MPs (notably from the Liberal Democrat Party) advocated the adoption of a general public interest test. Thi was strongly criticized and, unsurprisingly, the new Coalition Government stated that it had no plans to amend the 2002 Act to increase its powers of intervention. The Takeover Code was amended to improve transparency. The ultimately failed takeover attempt by Pfizer of AstraZeneca brought the takeover issue to the fore again. However, the debate was now more focused on the ability to government to enforce assurances made by a bidder, and no further changes have been made to the government’s ability to intervene in takeovers.


As the above discussion has shown, the government has shown itself very reluctant to interfere in takeovers, largely for fear of creating the impression that foreign investment is not welcome. Theresa May’s comments indicated that the matter might be about to come back onto the government’s agenda and the government’s powers of intervention might be increased. Sadly, her reaction to the ARM Holdings takeover would appear to indicate that the Prime Minister favours the status quo much more than her earlier comments indicated.

A week is a long time in politics: ARM Holdings plc (Part 1).

On the 11 July 2016, Theresa May launched her campaign to become leader of the Conservative Party and Prime Minister. I have already blogged about some of the noteworthy company law-related content here. Within her campaign speech was the following interesting paragraph:

‘Because as we saw when Cadbury’s – that great Birmingham company – was bought by Kraft, or when AstraZeneca was almost sold to Pfizer, transient shareholders – who are mostly companies investing other people’s money – are not the only people with an interest when firms are sold or close. Workers have a stake, local communities have a stake, and often the whole country has a stake. It is hard to think of an industry of greater strategic importance to Britain than its pharmaceutical industry, and AstraZeneca is one of the jewels in its crown. Yet two years ago the Government almost allowed AstraZeneca to be sold to Pfizer, the US company with a track record of asset stripping and whose self-confessed attraction to the deal was to avoid tax. A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.’

Barely a week after Theresa May made this speech, Japan’s SoftBank initiated a £24.3 billion takeover bid of ARM Holdings plc. ARM is a world-leading microchip design company. A few years ago, ARM was one of three world-leading technology companies based in Cambridge, with the other two being Autonomy Corporation plc and CSR plc. In 2011, Autonomy Corporation plc was taken over by Hewlett Packard. In 2015, CSR plc was taken over by Qualcomm. It now appears that ARM too will become owned by an overseas company (the board of ARM is recommending the takeover and the 49% premium being offered on the shares is an indication of how much SoftBank wants to acquire ARM).

Given her comments a week previously, one might assume that the Prime Minister would be concerned about yet another ‘strategically important’ UK company being taken over by an overseas company. After all, the founder of ARM, Herman Hauser, stated that the takeover would be ‘a sad day for technology in Britain.’ In fact, the Prime Minister’s spokesman stated that the takeover was ‘a vote of confidence in Britain,’ a sentiment that was echoed by the new Business Secretary. Of course, the reality is that, following the referendum result, the significant drop in the value of Sterling when compared to the Yen simply meant that SoftBank was able to acquire the shares in ARM for less than in the past.

A week is indeed a long time in politics. And the Prime Minister has been criticised for her apparent lack of consistency. It should, of course, be noted that the takeover might benefit all involved. SoftBank has provided assurances in its firm intention to offer announcement that it will at least double the employee headcount in the UK, and the government will be keen to see that these assurance are upheld. SoftBank has also stated that it intends to preserve ARM as an organisation, along with its senior management and business model. Despite this, there will be many who will be concerned that another world-leading UK company is no longer independent.

This is Part 1 of a two-part blog post. The second part will look at the ability of government and regulators to block takeovers, and will also look at previous discussions relating to foreign takeovers of UK companies.

Directors’ duties and creditors’ interests.

A few days ago, Rose J handed down her judgment in the case of BTI 2014 LLC v Sequana SA. The case dealt with a number of legal issues, but the issue I will focus on in this post is the extent to which directors’ have to take into account the interests of creditors.

Under s 172 of the CA 2006, directors are under a duty to ‘promote the success of the company for the benefit of its members as a whole.’ Section 172(1) contains a list of relevant factors that the directors must have regard to when fulfilling this duty (e.g. employees, the community and the environment, suppliers etc). A notable omission from this list are the creditors of the company. This omission is remedied by s 172(3) which provides that s 172 ‘has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company’.

As regards the common law, there exists a well-established string of authority that states that the directors should take into account the interests of the company’s creditors. Unfortunately, the courts have not been clear in terms of exactly when this duty arises.

Over the years, various points in time have been advocated. In Re Pantone 485 Ltd, the company in question was actually insolvency. In Re Horsley & Weight Ltd, Templeman LJ stated that the duty was triggered when the company was ‘doubtfully solvent.’ In Grove v Flavel, the court referred to the duty arising when liquidation was a ‘real possibility.’ Other cases refer to the company being on the ‘verge of insolvency.’ However, in the case of Re HLC Environmental Projects Ltd, the court moved away from seeking to establish a definite point in time when the duty arises, and instead stated that:

‘It is clear that established, definite insolvency before the transaction or dealing in question is not a pre-requisite for a duty to consider the interests of creditors to arise. The underlying principle is that directors are not free to take action which puts at real (as opposed to remote) risk the creditors’ prospects of being paid, without first having considered their interests rather than those of the company and its shareholders. If, on the other hand, a company is going to be able to pay its creditors in any event, ex hypothesi there need be no such constraint on the directors. Exactly when the risk to creditors’ interests becomes real for these purposes will ultimately have to be judged on a case by case basis.’

Which leads us to BTI 2014 LLC v Sequana SA. Here, Rose J stated that ‘[t]he essence of the test is that the directors ought in their conduct of the company’s business to be anticipating the insolvency of the company because when that occurs, the creditors have a greater claim to the assets of the company than the shareholders.’

It is contended that the approach in HLC Environmental Projects is preferable to that evidenced in BTI and the other cases that attempt to determine the trigger point of the duty by reference to closeness of insolvency. The principal disadvantage of this approach, other than its lack of clarity, is that it usually resulted in the duty coming into effect too late to be of any aid to creditors – once a company is close to insolvency, the creditors’ chances of being paid may be minimal or non-existent. The HLC approach, by focusing on the effect on the creditors’ chances of payment, avoids this criticism (although one could question how significant the risk of non-payment must be for the duty to trigger). However, in practice, the issue may not be significant in the majority of cases. Cases involving a possible breach of the failure to consider creditors’ interests (which are rare) tend to arise in relation to insolvent companies that were then liquidated. Accordingly, in most cases, it will be clear that the duty to consider creditors’ interests has indeed been triggered, but a definitive ruling would still be of use to deal with those cases where the company is not insolvent and the creditors’ interests might not have been given sufficient consideration.

Company law and the UK’s new Cabinet.

Here is a quick post on how the Cabinet reshuffle (or ‘clearout’ might be a better word given how few Cabinet members are keeping their jobs) has impacted upon the departments responsible for legal matters:

  • With Theresa May becoming Prime Minister, a new Home Secretary was required. This post has been filled by Amber Rudd.
  • Michael Gove was sacked as Secretary of State for Justice and Lord Chancellor. He has been replaced by Liz Truss, the former Secretary of State for Environment, Food and Rural Affairs. She will be the first ever female Secretary of State for Justice and Lord Chancellor (although there are some who argue that Eleanor of Provence was the first Lord Chancellor when she filled in for Henry III in 1253), and the third non-lawyer in a row to hold these posts. Despite his unpopularity of late, the general belief was that Gove did a good job and had effectively remedied a number of the mistakes made by his disastrous predecessor, Chris Grayling.
  • From a company law perspective, the key reform has been the rebranding of the Department for Business, Innovation & Skills, which will become the Department for Business, Energy and Industrial Strategy. The Secretary of State for this rebranded department will be Greg Clark, who replaces Sajid Javid. The exact scope of this rebranded department, and how it works with other business-related departments, will hopefully become clear over the next few days.
  • A new Department for International Trade is created and Liam Fox becomes Secretary of State for International Trade. This is controversial appointment, given that Liam Fox resigned in disgrace in 2011.
  • David Davis has been appointed as Secretary of State for Exiting the European Union. Amusingly, Davis is currently suing the UK government on the ground that it has failed to uphold EU law, with the opinion of the Advocate-General being due next week.
  • Jeremy Wright QC will remain as Attorney General (the Attorney General is not a Cabinet minister, but does attend Cabinet meetings).

Full details of all the new Cabinet appointments and their holders can be found at the website for the Prime Minister’s Office.