UK: England and Wales: section 172 of the Companies Act 2006

The High Court gave judgment last week in Shepherd v Williamson [2010] EWHC 2375 (Ch). The case concerned a petition presented under section 994 of the Companies Act (2006) (the unfair prejudice remedy) but what makes it particularly noteworthy is the judge's assessment of a director's actions with reference to Section 172 of the 2006 Act. Section 172 imposes, for the first time under UK companies legislation, a duty on each director to act in the way in which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) and lists various matters to which he should have regard including the likely consequences of decisions in the long-term and the interests of the company's employees.

The shareholder presenting the Section 994 petition - Mr Shepherd - was also a director of the company. In 2007 the relationship between Mr Shepherd and Mr Williamson (the company's other director and shareholder) deteriorated when they failed to agree the terms on which Mr Shepherd would retire from the business. Mr Shepherd subsequently petitioned under Section 994, seeking the purchase of his shares and alleging, amongst other things, that he had been excluded from management of the company.

It was in this context that Mr Williamson argued that Mr Shepherd had failed to act in good faith when, in November 2007, he left an anonymous voicemail message on the phone of a senior project manager of one of the company's important clients (a hotel chain) to whom tenders were being submitted saying that the company was under investigation by the OFT and that an employee of the company and the hotel chain were colluding. Prior to January 2006, the point at which an Office for Fair Trading investigation began, the company had taken part in "covering" in the construction industry, i.e., submitting a bid higher than other competing bids in a tender for a contract knowing that it would not succeed in order to prefer a chosen tenderer amongst the colluding parties. Mr Shepherd was not directly involved with these activities. In September 2009 the company was fined £ 91,053 by the OFT, a reduced figure reflecting a leniency agreement in which the company agreed to cooperate with the OFT's investigation.

The trial judge, Mrs Justice Proudman, considered Mr Shepherd's good faith for the purposes of Section 994 with reference to Section 172. She noted that "[an] anonymous telephone call is not a praiseworthy course of action" but did not find that Mr Shepherd had breached the duty imposed by Section 172. It is interesting to note the manner in which Mrs Justice Proudman assessed Mr Shepherd's actions with regard to the factors (e.g., the company's reputation) identified in Section 172; to quote (from paras. [103] - [104]):

Applying the criteria laid down in s. 172, Mr Shepherd was balancing the deleterious consequences of his conduct as far as its relations with its major customer was concerned, and the potential for damage to the Company's employees if the contract was not gained, (s. 172 (1) (a) (b) and (c)), against the Company's reputation as a whole (s. 172(1)(d) and (e)) in the light of the OFT investigation.
The decision as to what promotes the success of the Company within s. 172(1) is one for a director's subjective judgment, exercised in good faith: see per Lord Greene MR in Re Smith and Fawcett Limited [1942] Ch 304 at 306, per Jonathan Parker J in Re Regentcrest plc v. Cohen [2001] 2 BCLC 80 and see also Extrasure Travel Limited [2003] 1 BCLC 598. In my judgment Mr Shepherd cannot be criticised for wanting to ensure that the contract was not obtained by the use of collusive activities, irrespective of whether it meant that the Company might lose the contract altogether".