UK: 'Who owns the company?' - a speech by Andy Haldane

Andy Haldane, the chief economist at the Bank of England, delivered a speech earlier this year titled Who owns the company? A copy of the speech was published on the Bank's website yesterday, a few days after Mr Haldane's television interview in which he reflected on governance and the role of shareholders: see here or here (pdf).

In his speech, Mr Haldane explored the origins of the public company, identified the potential incentive problems among stakeholders and considered how policy actions could mitigate those problems. He concluded:

Challenges to the shareholder-centric company model are rising, both from within and outside the corporate sector. These criticisms have deep micro-economic roots and thick macro-economic branches. Some incremental change is occurring to trim these branches. But it may be time for a more fundamental re-rooting of company law if we are to tackle these problems at source. The stakes - for companies, the economy and wider society - could scarcely be higher".

Whilst the ideas and criticisms that Mr Haldane identified are not new, it is noteworthy that he should choose to highlight them (making clear that he was not necessarily expressing the views of the Bank or the Monetary Policy Committee). One thing that is missing from his speech, in which he traced the rising dominance of shareholder primacy and briefly considered section 172 of the Companies Act 2006, is the influence of the City Code on Takeovers and Mergers in reinforcing the position of shareholders. 

Europe: EU law and penalties on public company shareholders

The European Court of Justice delivered its opinion in Idrima Tipou AE v Ipourgos Tipou kai Meson Mazikis Enimerosis (Case C‑81/09) earlier this week: see here. The court found that the imposition of penalties on the shareholders of public companies operating television stations was contrary to the principles of freedom of establishment and free movement capital, as (now) found in Articles 49 and 63 of the Treaty on the Functioning of the European Union. A summary of the opinion is available here (pdf).

Under the Greek law in question, shareholders in companies operating television stations were subject to a maximum holding of 25% and those shareholders holding over 2.5% of the share capital were potentially subject to penalties where the company infringed certain broadcasting rules. This latter rule was introduced to create an incentive for shareholders to ensure companies' compliance.

The court held that the First Company Law Directive (68/151/EEC) did not prohibit rules under which shareholders were held liable for a fine imposed on a company. It found, however, that the liability rule had a deterrent effect on investors, affecting their access to the equity market. The court observed (at paras. 57 to 59);

The national measure allows shareholders of a public limited company in the television sector to be held liable for fines imposed on that company in order that they see to it that the company observes Greek legislation and rules of good conduct, whereas the powers accorded to those shareholders by the rules applicable to the operation of public limited companies’ organs do not actually give them a possibility of so doing.

Furthermore, although the measure is applicable without distinction to Greek investors and investors from other Member States, its deterrent effect is greater for investors from other Member States than for Greek investors.

Inasmuch as the objective of the Law is to induce shareholders to ally themselves with other shareholders in order to be able to influence the decisions of the company’s management, even though this option is applicable to all shareholders it is indisputably much more difficult for use to be made of it in the case of investors from other Member States who know less about the realities of media life in Greece and are not necessarily acquainted with the various groups or alliances represented amongst the shareholders of a company holding a licence to found, establish and operate a television station".

Europe: shareholder liability and the First Company Law Directive

Advocate General Trstenjak gave her opinion in Idryma Typou (Law relating to undertakings) (case C-81/09) last week. The case raised an interesting question regarding European law and the liability of public company shareholders.

Under Greek law, a fine in respect of infringements of legislation and other rules governing the operation of television stations was imposed jointly and severally on a company, its directors and those shareholders holding over 2.5% of the share capital. An annulment of the fine was sought and the court hearing this claim requested a preliminary ruling from the European Court of Justice as to whether the provision providing for the imposition of the fine was precluded by the First Company Law Directive (Council Directive 68/151/EEC) (now Directive 2009/101/EC).

In the opinion of Advocate General Trstenjak, which is not binding on the court, the First Company law Directive did not preclude provisions of the kind adopted by Greece. However, such provisions were, in her opinion, precluded by Articles 43, 48 and 56 of the EC Treaty (see now, respectively, Articles 49, 56 and 63 of the Treaty on the functioning of the European Union: here, pdf). The Advocate General noted (para. [57]):

In the absence of express provision in Directive 68/151 ... the power to prescribe the exceptional extension of liability to shareholders of public limited companies falls within the competence of the national legislature. In the absence of harmonisation, it is for the Member States, in principle, to decide to what extent they wish to take account of the protection of the interest in question in relation to extending liability to the shareholders of a public limited company".

UK: England and Wales: more Morshead Mansions litigation

The recent Court of Appeal decision Morshead Mansions Ltd v Di Marco [2008] EWCA Civ 1371 illustrates the interaction between company law principles and property law. The company (Morshead) was formed to manage a block of flats in London (or, to quote from the company's website, "perhaps the premier mansion block in Maida Vale"). The lessees of the flats were shareholders in Morshead, which owned the freehold.

The company's articles of association gave the directors the power to establish reserves and funds, to which members were obliged to contribute in terms decided by an ordinary resolution of the members in general meeting. Under this provision the company claimed over £ 4,000 from Mr Di Marco. Mr Di Marco claimed that this was a service charge within S. 18 of the Landlord and Tenant Act 1985 and therefore subject to statutory limitations. 

The Court of Appeal held that the company was entitled to claim the sum demanded, although it was not required to consider the S. 18 arguments raised by Mr Di Marco. Mummery LJ stated that it was important to remember the important legal distinction between a tenant’s liability to the landlord under a lease and the tenant’s liability qua member of a company. There were two relationships, giving rise to different legal obligations, and a defence to one claim would not necessarily be available as a defence to another legally separate claim.

Notes:

[1] The decision has been noted by the ICLR as part of its WLR(D) service: see here (this summary will be removed should the ICLR report the decision in one of its series of reports). 

[2] There has been much litigation concerning Morshead Mansions, which the trial judge noted in Mactra Properties Ltd. v Morshead Mansions Ltd. [2008] EWHC 2843 (Ch) had been described as "too horrific to record in detail".