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Draft clauses issued for comment on 9 June 2006

Comments from ACCA
August 2006

Clause 447 - Liability for false or misleading statements

One of the most substantial issues in the debate over the statutory OFR was the extent to which companies and their directors would feel able to provide forward-looking information if by doing so they would run the risk of incurring liability in the event of that information proving inaccurate. Clause 447 offers some conditional protection to directors in this area not only in respect of the Business Review but of the directors report generally as well as the remuneration report and any summary financial statement. 

We agree with the DTI that the reporting of information of a prospective nature is desirable and in the information interests of stakeholders. If the provisions of clause 447 help in this respect we would welcome this.

Under the proposed new rules on the Business Review (new clause 395), directors are most likely to  provide prospective information under the requirement to report on ‘the main trends and factors likely to affect the future development, performance and position of the company’s business’, and under the requirement to describe the principal risks and uncertainties facing the business.

Clause 447 now provides that a director will be liable to compensate the company for any loss it suffers as the result of any untrue or misleading statement in one of the reports covered by the clause. Liability will also apply if the director omits from a report anything which is required to be included in it.

But the conditions attached make clear that directors will only be liable in very limited circumstances. First, liability is only envisaged where loss has been incurred by the company, and not by any shareholder or third party, as the result of the statement or omission. Second, a director will only be liable if he knew the offending statement to be untrue or misleading or was reckless as to whether it was  so. Third, in respect of omissions, a director will only be liable if he knew the omission to be dishonest concealment of a material fact. In addition, it seems likely that a company’s shareholders could decide to ratify directors’ acts or omissions which would otherwise give rise to liability. 

The fact that the clause applies to all information in a directors’ report, and not solely to prospective information or even to the business review part of the directors’ report alone, means that it could on the face of it have a wider impact. As well as covering conscious untruths and misleading information, it provides for liability in respect of deliberate omissions of matters which companies are legally obliged to disclose (in their directors’ reports or remuneration reports. We have pointed out on a number of occasions that public companies have failed to comply with their disclosure obligations in respect of payment policies and practices (which may be linked to the fact that progress on combating the problem of late payment of business debts appears to have stalled).

The new clause could therefore offer some small additional encouragement to companies to make sure that they do disclose matters which they should do under the law, although the fact that liability will only attach to their directors where the company actually suffers loss as a result of a statement or omission is likely to limit the potential impact in this area.  
 
We would add that, by virtue of the clause being restricted in scope, protection will not be available with respect to information published either in the financial statements or in a voluntarily-produced OFR. The absence of protection in the latter case is likely to act as a significant deterrence to the development of OFRs on the lines set out in ASB’s Reporting Statement. The protection afforded by clause 447 is likely to mean that prospective information and other information considered to carry liability risks, is likely to be reported in the business review and not in any voluntary OFR.

We would also suggest that the clause make clear that its provisions apply to the prescribed statements where they have been approved and published. 

New clause on liability for misleading statements in reports (new clause 90E of Financial Services and Markets Act 2000).   

This clause refers to companies’ new reporting obligations under the Transparency Directive. It incorporates similar protections as appear in clause 447, and provides for liability to individual investors (on the part of companies and not directors) where companies consciously publish untrue or misleading statements or omit required information in circumstances where ‘a person exercising managerial functions’ within the reporting company knew the statement concerned to be untrue or misleading or knew the omission of information to be dishonest concealment of a material fact.

We welcome the fact that liability is envisaged only with respect to companies themselves and not to their directors or managers personally. Thus, the Government has chosen not to go further than the minimum standard required by the Directive.

We suspect, however. that the clause is likely to have longer term implications for directors’ duty of care in respect of published information, at least as regards  information published by listed companies under the requirements of the Transparency Directive. The standard UK legal position is that companies of all kinds report to their shareholders as a body and neither companies nor their directors are directly accountable to individual shareholders or to those who buy shares on the strength of published company reports. The new clause is, however, saying that individual shareholders will have grounds to sue a company for compensation for loss in respect of financial information which its directors prepare and approve for publication. Since there is to be a direct connection made between the  reports published under the Directive and the investment decisions of individual shareholders and prospective shareholders, it must follow that the responsibility of directors towards those parties will come to be integrated at least into the scope of the directors’ duty of care to their company.

The clause is likely to have more significant implications for the scope of the auditor’s duty of care in respect of reports published under the Directive. Regardless of the provisions of sub-clause (5), which says that no person other than the issuer is subject to any statutory liability in respect of reports published under the Directive, we consider it likely that, since the auditor will be aware that that the express purpose of these reports is to provide investors and potential investors with information on which they are entitled to rely in the context of investment decision-making, the auditor will be held to owe a duty of care to such parties in the conduct of the audit. This would raise the possibility that derivative actions under clause    of the Bill could be used to claim damages from the auditor.

We suggest that the DTI considers whether new provisions of this kind are necessary in order to fulfil the UK’s obligations under the Directive. The Directive does require member states to ensure that ‘their laws, regulations and administrative provisions on liability’ apply to at least issuing companies, if not individual officers as well. But it is not clear to us that this requires member states to bring in new measures on liability, as opposed to applying those rules which currently exist.  

 

Draft Model Articles for Public Companies

We have a number of technical comments on the content of the draft model articles. In a number of cases, we consider that the wording and consistency of wording is inadequate.

Clause 2

This is sensible. Specifying directors’ powers is at the heart of all company law and rightly this matter is set out at the beginning.

Clause 4 (2)

This provision we believe is mis-conceived, being completely contrary to the delegatus non potest delegare principle.

Clause 4 (3)(c)

This does not accord with clause 71(1)(a) which allows the company to declare dividends.

Clause 5(1)

This does not accord with clause 4(3).

Clause 7(3)

Surely this should read “A meeting is not properly called…”.

Clause 7(4)

Perhaps some explanation should be given as to what is meant by it not being possible to give reasonable notice.

Clause 16(1)

This provision needs to be re-worded to ensure that directors cannot overrule any relevant statutory provision, e.g. the rules regarding conflict of interest.

Clause 23(1)(b)

This needs to be deleted. Receiving orders were abolished in 1986.

Clause 23(1)(c)

There is obvious potential for abuse here. Perhaps one could add the word “reasonable” before “opinion”. Moreover, what if a physical disorder makes the discharge of a director’s duties impossible?

Clause 23(1)(d)

There should be provision that the board should resolve that the defaulting director should be removed. Moreover, the reference to “some other cause which the Directors consider sufficient” is far too subjective. For example, suppose a director was a member of the TA and was required to serve a six months tour of duty in Iraq. If the rest of the board was to consider the invasion of Iraq as being illegal then the absence of the board member could result in his dismissal.

Clause 23(1)(f)

This appears to suggest that every resignation depends upon the willingness of the rest of the board to accept it. This should clearly not be the case.

Clause 27(1)(a)

Alternate directors are said to be subject to the same liabilities as their appointers. This is inappropriate. Liabilities for matters such as wrongful trading and misfeasance have always been viewed as personal. To make alternate directors vicariously liable is crazy. An article on the basis drafted would be sufficient to deter any person from acting as an alternate.

Clause 29

Surely a meeting should be called at a time and place which is convenient to majority of the members.

Clause 32(2)

This provision is very obviously in error.

Clause 40(2)(a)

We are told in clause 11(2) that the chairman of the directors shall be known as “the chairman”. We are then told in clause 35(3) that the chairman of a general meeting shall be known as “the chairman of the meeting”. Here we are told that “the chair” of the meeting can demand a poll. Terminology must be correct and consistent throughout.
 
Clause 41(4)(a)

There is further inconsistency in the use of language. The reference to the election of “the chairman” should be to the election of “the chairman of the meeting”.

Clause 50(2)(b)

This appears to disregard the Regulatory Reform (Execution of Deeds and Documents) Order 2005. It simply does not make sense that the directors should be able to determine how documents are executed.

Clause 51(1)

This is going to cause an enormous administrative burden for companies which pay scrip dividends.

Clause 57(5)

In clause 56(1) the company’s lien is defined. Now we have reference to a lien of the company. Thus it would appear that a company can have more than one lien. This does not make sense.

Clause 67(6)(b)

It would appear that the entitlement of the board to refuse to register a transfer of shares in the event of the transfer instrument not being properly stamped is discretionary. This does not accord with the Stamp Act 1891, s.17 of which makes it an offence for a director to register a transfer which has not been properly stamped.

Clause 66(1)(a)

This provision incorporates the word “may”, suggesting that the payment of unpaid calls is discretionary on the part of the member. This is clearly an error.

Clause 69(1)

This provision is inadequate. It disregards the possibility of transmission of shares  as a result of bankruptcy. 

Clause 69(2)

This clause needs to be rethought. It could be held to mean that if a share has two joint holders and the two of them die then the company shall not recognise any person other than the deceased holder’s personal representative as having any title to the deceased holder’s interest. This clearly does not make sense. The 1985 Table A (articles 29-31) expressed this perfectly satisfactorily.

Clause 78(1)

This is a welcome simplification. However, surely there should be some provision of an indemnity for directors to use unclaimed dividends in circumstances where the company subsequently collapses.

Clause 91(4)

Again this appears not completely to conform to the Regulatory Reform (Execution of Deeds and Documents) Order 2005.

Clause 94(2)

We refer back to the point about delegation of duties made under clause 4(2).

Clause 97(1)

Having regard to the fact that the model articles will be contained in delegated legislation, it is difficult to see how this conforms to CA s.309A. Admittedly there is a corresponding provision in the 1985 Table A (regulation 118) but there has for some time been an academic argument that articles such as these are illegal as being ultra vires the enabling Act. Section 310(3), which applied until 5 April 2005, permitted a company to indemnify a director so long as judgement has been given in his favour. However, the new s.309A does not refer specifically to this.

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