05 November 2016

Brexit: judicial independence and the Bill of Rights

Attacks on our guarantees of freedom from tyranny

The vicious attacks on the judges in the papers over the Brexit judgment are disgraceful. We have an independent judiciary and the rule of law for good reasons, and we forget them at our peril. But what did the court actually decide? Contrary to what the tabloids say, it has nothing to do with the referendum and whether it is binding - the Government did not even attempt to argue that the referendum provided legal authority for giving the Article 50 notice. The case turns on whether giving the Article 50 notice effectively changes the law enacted by Parliament. The Government accepted that the notice automatically brings about the end of UK membership and cannot be withdrawn. The court found that this changes the legal rights of UK citizens, and any Brexit agreement with the EU would also have legal effects inside the UK. The power of Government to make (and unmake) treaties is under the Royal Prerogative. It is clear - and very important - that ministers do not have power to change or override the law as enacted by Parliament. A commentator criticised the judges' reliance on "a 17th century statute" - but that is the Bill of Rights, as close as we get to a written protection of freedoms in English law! It says, "the pretended Power of Suspending of Laws or the Execution of Laws by Regall Authority without Consent of Parlyament is illegall ... the pretended Power of Dispensing with Laws or the Execution of Laws by Regall Authoritie ... is illegall." Everyone knows that untangling UK laws from the EU will need an act of Parliament. What the judges have decided - and the point on which an appeal to the Supreme Court could succeed - is that the mere giving of the Article 50 notice has a legal effect that amounts to repealing or suspending the European Communities Act 1972, wholly or partially. That needs an act of Parliament. The central point is whether the Article 50 notice has that effect. Does it, of itself, change domestic laws; or does it, like many treaties, change international obligations in ways that need UK legislation to implement them, which comes later? Can ministers create a legal mess at international level, which then has to be sorted out later by Parliament? Wait for the next thrilling instalment of R (Miller) -v- S of S for Exiting the European Union. 

18 October 2016

Forfeiture of partnership and LLP profit shares

Having your slice and eating it

A partner can potentially forfeit all part of his profit share if he breaches his fiduciary duties, according to a recent decision of the High Court. That comes as a surprise to many partnership lawyers, and has some interesting implications for partnerships and LLPs.

Hosking v Marathon Asset Management LLP was an appeal on a point of law from the decision of an arbitrator, so the court was only asked whether forfeiture was possible in principle. The court did not have to decide on the details of how it would work, either generally or in this particular case, so there is a lot of room for interpretation. The judge did quote with approval Snell’s Equity saying “a fiduciary's fees may not be forfeit if the betrayal of trust has not been in respect of the entire subject matter of the fiduciary relationship and where forfeiture would be disproportionate and inequitable.”

A fiduciary is a person in a particular position of trust, such as a trustee, a director or an agent. In other contexts, it has been held that a fiduciary who breaches his fiduciary duties forfeits any right to remuneration for performing them. Most of the cases concerned agents, as in Imageview Management Ltd v Jack, where a footballer’s agent negotiating for a player to join Dundee United made a secret deal with the club for his own benefit, and forfeited his commission. Most of the cases concerned dishonesty.

In Hosking the arbitrator found Mr Hosking guilty of a series of serious breaches of his fiduciary duties to his LLP, largely by making preparations to leave and compete with the LLP. In that particular LLP, full-time working partners got twice the profit share of non-executive partners. Because of this, the arbitrator concluded that 50% of the profit share should be regarded as remuneration for executive services, and ordered it to be forfeited for the entire period in which Mr Hosking was in breach of fiduciary duty. This amounted to over £10 million.

The effect on partnerships and LLPs may be surprising:
  • Unlike a straightforward agency, the roles and responsibilities of partners are very complex. Everything a partner does is governed by his fiduciary duties to his partners or his firm. The arbitrator equated the whole of a partner’s share attributable to his work in the LLP with remuneration for performing his fiduciary duties, and said it was "proportionate and equitable" that he should forfeit the whole amount. As well as acting in breach of his fiduciary duties, Mr Hosking must also have performed his duties to a very considerable extent during that period, for the benefit of the LLP and his partners. He got no credit for that work. Was the betrayal of trust really “in respect of the entire subject matter of the fiduciary relationship”? Did it really “go to the whole contract”? 
  • The compensation awarded against him for the actual breach seems to have been £1.38 million, so the forfeiture was worth many times the proven financial loss. Can that really be "proportionate and equitable"? 
  • The forfeiture period was only four months. What if the breach of fiduciary duties had lasted much longer, perhaps his entire career with the LLP? Would he still have lost all his remuneration for the entire period? 
  • Is it fair or realistic to characterise a profit share at a rate of over £30 million a year as remuneration for executive services? Where do you apply for a job like that? 
  • A partnership or LLP agreement will not normally attribute a proportion of profit share to remuneration of working partners. It may have a formula which appears to show working partners getting more than others, but the reasons behind that may be varied and complex. Even if the profit share includes a fixed salary, you cannot always conclude that it represents the partner’s remuneration for performing fiduciary duties, or for working for the LLP. Some partners contribute their work, some capital, some contacts or know-how, or in most cases a mixture of all of them; the maths of how their shares are calculated will rarely be a guide to valuing these separate contributions. 
  • Does the operation of forfeiture really depend on how partners structure their agreements? If there is a fixed share, often called a “salary”, is that going to be seized upon as remuneration? If partners get interest on their capital, is the rest of their share “remuneration”? If all partners get different shares, can you infer “remuneration”? What if they all get the same, but some do more work than others? What if shares depend on personal contribution, such as personal billings, or on management responsibilities? 
  • In a partnership or LLP, the profit shares must go somewhere. They must still add up to 100%. If the profit share is forfeited, what happens to it? In this case the arbitrator said that it would fall into the general pool and be shared, including by Mr Hosking, according to the partners’ remaining entitlements. That result is a bit random: if there had been only one other partner, Mr Hosking would have received back half the amount he forfeited, under his remaining profit share. But if the arbitrator had held that he forfeited only half his remuneration, or that the “remuneration” element was less, he would then have got back a larger proportion of the forfeited amount. 
  • What if the partnership or LLP agreement makes no provision for the sharing of the amount forfeited? What if all other partners were on fixed shares? 
  • Partnership disputes typically involve a wide range of allegations and counter-allegations. What if all the partners had been in breach of fiduciary duties, perhaps in different ways and different degrees of seriousness? Would they all forfeit their profit shares, and where would they go? The potential for forfeiture is likely to create enormous arguments in partnership disputes as each partner claims that the others should forfeit all or part of their profit shares.
  • What if some partners are complicit in the breach of duty? Do partners forfeit their shares as against some partners but not others? Do they forfeit shares to each other? If all but one of the partners are guilty, does the innocent partner get 100%?
  • We seem to have slipped from forfeiture for “dishonesty” in the early cases to forfeiture for any breach of fiduciary duty in Hosking. In a commercial context, such as partnerships and LLPs, there really has to be more allowance for the realities of business life. Forfeiture is a punitive measure, not a compensatory one, and gives a windfall to the injured party even if all his losses have been made good. Bad behaviour, short of criminal fraud, does not normally have this effect.
At least the judge accepted that the partnership deed or LLP agreement can exclude forfeiture. I have already modified my standard forms (I immodestly think my LLP agreement is the best there is!) with a clause you can have for free: “Without prejudice to any other remedy for any breach of fiduciary duty or of this agreement, no part of the profit share of any Member is liable to be forfeited under the principle of equity that a fiduciary may forfeit remuneration due to his breach of fiduciary duty.”

Partnerships and LLPs are a business arrangement founded on contract. In my view there should be limits on how far equitable principles should intrude into partnership law. Enforcing fair dealing and openness between partners is essential, but this decision seems to go too far. 

26 February 2016

UK company fined at home for failing to prevent bribery overseas

A bung can cost more than a fistful of dollars

Last week Sweett Group PLC became the first company to be sentenced for the crime of failing to prevent bribery by an associated person (s7 Bribery Act 2010). One of its overseas subsidiaries paid bribes to secure a contract concerning an hotel in Abu Dhabi: Sweett Group is an AIM-listed construction consultant.

An English court imposed a fine of £1.4 million and a confiscation order of £851,000, plus costs. A number of lessons can be learned:

·     The Bribery Act has not gone away: the noise made by law firms when it came in has abated, but the Serious Fraud Office will prosecute British companies for failing to stop corruption overseas

·     Co-operating with the authorities will not always avoid prosecution – Sweett Group reported itself after it got media attention, but the SFO did not even offer a “plea bargain” deferred prosecution agreement

·     Penalties can be swingeing

·     Professional practices are not immune

·     UK companies must take precautions: demonstrable adequate procedures to avoid bribery, and an anti-bribery culture must exist before the problem arises.

16 February 2016

Using directors' powers for their proper purposes

Doing the right thing for all the wrong reasons

One of the more subtle aspects of a director's duties is the obligation to use his powers  only for the purpose for which they were granted. this duty was often known only to company law experts until it was codified in s171(b) Companies Act 2006.

The Supreme Court has just given a reminder of this duty in Eclairs Group v JKX Oil & Gas Plc. The company's board served information disclosure notices on two major shareholders, holding 39% of the voting rights. they then decided that the responses were inadequate and exercised powers to remove the shareholders' voting rights. The court concluded that the directors were motivated by the desire to stop these shareholders voting against the board's proposals at a forthcoming meeting, and not by a wish to achieve disclosure the information they had requested - so the decisions were invalid.

How do you disentangle all the complicated motives that lead a single director, still less a whole board, to come to a decision? Lord Sumption said, "Directors of companies cannot be expected to maintain an unworldly ignorance of the consequences of their acts or a lofty indifference to their implications. A director may be perfectly conscious of the collateral advantages of the course of action that he proposes, while appreciating that they are not legitimate reasons for adopting it. He may even enthusiastically welcome them. It does not follow without more that the pursuit of those advantages was his purpose in supporting the decision. All of these problems are aggravated where there are several directors, each with his own point of view." But he approved the formulations from earlier cases, "if, except for some ulterior and illegitimate object, the power would not have been exercised, that which has been attempted as an ostensible exercise of the power will be void, notwithstanding that the directors may incidentally bring about a result which is within the purpose of the power and which they consider desirable," and "regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the [decision] will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, the power would not have been exercised."

The most common abuse of powers for an improper purpose seems to be in the issue of shares, where the power to allot shares is used to dilute minority shareholdings or distort the voting control of the company. The power to issue shares is primarily for the purpose of raising capital for the company, and its use as a weapon in shareholder disputes will usually be illegitimate. Dressing it up as a rights issue, perhaps where you know the minority have no money to invest, will not help if the rights issue would not have happened but for the intention to bring about the change of control.