ABG Commercial Newsletter - November 2011

Corporate governance and directors' reports

The Government has announced a consultation on the future of narrative reporting. The consultation paper proposes a new, simpler reporting framework for UK companies under which the directors' report and the business review would be replaced with a strategic report and an annual directors' statement.

The strategic report would be a key messages report setting out the company's strategy, business model, performance, principal risks and remuneration. It would also include disclosures on social and environmental matters and the number of women on the board.

Small companies would not be required to produce a strategic report.

The annual directors' statement would be an online publication setting out more detailed information, including the directors' remuneration report, corporate governance statement and audit committee's report.

The Government is keen to facilitate shorter annual reports and will encourage the use of cross referencing in the annual directors' statement to additional materials published by the company.

Responses to the consultation are requested by 25th November 2011. The aim is for any changes to be effective for financial years beginning on or after 1st October 2012.

Building contracts and performance bond

In the case of Hackney Empire Ltd -v- Aviva Insurance UK Ltd a Court has ruled that, after a building contractor had become insolvent and entered into administration, the building owner could recover damages from a guarantor who had entered into a performance bond. The guarantor had argued that it was discharged from the bond due to a side agreement, but this argument was rejected by the Court which ruled that the guarantor's obligations remained in place.

Where a performance bond has been entered into in relation to a commercial agreement, the bond may be discharged if the underlying obligations under the agreement are varied. In this case the owner of Hackney Empire contracted with Sunley Turriff Construction Ltd to carry out extensive refurbishment and new build works. A bond in favour of the building owner was executed by the contractor and the guarantor/surety, Aviva Insurance.

Subsequently there was a side agreement making some variations to the building contract. The Court ruled that the law allowed minor variations to be made to a contract without discharging the bond and in these circumstances the guarantor/surety had not been discharged from its liability. The building owner was entitled to recover the full amount of the bond, a figure in excess of £1 million.

Shareholder disputes and powers of managing director

In the recent case of Smith -v- Butler the chairman and majority shareholder of a company obtained a court declaration that a decision made by the managing director (who was a minority shareholder) to suspend him as chairman was unlawful and invalid. The Court ruled that the managing director had no implied delegated authority in this capacity to suspend the chairman because the suspension was not a commercial decision and was not something occurring in the day to day running of the company's business.

Under the company's articles the chairman was able to ensure that, as majority shareholder, the Board could not pass a resolution dismissing him as chairman. This further meant that it could not have been intended that this could be sidestepped by the managing director. It was for the Board, not the managing director, to dismiss the chairman and so equally it was for the Board, not the managing director, to suspend the chairman.

The Court also issued an order under the Companies Act authorising a quorum of one for a general meeting to take place for the purpose of appointing a new director or removing the managing director. The majority shareholder was entitled to exercise his ordinary voting rights to appoint and remove directors and the will of the majority shareholder could not be thwarted by the refusal of the minority shareholder/managing director to attend company meetings so as to render the meetings inquorate.

This case is an interesting example of how the Court's powers and procedures may be used when the shareholders of small companies fall out and get into a dispute over the control of the company.

Limited liability partnerships

The Limited Liability Partnerships Act 2000 provides for the establishment of limited liability partnerships, which are (relatively speaking) new kinds of corporate entities which differ from both traditional partnerships and limited liability companies.

A recent decision of the High Court has clarified that LLPs have their own corporate governance structures as set out in the LLP Agreement and it will be the provisions of the LLP Agreement which largely govern the relationship between the LLP members. Thus the Court ruled that, unlike a traditional partnership in which the individual partners owe fiduciary duties to each other in relation to the management of the partnership's affairs, LLP members do not owe general fiduciary duties of good faith to each other or to the LLP itself. However, the LLP agreement can include duties of good faith.

It should also be noted that the unfair prejudice provisions in company legislation do apply to limited liability partnerships so that an LLP member can petition the Court on the ground that the LLP's affairs are being conducted in a manner unfairly prejudicial to the interests of all or some of its members. In such circumstances the Court can make such order as it sees fit, including an order for the purchase of the rights and interests of any members in the LLP by the other members of the LLP.

In this particular case an LLP was set up to run a hedge fund business. There were 3 LLP members, a corporate member holding a 60% interest in the business and 2 individual members each holding a 20% interest. The LLP agreement provided for the LLP to be managed by the LLP Board which consisted of the 2 individuals and 3 representatives appointed by the corporate member.

Subsequently friction arose between the 2 individuals and the corporate member and relationships became particularly tense following the downturn in hedge fund business as a result of the global financial crisis. The 2 individuals thought the corporate member was deliberately seeking to damage or destroy the LLP's business.

They then brought a claim seeking relief under the Companies Act (as applied to LLPs) on the basis that the corporate member had engaged in unfairly prejudicial conduct and sought an order that their interests should be bought out at an advantageous price.

The Court upheld their claim for relief, but did so largely on the basis of the provisions set out in the LLP Agreement, rejecting arguments that the parties owed general fiduciary duties to each other.

The case demonstrates the considerable freedom which is given to parties who decide to establish limited liability partnerships and the importance of ensuring that a comprehensive LLP agreement is put in place regulating their future relationships and the way in which the business is to be managed.

The comments in this note are of a general nature only. Full advice should be sought on any specific problems.

ABG Commercial Newsletter - November 2011

Tim Sisson	Andrew Sutton
tsisson@abg-law.com	asutton@abg-law.com
+44 (0)115 934 3333	+44 (0)115 934 3303