Professional Documents
Culture Documents
Modern business frim own assets, enter contracts and incur liabilities that are legally separate from those of their
owners and managers
Study modern business firm, investigate:
Key features, how it is financed and governed
Coase, The Nature of the Firm, 1937: The firm as a set of incomplete contracts
Two types of contracts One stipulates the parties total obligations or reverse
rights, the other is left incomplete by not specifying all obligations thus allowing a
free margin for unilateral decisions by pone of the parties
Open contract can be exemplified by employment contracts, usually leaving room for
directions and orders
Firms are characterised by latitude for decision created by a particular cluster of such
open contracts
Related to the rest of the world by other fully specified contracts, regarding
purchases of inputs, sales of production and loans under prescribed terms
Transaction costs
Under the standard assumption of zero transactions costs, externalities
would vanish, because it would be less costly for the parties to bargain an
efficient result
There would never be an occasion for vertical integration, contracts would
cost less to complete
Pushing the need for positive transactions costs, arise three problems
1. Positive transaction costs are everywhere, rationalisations were easy and
TC got a bad name focus on basics
2. Not sufficient to show largeness of transactions costs, you had to highlight
the differences across alternative modes, markets and hierarchies
3. Analytical framework needed from which predictions can be derived and
empirical tests concluded
Market: Spot contracts Complex contractual setting
Some form of joint organisation, e.g. consortium, joint venture Firm
Organigram
Suppliers
Organisation: Goods,
Manager Manager Equipments, Lenders
Employees etc.
Founders
Common contribution of cash
Employee Employee Employee or goods/services Shareholders
Companies are a nexus of contracts, between managers and owners, among owners,
managers and employees etc.
The Contract
Partnership is a relation between partners carrying on a common business aiming to
profit
Can be created orally, often an agreement is drawn up called Articles of Partnership,
Partnership Agreement or Partnership Deed
Contains rights and obligations of each partner, agreement can be changed either
unanimously or with the prescribed majority at any time
General rule: Partners are jointly and severally liable for the full value of any
partnership debts
Wrongful acts or omissions, such as torts of any partners acting in the the ordinary
course of the business with the authority of the other partners gives rise to joint and
several liability
Contract regulates e.g. following issues:
Who manages the partnership?
What is each partners contribution to it? (cash, work, credits, material goods)?
How are profits and losses shared? (What is the profit sharing ratio?)
Can partners use the partnerships assets?
What happens if a partner wants to sell his participation to the partnership?
Can partners be excluded? Under what conditions?
What happens if a partner dies? Can heirs take his place?
Registration
Prerequisite for limiting liability (through appropriate organisational form, s.a.s.) and
getting some form of entity shielding
In some countries (England) partnerships have no separate legal existence of their
own, the firm is not a legal entity, e.g. when suing the partnership, the partners are
sued
In other countries registered partnerships have some form of separate legal
existence (Italy is a case in point- autonomia soggetiva)
Part 1.D The Company short history and core characteristics of company law
Charters
Guilds of traders, operating through commenda-like arrangements, were issued
charters that included exclusive privileges to trade.
These chartered companies divided the cargo among the investors at the end of each
voyage, but this was inefficient.
In 1623, the Dutch East India Company was granted perpetual existence:
shareholders lost their power to withdraw at will but were compensated with a new
right to sell their shares without the consent of other owners.
Chartered companies
The English East India Company (EIC), founded in 1600
The Dutch East India Company (VOC), founded in 1602
They pioneered features which later became textbook characteristics of modern companies: legal
personhood, a permanent capital, limited liability for shareholders, tradable shares, separation of ownership
and management
The US trajectory
After the Revolution, when the authority of the English monarch and Parliament
were no longer recognized, state legislatures took over the task of issuing charters,
and did so with greater frequency and for more different types of organizations than
had the King or Parliament.
Nonetheless, it was still costly to organize a business as a chartered corporation
rather than as a partnership or unchartered joint-stock company (individual special
acts by the governor or state legislature were required)
M. M. Blair, "Corporate Personhood and the Corporate Persona" (2013) U. Ill. L. Rev. 785, at
794-795
Art. 2394 Italian Civil Code: Il potere di rappresentanza attribuito agli amministratori dallo statuto o
dalla deliberazione di nomina generale. Le limitazioni ai poteri degli amministratori che risultano dallo
statuto o da una decisione degli organi competenti non sono opponibili ai terzi, anche se pubblicate, salvo
che si provi che questi abbiano intenzionalmente agito a danno della societ.
US Examples Alphabet, bylaws 2015
Criminal Liability
The UK experience
The US one
The Italian experience: Legge 231/2001
If you want to know more see Torraca "Corporate Liabilities as a Consequence of Criminal Offences in Italy: Legislative
Decree No. 231/2001." US-China L. Rev. 12 (2015): 616 (in the course webfolder, optional reading).
L. Enriques and J. R. Macey, "Creditors versus capital formation: The case against the European legal capital rules"
(2000) 86 Cornell L. Rev. 1165, at1169-70.
Asset partitioning limited liability
Art. 2325 Italian Civil Code: Nella societ per azioni per le obbligazioni sociali
risponde soltanto la societ con il suo patrimonio.
The US way
In the US the Europe-style rules on capital protection were abolished a long time
ago, on the assumption that:
The Legal Capital Doctrine Does Not Protect Creditors: minimum capital is trivial
and not sensible to business specificities
The capital maintenance rules are ineffective and very costly for the company
Legal capital rules limit opportunistic behaviour on the part of the companies by
restricting the boards freedom to make distributions of assets to the shareholders.
However, the the controllers of a company may reduce the value of the companys net
assets not only by shifting assets out of the companys corporate box
Controls on opportunism not linked to legal capital rules: piercing the corporate veil?
Should court pierce the corporate veil in order to protect creditors from abuses such as
undercapitalization?
Common law (confused) doctrines
Civil law (confused) doctrines
In any jurisdiction, piercing the veil is extremely rare
In Italy, it is basically unknown
Recent studies in the US show that the doctrine is applied to cases different from
undercapitalization or similar
Controls on opportunism not linked to legal capital rules: controls over intra-group
transactions
Company groups: what is their purpose?
How do they work in practice?
See slides 108 109
Part 5 Shares
Shares
Shares incorporate the right to the distribution of profits and the right to the
liquidation value of the company, the right to vote in the shareholding meeting and other
rights, such as the right to ask for inspections, internal investigations, the call of
shareholders meetings, etc.
Compare to debt instruments: debt instruments incorporate the right to repayment
and interest
Equity to debt continuum: quasi equity and hybrids
1. Profits distributed to shareholders = dividends
2. Liquidation = with the shares you can receive your % of the liquidation value
(diritti patrimoniali delle azioni)
3. Voting rights in the shareholder meeting
4. Right to ask for investigations
5. Right to call for a shareholder meeting
Debt instrument (Equity) = bond, a certificate incorporating a participation to a loan
agreement.
Shares = right to distribute profits if they are profits = shareholder
Debt instrument = right to a payment + an interest = debt holder
Key distinction = you should repay debts in any case, while distribute dividends only if
there are profits
Listed shares
Shares can be listed on secondary markets (stock exchanges) or other types of
electronic trading systems, listed shares are dematerialised and
Shares can be not listed, but buying and selling those shares is more difficult
Public companies usually have listed shares public companies = listed companies
Private companies are not listed
Non listed shares
Shares can be sold and purchased, but there is no secondary market
In non listed companies (private companies) the sale of shares can be limited or
conditioned, through right of first refusal, co-sale and tag along rights, drag along rights
These are contractual terms between shareholders which can be included in the
Articles of Association
1. ROFR, Tag along rights
If one shareholder wishes to sell shares that are subject to a right of first refusal
(ROFR), it must first offer them to other shareholders
If a shareholder wishes to dispose of shares that are the subject of a co-sale or
tag along right, the other shareholders can insist that the potential purchaser
agrees to purchase an equivalent percentage of their shares, at the same price
and under the same terms and conditions Used as an instrument to avoid the
possibility that the third party enters and to have a controlling shareholder
2. DAR, Drag along right
Drag-along right (DAR) assures that if the majority shareholder sells their stake,
minority holders are forced to join the deal (same price and terms)
A drag-along right gives the investing shareholder the right to force the other
investor(s) to exit, should the investing shareholder exit, again, usually on the
same price and terms
It is possible to buy shares with a controlling premium price (low/high depending on
the jurisdiction)
Share classes
Companies can issue, in accordance with their articles of incorporation, single class
shares or what the Americans call dual class stocks
In a dual class structure, different classes of shares enjoy distinct voting rights, dividend
rights or rights of any other type
In UK listed companies dual share structures are unusual (Davis 222-224)
Loyalty shares
Are allowed in Italy for listed companies as well, they favour controlling shareholders
reaction to FCAs reincorporation in the Netherlands
For instance, Campari in Italy adopts a loyalty share structure:
() 2. Ogni azione d diritto a un voto. 3. In deroga a quanto previsto dal comma precedente,
ciascuna azione d diritto a voto doppio ove siano soddisfatte entrambe le seguenti condizioni: a) il
diritto di voto sia spettato al medesimo soggetto in forza di un diritto reale legittimante (piena propriet
con diritto di voto, nuda propriet con diritto di voto o usufrutto con diritto di voto) per un periodo
continuativo di almeno ventiquattro mesi; b) la ricorrenza del presupposto sub a) sia attestata
dalliscrizione continuativa, per un periodo di almeno ventiquattro mesi, nellelenco speciale di cui al
presente articolo.
Hybrids
The company can issue quasi-equity and other hybrids
Hybrids and other capital securities refer to a wide range of capital markets
instruments with precise definitions varying by sector and jurisdiction
Have characteristics of debt and equity instruments they are somewhere in the equity
to debt continuum, very common in debt restructuring transactions
The division of power between the board of directors and the shareholders in
Continental Europe
Continental Europes company acts generally regulate separately private
companies SrL and public companies SpA
The division of powers is located in the companys own constitution but also in the
law
See article 2380-bis Italian Civil Code, concerning s.p.a.
ARTICOLO N.2380 bis Italian Civil Code
Amministrazione della societ.
[I]. La gestione dell'impresa spetta esclusivamente agli amministratori, i quali compiono le operazioni
necessarie per l'attuazione dell'oggetto sociale.
Company run by the directors
[II]. L'amministrazione della societ pu essere affidata anche a non soci.
[III]. Quando l'amministrazione affidata a pi persone, queste costituiscono il consiglio di
amministrazione.
[IV]. Se lo statuto non stabilisce il numero degli amministratori, ma ne indica solamente un numero
massimo e minimo, la determinazione spetta all'assemblea.
[V]. Il consiglio di amministrazione sceglie tra i suoi componenti il presidente, se questi non nominato
dall'assemblea.
Appointment rights
Appoint and remove directors typical pattern: director either elected or
approved at their first AGM, annually or every three years subject of re-election,
articles make it difficult for the shareholders to propose a new director, other
shareholders have a veto right
It is on the companys constitution to decide how directors are to be elected and
what is the voting procedure, absence of mandatory rule requiring appointment or
periodic reappointment by shareholders may simply operate as to facilitate the
entrenchment of incumbent management
E.g. 51 % vs 49 % shareholders ->51% appoints all directors unless otherwise
specified in constitution (other system one vote per share or voto di lista,
coalitions by minority shareholders)
Why does the shareholder disapprove of the constitution giving the right to
appoint the directors to creditors? They wont distribute dividends thus repaying
the loans etc., will keep the company safe, take business decisions that will only
repay the loans, wont take risks and take opportunities (limited liability ->
shareholders want to be risky)
Shareholders can at any time remove directors without having to assign a reason
for doing so, applies also to the director appointed by the third party though
company may suffer from undesirable consequences like obligation of paying back
the loan immediately
Dismissed director hat the right to compensation or damage payable to him in
respect of the termination of his appointment as director or of any appointment
terminating with that as director
The dismissed director has a right to claim damages if he was not breaching the
service contract, e.g. pay the time left in the contract
Convening meetings
Great differences between jurisdictions
Usually shareholders having a certain percentage of the voting rights can requisite
a special shareholder meeting e.g. 5% or more of the companys voting rights
Quite often these special meetings concern directors removal discussed
When no AGM in the near future, request a special meeting Directors usually
do not want to call this meeting, knowing it concerns a (their) removal obliged
by the law, otherwise the court would be calling the meeting
Exit or Voice?
The collective action problem in widely held companies
huge amount of work if you do not have a lot of shares, so when faced with
problems you tend to prefer to sell your shares instead of trying to make your
voice heard, e.g. in Company with a large body of shareholders, each with small
holdings
Instructions (SH to DIR) requires a special resolution 2/3 majority
Removals requires ordinary resolution of simple majority
When wishing to instruct, shareholders often formulate their resolution as a
conditional removal one
Shareholder = Institutional investors pension funds, mutual funds etc. are a
simple solution for this problem
Their (moderate) activism participate in shareholder meetings etc. are more
active in working more with managers and directors
Institutional shareholders activism and Governments
Legislation in all countries tries to make inst. Inv. Use their voice rather than
using exit strategy
Voice not only means exercise of the removal rights but all the decision rights as
well, especially their oversight powers
Governments solution to the coordination problems of shareholders in listed UK
companies is to pressurize the institutional shareholders to take the lead
Affiliation Right
Unsatisfied shareholders can sell their shares and choose exit
In listed companies shares must be freely tradable
From the companys point of view free transferability is provided by the
doctrine of separate corporate personality, the shares in the company can be
transferred without any impact on the ownership of the business assets which
remains vested in the company
For the shareholders it is legally much less secure
In non listed companies the articles can contain limits to the tradability, e.g. by
requiring boards consent to transfers or by giving a pre-emption right to other
shareholders
In not listed companies exit strategy is not an option usually (difficult to find buyer,
limits etc.)
However, the exit right can be of no great value only of value to the highly
prescient shareholder who can predict the unlawful or unwise conduct of the
board before it occurs and before the rest of the market realizes what happened!!
because the sale will simply crystallize the loss even for listed companies
therefore exit may not be a (good) option
Takeover bids
Unsatisfied shareholders can sell their shares at a price above the market price in a
takeover bid
Major advantages of the takeover offer:
under a legal regime which facilitates takeover bids, the threat of it will be a
constant pressure, on the boards of all companies quoted on public markets, to
keep the interests of the shareholders centre-staged shareholder value
takeover threat requires no input of resources
if the board does not respond to the pressure and the shareholders interest are
neglected, the shareholders can exit the company at a premium to market price
What is a takeover bid? (in Italian: offerta pubblica di acquisto, OPA; in the US,
tender offer)
the bidder is willing to pay more than the market price, because once he has
obtained control of the company he can and will replace the board with his own
new nominees
Conclusion
Three legal strategies for empowering shareholders in companies without a
controlling shareholder
o Decision rights strategy turns on involving the shareholders as a body in
corporate decisions, shifting decision making in the hands of shareholders risks
making corporate decisions making process inefficient
o Appointment rights strategy can be applied by company law, it impact might be
lessend by the inability of highly dispersed shareholder bodies tomake much use of
it due to coordination difficulties; partial re-concentration of shareholding into the
hand of institutional shaerholders has lessend this problem
o Affiliation right strategy Exit right is not as such much protection, shareholders
need to sell a price which reflect the value of the company, it would have, if it were
run properly, threat of a takeover bid is a very powerful corporate governance tool
Strategies to strengthen the hand of the shareholders as a group against the board
Preliminary remarks
Constraints strategy, comes in form of either specifying rules for decision making by
the board or by laying down standards by which the boards decisions can be reviewed by
the courts
Incentives strategy, which consists of either trying to avoid director high-powered
conflicts of interest by excluding them from decision making (trusteeship strategy) or
realigning those high-powered conflicts with the interest of the shareholders
Duties are owed by the directors term includes those properly appointed by the
board and those who act as directors whether regularly appointed to that to the board or
not, including shadow directors i.e. persons in accordance with whose instructions or
directions the directors of the company are accustomed to act
What is equity?
Standards vs rules (discussed by Davies at p. 149)
Standards are easy to formulate but hard to apply (e.g. directors must exercise
due care etc. vs work out on the facts of a particular case what is required by these
precepts) the law making function is shared between the formulator and the
applier, but does the applier have the necessary expertise to work out the best
solution to the issue the standard requires?
The directors may act differently taking less risks ex ante if it unknown how the
court might judge them ex post
Rules, the law-making function lies nearly entirely with the formulator
Duty of loyalty
Duty to promote the success of the company, it is a fiduciary duty loyal to
interests of a company
But what is the company? The interest of the company is the interest of the
shareholders only or is the interest of the stakeholders (creditors, employees,
local communities) as well? Promote the success of the company for the
benefit of its members, shareholder-centred statement, but the director is
required to have regard to a number of stakeholder interests, only insofar as
they have an impact on the directors goal of achieving business success for the
benefit of the shareholders
Nevertheless, the director is not required to balance both share and stakeholder
interest
E.g. move the company to another country in order to pay less taxes good for
shareholders but bad for stakeholders
This is an unresolved area of academic, legal and political debate, in any
jurisdiction around the world
EU view more elastic interest of everybody , take into account also the interest
of the people who need the company to run
The UK adopted a tempered shareholder-centred statement of the rule, with
enlightened shareholder value (ESV)
Act in good faith
Section 172 UK Companies Act
172 - Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole, and in doing so have
regard (amongst other matters) to
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment, (e)the desirability
of the company maintaining a reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the company
(2) Where or to the extent that the purposes of the company consist of or include purposes other than
the benefit of its members, subsection
(1) has effect as if the reference to promoting the success of the company for the benefit of its members
were to achieving those purposes
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring
directors, in certain circumstances, to consider or act in the interests of creditors of the company
If strictly forced (it is not) direct would have consider too many aspects and interests,
nearly impossible
Italy, France, Spain, Shareholder oriented
US, interest of company = interest of shareholder, shareholder centric approach
Self dealing transactions Do not study the details only the key concepts
A director of a company must avoid a situation in which he has, or can have, a
direct or indirect interest that conflicts, or possibly may conflict, with the interests
of the company
E.g.
The relation between company and subsidiary is not equal to market relations
Person wants to sell a copyright, which is needed by a company
This applies in particular to the exploitation of any property, information or
business opportunity
However, self dealing transactions are not banned. Can you explain why, from a
Law & Economics perspective?
Only if the presence of the director on both sides of the table leads to a deal
which is less favourable to the company than an arms length negotiation would
have produced can the shareholder be said to have suffered harm
Prohibition would impose more costs on the shsareholders
The conflicted director must follow a procedure
Corporate opportunities
The self interest of the director may lead to the exclusion of the company from the
transaction
There is a business opportunity and the director develops it through a new entity
fully owned by her, when it could have been developing through the company
Business opportunities/corporate opportunities
There are different possible strategies
oblige the director not to compete against the company
When approached as a director of the company, they have to act in the interest
of the company and not in their self interest
when taking the opportunity for himself, the director is liable for the escaped
profit
Conflict of interest or no profit rule?
Conflict of interest: opportunity must first be offered to the company, where the
exploitation of the opportunity by the director would generate a conflict of interest
between the directors personal interest and his or her duty to the company
No profit rule: Rule against secret profits, director must not make profit arising out
or in the course of his office as director without that profit having been disclosed in
advance and approved by them
Remedies by the company Accounting by the director for the profits made out
out of the personal exploitation, aim to deprive the director of any incentive, to
put the companys interest second, the company can sue for damages
Competing directors
Should directors be allowed to compete with their company?
In Continental Europe the general rule is that they are forbidden from competing
unless so authorized by the shareholder meeting
In the UK there is no clear rule but the non competing duty falls within the duty to
promote the companys success
Exculpatory clauses
Can shareholders shape the extension of directors liability to the company
through exculpatory clauses?
Under Delaware law, the limitation of directors personal liability for monetary
damages for breaches of the duty of care is permitted, provided that the clause in
the corporations charter does not eliminate liability
o for any breach of the directors duty of loyalty,
o for acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, and
o for any transaction from which the director derived an improper personal benefit.
Exculpatory clauses
Exculpatory clauses are not allowed in the UK: the provisions on directors liability
are mandatory, they are not default rules that shareholder can alter in the
companys constitution
This approach is generally followed in Continental Europe as well.
Insurance
However, the company can purchase insurance against the directors liability to
the company, at the companys expense and for the benefit of the director, paying
directly or indirectly through an increased remuneration
This insurance cannot cover intentional wrongdoing, but the presence of insurance
may encourage litigation
This approach is followed in Continental Europe as well
Policy question: Why are companies allowed to protect directors against their own
claims against them? It would not be easier to allow exculpation clauses?
There is no straightforward answer as far as I know: the law is not always fully
rational. Del. law appears more rational.
Conclusion
Shareholder-centric formulation of the duties, with adoption of enlightened
shareholder value means that the shareholders are the primary beneficiaries of
the duties, but the duties are not formulated as to reduce the shareholders
agency costs
Caremark Case Directors Duties
Derivative action The company is suing a director, through a shareholder, when settling the judge has to consent
Allens opinion - framework
Caremark is about the approval of a settlement concerning a derivative action
What is a settlement? Agreement between parties, It Transazione
What is a derivative action?
Why did shareholders sue Caremarks directors?
Which kind of losses had directors caused to the company according to the claim?
The claim
The claim was that the directors allowed a situation which exposed the corporation to enormous legal liability
and that in so doing they violated a duty to be active monitors of corporate performance
Was there any charge of directors self-dealing or conflict of interest?
Was there any charge concerning the duty of loyalty?
Does a violation of criminal law create a breach of fiduciary duties by directors?
Liability of directorial decisions
Judge Allen notes that director liability for a breach of the duty to exercise appropriate attention may arise in
two distinct contexts
Which are those contexts?
1: A board decision that results in a loss because that decision was ill advised or "negligent"
Is this the area concerning the duty of care?
Is the Business Judgement Rule applicable in this context?
Why, according to Allen, compliance with a director's duty of care can never be judicially determined by
reference to the content of the board decision that leads to a corporate loss, apart from consideration of the
good faith or rationality of the process employed?
What is the policy position that supports Allens opinion?
What does it mean second guessing?
Why are judges ill-equipped to second guess directors decisions?
Why is the BJR process oriented?
When a director should be deemed to have satisfied the duty of attention?
Allen writes about moral as well. Can you remember in relation to what he mentions moral issues?
2. Liability for failure to monitor
Why is Allen discussing criminal law and the modern tendency to assure corporate compliance with external
legal requirements?
What are compliance programs?
Allen discusses a 1963 Delaware Supreme Court case concerning the potential liability potential liability of
board members for losses experienced by the corporation as a result of the corporation having violated the
anti-trust laws of the United States. Why? Does he think that the decision is still applicable?
1963 vs 1996
The Delaware Supreme Court in 1963 and in 1996 according to Allen
Why they would not share views about directors liability in oversight cases?
What are the three developments that have changed the law on this issue according to Allen?
How is the law changed according to Allen?
Caremarks directors
Was there a knowing violation for statute?
Was there a failure to monitor?
According to Allen, what kind of failure of the board would establish the necessary conditions to liability?
Is the BJR applicable to oversight cases?
Allen never discusses good faith
What is it in your opinion in this directors liability context?
Chapter 7 - Centralized Management, Setting the Boards Incentives
Trusteeship and non executive directors (The nature of Trusteeship on the board)
Trusteeship strategy as a central element of the reforms in the modern corporate
governance debate
They are based on the insight that the most powerful incentives to self interested
behaviour comes from holding a directorship in conjunction with a full time executive
position in the company as a senior manager and CEO (raising their reward package
and influence the company in away it does not benefit the shareholders but confers
private benefits, e.g. private jets or exercising power publicly)
as long as the company is going well it is very difficult to prove the company could
have been run better from the point of view of the shareholders
Raise of non executive directors, NED After many corporate failures in part
attributable to the CEOs
Independent non executive directors (those not otherwise currently or recently
connected with the company)
They only have a directorship and no managerial positions in the company, part-
time and remunerated by corporate standard, rather modestly
They may be motivated by low-powered reputational incentives to do a good
controlling job and by being more demanded in this role for other companies
! Though it is still being questioned whether low powered reputational incentives
can act as an effective counterweight to self interested executives and are able to
challenge dominant executives
US: NEDs usually constitute the overwhelming majority of members of the board,
making them dependent upon the shareholders and not independent of the
management, the appointment rights strategy being more effective than the
trusteeship strategy
UK: The report of the Cadbury Committee It rejected the proposal for closer
shareholder involvement in the selection of NEDs, not wanting to alienate
management from its proposals
But think of Allens reasoning in Caremark and think how new practices can
influence law nevertheless
How and who is going to vote and appoint directors? Depends on the companys
constitution and the articles of association
1. Simple majority as default rule
2. Voting by proportion
3. Voting by lists, slate election Two groups of shareholders, majority
shareholders propose 4 out of 5, the minority shareholders propose 1
(most common)
1. Dual function of the board Lead and control the company within a framework of prudent and
effective controls, assessing risks and managing them and setting strategic aims
2. Exceptions are small listed companies
Board should consist of directors with the appropriate balance of skills, experience, independence,
knowledge of the company to enable its discharge its duties and responsibilities (around NEDs)
3. Directors have to be independent in character and judgement, meaning the board has to assess and
disclose whether the director has or had certain types of relationship with the company (e.g.
employment in the past 5 years, material business relationship in the last 3, other form of income or
acting as a representative of a significant shareholder)
4. NEDs both lead and control as well, they should challenge and help develop proposals on strategy,
controlling includes monitoring the performance of the companys executive directors and ensuring
financial controls and systems of risk management are robust and defensive
5. Committees consisting only (or majority) of NEDs for audit, remuneration and nomination, these
matters tend to generate high powered conflicts
6. Formal statement of the matters on which the boards decision is necessary
7. NEDs should have access to appropriate outside professional advice and to internal information
from the company
8. The chair of the board as a counterweight to the CEO, a clear division of responsibilities at the head
of the company between running the board and the executive responsibility for running the
companys business. For both position to be held by one person or a former retiring CEO becoming a
Chair, the board has to consult with the major shareholders in advance and give written reasons in
the next AGM (Chair is responsible for leadership of the board and ensure its effective operation)
9. Senior NED, acting as a crisis manager, proving a conduit between the other NEDs and the chair or
between shareholders and the chair/CEO, and is to lead one meeting a year without executives and
the chair
Importance of trusteeship strategy becomes clear
Not a law, but a code of best practice recommendation Only hard obligation to set out in the
Listing Rules how the company has complied with the provisions and explain areas of non compliance, if
that is done well the company cannot be criticised on non compliance ground
The Italian code
Referred to listed companies exclusively wants to satisfy institutional investors READ ON WEBFOLDER
Remuneration committees
Code requires the companies it covers to establish a remuneration committee
consisting of independent NEDs and usually the chair of the board
Should set the remuneration for the executive directors and the chair and
recommend to the board the remuneration level for senior management below
board level
Code provides guidance on setting of the performance related elements of the
remuneration package, including reclaiming it in case of exceptional misconduct
and misstatement and avoidance of excessive compensation when a director is
removed during his/her term of office ex ante a golden parachute could
induce a director to make risky decisions and take on major role in a company
which needs to be turned around, an alternative would be a higher basic salary
which might be more expensive in the event
Impact of the committees has been muted, often the code seems to associated
with the upward rise of remuneration packages
Main reason for the high remuneration is the following: Many independent
NEDs are executive directors in other companies and are more likely to share a
high compensation culture
Problem with implementation of trusteeship strategy and the difficulty of
finding non executive directors who are both effective and free from executive
directors issues