Company law briefing
Directors'duties
Obligations clarified
In McKillen v Misland (Cyprus) Investments Ltd and others, the High Court
gave judgment on directors' duties
among other things [12012] EWHC 2343
(Ch)). The case provides some of the
first judicial guidance on directors' duties since the Companies Act 2006 (2006
Act) was fully implemented. References
to sections in this article are to sections
in the 2006 Act. The case also considers
unfair prejudice {section 994), shareholder pre-emption rights, and the nature of shadow directorships {see box
"Other key elements of the decision ").
Other key elements of the decision
Some key elements of the court's decision on unfair prejudice, shareholder preemption rights and the nature of shadow directorships include:
•
There was no place for Mr McKillen's claims of unfair prejudice on equitable
grounds because the case involved "highly sophisticated and experienced
business people" who had documented in detail how their relations with each
other were to be governed.
•
Other aspects of Mr McKillen's case failed because they were complaints
about the behaviour of shareholders, not of the company, because the relevant
breaches of director's duties were not made out or because no prejudice was
caused to Mr McKillen.
Background
The case relates to Patrick McKillen's
quest for control of three leading London hotels. The issues concern his objections to steps taken to bring the company which owned those hotels, Coroin
Limited (Coroin), within the control
of Sir David and Sir Frederick Barclay,
through companies and trusts controlled by them (the Barclay interests).
•
The claim that Sir David Barclay was a shadow director of Coroin Limited
(Coroin) failed. The court found that, although directors for the Barclay interests had corresponded with Sir David Barclay on certain matters, they had in
those matters reached their own decisions as directors of Coroin and were not
accustomed to act in accordance with Sir David Barclay's instructions. Other
elements of Mr McKillen's case were dismissed on grounds that they related to
actions of the Barclay interests as shareholders, not as directors.
•
An arrangement for a right of first refusal in relation to the acquisition of
shares did not constitute the transfer of or dealing with an "interest" in shares
Mr McKillen was one substantial investor
in a consortium which acquired the hotels
in 2004. The other principal investors were
Derek Quinlan and the Green family.
Coroin had total borrowings of approximately £660 million. By 2010, this loan
had been transferred to the Irish National
Asset Management Agency (NAMA) and
was thought to be some £150-£200 million
more than Coroin could sustain. Therefore, to redeem such debts in full, Coroin
needed a combination ofnew debt finance
and equity investment. None of the principal shareholders in 2010 could provide the
necessary capital.
Mr Quinlan's shares in Coroin were
charged to secure debts. The Barclay
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for the purposes of the pre-emption provisions in the shareholders' agreement.
•
An agreement to acquire shares which was conditional upon compliance with
the terms of the shareholders' agreement could not be regarded as an attempt
to deal with such shares in breach of the shareholders' agreement.
interests acquired those debts, gaining
control of shares in Coroin by virtue of
the security over them. In January 2011,
the Green family sold Misland (Cyprus)
Investments Ltd, the company which
owned their stake in Coroin, to the
Barclay interests. In September 2011,
NAMA transferred Coroin's loan facilities to Maybourne Finance Limited
(MFL), a company controlled by the
Barclay interests.
Directors' duties
Mr McKillen alleged that three of
Coroin's directors, F, S and M, had
breached their duties to Coroin. All
three were appointed by shareholders
comprising the Barclay interests. The alleged breaches concerned duties set out
in sections 172 to 175 and section 177. In
all but one instance, the court found on
the facts that the directors had acted in
Coroin's interests and were not, as al17
"'"•"ai
Commercial law briefing
There is no longer an artificial distinction between the techniques of construction and implication. In every case
in which it is said that some provision ought to be implied in an instrument, the only question for the court
is whether such a provision would spell
out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. In Jackson v Dear, the
High Court stuck firmly to this analysis
{12012} EWHC 2060 (Ch)) [see News
brief "Shareholder and director roles:
not parallel universes", www.practical
law.coml 0-521-4901).
Textual or contextual
With this shift from the words used to
the underlying commercial realities, the
court lays itself open to the accusation
that it is rewriting agreements to make
them fairer or commercially more reasonable and, in the process, that it is
undermining the deal negotiated and
documented by the parties.
With this, it is said that commercial
certainty is undermined, third party
rights are potentially prejudiced, the
length and cost of litigation are increased, and that its predictability is
diminished. No doubt there is some
truth in these points, although they
are liable to be overstated. In the vast
majority of cases, the words used will
continue to be wholly, or largely, determinative.
On the other hand, it
construe as accurately
parties' actual (albeit
ment. The meaning of
is necessary to
as possible the
deemed) agreea sentence will
very often be more than that of the
separate words.
Interpreting agreements pragmatically
and commercially, through the weighing of all relevant evidence, is surely
the most fundamental task of any credible, modern and commercial dispute
resolution system. There is no reason to
doubt the English court's ability to do
this and it is to be commended for having grasped the nettle and shown itself
willing to tackle this challenge head on.
The exclusionary rule
The main exception to the rule that the
court can consider anything available
to the parties at the time of the contract
is the inadmissibility of pre-contractual
negotiations on questions of construction: the so-called "exclusionary rule".
Lord Hoffman found, in Chartbrook,
that there was no clearly established
case for departing from the exclusionary rule. Supporters of the rule rely
on many of the same arguments as
are deployed for a textual, rather than
contextual, approach to construction:
greater predictability, increased fairness
to third parties, and better economy of
time and cost in the dispute resolution
process.
Practically speaking, it is not clear that
admitting pre-contractual negotiations
in principle should render the resolution of disputes more cumbersome and
costly Pre-contractual negotiations are
most often likely to be irrelevant. It is
not clear why the simple evidential test
of relevance is not a sufficient threshold in this sphere, as it is in all others.
Moreover, the blanket exclusion is itself
responsible for confusion and cost. It
can be wholly unclear where admissible
background ends and inadmissible evidence of negotiations begin. And, given
that pre-contractual negotiations are
admissible in a claim for rectification,
parties often seek rectification in the alternative in order to sidestep the blanket
prohibition and introduce the evidence
through the backdoor in any event.
Most significant, however, is the risk
of injustice. Not only does what is said
and done at the time often shed light
on what is meant by a disputed clause,
but, for as long as the blanket exclusion
remains, a party is ostensibly free to
advocate a particular construction that
had been expressly rejected during the
negotiation.
There is no justification, of principle
or policy, for restricting the relevant
evidence that the court may consider in
its interpretative endeavour (including
evidence of pre-contractual negotiations). Contractual interpretation is an
art, not a science, and it is impossible
for any precise, one-size-fits-all, formula to be laid down. The movement
from heavily formulaic tests towards
a more flexible contextual focus on
eliciting what it is that the' parties can
be deemed to have agreed is as commercial as it is laudable. The exercise is
not straightforward but it is one which
the court is more than equipped to
undertake.
Geraldine Elliott is head of, and Matthew Dando is an associate in the commercial litigation group at RFC.
PRACTICAL LAW COMPANY^
nfieu pdates are invaluable.
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