Scottish Law Commission (Discussion Papers)

Part 4




Section A

Part X of the Companies Act 1985

Part 4 Substantive Improvements 1: Sections 312-323 of the Companies Act 1985

Introduction

4.1      In this part, we review sections 312-323.^[1] In the following three parts (Parts 5-7) we review the other main groups of sections: disclosure of directors' share dealings (sections 324-329^[2] and Schedule 13); loans and similar transactions (sections 330-342); and disclosure in the annual accounts and elsewhere of loans etc in which directors are interested (sections 343-344 and Schedule 6). Part 8 contains a review of section 346 (which defines "connected persons" and like expressions) and the remaining sections of Part X. We put forward in these parts a number of suggestions for amending the relevant provisions. In Part 9 we consider two further approaches, namely the repeal or rewriting of some or all of these provisions. In Part 10 we consider the question of decriminalising the provisions.
4.2      The project involves a review of each of the sections of Part X and this means that we must critically examine almost every section in turn, both in terms of its substance and textually. This is not our normal approach, so we begin by outlining how this review proceeds. Of necessity, the complete exercise is a lengthy process.
4.3      We set out the wording of each of the sections (or groups of sections) in the text of the paper. This is followed by a commentary, and then by specific questions for consultees to consider on the relative section or group of sections. The examination of each section varies in length and complexity. In some cases, we simply ask whether consultees have experienced any difficulties with the relevant provisions;^[3] in others, we set out a number of detailed suggestions for reform.
4.4      Turning to the provisions reviewed in this part, we have raised in respect of many of the sections a considerable number of different suggestions - which we call "options" - as to the way in which the sections might be dealt with or amended. In some cases these are fundamental changes, in others they are small changes designed to deal with specific problems. Thus it is possible in many cases to choose more than one option.
4.5      In all cases where we have put forward suggestions for reform,^[4] we have included as option 1 "no change". This is to provide an opportunity for those respondents who reject any change, perhaps because they take the view that the section should have only its existing limited operation. If a respondent chooses option 1 he or she of necessity rejects all the ideas for change considered in the succeeding options on that section, but we do not duplicate those ideas or the arguments for and against them under the "no change" option.
4.6      In choosing options consultees are asked whether the relative section would actually be improved if the option were reflected in the section. In some cases, consultees may conclude that the legislation would be more flexible if the section covered a particular - though exceptional - situation and feel that the added complexity is inevitable and essential. In other cases, consultees may reject change not because the option is not technically sound, but on the grounds that the complexity which it would introduce would render the legislation yet more unwieldy. It should be borne in mind that it has traditionally been difficult to obtain amendments to the Companies Acts which were needed in practice. It is possible that the method of reforming company law will to some extent be improved in the future so that the law can be amended more much speedily, and with a much greater level of consultation with users of company law in particular than has been the case in the past. The issue of future handling of company law reform is outside the scope of this project, but may fall for consideration in the DTI's wider review of company law.^[5]
4.7      As indicated above, the question of repealing individual sections or groups of sections is considered in Part 9 below. Obviously, if consultees take the view that any of the sections discussed there should be repealed, the question of substantive amendments does not arise. The sections discussed in this part in respect of which repeal is considered in Part 9 are sections 312-316,^[6] section 319,^[7] sections 320-322,^[8] and section 323.^[9] We would be grateful for consultees views on the options set out in this part even if consultees consider that the section should be repealed.
4.8      We consider the sections in turn under the following heads:

Sections 312-316: Payments to directors for loss of office, etc

Section 317: Disclosure by directors to their board

Section 318: Directors' service contracts (1)

Section 319: Directors' service contracts (2)

Sections 320-322: Substantial property transactions involving directors etc

Section 322A: Transactions beyond the directors' powers

Section 322B: Contracts with sole member directors

Sections 323 and 327: Prohibition of option dealing by directors and their near families

Impact of the economic considerations discussed in Part 3

4.9      In Part 1, the view was expressed that Part X was concerned with what was done and the way in which it was done rather than the merit of what was proposed.^[10] The economic analysis in Part 3 is consistent with this.^[11] The economic analysis also shows that there are different ways in which Part X regulates self-dealing: most particularly, so far as this part is concerned by imposing an obligation to make disclosure to the shareholders or the board, an obligation to obtain approval of the shareholders as well or an absolute prohibition.^[12] There are examples of all these methods in the sections considered in this part. The choice of method depends on the policy behind the rule. For example in sections 320-322, which we consider in this part,^[13] the purpose of the rule would seem to be to protect shareholders from the risk of detrimental depletion of assets and accordingly these transactions when significant in general require the approval of shareholders. The general conclusion in Part 3 is that the general principle ought to be one of disclosure to the shareholders, with approval or ratification being required only in exceptional situations. Part 3 identified these situations as being where there is a risk of a depletion of corporate assets or where the agreed division of powers between the board and shareholders is in danger of being undermined.^[14]

Impact of the general principles provisionally identified in Part 2

4.10      As already stated, Part X sets out the procedure for permitting self-dealing by directors in a number of specific cases. The basic approach of Part X thus illustrates the first general principle that we provisionally identified in Part 2 - the principles of separate but interdependent roles for directors and shareholders. The method of controlling self-dealing has to make best use of their respective roles. Deciding whether and if so how to regulate self-dealing also calls for the application of other of the principles that we have provisionally identified, including the law as facilitator principle,^[15] the usability principle,^[16] the certainty principle,^[17] the "enough but not excessive" principle of regulation,^[18] and the principle of ample but efficient disclosure.^[19] We ask consultees, if they agree with the principles set out in Part 2, to have regard to those principles in addressing the options for reform presented in this part, and in particular to the multiples options in:

paragraphs 4.42-4.61 (sections 312-316);

paragraphs 4.94-4.118 (section 317);

paragraphs 4.131-4.152 (section 318);

paragraphs 4.163-4.171 (section 319); and

paragraphs 4.190-4.204 (sections 320-322).

sections 312-316: Payment to director for loss of office, etc

312.( It is not lawful for a company to make to a director of the company any payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, without particulars of the proposed payment (including its amount) being disclosed to members of the company and the proposal being approved by the company.

313.( (1) It is not lawful, in connection with the transfer of the whole or any part of the undertaking or property of a company, for any payment to be made to a director of the company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, unless particulars of the proposed payment (including its amount) have been disclosed to members of the company and the proposal approved by the company.

(2) Where a payment unlawful under this section is made to a director, the amount received is deemed to be received by him in trust for the company.

314.((1) This section applies where, in connection with the transfer to any persons of all or any of the shares in a company, being a transfer resulting from...

(a) an offer made to the general body of shareholders; or

(b) an offer made by or on behalf of some other body corporate with a view to the company becoming its subsidiary or a subsidiary of its holding company; or

(c) an offer made by or on behalf of an individual with a view to his obtaining the right to exercise or control the exercise of not less than one-third of the voting power at any general meeting of the company; or

(d) any other offer which is conditional on acceptance to a given extent,

a payment is to be made to a director of the company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.

(2) It is in those circumstances the director's duty to take all reasonable steps to secure that particulars of the proposed payment (including its amount) are included in or sent with any notice of the offer made for their shares which is given to any shareholders.

(3) If...

(a) the director fails to take those steps, or

(b) any person who has been properly required by the director to include those particulars in or send them with the notice required by subsection (2) fails to do so,

he is liable to a fine.

315.((1) If in the case of any such payment to a director as is mentioned in section 314 (1) ...

(a) his duty under that section is not complied with, or

(b) the making of the proposed payment is not, before the transfer of any shares in pursuance of the offer, approved by a meeting (summoned for the purpose) of the holders of the shares to which the offer relates and of other holders of shares of the same class as any of those shares,

any sum received by the director on account of the payment is deemed to have been received by him in trust for persons who have sold their shares as a result of the offer made; and the expenses incurred by him in distributing that sum amongst those persons shall be borne by him and not retained out of that sum.

(2) Where...

(a) the shareholders referred to in subsection (1)(b) are not all the members of the company, and

(b) no provision is made by the articles for summoning or regulating the meeting referred to in that paragraph,

the provisions of this Act and of the company's articles relating to general meetings of the company apply (for that purpose) to the meeting either without modification or with such modifications as the Secretary of State on the application of any person concerned may direct for the purpose of adapting them to the circumstances of the meeting.

(3) If at a meeting summoned for the purpose of approving any payment as required by subsection (1)(b) a quorum is not present and, after the meeting has been adjourned to a later date, a quorum is again not present, the payment is deemed for the purposes of that subsection to have been approved.

316.((1) Where in proceedings for the recovery of any payment as having, by virtue of section 313(2) or 315 (1) been received by any person in trust, it is shown that...

(a) the payment was made in pursuance of any arrangement entered into as part of the agreement for the transfer in question, or within one year before or two years after that agreement or the offer leading to it; and

(b) the company or any person to whom the transfer was made was privy to that arrangement,

the payment is deemed, except in so far as the contrary is shown, to be one to which the provisions mentioned above in this subsection apply.

(2) If in connection with any such transfer as is mentioned in any of sections 313 to 315...

(a) the price to be paid to a director of the company whose office is to be abolished or who is to retire from office for any shares in the company held by him is in excess of the price which could at the time have been obtained by other holders of the like shares; or

(b) any valuable consideration is given to any such director,

the excess or the money value of the consideration (as the case may be) is deemed for the purposes of that section to have been a payment made to him by way of compensation for loss of office or as consideration for or in connection with his retirement from office.

(3) References in sections 312 to 315 to payments made to a director by way of compensation for loss of office or as consideration for or in connection with his retirement from office, do not include any bona fide payment by way of damages for breach of contract or by way of pension in respect of past services.

"Pension" here includes any superannuation allowance, superannuation gratuity or similar payment.

(4) Nothing in sections 313 to 315 prejudices the operation of any rule of law requiring disclosure to be made with respect to such payments as are there mentioned, or with respect to any other like payments made or to be made to a company's directors.

General

4.11      These sections are derived from sections 191-194 of the Companies Act 1948, which re-enact earlier provisions in the Companies Acts of 1947, 1929 and 1928.^[20]
4.12      The object of sections 312-316 is to make payments to directors for loss of office or as consideration for or in connection with retirement from office unlawful unless there has been prior disclosure and approval. The sections do not apply to any other form of side payment to a director (eg. a bribe not connected with retirement from office), and they exclude the possibility of ratification after the payment has been made. The sections deal with three situations: (i) payment by the company on a director's^[21] retirement, resignation or removal;^[22] (ii) payment by the company or a third party in the event of a transfer of the whole or part of the company's undertaking or property;^[23] and (iii) payment by any person in connection with the types of share offer specified in section 314, primarily general offers or offers for control.^[24] In the case of (i) and (ii), the Act requires disclosure to all the members whether they hold voting shares or not^[25] and approval by the company in general meeting. In the case of (iii), the Act requires the director to take all reasonable steps to secure disclosure of the payment in the offer document.^[26] Section 316(3) excludes from all these sections "any bona fide payment by way of damages for breach of contract or by way of pension for past services".

The Jenkins Committee

4.13      In 1962 the Jenkins Committee considered the predecessor provisions of what are now sections 312 to 316. The Committee recommended that:^[27]

1. sections 312-315 should be amended to cover payments to former directors;

2. sections 312-315 should be amended to cover payments for the loss, while a director of the company or on the occasion of or in connection with loss of office as a director of the company, of any other office in connection with the management of the company's affairs or of any office as director or otherwise in connection with the management of the affairs of a subsidiary;

3. sections 312 and 313 should require the approval of a special resolution and section 315(1)(b) should refer to an equivalent majority of the members concerned; and

4. where disclosure was required it should include disclosure of any payments for which approval was not required.

Sections 312-316 have not been amended as recommended by the Jenkins Committee.

The distinction between covenanted and uncovenanted payments and the Privy Council's decision in Taupo Totara Timber v Rowe^[28]

4.14      As already noted,^[29] bona fide payments by way of damages for breach of contract are excluded from sections 312-316. The view of the Cohen Committee was that these sections should not extend to the giving up of executive offices for example as managing director:

92. ...(a)... Our attention has been drawn to cases where the powers of "settling" claims by a director who is also an executive and who is asked to give up his executive office, are exercised by a board in a manner open to invidious comment, eg where a contract is entered with a managing director with the very intention of terminating the contract and paying compensation in the form of capital not income. The practice is open to obvious objections, but numerous cases must occur where a board desire to dispense with the services of an executive director and where it is to the advantage of the company to negotiate a resignation, on the footing of paying compensation rather than to dismiss the executive director and face legal proceedings and in our view, it would not be right to interfere with the exercise by the board of such a power merely because a minority abuse it.^[30]

The Cohen Committee envisaged that as now the compensation would be disclosable in the notes to the annual accounts. The Jenkins Committee also thought that payments to which directors were legally entitled should remain outside these sections and not require approval by the company or members concerned.^[31] Clearly if a case such as the Cohen Committee envisaged occurred there would be likely to be a remedy open to the company against its directors for breach of duty.

4.15      The wording of section 316(3) is not however wide enough to exclude payments which a company is bound to pay to a director on his retirement or other loss of office because it has made some prior agreement to that effect or it otherwise has some legally binding obligation to do so.^[32] The question whether sections 312-316 apply to such payments (which we will call covenanted payments) has arisen, however, in a decision of the Privy Council namely Taupo Totara Timber v Rowe,^[33] and in a case before the Outer House of the Court of Session, Lander v Premier Pict Petroleum Ltd.^[34]
4.16      Taupo Totara Timber v Rowe was an appeal from New Zealand's Court of Appeal to the Privy Council, concerned with whether a payment agreed to be made under the terms of a service contract to a managing director on loss of office was unlawful by virtue of section 191 of the New Zealand Companies Act 1955, as it had not been approved by the company in a general meeting. Section 191 is identical to section 312 of the Companies Act 1985.
4.17      Lord Wilberforce, giving the advice of the Privy Council, held that section 191 made payments illegal only where they were uncovenanted and made to directors in connection with their loss of office as director alone. He referred to the judgment of Hudson J in the Australian case of Lincoln Mills (Aust) Ltd v Gough.^[35] In that case, the provision in question section 129 of the Companies Act 1961 (Victoria), which was the same as section 191 but added after the words "compensation for loss of office" the words "as director" and referred to "retirement from such office", but Lord Wilberforce considered the additional words of the Australian provision to be clarificatory rather than restrictive.
4.18      Lord Wilberforce continued:

The respondent, as well as being a director, was an employee, and, as other employees with this company, had the benefit of a service agreement: he was described as 'employee' in it. In certain events, which might not happen, he could become contractually entitled to a sum of money, on resignation or dismissal, the amount of which was not fixed by the agreement and could only be ascertained if and when the event happened. The directors had full power under art 116 to appoint him as managing director on such terms as they thought fit. There was no obligation on them to seek approval of this agreement by the company in general meeting; to do so indeed would be both unusual and possibly undesirable. Then, if the agreement was, as (subject to any point as to vires, see below) it undoubtedly was, valid in itself, does s 191 require the directors to seek the approval of a general meeting for carrying it out? Presumably this approval would be sought at a time when the obligation to make the payment had arisen and when its amount was known, but meanwhile the position of the employee would be uncertain and difficult. In their Lordships' view the section imposes no such requirement. The section as a whole read with ss 192 and 193 which are in similar form and the words 'proposed payment' and 'proposal' point to a prohibition of uncovenanted payments as contrasted with payments which the company is legally obliged to make. Their Lordships note that this contrast is drawn by the authoritative report of the Jenkins Committee; there is also textbook support for it.^[36]

4.19      Although, as a decision of the Privy Council, the decision is persuasive rather than binding, it is commonly thought that section 312 would be held to have the same effect. On this basis sections 312-315 is of much reduced importance. As respects that part of the decision which excludes from the requirement for shareholder approval payments to a director for the loss of an executive position (under a service contract) rather than his office as director, Gower notes that the effect of the decision is to make section 312 inapplicable where it is most needed. He concludes that "the loopholes with which sections 312-316 are riddled enable their obvious purpose to be easily defeated and they are in urgent need of review."^[37]
4.20      We provisionally consider, however, that, provided section 316(3) is properly applied in practice,^[38] as a matter of policy the effect of the Taupo decision is right. The other terms of a service agreement generally^[39] are not subject to shareholder approval, and in practice they cannot be. The shareholders have the power to remove the directors, and if the payments are not justified, the company^[40] can sue the directors for breach of duty.
4.21      If it is considered that the position established by the Taupo decision ought to be or is the position under UK law, then arguably sections 312-314 should be amended to make it clear that they do not apply to covenanted payments.
4.22      In addition to pre-determined contractual payments, covenanted payments include:

payments to directors who though executive have no service agreement

payments to non-executive directors who are given a sum to compensate them for extra work done^[41]

if, in each case, the company has a legally enforceable obligation to pay the sum in question, for example by way of quantum meruit.

Later authorities

4.23      The decision of the Privy Council was followed by Lord Osborne in Lander v Premier Pict Petroleum Ltd.^[42] This case concerned a company director who was employed under a contract of service as a managing director. Under the terms of the contract, if the director gave notice to terminate his employment in the event of a change in the company's ownership, he became entitled to payment of a compensatory sum, sometimes referred to as a "golden parachute" payment. The company refused to pay the sum, arguing that the effect of section 312 of the Companies Act 1985 was to require such a payment to have been approved by its members.
4.24      Rejecting this argument, Lord Osborne said:

It is to my mind quite clear that in this case the Privy Council decided that the section they were considering applied only to payments made in connection with the office of director ... Further, their Lordships considered that the language of the section and, in particular, the words "proposed payments" and "proposal" pointed to a prohibition of uncovenanted payments, as contrasted with payments which the company was legally obliged to make.^[43]

Is section 316(3) properly applied?

4.25      In many cases approval for compensation for loss of office is not sought for compensation payments on the basis that they are bona fide payments by way of damages for breach of contract, and that accordingly section 316(3) applies. Because these payments often appear to be excessive, there is concern that section 316(3) may not be properly applied in practice.^[44] It may be that to obtain a quiet and confidential settlement the company takes rather a generous view of what are the appropriate damages bearing in mind that this will involve some difficult estimates of what mitigation for further employment a director should be allowed.
4.26      The subsection clearly permits a payment made in good faith on the grounds that it represents damages for breach of contract, and to ensure that a payment meets this description, legal advice will often be sought. Directors will have the protection of the section if they seek proper advice. The exception does not cease to apply because the apparently proper advice in the event is wrong.
4.27      We invite consultees' views as to whether the provision is being properly applied and call for any evidence on this point. In the case of listed companies it may be that in future the remuneration committee will be required to express a view as to whether they consider that the payment was within the exception and give reasons in the case of payments which, for example, exceed one year's salary for the director involved. We invite consultees' views below on possible solutions for both listed and unlisted companies.^[45]

Consultees are asked whether section 316(3) is being properly applied in practice and, if not, to produce, where possible, evidence to support their answer.

Role of self-regulation

(i) Hampel Committee: Pre-determined compensation clauses encouraged

4.28      In its final report the Hampel Committee recommended that the sum to be paid to a director if he is removed from office before his contract expires (except for misconduct) should be agreed in advance as a term of his service contract.^[46]
4.29      The Committee concluded that this solution would overcome the difficulties of negotiating compensation:

Such provision would be effective whether or not the director found other employment. The arrangement would provide certainty for both sides, be operationally convenient for the employer, recognise the dislocation to the director inherent in summary dismissal, but avoid the problems of mitigation and inevitably subjective arguments about performance, conducted at the time of departure. Shareholders would of course see these provisions as they would be part of the director's service contract available for inspection.^[47]

(ii) The Combined Code: Role of remuneration committees explained

4.30      Remuneration committees have a role both at the time a director's service contract is negotiated and when the question of making a payment of damages to an executive director for loss of office arises. Provisions B.1.9 and B.1.10 of the Combined Code state:

B.1.9:

Remuneration committees should consider what compensation commitments (including pension contributions) their director's contracts of service, if any, would entail in the event of early termination. They should in particular consider the advantages of providing explicitly in the initial contract for such compensation commitments except in the case of removal for misconduct.

B.1.10:

Where the initial contract does not explicitly provide for compensation commitments, remuneration committees should, within legal constraints, tailor their approach in individual early termination cases to the wide variety of circumstances. The broad aim should be to avoid rewarding poor performance while dealing fairly with cases where departure is not due to poor performance and to take a robust line on reducing compensation to reflect departing directors' obligations to mitigate loss.

4.31      The last sentence does not refer to the procedure for approving compensation payments, which is that shareholder approval must be sought if the damages are not payments in good faith by way of damages for breach of contract.^[48]
4.32      The Combined Code states that the board should report to shareholders each year on remuneration. It leaves it to companies to decide whether the company in general meeting should be asked to approve the policy in the report.^[49] Apart from that provision, the Combined Code does not envisage that shareholders shall have any voice on directors' compensation for loss of office in addition to that given by the Companies Act.

(iii) The City Code

4.33      The City Code requires disclosure and approval of any contracts made from the point at which an offeree board "has reason to believe that a bona fide offer might be imminent", if, for example, they involve the disposition of assets "of a material amount"^[50] or entry into or amendment of any contract "otherwise than in the ordinary course of business".^[51] This includes a service contract which provides for an abnormal increase in emoluments.
4.34      In addition, Rule 24.5 states:

unless otherwise agreed with the Panel, the offer document must contain a statement as to whether or not any agreement, arrangement or understanding (including compensation arrangement) exists between the offeror or any person acting in concert with it and any of the directors, [or] recent directors ... of the offeree company having any connection with or dependence upon the offer, and the full particulars of any such agreement, arrangement or understanding.^[52]

Overlap with section 320

4.35      The question has arisen whether payments which do not require approval under sections 312-314 because of the application of section 316(3) or because they constitute covenanted payments may still require approval under section 320. As a matter of policy section 320 should not apply to damages for breach of contract or to covenanted payments if they are outside sections 312-316, since those latter sections constitute the special statutory regime for approval of payments for loss of office. Lord Osborne in the Lander case^[53] considered that section 320 did not apply to a golden parachute payment. There is a first instance decision in England to the same effect regarding damages for breach of contract.^[54] However, in practice the position is still regarded as unclear. Accordingly, we consider below the question whether section 320 should be amended to make this clear.^[55]

Takeover offers and sections 314-315

4.36      The world of takeover offers has moved on since sections 314-315 were first enacted. There are at least two types of takeover with which section 314 does not deal. It does not deal with those that are achieved by a scheme of arrangement involving a reduction of the capital paid up on the offeree's shares. This is a common method for an agreed takeover and has several advantages for the offeror, including the knowledge that when the scheme is sanctioned the shares in the offeree will all have been effectually acquired. Section 426 requires disclosure in the explanatory statement sent to shareholders in the offeree with the notice convening the meeting to consider the scheme of all "material interests of directors". The explanatory statement must also state the scheme's effect on directors' interests, in so far as that differs from the scheme's effect on the like interests of other persons.^[56] However, there is no provision which makes a payment to a director in connection with loss of office unlawful if the scheme is a cancellation scheme, or imposes on him any trust of the benefit received for former shareholders.
4.37      Furthermore, section 314(1) appears to apply only to offers conditional on acceptance for example by 51 per cent of the shareholders.^[57] In some cases, offers (for example offers to acquire outstanding minority shareholdings) are unconditional. It is therefore questionable whether section 314 should be restricted to conditional offers.
4.38      A further point that arises in connection with takeover offers is that the wording of section 315(1)(b) appears to permit the offeror and his associates^[58] to vote at a meeting convened to consider a loss of office payment to which section 314 applies in respect of shares in the offeree shareholders which they already hold. Such shareholders should arguably be excluded from voting at a meeting of the offeree shareholders.

Conflicting claims

4.39      The question also arises whether a claim could arise under both sections 312 and 314 on the same facts, for example because a company offers a payment to a director for loss of office in connection with a takeover. If section 312 applies but not section 314, the refunded payment would benefit the company and not the offeree shareholders. In either case, the director should not keep the payment unless the requisite disclosure and approval has taken place. On the other hand, where it was paid by the offeror, it would be a windfall to him if the claim under section 312 superseded any claim under section 315 and the price paid by the offeror for the offeree's shares had taken account of the payment. In those circumstances, it would seem that the claim under section 315 should prevail.

Civil remedies

4.40      Section 315 sets out civil remedies for breach of section 314. However unlike sections 320-322, sections 312 and 313 do not set out the effect of a payment in breach of these sections. Under sections 312 and 313, the payment will be unlawful, and the consequences of this on the agreement for payment are explained in Part 10.^[59] Under section 314, however, the payment is not unlawful, and accordingly a contract to make a loss of office payment in a takeover will be enforceable.
4.41      It is for consideration whether sections 312 and 313 should specifically provide that where a payment is made in breach of these sections, the director who receives it is liable to account to the company, and the directors who authorised it are liable to indemnify it against loss.

Options for reform and issues reviewed

4.42      We set out 12 options for reform in respect of sections 312-316, including option 1 which is to leave the sections unchanged. Options 2 and 3 concern the extent to which the provisions should apply to covenanted payments and are alternatives. Most of the other options suggest extensions to the scope of the provisions (options 4, 5, 7 ,9 and 12), clarification of the consequences of a breach of the provisions (options 10), or additional disclosure requirements (option 11), and consultees may choose more than one of these options. Options 6 and 8 concern the manner in which shareholders must give approval of relevant transactions and are mutually exclusive. Finally we ask consultees whether any further reform of sections 312-316 should be considered. The question whether these sections should be repealed in their entirety is considered in Part 9 below.^[60] The question whether sections 312-316 should be criminalised is considered in Part 10 below.^[61] In considering the options for reform, consultees are asked to have regard to the principles set out in Part 2 above.

Option 1: No Change

4.43      The sections arguably provide sufficient protection for companies and their members. It can additionally be said that a boards' freedom to determine departing directors' compensation with appropriate speed (that is not hindered by any additional requirement to seek shareholder approval) should not be further curtailed, but existing controls are necessary and familiar. This view assumes that there are no problems in those sections which require to be addressed.

Consultees are asked whether, if retained, sections 312-316 should be retained without amendment.

Option 2: Reverse the effect of the decision in Taupo Totara Timber v Rowe

4.44      The Taupo decision is only persuasive authority but, assuming that the same result applies in the UK, payments of damages for breach of a service contract and predetermined compensation clauses, such as golden parachute payments do not require either disclosure or approval. While this has reduced the apparent effectiveness of sections 312 to 316, the negotiation of service contracts may be regarded as a management matter in which shareholders should not be involved. This would be an application of the principle identified above that shareholders and directors should have separate but interdependent roles.^[62] Moreover it would be consistent with the recommendation of the Hampel Report for a remuneration committee to consider these and other matters relating to the remuneration of directors.^[63] Furthermore, it would be odd if approval was only required when a liability to make the payment had arisen. Shareholders are not required to approve the terms of an executive director's service contract before he commences, and even if Taupo does not apply in UK law there is no requirement for approval of such terms as the amount of the salary or any golden hello payment.^[64] If approval is required, it may deter suitable candidates from becoming directors. Moreover, if the terms which the board negotiates are over-generous, the board may be in breach of duty and the shareholders will have remedies against them irrespective of the requirement for prior approval. In other words these matters are regulated to some extent by the general law.^[65]
4.45      However, as against those points, it may be said that there is a potential inconsistency in Part X between, on the one hand, section 319, which regulates the period of service contracts^[66] and gives shareholders a voice if they exceed a certain length, and sections 312 and 316, assuming that the result in Taupo applies and that those sections are not amended to give shareholders any voice when it comes to covenanted payments.^[67] The solution to this problem might be to impose a limit on covenanted payments over a certain amount. This would then mirror the scheme in section 319. Such a limit might lead to directors' remuneration packages in effect being limited because companies would, as they are with service contracts, be unwilling to seek shareholder approval for a higher amount. A major difficulty would be in fixing that amount: if it was pegged to the director's legal entitlement to damages in the event of early termination, it would be difficult to know precisely when that limit had been reached^[68] and that is not therefore a limit which we have put forward. In view of the fact that the DTI's Consultative Paper states that directors' pay is a controversial issue and that the Government is watching developments closely, and further that the review will provide an opportunity to examine the responsibilities of shareholders in this area, the question of imposing a scheme on covenanted payments which involves shareholder approval in certain circumstances has not been pursued in this consultation paper.
4.46      As we indicated in paragraph 4.20 above, our provisional view is that provided section 316(3) is properly applied in practice, as a matter of policy the effect of the Taupo decision is right. Accordingly, we do not consider that sections 312-316 should apply to covenanted payments. This would also seem to be the likely starting point even if a change in the law to give shareholders increased responsibility in this sphere is recommended by the review, and it would represent a principled starting point for any future development of the law of that kind.

Consultees are asked whether they agree with our provisional view that sections 312-316 should not apply to covenanted payments.

Option 3: Amend sections 312-316 to make it clear that they do not apply to covenanted payments

4.47      If it is accepted that Taupo is right, sections 312-314 should be amended to make clear that they only apply to uncovenanted payments. Covenanted payments would include:

payments to directors who though executive have no service agreement

payments to non-executive directors who are given a sum for extra work that they do for the company

if in each case the company has a legally enforceable obligation to pay the sum in question. As indicated above, our provisional view is that the effect of the Taupo decision is correct, and we consider provisionally that sections 312-316 should be amended to make it clear that they do not apply to covenanted payments.

Consultees are asked whether they agree with our provisional view that sections 312-316 should be amended to make it clear that they do not apply to covenanted payments.

Option 4: Extend the provisions of sections 312-316 to former directors

4.48      This option seeks consultees' views on one of the recommendations of the Jenkins Committee.^[69] So far as former directors are concerned, our provisional view is that if the sections were extended to former directors, they might unfairly catch proper transactions. For example, ex gratia payments made to directors who have had to retire because of illness, to relieve financial hardship. Moreover, there is no evidence that directors are resigning before they make any arrangement to receive compensation and they are unlikely in fact to do so.

Consultees are asked whether they agree with our provisional view that sections 312-316 should not be amended so as to apply to payments to former directors.

Option 5: Extend the provisions of sections 312-316 to cover payments to connected persons

4.49      Sections 312-316 do not in terms apply to payments to connected persons occasioned by a director ceasing to hold office, although in other sections of Part X, transactions or arrangements involving connected persons are included.^[70] The definition of "connected person" is in section 346, which we review below. Where the payment is made to the connected person as a nominee for the director, the courts are likely to hold that the sections apply anyway. If the payment is made to a connected person on some other basis, for example to the spouse of a retiring director who retires from some other position in the company at the same time as his or her spouse who is a director, the company is already protected by the fact that the director must act in good faith in the best interests of the company. We are not aware that such payments are made to connected persons. If sections 312-316 were extended to cover payments to a connected person of a director in connection with the connected person's loss of office, consideration would have to be given for a provision which exculpates either the payer or the recipient because they did not know the facts which made the person connected. In any event, the provisions applying to connected persons could be no wider than those applying to directors, and so (for example) section 316(3) would apply.

Consultees are asked whether sections 312-316 should cover payments made to connected persons, and, if so, in what circumstances.

Option 6: Require approvals by company in general meeting under sections 312 and 313 to be by special resolution and where disclosure under those sections or section 314 is required, stipulate that disclosure should cover payments made on the same occasion for which disclosure is not required by those sections

4.50      These were recommendations made by the Jenkins Committee which was concerned that a director might receive contractual damages (not disclosable) as well as an ex gratia payment.^[71] Our provisional view is that a special resolution is inappropriate because the special resolution procedure is reserved for fundamental corporate changes, and that there is no need for any special statutory rules as to the circular for members.^[72]

Consultees are asked whether they agree with our provisional views that:

(i) it should not be a requirement that the approval by the company in general meeting required by sections 312 and 313 should be by special resolution;

(ii) it should not be a requirement of approval under those sections or section 314 that there should be a stipulation that details of payments which do not require approval should be disclosed when approval of those which require disclosure is sought.

Option 7: Non-contractual payments received for loss of other offices

4.51      As stated in paragraph 4.13 above, the Jenkins Committee recommended that sections 312-315 should be amended to cover payments for the loss, while a director of the company or on the occasion of or in connection with loss of office as a director of the company, of any other office in connection with the management of the company's affairs or of any office as director or otherwise in connection with the management of the affairs of a subsidiary.
4.52      Where a director, in addition to being a director, holds some other position in a company or its group, it is possible for a company to circumvent the requirement for approval of uncovenanted payments by making such a payment to the director in connection with his loss of that position. Under paragraph 8 of Schedule 6 to the Companies Act 1985, such a payment would require to be aggregated in the figure for compensation to directors for loss of office to be shown in the notes to the annual accounts.
4.53      Payments for loss of other offices would appear to be caught by section 316(2)(b) for the purposes of sections 313 and 314, but not by section 312. That section therefore allows some scope for avoidance, and it may be anomalous that the Act considers the figure sufficiently important to be the subject of (aggregated) disclosure but does not require approval of it.

Consultees are asked:

(i) whether they consider that section 312 should require approval of uncovenanted payments made to a director in respect of the loss of some other position in the company, or its group, apart from that of director (a) if he loses that position at the same time as he loses his office as a director, or (b) whenever he receives such a payment;

(ii) whether they consider that sections 312-316 should apply to any such payments which are covenanted as well.

Option 8: Deem payments approved if notified and members raise no objection to the proposed payment within a stipulated period

4.54      The argument raised against shareholder approval is that it may be costly, cumbersome and create uncertainty. One answer to this objection (and indeed to the requirement for approval under, for example, section 319) would be to make the payment subject to "negative approval", ie to deem it approved if the company gave notice of the intention to make it to shareholders unless a specified proportion of members, say shareholders holding shares carrying the right to 5 per cent of the votes capable of being cast on the resolution, objected to it within, say, three weeks of the notice. If an objection was received, the company would have to call a meeting to approve the payment. This option could be in addition to, or in lieu of, the additional requirement for a meeting. We are provisionally of the view that this option should be rejected for the reasons given in 4.171 below.

Consultees are asked whether they agree with our provisional view that sections 312-314 should not be amended so as to permit a company to dispense with approval of the company in general meeting if notice is given to members and there is no objection from a specified proportion of members within a specified period.

Option 9: Amend sections 314 and 315 to cover acquisitions by way of a cancellation of shares under schemes of arrangement etc

4.55      We have noted above that there are deficiencies in sections 314 and 315: in particular that they do not apply to takeovers that proceed by way of a scheme of arrangement involving a cancellation of shares rather than an acquisition of shares, that the offer must be a conditional one and that the offeror and his associates^[73] are permitted to vote at the meeting convened pursuant to section 315. It is also the case that there is no remedy at all under the section unless the offer becomes unconditional. If the obligation to make the payment is unconditional, section 315(1) will not apply unless the offer also becomes unconditional. Moreover, if the offer does become unconditional the selling shareholders get the whole of the benefit even if the offer was only a partial one.

Consultees are asked whether they consider that sections 314 and 315 should be amended:

(i) to cover acquisitions by way of a cancellation of shares under a scheme of arrangement;

(ii) to cover unconditional offers;

(iii) to prevent the offeror or his associates from voting at the meeting convened pursuant to section 315;

(iv) in any other way to remove deficiencies in their application to takeovers in accordance with modern practice.

Option 10: Amend sections 312-314 to provide civil remedies against the directors and section 315 so that a claim under this section has priority where the amount paid to the director was taken into account in determining the price to offeree shareholders

4.56      We have observed already that section 314 contains provision for recovery of the amount of the payment by former shareholders but that sections 312 and 313 make no such provision. In the case of these sections, the recovery should logically be by the company of which the director was a director since (a) in the case of section 312 it was the payer, and (b) in the case of section 313 it may have been the payer, but in any event the membership of the company is unaffected and if there was any loss it (or the totality of its members) would have been the loser. In the case of section 315, it is appropriate that the remedy should be in favour of the offeree shareholders since if the offer is successful they will no longer be able to claim through the company.
4.57      The provision that would seem appropriate if any provision is to be inserted into section 312 and 313 to deal with civil remedies, is a simple provision that the director is liable to account to the company for the benefit of the payment and the directors who authorised it are liable to indemnify the company against any loss. If the provisions are extended to cover payments to connected persons they should be liable in the same way as recipient directors.
4.58      The insertion of a civil remedy would assist users in understanding the effect of a breach. We are provisionally in favour of it.
4.59      So far as section 314 is concerned, it is possible that the payment may be made by the company rather than say, the offeror, and that accordingly a claim pursuant to section 312 (on the basis that the payment was a breach of duty by the directors involved) may lie as well as a claim under section 315. We suggest that it is clear that the director should not retain the payment if the appropriate disclosure and approval does not occur. In addition, if the company made the payment in circumstances where the shareholders parted with their shares to the offeror, on the face of it the benefit of the remedy should not reside with the company and through its new owner, the offeror, because the former shareholders would get nothing. On the other hand, it may be that they should not get anything if the price for their shares took into account that the company would be making payment rather than the offeror direct. In those circumstances the remedy should lie with the offeror.

Consultees are asked:

(i) whether they agree with our provisional view that sections 312 and 313 should be amended to provide for civil remedies on the lines suggested in paragraph 4.50;

(ii) whether section 315 should be amended so as to provide that, unless the court otherwise orders, the claim of former shareholders under section 315 should prevail over that of any of the company in section 312 in respect of the same payment.

Option 11: Reinforce section 316(3) by requiring companies to disclose in their annual accounts particulars of the calculation of compensation paid to a director

4.60      While no doubt any prudent board would wish to have the benefit of legal advice when approving a severance payment to ensure that it was properly calculated, there is a certain amount which turns on the precise facts when poor conduct or misconduct is alleged or other factual questions arise as to the proper allowance to be made for mitigation. In the last mentioned case, the directors can take the obvious step in the case of damages for breach of contract of paying the director his contractual entitlement and waiting to see when he gets a new post. But there is some evidence^[74] that directors need to be encouraged, as exhorted by the Combined Code, to take a robust line and one way of achieving this would be through a requirement for disclosure.^[75] In larger companies directors' claims for compensation following early termination of their contracts will be considered by the remuneration committee. At the present time, the notes to the annual accounts show the aggregate amount paid to all directors for loss of office in the year in question.^[76]

Consultees are asked whether they consider that particulars of a severance payment made to a director should be included in the annual accounts and, if so, what in their view those particulars should cover and when the disclosure requirement should arise.

Option 12: Extend section 312 to cover the situation where the payment is made by a company to a director of its holding company in connection with loss of office as such director

4.61      Section 312 does not deal with the situation where a payment is made by say a wholly-owned subsidiary to a director of its parent company. The director may have been employed as a director of the holding company by the subsidiary, especially if the subsidiary is the company which employs all employees in the group. Section 320, by contrast, deals with the situation where a company enters into a substantial property transaction with a director of a parent company. In that situation the Act presently requires a resolution of both the subsidiary and the parent company, unless the subsidiary is a wholly owned subsidiary. In that case its shareholders do not need to be protected by a requirement for disclosure or the passing of a resolution.

Consultees are asked whether section 312 should apply to payments made by a company to a director of a holding company in connection with his loss of office as such director and, if so, whether the requirement for disclosure and approval should be satisfied in both companies (other than a wholly-owned subsidiary).

Generally

Finally, consultees are asked whether any further reform of sections 312-316 should be considered.

Section 317: Disclosure by directors to their board

317.((1) It is the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company.

(2) In the case of a proposed contract, the declaration shall be made...

a) at the meeting of the directors at which the question of entering into the contract is first taken into consideration; or

b) if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after he became so interested;

and, in a case where the director becomes interested in a contract after it is made, the declaration shall be made at the first meeting of the directors held after he becomes so interested.

(3) For purposes of this section, a general notice given to the directors of a company by a director to the effect that...

(a) he is a member of a specified company or firm and is to be regarded as interested in any contract which may, after the date of the notice, be made with that company or firm; or

(b) he is to be regarded as interested in any contract which may after the date of the notice be made with a specified person who is connected with him (within the meaning of section 346 below),

is deemed a sufficient declaration of interest in relation to any such contract.

(4) However, no such notice is of effect unless either it is given at a meeting of the directors or the director takes reasonable steps to secure that it is brought up and read at the next meeting of the directors after it is given.

(5) A reference in this section to a contract includes any transaction or arrangement (whether or not constituting a contract) made or entered into on or after 22nd December 1980.

(6) For purposes of this section, a transaction or arrangement of a kind described in section 330 (prohibition of loans, quasi-loans etc to directors) made by a company for a director of the company or a person connected with such a director is treated (if it would not otherwise be so treated, and whether or not it is prohibited by that section) as a transaction or arrangement in which that director is interested.

(7) A director who fails to comply with this section is liable to a fine.

(8) This section applies to a shadow director as it applies to a director, except that a shadow director shall declare his interest, not at a meeting of the directors, but by a notice in writing to the directors which is either...

(a) a specific notice given before the date of the meeting at which, if he had been a director, the declaration would be required by subsection (2) to be made; or

(b) a notice which under subsection (3) falls to be treated as a sufficient declaration of that interest (or would fall to be so treated apart from subsection (4)).

(9) Nothing in this section prejudices the operation of any rule of law restricting directors of a company from having an interest in contracts with the company.

General

4.62      In the words of Lord Templeman, "Section 317 shows the importance which the legislature attaches to the principle that a company should be protected against a director who has a conflict of interest and duty."^[77] This section is derived from section 199 of the Companies Act 1948.^[78] The duty on a director to disclose to the company, through its board, any interest in its contracts first appeared in section 81 of the Companies Act 1928,^[79] later re-enacted as section 149 of the Companies Act 1929. This duty is in addition to the general law which makes voidable a contract between a company and a director where the latter has a conflict of interest for which he does not have the fully informed consent of the company in general meeting.^[80] The statutory duty of disclosure to the board under section 317, and the duty under the general law to make full diclosure to the company in general meeting for its consent, are easily confused but must be kept separate.
4.63      The effect of section 149 was reviewed by the Cohen Committee. The focus of the Cohen Committee's concern was the question whether directors should be prohibited from voting at board meetings on contracts in which they had an interest, and additionally, if it was desirable to require disclosure to shareholders, through the director's report, of "exceptional contracts" in which they had some personal stake. Having concluded that neither of the foregoing should be dealt with by statute, the Committee limited its recommendations to "one relatively small matter". It recommended that where disclosure was to be made by a general written notice of a director's membership of another company, so that he might be regarded as interested in any contract made with that company after the date of the notice:^[81]

it should be provided that the notice of disclosure should be deemed to be part of the proceedings of a meeting of directors so that the obligation to keep minutes of a meeting of directors laid down by section 120 shall apply.^[82]

This recommendation was implemented by section 41(5) of the Companies Act 1947.^[83] Section 149 of the Companies Act 1929, as amended by the Companies Act 1947, was re-enacted as section 199 of the Companies Act 1948.

4.64      In 1962, the Jenkins Committee recommended that section 199 be limited, so that, rather than require a director to disclose an interest, however small, only in contracts that came before the board, the requirement should fix on the disclosure of "material interests in contracts, whether or not any such contracts come before the board of directors."^[84] However, it also recommended that there be a saving provision:

for cases where a director can show that he had no knowledge of the contract and that it was unreasonable to expect him to have had such knowledge.^[85]

4.65      In addition, it recommended that section 199(3)^[86] should be extended in order that a director could give a general notice of a broader range of interests than simply those related to his membership of another firm, and to require the nature of the interest to be stated.^[87] It rejected as not "desirable or practicable" the notion that a director's interests should be disclosed to the general body of shareholders. At most, in the particular circumstances of a director having a material interest in a managing agency approved to manage the whole or a substantial part of the company's business, the Committee saw merit in that interest being disclosed in the directors' report and the relevant contract being filed with the Registrar of Companies.^[88] However, none of its principal recommendations were enacted.^[89]
4.66      The Companies Bill 1973 contained provisions which, although adopting the Jenkins Committee's suggestions in relation to contracts not coming before the board and the extension of section 199(3), did not incorporate its "materiality" threshold or the saving provision in relation to a director's "reasonable knowledge" of the existence of a contract.^[90]
4.67      In addition, disclosure of the interests of members of a director's family in contracts or proposed contracts was also required.^[91] The Bill was lost, however, as a consequence of the first 1974 general election.
4.68      In 1977^[92] a White Paper, "the Conduct of Company Directors", again addressed disclosure of directors' interests in contracts with the company. It proposed inter alia fuller disclosure in the annual accounts of certain transactions involving possible conflicts of interests.^[93] The following year, another White Paper, "Changes in Company Law",^[94] set out clauses in a draft Bill that sought to give statutory effect to the recommendations in "The Conduct of Company Directors", focusing, in clause 52, on the increased disclosure of transactions involving directors in the company accounts.^[95] However the 1978 Bill was lost as a consequence of the general election of 1979.
4.69      The Companies Act 1980^[96] widened the scope of the duty of disclosure in section 199 so that it attached to shadow directors^[97] and made the first express reference to the possibility of directors being interested in contracts made between the company and persons "connected" with them.^[98] It also extended reference to a "contract" to include any "transaction or arrangement" entered into after 22nd December 1980,^[99] whether or not constituting a contract, thus increasing the disclosure that needed to be given.
4.70      Pursuant to the joint recommendations of the Law Commission and the Scottish Law Commission in relation to the consolidation of the Companies Acts,^[100] section 63(3) of the 1980 Act was clarified to ensure that general declarations of interest by shadow directors were properly recorded in board minutes, and this clarification is reflected in the current section 382(2) of the Act.

Effect of section 317

4.71      Section 317 imposes a statutory duty on directors,^[101] including shadow directors,^[102] to disclose^[103] to the board^[104] any interest^[105] they^[106] may have in any proposed or subsisting contract or any proposed or subsisting transaction or arrangement with it^[107] (in the case of a transaction or arrangement, provided that the latter was made or entered into on or after 22nd December 1980);^[108] subject to the penalty of a fine^[109] for any failure to comply with the statutory duty in the section.^[110]
4.72      In relation to proposed contracts, the duty of disclosure is discharged either by making a declaration or by giving a general notice. If it is discharged by making a declaration, this must be made at the board meeting on the occasion that entering the contract is first "taken into consideration".^[111] If the director acquires his interest subsequently, the declaration must be made at the first board meeting after he became interested in the contract. However, a shadow director^[112] may only declare his interest in a contract (either proposed or subsisting) by a notice in writing to the directors (having the same effect as a verbal declaration and being duly deemed to be and minuted as part of the proceedings),^[113] which must be given to them prior to the date of the meeting at which an ordinary director would have needed to give notice under subsection (2).^[114]
4.73      Disclosure may alternatively be made by a general notice given to all the directors that the director is a member of a specified company or firm,^[115] and should be treated as interested in any contract made with it subsequent to the date of the notice, or that he should similarly be regarded as interested in any contract the company may make with a specified person with whom he is "connected" within the definitions set out in section 346 of the 1985 Act.^[116] A shadow director may similarly give a general notice under section 317(8)(b), which must be in writing.^[117] In the case of a director other than a shadow director, the notice is of no effect unless it is either given at a meeting of directors or the director takes reasonable steps to secure that it is brought in and read at the next board meeting after it is given.^[118]
4.74      In relation to contracts that the company has already concluded, but in which a director acquires an interest, the director must declare his interest the first full board meeting following the date on which the director becomes so interested. A shadow director must declare that he has acquired an interest in a contract already concluded by written notice to the directors.
4.75      Section 317(9) states that the obligation to make disclosure to the board does not alter the general law. Under the general law a director cannot vote on any matter in which he is interested or receive any benefit without the informed consent of shareholders. This informed consent is frequently given in the articles of association, but contingent on disclosure which complies with section 317. Thus articles of association commonly provide:

Subject to the provisions of section 199 of the Act a Director may contract with and participate in the profits of any contract or arrangement with the Company as if he were not a Director. A Director shall also be capable of voting in respect of any such contract or arrangement where he has previously disclosed his interest to the Company ... .^[119]

4.76      The current version of Table A^[120] also makes the permission given to directors to have an interest in contracts with the company subject to proper disclosure of such interests, but in this case the disclosure requirement is modified in accordance with the Jenkins Committee recommendations:

85. Subject to the provisions of the Act, and provided that he has disclosed to the directors the nature and extent of any material interest of his, a director notwithstanding his office...

(a) may be a party to, or otherwise interested in, any transaction or arrangement with the company or in which the company is otherwise interested;

(b) may be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by the company or in which the company is otherwise interested; and

(c) shall not, by reason of his office, be accountable to the company for any benefit which he derives from any such office or employment or from any such transaction or arrangement or from any interest in any such body corporate and no such transaction or arrangement shall be liable to be avoided on the ground of any such interest or benefit.

86. For the purposes of regulation 85...

(a) a general notice given to the directors that a director is to be regarded as having an interest of the nature and extent specified in the notice in any transaction or arrangement in which a specified person or class of persons is interested shall be deemed to be a disclosure that the director has an interest in any such transaction of the nature and extent so specified; and

(b) an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge shall not be treated as an interest of his.

4.77      It has been held in Australia that the breach of section 317 does not of itself give rise to an action for damages for breach of statutory duty.^[121] The point has not arisen in the United Kingdom but it is considered that the same would be held to be the position under UK law.
4.78      There is then the question of the effect of a breach of section 317 on the contract which the board subsequently approves. In Hely-Hutchinson v Brayhead^[122] this point was not contested but it was considered by the Court of Appeal. Their conclusion was that breach of the section did not of itself render the contract unenforceable. Where the director ought under the general law to have disclosed his interest, the consequence was that the contract was voidable.^[123] The contract would therefore be binding on the company unless it exercised its right under the general law to avoid it and that right had not been lost, for instance by affirmation or because the rights of a third party, who had no notice of the breach of section 317 and had acquired his rights for value, had intervened. Lord Pearson said:

The section merely creates a statutory duty of disclosure and imposes a fine for non-compliance.^[124]

4.79      In Guinness Plc v Saunders,^[125] Lord Goff, obiter, approved Lord Pearson's approach in Hely-Hutchinson adding that:

On this basis^[126] I cannot see that a breach of section 317, which is not for present purposes significantly different from section 199 of the Act of 1948, had itself any effect upon the contract ... As a matter of general law, to the extent that there was failure by Mr Ward to comply with his duty of disclosure under the relevant article of Guinness ... the contract (if any) between him and Guinness was no doubt voidable under the ordinary principles of the general law to which Lord Pearson refers.^[127]

4.80      In the same case, Lord Templeman in passing suggested that Hely-Hutchinson decided that section 317 rendered the contract voidable.^[128] However, Harman J, reviewing these decisions in the later case of Lee Panavision Ltd v Lee Lighting Ltd,^[129] concluded that Lord Templeman was incorrect in this and that "section 317 itself does not invalidate any contract"^[130] and was not "the foundation for the rule of law that a director or other fiduciary may not be concerned in a contract in which he also has a duty or an interest."^[131] That arose from the general law.

Stock Exchange requirements

4.81      The Stock Exchange Listing Rules require^[132] that listed company articles of association must:

prohibit a director from voting on any contract or arrangement or any other proposal in which he has an interest which (together with any interest of any person connected with him) is to his knowledge a material interest otherwise than by virtue of his interests in shares or debentures or other securities of, or otherwise in or through, the listed company.^[133]

4.82      Exceptions to this prohibition are permitted in respect of resolutions relating to the giving of security, guarantees or indemnities in relation to debts or other corporate obligations incurred or assumed by the director, or another person at the company's request, on behalf of the company or its subsidiaries;^[134] offers of securities in which a director may be entitled to participate;^[135] contracts or arrangements with other companies in which the director or persons connected with him have, to their knowledge, a 1 per cent or less share of the equity or voting rights;^[136] arrangements for the benefit of company or subsidiary company employees, where the directors entitlement is generally no more than that of other employees^[137] and Directors & Officers ("D&O") insurance cover.^[138]

Requirements of the Codes

(a) The corporate governance reports

4.83      The Cadbury Committee made no recommendations as to what a company's articles should contain, but stated that its Code of Best Practice was founded on the principles of "openness, integrity and accountability".^[139] In the context of contracts in which directors had an interest, it confined its explicit recommendations to directors' service contracts, noting that "executive directors should play no part in decisions on their own remuneration".^[140]
4.84      The Greenbury Committee, which focused exclusively on director's remuneration, echoed the Cadbury Committee's conclusion on this particular conflict of interest,^[141] and the Hampel Report supported its approach, emphasising that directors "should not participate in the decisions on their own remuneration packages".^[142]

(b) The Combined Code

4.85      Principle A.1.5 of the Combined Code simply states:

All directors should bring an independent judgement to bear on issues of strategy, performance, resources (including key appointments) and standards of conduct.

4.86      In relation to non-executive directors only, the Combined Code further identifies their "independent judgement" as being impliedly undermined where they are not "independent of management" or might be "materially" influenced by a "business or other relationship".^[143]

What must a director disclose?

4.87      Section 317(1) requires the director to disclose "the nature of his interest". It is not enough for him merely to state that he has an interest. He must also state what that interest comprises.^[144] Dealing with the same phrase in section 94 of the Canadian Companies Act 1937, Lord Radcliffe, giving the advice of the Privy Council said:

There is no precise formula that will determine the extent of detail that is called for when a director declares his interest or the nature of his interest. The amount of detail required must depend in each case upon the nature of the contract or arrangement proposed and the context in which it arises. His declaration must make his colleagues "fully informed of the real state of things" (see Imperial Mercantile Credit Assn v Coleman (1873) LR 6 (HL) 189 at p 201, per Lord Chelmsford). If it is material to their judgment that they should know not merely that he has an interest, but what it is and how far it goes, then he must see to it that they are informed (see Lord Cairns in the same case at p 205).^[145]

Disclosure of interests already known to the board

4.88      In Runciman v Walter Runciman plc^[146], a director's service contract had been extended by the board. The company's articles required that a director with an interest in a contract should disclose his interest at a directors' meeting in accordance with section 199 of the Companies Act 1948. No declaration in accordance with the terms of section 317 ever took place in relation to the director's interest in the extended term. Simon Brown J held that both a director's service contract and contractual variations of it would be caught by the provisions of the section.^[147]
4.89      However, the court held that in relation to the particular circumstances of the case, there was no requirement for a declaration.^[148] Simon Brown J held that:

Whatever may be the suggested advantages of a strictly formal approach to the section, such as a record of the proceedings and a reduced risk of directors abusing their position, no such advantage would have accrued here. It is certainly not suggested in this case that the plaintiff or his fellow directors in any way abused their position.^[149]

4.90      On this basis, and on the grounds that all affected parties were aware of the nature of the plaintiff's contract and his interest in its extension, his conclusion was that the "balance of justice" did not require that "a merely technical breach" of the statutory duty of disclosure should render the variation unenforceable.^[150]

Disclosure by a sole director

4.91      In Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald,^[151] the director was the sole member of the board and the question arose as to whether a declaration was required under these circumstances.
4.92      Emphasising the importance of section 317, Lightman J held that the object of the section was to ensure that the issue of a director's interest in a contract became an "item of business at a meeting of the directors".^[152] Thus, a sole director, holding a meeting at which only he was present:

must still make a declaration to himself and have a statutory pause for thought, though it may be that the declaration does not have to be out loud, and he must record that he has made the declaration in the minutes.^[153]

Voting by the interested director

4.93      In the United Kingdom the question whether a director can vote on a matter in which he is interested is usually dealt with in the articles. If the articles are silent, there is nothing in section 317 to prevent the director from voting.^[154] The position is the same in New Zealand where the matter may be dealt with by the articles but if it is not so dealt with the director may vote.^[155] In Australia however there is a provision, which applies only to public companies, which prevents a director of a public company from voting on any matter in which he has a material personal interest. What constitutes such an interest is not defined, but the prohibition on voting does not apply where the director's interest is held as a member of the company and in common with other members of the company, or where the transaction is a directors' insurance policy unless the company is the insurer. Moreover the prohibition does not apply if the board passes a resolution which specifies the director, the interest and the matter and states that the directors are satisfied that the interest of the director should not disqualify him from voting on the matter.^[156] The effect of the recommendations in the Hong Kong Consultancy Report would be that no director could vote on a matter in which he was interested.^[157]

Options for reform

4.94      We proceed generally on the basis that the Cohen Committee's views remain valid, that disclosure of contracts in which a director is interested should be mandatory, and if mandatory, as a practical matter, must be to the board so far as the statutory duty is concerned. This was the view of both the Cohen Committee and the Jenkins Committee. Below, we set out 13 options for reform (including, as option 1, no change to the current wording). Some of these suggest possible exemptions to the disclosure requirements (options 3, 4, 5, 6, 7, and 8) or other ways in which the requirements may be limited (option 2); others suggest ways in which the requirements could be tightened up (options 10, 11, 12 and 13). Option 9 concerns the consequences of breach of the provisions. With the exception of option 1 (no change) consultees may choose any number of these options. In considering the options for reform, consultees are asked to have regard to the principles set out in Part 2 above.

Option 1: No change

4.95      Consultees may take the view that the disclosure requirements contained in section 317 are operating satisfactorily in practice. The arguments in favour of creating exceptions to the requirements, or tightening up the provisions in certain respects, are discussed under the relevant options below.

Consultees are asked whether section 317 should be retained as it is.

Option 2: Limit the duty of disclosure to material interests only

4.96      On the face of it, it seems unnecessary that a director should have to disclose any interest however trivial. The alternative would be to confine the obligation to disclose to material interests.^[158] If that were to be done, how should "material" be defined? It is difficult to see how it could be defined in terms of a monetary amount. The choice would appear to be whether it means:

material in the sense that the board would normally consider a transaction of this type;

material to the director; or

material to the company.

4.97      Financial Reporting Standard 8 on Related Party Disclosures in the annual accounts states that:

Transactions are material when their disclosure might reasonably be expected to influence decisions made by users of general purpose financial statements. The materiality of related party transactions is to be judged, not only in terms of their significance to the reporting entity, but also in relation to the other related party when that party is

(a) a director, key manager or other individual in a position to influence, or accountable for stewardship of, the reporting entity; or

(b) a member of the close family of any individual mentioned in (a) above; or

(c) an entity controlled by any individual mentioned in (a) or (b) above.

By analogy to the first sentence quoted above, section 317 could define "material interests" as those whose disclosure might reasonably be expected to affect the decisions of the board.^[159] In the above passage materiality is to be judged both in terms of significance to the company and in terms of significance to the director concerned. By contrast, the recent Financial Reporting Standard for Smaller Entities does not require disclosure in the annual accounts of transactions which are not material to the company, thus making the financial amounts involved generally a critical factor. Section 139 of the Companies Act of New Zealand^[160] sets out a non-exhaustive list of situations which will result in a director being interested in a transaction with the company for the purposes of their section 317, but this approach is also likely to result in situations arising in which a director should be taken to be interested but which fall outside the statutory list.

Consultees are accordingly asked whether they consider that section 317 should only apply to material interests in a contract; and if so (a) whether "material" should be defined by statute, and (b) if so, whether it should mean those interests whose disclosure might reasonably be expected to affect the decision of the board or some other meaning.

Option 3: Exempt from the obligation of disclosure transactions or arrangements which either do not come before the board or a committee of the board, or do not require approval by the board or a committee of the board

4.98      The director's duty to disclose an interest in a contract^[161] in section 317 has been held to be a general obligation applying to all contracts and not only those that come before the company's board.^[162] In many large companies only contracts of very high value or policy importance require board approval. Section 317 thus places a heavy disclosure burden on directors in large companies who may have no knowledge, through their office, of minor contracts in which a disclosable interest of theirs has arisen. The burden is all the heavier as section 317 contains no de minimis threshold. The duty on directors to disclose very minor interests imposes, in turn, administrative burdens on companies in relation to the recording of those interests. The effect of this option would be that there would be no statutory duty to disclose interests in contracts which do not qualify for consideration by the board.
4.99      On the other hand, this option may result in there being insufficient protection or information for creditors or members, or may open up areas for dispute and litigation. For this reason, our provisional view is that there should be no exemption along the lines suggested above.

Consultees are asked whether they agree with our provisional view that section 317 should not exempt directors from the need to disclose their interests in transactions or arrangements which either do not come before the board, or a committee of the board, or do not require approval by the board, or a committee of the board.

Option 4: Exempt sole director companies

4.100      Both Cheffins and Gower criticise the Neptune case. Gower described it as "the apotheosis of meaningless disclosure".^[163] Cheffins said "the judiciary again adopted a highly technical and arguably unnecessary strict interpretation of legislative measures".^[164]
4.101      Does a disclosure of interest by a director to himself serve any useful purpose? It may have little effect on the director's decision.^[165] However it may facilitate record keeping and thus the process of liquidation, should the company become insolvent.^[166] The further question is whether, in this one case, disclosure should be to the shareholders.^[167] Our provisional view is that in a single director company there should be no obligation on a director to make any disclosure to the board. On the other hand, we consider that it would be appropriate for this information to be made available to the shareholders of such a company. At paragraph 4.118 we consider whether there should be disclosure of directors' interests to shareholders (for all companies - not just single director companies) both by means of a register of directors' interests and a report to shareholders in the annual accounts. This would serve a similar purpose to a requirement that directors of single director companies should disclose interests to the company in general meeting, and would in our view render such an additional requirement for single director companies unnecessary. If, however, the suggestion put forward at paragraph 4.118 is not adopted, then we provisionally consider that there should be a requirement that a director of a single director company should disclose interests to the company in general meeting. However, we would allow shareholders to waive or vary this duty by resolution or in the articles.^[168]

Consultees are accordingly asked whether they agree with our provisional views that:

(i) section 317 should not apply where there is only one director; and

(ii) if the suggestion put forward at paragraph 4.118 is not adopted, there should be a requirement that where there is only one director, the director should disclose interests to the company in general meeting, unless this requirement is waived by shareholders or varied by resolution or in the articles.

Option 5: Exempt from the obligation of disclosure interests in director's own service agreement

4.102      This option would be consistent with developing case law.^[169] In addition, there are already separate provisions for ensuring that shareholders can inspect directors' service contracts^[170] and for regulating the length of directors' service contracts.^[171] Our provisional view is therefore that there should be an exemption for a director's own service contract. The exemption would have to cover variations to service agreements, as well as the service agreement itself.

Consultees are accordingly asked whether they agree with our provisional view that section 317 should exempt directors from the need to make formal disclosure of their interest in their own service contracts.

Option 6: Exempt from the obligation of disclosure executive directors' interests in contracts or arrangements made for the benefit of all employees

4.103      The argument that a director should disclose his interest in a contract or arrangement diminishes if the interest which he has is as an employee and the benefit is one which is ordinarily made to the "company's" employees and on terms no less favourable.^[172] It is suggested that it is likely to be obvious to fellow directors that executive directors have an interest. On the other hand that will be obvious to executive directors too so it is hardly burdensome, and probably prophylactic, for them to make disclosure of their interest.

Consultees are accordingly asked whether there should be an exemption from disclosure under section 317 for benefits which a director receives which are ordinarily made to employees on terms no less favourable.

Option 7: Exempt from the obligation of disclosure interests arising by reason only of a directorship of, or non-beneficial shareholding in, another group company

4.104      It has been suggested that this exemption would be useful particularly where cross-guarantees are being taken from several members of a group^[173] in connection with banking facilities. However there is often a divergence between the interests of the different companies in this type of situation: they may for example be obtaining different benefits from the arrangements and be giving disproportionate amounts of security.^[174] Accordingly there is the possibility that this exemption would operate to the detriment of creditors. For this reason, we are provisionally against such an exemption.

(i) Consultees are asked whether they agree with our provisional view that there should not be excepted from disclosure under section 317 interests which a director has by reason only that he is a director of another company in the same group or has a non-beneficial shareholding in it.

(ii) If consultees disagree, do they consider that this exception should only apply to directorships and shareholdings in (a) wholly-owned subsidiaries, or (b) all subsidiaries (whether or not wholly-owned)?^[175]

Option 8: Exempt from disclosure an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge

4.105      While it is reasonable to expect a director to make himself aware of interests of which he ought to inform the board where that is reasonably possible, there would seem to be no point in putting him under a duty to disclose that of which he could not reasonably be aware. Still less is there any basis for subjecting him to criminal liability in these circumstances. It is to be noted that article 86(b) in the current Table A quoted in paragraph 4.76 above excludes this kind of interest. Our provisional view is therefore that there should be an exemption from disclosure for an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge.

Consultees are asked whether they agree with our provisional view that section 317 should exempt from disclosure an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge.

Option 9: Make any contract voidable where the requisite disclosure has not been made and provide a civil remedy for compensation or disgorgement, or alternatively provide that the section does not affect any resulting contract

4.106      At present, non-compliance with section 317 has no effect on the resulting contract. It is for consideration whether a failure by directors to disclose their interest in a contract with the company to the board in breach of section 317 should of itself render any such contract voidable at the instance of the company, subject to loss of the right of rescission under the general law. We discuss below the scheme which applies in relation to substantial property transactions under sections 320-322.^[176] An arrangement in contravention of section 320 is voidable, but section 322(2) sets out circumstances in which the company's right to avoid the arrangement is lost. This is essentially where:

(a) restitution is no longer possible or the company has been indemnified, or

(b) rights acquired by a third party would be affected, or

(c) the arrangement is affirmed by the company within a reasonable period.^[177]

4.107      If section 317 were to be amended so that breach of the section would render the contract voidable, a provision could also be included that the contract would cease to be voidable in similar circumstances to those set out (in relation to substantial property transactions) in section 322(2). As regards third party rights ((b) above) under section 322(2) the party must not be a party to the arrangment which breaches the section. Arguably, however, under section 317 it should be sufficient if the third party acted in good faith, for value and without actual notice of the breach of section 317, because the director's interest is indirect and it may be difficult for the counterparty to know of it.
4.108      Likewise, following the pattern in section 322(3), it is for consideration whether section 317 should also provide that where a director does not make the disclosure required by section 317, he should be liable to account to the company for any gain he makes from the breach or to indemnify it against any loss from the breach.
4.109      There may be cases, however, where the need for disclosure in accordance with section 317 serves no useful purpose, for example because the board is fully aware of the interest in any event. One possibility for making section 317 operate in a way which draws a fairer balance between the interests of members and directors would be to give the courts a dispensing power in relation to the consequencese of a breach of the section where a director had (without any intention to deceive) failed to make disclosure where it would have served no useful purpose. So far as the liability of a director is concerned (if the proposal in paragraph 4.108 is adopted), there would be no need for a new dispensing power, since the director could apply for relief under section 727 of the Companies Act 1985.^[178] However, it may be appropriate to give the court discretion to disapply any new provision rendering the contract automatically voidable (ie if the proposal in paragraphs 4.106-4.107 is adopted). This was in effect what happened in the Runciman case.^[179] However, the disadvantage of this course is that it would be uncertain when the contract was made, whether the court would (later) grant relief under such a discretionary power.
4.110      One final point to consider is the position of connected persons. We discuss below^[180] the extent to which a director is obliged to disclose transactions in which a person connected with him is interested. We provisionally recommend that section 317 should be amended to provide that a director should disclose the interests of connected persons if he is aware of them and if they would have to be disclosed if they were interests of his. If that proposal is adopted, the liability discussed in paragraph 4.108 could be extended to connected persons if, in addition, the connected person cannot show that he did not know of the failure to discharge that obligation. The company in general meeting would have power to release a claim to enforce any such liability against a director (or a connected person) in the usual way.
4.111      The issues we have raised in paragraphs 4.106-4.109 would lead to a considerable increase in the length of section 317.
4.112      If consultees are of the view that a breach of section 317 should not have the consequences described in paragraphs 4.106-4.109 above, then the question arises whether section 317 should be amended so as to include expressly a statement that a breach of the section has no effect on the resulting contract. This is the effect of the current law but it might make section 317 clearer and easier to understand if that was stated.
4.113      Our provisional view is that a breach of section 317 should render the contract voidable unless (a) one or more of the conditions set out in section 322(2) (in relation to substantial property transactions) apply, or (b) the court otherwise directs. We are also of the provisional view that a breach of section 317 should result in the director being personally liable to account for any profit he makes, and to indemnify the company for any loss it incurs as a result of the breach. We have not formed a provisional view on the extension of this liabiltiy to connected persons as this depends on the view taken in relation to option 11 below.

Consultees are accordingly asked:

(i) whether they agree with our provisional views that:

(a) a breach of section 317 should automatically result in the contract or arrangement being voidable unless the court otherwise directs;

(b) the contract or arrangement should cease to be voidable in the same circumstances as those set out in section 322(2);

(c) a breach of section 317 should result in the director being personally liable (a) to account for any profit he makes, and (b) to indemnify the company for any loss it incurs as a result of the breach.

(ii) whether, if the answer to (i)(a) is no, section 317 should be amended to state that it has no effect on the contract or arrangement.

(iii) whether, if section 317 is amended so as to require the disclosure of the interests of connected persons, the liability referred to in paragraph (i)(c) above should extend to connected persons, and if so whether connected persons should have a defence if they can show that they did not know of the director's failure to comply with the section.

Option 10: Disqualify directors of public companies from voting on matters in which they have an interest or a material interest

4.114      As already noted,^[181] in Australia there are provisions which prevent directors of public companies from voting on matters in which they are interested though this prohibition may be lifted by the board. In the United Kingdom, this matter is left to be dealt with by the articles. The Listing Rules require articles of listed companies to prohibit (subject to specified exceptions) an interested director from voting in respect of matters in which he has a material interest. We are not aware that the present situation is unsatisfactory. The City Group for Small Companies ("CISCO") has commented that smaller companies face particular difficulties in recruiting non-executive directors.^[182] They may thus face greater problems when directors can only vote in relation to issues in which they are disinterested or where they might be regarded as "independent".

Consultees are asked whether they consider that the Companies Act should prohibit directors of public companies from voting on matters in which they have a material interest and, if so, whether there should be any exceptions to this general rule.

Option 11: Require directors to disclose material interests of their connected persons of which they are aware

4.115      Under section 317 the present position as regards the interests of connected persons is as follows: (1) in the case of a transaction to which section 330 applies, a director is deemed to be interested in it if a connected person of his is interested in it^[183] and (2) in other cases he may be interested in a transaction because one of his connected persons is interested in it.^[184] Thus section 317 recognises that a director's judgment may be affected by the interests of his connected persons. The difficulty about the present section is that where test (2) applies it is uncertain when a director would be taken to be interested in a transaction because one of his connected persons is interested in it; indeed the existence of the second test seems to us to be well hidden and that the drafting of the section could usefully be clarified in any event. To resolve the disadvantage of uncertainty we provisionally consider that it would be better to provide that a director should disclose the interests of connected persons if he is aware of them and if they would have to be disclosed if they were interests of his.

Do consultees agree with our provisional view that section 317 should be amended to provide that a director should disclose the interests of connected persons if he is aware of them and if they would have to be disclosed if they were interests of his?

Option 12: Require that general notice under section 317(3) include details of the interest concerned

4.116      At present the subsection enables a director to give general notice of certain interests but does not require details of those interests to be given. It has been suggested that the formula in Table A (article 86(a)) could be followed, requiring disclosure of the "nature and extent" of any material interest. This would follow a recommendation made previously by the Jenkins Committee.^[185] It would also mean that the board would have to be informed if there was a change in that interest. Our provisional view is that this would be desirable because the present requirment does not reasonably give sufficient information to enable the board to assess the weight to be given to the views of the director having the interest.

Consultees are accordingly asked whether they agree with our provisional view that a general notice under section 317(3) should be required to state the nature and extent of the interest, and that the director should give notice amending these particulars if they change.

Option 13: Require a register of directors interests to be kept which would be open to inspection by members or require a report to be made to shareholders in the annual accounts of the nature of interests which directors had disclosed

4.117      In Part 3, it is suggested for reasons there given^[186] that there may be merit in moving towards a general principle of disclosure to shareholders of information concerning self-dealing and directors' contracts. This could be achieved by having a register of directors' interests along the lines of the register of directors' service contracts^[187] and/or a report to shareholders on the lines of a remuneration committee report. The information given could be subject to audit.^[188] There might have to be an exemption for information if the directors reasonably considered that disclosure of it would be harmful to the company.^[189] This would reduce some of the value of disclosure. The idea of disclosure to shareholders still however has considerable merit. First, as already noted in Part 2, disclosure can often lead to reticence about entering into transactions in which directors are interested and where this is desirable this may have the effect of raising standards of corporate behaviour. Second, it may often happen that all the board has an interest but yet is permitted to vote^[190] and in those circumstances the disclosure mandated by section 317 to the board alone seems to have little point. Third, section 317 is rightly criticised as giving no protection where all the board is dishonest, but it is difficult to devise any solution to meet that particular situation.^[191]
4.118      As against the view expressed in the preceding paragraph, paragraphs 15(c) and 16(c) of Schedule 6 to the Companies Act 1985, which we consider in Part 7 below,^[192] require the disclosure in the notes to the annual accounts of specified particulars of transactions and arrangements in which a director had directly or indirectly a material interest. However as we shall see this disclosure requirement is subject to a number of broad exemptions. Moreover these requirements only apply if the transactions or arrangements are actually entered into. Apart from Schedule 6, there are also requirements in the Listing Rules concerning related party transactions,^[193] and FRS 8 requires the disclosure in annual accounts of related party transactions: the exemptions provided by FRS 8 are not the same as those provided by Schedule 6.^[194] It is for consideration whether an additional requirement for a register of directors interests, which sets out particulars of interests which the directors have declared^[195] on a permanent and ongoing basis might not be a better way of monitoring compliance with section 317 and indeed compliance with Schedule 6, paragraph 15(c) and 16(c). The register would not necessarily cover the same ground as the Schedule 6/ FRS 8 disclosure, and it may be thought to convey more meaningful information than the details required to be disclosed under Schedule 6. The register would be open for inspection by members at the same times and in the same places as the section 318 register. The register would not wholly obviate the desirability of a report to shareholders as well since not every shareholder would wish or be able to exercise his right of inspection. As against these arguments, however, it would be inconsistent with the guiding principles which we have provisionally identified above^[196] to require the disclosure of too much information or the disclosure of information which is not useful to shareholders in performing their monitoring function, and to impose unwarranted cost burdens on companies.

Consultees are asked:

(i) whether a register of directors interests should be required to be kept which would be open to inspection by members;

(ii) whether a report should be required to be made to directors in the annual accounts of the nature of interests which directors had disclosed;

(iii) if the answer to (i) or (ii) is yes:

(a) whether there should be an exemption from disclosure for information which the directors reasonably consider it would be harmful to the company to disclose; and

(b) whether any information disclosed in the register or report should be audited.

Section 318: Directors' service contracts (1)

318. ((1) Subject to the following provisions, every company shall keep at an appropriate place(

(a) in the case of each director whose contract of service with the company is in writing, a copy of that contract;

(b) in the case of each director whose contract of service with the company is not in writing, a written memorandum setting out its terms; and

(c) in the case of each director who is employed under a contract of service with a subsidiary of the company, a copy of that contract or, if it is not in writing, a written memorandum setting out its terms.

(2) All copies and memoranda kept by a company in pursuance of subsection (1) shall be kept at the same place.

(3) The following are appropriate places for the purposes of subsection (1)...

(a) the company's registered office;

(b) the place where its register of members is kept (if other than its registered office);

(c) its principal place of business, provided that is situated in that part of Great Britain in which the company is registered.

(4) Every company shall send notice in the prescribed form to the registrar of companies of the place where copies and memoranda are kept in compliance with subsection (1), and of any change in that place, save in a case in which they have at all times been kept at the company's registered office.

(5) Subsection (1) does not apply to a director's contract of service with the company or with a subsidiary of it if that contract required him to work wholly or mainly outside the United Kingdom; but the company shall keep a memorandum...

(a) in the case of a contract of service with the company, giving the director's name and setting out the provisions of the contract relating to its duration;

(b) in the case of a contract of service with a subsidiary, giving the director's name and the name and place of incorporation of the subsidiary, and setting out the provisions of the contract relating to its duration,

at the same place as copies and memoranda are kept by the company in pursuance of subsection (1).

(6) A shadow director is treated for purposes of this section as a director.

(7) Every copy and memorandum required by subsection (1) or (5) to be kept shall, ... , be open to inspection of any member of the company without charge.

(8) If...

a) default is made in complying with subsection (1) or (5), or

b) an inspection required under subsection (7) is refused, or

c) default is made for 14 days in complying with subsection (4),

the company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine.

(9) In the case of a refusal of an inspection required under subsection (7) of a copy or memorandum, the court may by order compel an immediate inspection of it.

(10) Subsections (1) and (5) apply to a variation of a director's contract of service as they apply to the contract.

(11) This section does not require that there be kept a copy of, or memorandum setting out the terms of, a contract (or its variation) at a time when the unexpired portion of the term for which the contract is to be in force is less than 12 months, or at a time at which the contract can, within the next ensuing 12 months, be terminated by the company without payment of compensation.

General

4.119      Section 26 of the Companies Act 1967 introduced, for the first time, statutory provisions whereby the members of a company could inspect the service contracts of its directors. This was not in response to any Jenkins Committee recommendation. Section 26 of the 1967 Act was extended by the Companies Act 1980,^[197] to require disclosure of contracts of service between directors of the company and its subsidiaries.
4.120      Section 318 requires a company to keep a copy of any service contract^[198] between it (or a subsidiary of it) and any of its directors,^[199] or a written memorandum of terms of any such contract if not itself in writing, or a variation of any such contract,^[200] at either its registered office or the place where its register of members is kept or its principal place of business,^[201] provided the latter is "situated in that part of Great Britain^[202] in which the company is registered"(section 318(2)(c)).^[203]
4.121      All documents required to be kept under this section must be kept in the same place (sections 318(2) and 318(5)). This place must be notified^[204] to the registrar of companies (section 318(4)), together with any change of location, if it is not the company's registered office. Further, all such documents must be open to inspection and copying by any member of the company without charge (section 318(7)).^[205]
4.122      If an inspection is refused, the member can obtain a court order^[206] compelling the company to allow it access,^[207] and the company and every officer in default is liable to a fine and, for continued contravention, a daily default fine.^[208] Likewise, default in complying with subsection (4),^[209] or default in complying with subsections (1) and (5) may also result in the commission of an offence.^[210]
4.123      Copies of contracts of service requiring directors to work "wholly or mainly" outside the UK need not be kept, but the company must keep a memorandum setting out minimum stipulated information. In the case of contracts of service with the company itself, the memorandum merely has to name the director and set out the provisions governing the duration of the contract,^[211] with contracts with subsidiaries needing only to add the name and place of the subsidiary's incorporation.^[212] Although "mainly" presumably bears its normal meaning of more than half,^[213] it is not clear how the section applies to a director who works abroad during part of the contract and then wholly in the UK.
4.124      Further, contracts with less than 12 months to run and contracts that can be terminated with 12 months^[214] notice without payment of compensation are exempted from the provisions of the section.^[215]

The Stock Exchange Listing Rules

4.125      Rules 16.9 to 16.11 of the Listing Rules contain additional disclosure requirements:

(i) Rule 16.9 requires that directors' service contracts^[216] should be available^[217] for inspection by any person, whereas section 318 disclosure is restricted to members of the company;^[218]

(ii) Rules 16.9 to 16.11 make no distinction between UK and foreign based directors, thus not adopting the exemption in section 318(5);

(iii) Rules 16.9 to 16.11 do not exempt from disclosure contracts which require a director to work wholly or mainly outside the UK;^[219]

(iv) Rule 16.11, unlike s 318,^[220] requires not only the director's service contract itself be available for inspection, but if that document does not contain:

(a) the name of the employing company;

(b) the date of the contract, the unexpired term and details of any notice periods;

(c) full particulars of the director's remuneration including salary and other benefits;

(d) any commission or profit sharing arrangements;

(e) any provision for compensation payable upon early termination of the contract; and

(f) details of any other arrangements which are necessary to enable investors to estimate the possible liability of the company upon early termination of the contract;"

then that information must be attached to the service contract and also made available for inspection. In contrast, s 318(1)^[221] merely requires the service contract (if in writing) or a written memorandum of its terms be disclosed.

4.126      Rule 16.11(f)^[222] is significant, and catches for example golden parachute clauses.^[223]

The Combined Code

4.127      Listed companies are also required^[224] to make a statement in their annual report and accounts in relation to their compliance with the Combined Code.
4.128      Schedule B to the Combined Code requires that the remuneration package of each director, identified by name, should be disclosed,^[225] including pension entitlements earned during the year.^[226]

The City Code

4.129      Rule 25.4 of the City Code requires that certain particulars of the current or proposed offeree board's service contracts^[227] be included in its first major circular advising shareholders on an offer. The particulars required to be given are the directors' name, the contract's expiry date and the amounts of both fixed and variable remuneration. Service contracts are not required to be put on display. Particulars of contracts with less than 12 months to run need not be disclosed. If there are no service contracts with less than 12 months to run, this fact must be stated in the circular. There is no exemption equivalent to section 318(5).
4.130      If any service contracts of which particulars are required to be given have been entered into or amended within 6 months of the date of the document, particulars must also be given of the earlier arrangements. Again, if there were no earlier arrangements, this fact must be stated.

Options for reform

4.131      The possible deficiencies of section 318 seem to us to be:

(1) it is restricted to contracts of service;^[228]

(2) it does not require disclosure of all documents or terms collateral to the service contract;

(3) it does not conform to the Listing Rules;

(4) the exemption contained in subsection (5);

(5) the exemption contained in subsection (11); and

(6) it is over-complex.

4.132      We set out below 7 options for reform which (with the exception of option 1 which proposes no change) suggest ways of dealing with these problems. In considering the options for reform, consultees are asked to have regard to the principles set out in Part 2 above.

Option 1: No change

4.133      It can be argued that the level of disclosure required by section 318 is sufficient. We deal with the reasons for each suggested extension of section 318 under the relevant options below.
4.134      It can also be argued that any reform requiring a greater degree of disclosure would serve to increase company costs.

Consultees are asked whether section 318 should be retained as it is.

Option 2: The Secretary of State should have power to disapply section 318 to the extent that, in the Secretary of State's opinion, a company is already bound by sufficient comparable disclosure obligations under the Listing Rules

4.135      This option offers a limited change to avoid listed companies being subject to both statutory and Stock Exchange control. The cost saving value of this measure is likely to be small. The sanctions for breach of the Listing Rules are discussed in Part 1. If this option were followed, the criminal sanctions in section 318 would not apply to listed companies.
4.136      This option would not act to increase the disclosure requirements for unlisted companies and should not therefore be seen as an alternative to options 3 to 7.

Consultees are asked whether the Secretary of State should be able to disapply section 318 to the extent that, in the Secretary of State's opinion, a company is already bound by sufficient comparable disclosure obligations under the Listing Rules.

Option 3: Extend section 318 to contracts for services and non-executive directors' letters of appointment

4.137      The section currently requires that only contracts of service be disclosed, not contracts for services. Under section 319, "employment" includes employment under a contract for services.^[229]
4.138      The question also arises whether the section applies where non-executive directors are appointed by means of letters of appointment. We do not consider that this is generally a service contract.^[230]
4.139      It is arguably anomalous that contracts for services and non-executive directors' letters of appointment are not already within section 318. Any increase in costs is likely to be marginal. Our provisional view is that section 318 should be extended to contracts for services and letters of appointment of non-executive directors.

Consultees are asked whether they agree with our provisional views that:

(i) section 318 should require the disclosure of contracts for services and not just contracts of service; and that

(ii) section 318 should apply to letters of appointment for non-executive directors.

Option 4: Repeal of subsection (5) (Director to work abroad)

4.140      The subsection (5) exemption was introduced at a time when few company directors could take advantage of its provisions. It is unclear whether there was a particular reason for its introduction as opposed to a general concern to keep the section restricted. There may have been a concern that directors based in countries where they may have been at risk of kidnap or extortion might have derived some benefit from keeping the details of their remuneration secret. Nonetheless, it is difficult to conceive of a situation in which, in the absence of the exemption, kidnappers from (say) South America, for example, would have acquired shares in an English company^[231] and then travelled to its registered office in (say) Bradford in order to inspect directors' service contracts and assess a director's ransom potential, before returning home to abduct their target.
4.141      In any event, the exemption has been lost for directors of listed companies due to the disclosure requirements of the Listing Rules. These make no distinction between directors based in the UK or abroad (in fact, requiring that listed overseas companies disclose details of their directors' service contracts (see Rule 16.9(a)). Moreover, section 318(5) never provided any protection to any UK based director who was (for example) subject to a risk of kidnapping because of the ransom that could be extracted.
4.142      The benefit offered to directors of non-listed companies to avail themselves of the subsection (5) exemption is therefore the only issue to be considered in assessing the value of its retention. There seems no reason why directors of non-listed companies need protection if directors of listed companies do not require it.
4.143      Further, as business becomes increasingly global, the exemption may be applicable to a growing number of directors and may be used to avoid disclosure more frequently. If there is concern that certain information about directors working abroad should not be disclosed, the Seceretary of State could be given power to exempt prescribed information from disclosure. Our provisional view is therefore that the subsection (5) should be repealed.
4.144      If the section is not repealed, or if the Secretary of State is given the power suggested in the preceding parargraph, it should be made clear that the question whether a director works "mainly abroad" should be determined by assessing whether, at the material time, he is working mainly abroad. It should not be sufficient that in some periods he works mainly or exclusively abroad and in others in the UK.

Consultees are asked:

(i) whether they agree with our provisional view that section 318(5) should be repealed, and, if so, whether the Secretary of State should be given power to exempt prescribed information from disclosure in the case of directors working wholly or mainly abroad; and

(ii) whether, if there continues to be an exemption or a power to give exemption in respect of service contracts which require a director to work wholly or mainly abroad, it should be made clear that, in the case of a contract which requires a director to work abroad and in the UK for different periods of the contract, the exemption or power applies only in relation to the period for which he actually works mainly abroad.

Option 5: Repeal of subsection (11) (Contract with less than 12 months to run)

4.145      It has been said that, the equivalent exemption under the Stock Exchange's pre-1993 Listing Rules to section 318(5)^[232] was used as a widespread means of directors keeping their pay secret; thus it may be that, in relation to unlisted companies, the exemption in section 318(11) is being used in a similar way.^[233]
4.146      Further, the exemption will become increasingly important given the pressure that now exists to reduce the length of fixed-term contracts to a duration of less than 12 months.^[234]
4.147      As with subsection (5), the exemption will in practice only apply to directors in companies not subject to the Listing Rules.^[235] Many directors in these companies have fixed-term contracts in excess of 12 months in any event. Our provisional view is that subsection (11) should be repealed.

Consultees are asked whether they agree with our provisional view that section 318(11) should be repealed.

Option 6: Amend section 318 to require disclosure of particulars of terms collateral to the service contract

4.148      The need only to disclose the contract or a memorandum of its terms, without making available for inspection collateral documents or terms referred to therein, may result in shareholders being unable to assess, by inspection under section 318, the full value of the directors' remuneration.
4.149      On the other hand, to require disclosure of all collateral documents may be unduly burdensome. In addition, there may be some information that ought, arguably, to remain outside the public domain. A particular concern might attach to the disclosure of D&O insurance or kidnap and ransom insurance. Disclosure of these kinds of insurance may encourage claims. D&O insurance is now increasingly common.^[236] The answer here may be to give the Secretary of State power by order to grant exemptions from disclosure for prescribed information, for example, information which relates to insurance designed to ensure the personal safety of directors or their families.
4.150      This option would also increase the administrative costs on companies, and listed companies already undertake extensive disclosure.^[237]

Consultees are asked whether section 318 should require disclosure of particulars of terms collateral to the service contract, and, if so, whether the Secretary of State should have power to exempt prescribed information from disclosure.

Option 7: Allow public inspection of directors' service contracts

4.151      Unlike the Listing Rules, section 318 only gives members a right of inspection. Arguably, there are today others, such as potential investors, creditors and employees who also have a legitimate interest in inspection. This option thus proposes for consideration public inspection of directors' service contracts.
4.152      This option would increase administrative costs for unlisted companies.

Consultees are asked whether the statutory register ought to be open to public inspection (a) in the case of all companies, or (b) in the case of companies listed on the Stock Exchange or AIM only.

Section 319: Directors service contracts (2)

319. ((1) This section applies in respect of any term of an agreement whereby a director's employment with the company of which he is a director or, where he is the director of a holding company, his employment within the group is to continue, or may be continued, otherwise than at the instance of the company (whether under the original agreement or under a new agreement entered into in pursuance of it), for a period of more than 5 years during which the employment...

(a) cannot be terminated by the company by notice; or

(b) can be so terminated only in specified circumstances.

(2) In any case where...

(a) a person is or is to be employed with a company under an agreement which cannot be terminated by the company by notice or can be so terminated only in specified circumstances; and

(b) more than 6 months before the expiration of the period for which he is or is to be so employed, the company enters into a further agreement (otherwise than in pursuance of a right conferred by or under the original agreement on the other party to it) under which he is to be employed with the company or, where he is a director of a holding company, within the group,

this section applies as if to the period for which he is to be employed under that further agreement there were added a further period equal to the unexpired period of the original agreement.

(3) A company shall not incorporate in an agreement such a term as is mentioned in subsection (1), unless the term is first approved by a resolution of the company in general meeting and, in the case of a director of a holding company, by a resolution of that company in general meeting.

(4) No approval is required to be given under this section by any body corporate unless it is a company within the meaning of this Act, or is registered under section 680, or if it is a wholly-owned subsidiary of any body corporate, wherever incorporated.

(5) A resolution of a company approving such a term as is mentioned in subsection (1) shall not be passed at a general meeting of the company unless a written memorandum setting out the proposed agreement incorporating the term is available for inspection by members of the company both...

(a) at the company's registered office for not less than 15 days ending with the date of the meeting; and

(b) at the meeting itself.

(6) A term incorporated in an agreement in contravention of this section is, to the extent that it contravenes the section, void; and that agreement and, in a case where subsection (2) applies, the original agreement are deemed to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.

(7) In this section...

(a) "employment" includes employment under a contract for services; and

(b) "group", in relation to a director of a holding company, means the group which consists of that company and its subsidiaries;

and for purposes of this section a shadow director is treated as a director.

General

4.153      This section is derived from sections 47 and 63(1)^[238] of the Companies Act 1980, and contains controls to prevent directors arranging for themselves long-term service contracts with their companies. A White Paper on "The Conduct of Company Directors" issued in 1977^[239] recommended that directors' service contracts for longer than 5 years should be approved by the company in general meeting.^[240] A clause to implement this recommendation was contained in the draft Companies Bill 1978^[241], but the bill that was subsequently introduced was lost because of the 1979 General Election.
4.154      Section 319 requires shareholder approval to be obtained^[242] for any proposed term in any agreement^[243] whereby a director's employment^[244] with the company, or, if he is a director of a holding company, the group^[245] is to continue or may be continued, otherwise than at that company's instance for a period in excess of 5 years (see sections 319(1) and (3)) during which the company cannot terminate his employment by notice or can only do so in certain circumstances. Section 319 provides for aggregation of periods of employment where a new contract is to be entered into more than six months before the expiration of a previous agreement.^[246]
4.155      By section 319(6), failure to obtain the necessary shareholder approval renders the term in question void and the company can terminate the agreement (and, where section 319(2) applies, the previous agreement) by notice. Thus section 319(6) can apply to a previous agreement even if it would have fallen outside section 319 but for the company's entry into a new agreement.
4.156      If a company^[247] wishes to enter any fresh agreement, containing a term to which section 319(1) applies, the necessary approvals process is set out in subsections (3) and (5). First, subsection (3) stipulates that the subsection (1) term must be approved by a resolution of the company,^[248] or the holding company, in general meeting. Subsection (5) then provides that the resolution may not be passed unless a written memorandum which sets out the proposed agreement incorporating the term has been available for inspection by members of the company, not only at its registered office for a period of not less than 15 days^[249] culminating with the date of the meeting, but also at the meeting itself. Alternatively, a private company^[250] can use the written resolution procedure permitted by section 381A but in that case the document referred to in subsection (5) must be given to members of the company eligible to sign the resolution either at the time of signature or before.^[251] Thus although all members of the company, irrespective of their voting rights, will have access to the text of the proposed agreement if approval is to be obtained at a general meeting of the company,^[252] only members entitled to attend and vote at the meeting if one had been held will have access to its text if the approval is to be by written resolution.

Listed companies and self-regulation

4.157      Since section 319 was first introduced, there have been a number of self-regulatory developments affecting the service contracts of directors of listed companies.

(a) Recommendations of the Cadbury, Greenbury and Hampel Committees

4.158      The Cadbury Committee recommended that directors' service contracts should not exceed three years without shareholder approval. The Greenbury Committee thought that there was a strong case for setting notice or contract periods at, or reducing them to, one year or less, and that provisions for predetermined compensation on termination which exceeded one year's salary and benefits should be disclosed and the reasons for the longer notice periods explained.^[253]

The Hampel Committee recommended that:

boards should set as their objective the reduction of directors' contract periods to one year or less, but the committee recognises that this could not be achieved immediately.^[254]

(b) The Combined Code

4.159      Paragraphs B.1.7 and B.1.8 of the Combined Code state:

B.1.7

There is a strong case for setting notice or contract periods at, or reducing them to, one year or less. Boards should set this as an objective; but they should recognise that it may not be possible to achieve it immediately.

B.1.8

If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce after the initial period.

4.160      Paragraph 7 of Schedule B in Part 2 of the Combined Code, which contains provisions on what should be included in the Remuneration Report, adds:

Any service contracts which provide for, or imply, notice periods in excess of one year (or any provisions for predetermined compensation on termination which exceed one year's salary and benefits) should be disclosed and the reasons for the longer notice periods explained.^[255]

"Rolling" contracts, fixed-term contracts and long notice periods

4.161      The purpose of section 319 is to ensure that a company is not put under an obligation to employ a director for more than five years unless its members have approved the relevant term. Section 319 does not regulate the length of notice that the company can be required to give. However, the directors approving the contract may be in breach of duty under the general law if this is excessive.
4.162      Section 319 is not treated as prohibiting "rolling contracts". This is not a term of art. It appears to include contracts for periods of up to 5 years which might, for example, be replaced at the end of their first year with a new fixed term contract. The contract may be replaced either by agreement or automatically, subject to the company not giving notice that the replacement was not to take place. The view is taken that this practice is outside section 319 on the basis that as the old contract is brought to an end and is replaced by a new contract, there is no period of the old contract which is unexpired for the purposes of section 319(2). It also includes contracts for an indefinite duration terminable by the company on (say) two years notice. The agreement can be characterised as a contract for the notice period which rolls over daily. The contract may require the notice to be given on a particular day or in a particular period of the year.

Options for reform

4.163      We set out below 4 options for reform in respect of section 319 (including option 1 which is for no change to the wording). The question of repeal of section 319 is considered in Part 9.^[256] If consultees reject option 1 (no change) and are against repeal, they may choose more than one of the remaining options. In considering the options for reform, consultees are asked to have regard to the principles set out in Part 2 above.

Option 1: No change

4.164      It is arguable that section 319 is now well understood and confers adequate protection to shareholders, and therefore should not be changed in any of the ways specified below or at all.

Consultees are asked whether section 319 should be retained in its current form.

Option 2: Reduce the statutory period in section 319(1) from 5 years to 1, 2 or 3 years

4.165      The importance of limiting the length of fixed term contracts has been recognised in the reports of the Cadbury, Greenbury and Hampel Committees, as well as by the Stock Exchange through its adoption of the Combined Code. The final report of the Hampel Committee concluded that most companies had reduced directors' contracts from 3 years to 2, without cost to the company and that a general reduction to one year could not be achieved immediately.^[257] Research published in 1997 noted that 62 per cent of directors in 68 FTSE 100 companies had service contracts with notice periods of 2 years or more.^[258] However, data supplied to the Hampel Committee (by the Association of British Insurers) on compliance with the Cadbury and Greenbury codes in the 1994/5 and 1995/6 company reporting seasons indicated a marked decrease in, but not elimination of, the number of directors with rolling contracts of more than 3 years between the two years. This reducing trend is corroborated by PIRC's research which states that less than 5 per cent of directors in the largest 296 companies had contracts for 3 years or longer by 1996.^[259] Change is therefore occurring, and there is a question whether section 319 should be amended to force the pace of change or simply to reflect it.
4.166      Although the Combined Code now favours notice or contract periods being set at one year or less, its Provision B.1.8 notes that longer periods may be initially acceptable, in particular in the case of new directors recruited from outside the company. Shareholders could be asked to approve a longer period, though this may involve some cost and delay.
4.167      The position of smaller listed companies and unlisted companies must be considered.^[260] CISCO was established in 1992 as an independent organisation^[261] to voice the concerns of the smaller company sector of the London stock market.^[262] It has produced responses^[263] to the Cadbury and Greenbury Committee's reports and has most recently commented on the Stock Exchange's new Combined Code and related Listing Rules amendments. In its response to the Greenbury Report, CISCO supported a reduction in the length of service contracts to one year as a way of avoiding directors' being compensated for failure. However, its view was that most service contracts in smaller companies would typically be for two years, particularly due to the "higher risk of employment in a smaller company."^[264]
4.168      The protection offered by section 319 to unlisted companies may be as important as that offered to listed ones; on the other hand it may be in smaller companies that in order to attract directors it is necessary to give them longer contracts without shareholder approval. Apart from the potentially larger costs that may initially accrue to unlisted companies if the law is changed there is arguably no reason for listed and unlisted companies to be treated any differently under the section.

Consultees are asked:

(i) whether the statutory period in section 319(1) should be reduced to (a) one year, (b) two years, or (c) three years;

(ii) whether any reduction of the statutory period should apply either (a) to both listed and unlisted companies, or (b) only to listed companies.

Option 3: Amend section 319 to prohibit (without shareholder approval) the creation of "rolling contracts" having a notice or contract period in excess of the period permitted by section 319

4.169      As is described above, section 319 is treated as not prohibiting "rolling contracts".^[265] Thus a director may in practice be able to maintain a security of tenure for, effectively, in excess of five years without the company needing to seek shareholder approval for this arrangement. Section 319 would need to be amended to prevent a company giving valid notice beyond a maximum length. Shareholders would be free to approve a longer period. In addition, section 319 would need to be amended so that the length of the term of the prior contract is aggregated with the new contract, in a similar way to that which already occurs for contracts with 6 months still to run under section 319(2)(b), and with the same consequences. However this may catch situations which ought not to require shareholder approval, for example where a director who has a 5 year service contract as an executive director is promoted to finance director and offered a new 5 year contract. Moreover, this may cause a rise in remuneration levels, if the practice of rolling contracts is widespread.

Consultees are asked whether section 319 should be amended to prevent "rolling contracts" for a period exceeding the maximum term permitted by section 319 unless they are first approved by ordinary resolution.

Option 4 : Deem terms approved if notified and members raise no objection to the proposed term within a stipulated period

4.170      The argument raised against shareholder approval is that it may be costly, cumbersome and create uncertainty. One solution to terms requiring approval under section 319 is to make them subject to "negative approval". Thus the term could be made subject to an obligation on the part of the company to give notice to shareholders and to a notice by shareholders holding a specified percentage of shares carrying the right to vote to object with a set time limit. If no objection was raised, the term could then be deemed approved. If an objection was received, the term would require shareholder approval.^[266] This option could be in addition to, or in lieu of, the existing requirements for shareholder approval.
4.171      This solution would not eliminate uncertainty. It might in some cases offer a cheaper and quicker method of obtaining approval. However, if a meeting was required there would be a longer interval of time before it was held. There is also the problem of shareholder apathy. Shareholders may very well fail to consider the proposals with the result that the time for requiring a meeting passes by. In these circumstances the requirement for a meeting would not be an effective scrutiny of the transaction. We are provisionally against a "negative approval" procedure along these lines.

Consultees are asked whether they agree with our provisional view that section 319 should not be amended so as to permit a company to dispense with approval of the company in general meeting^[267] if a notice was given to members and there is no objection from a specified proportion of members within a specified period.

Sections 320-322: Substantial property transactions involving directors etc

320.((1) With the exceptions provided by the section next following, a company shall not enter into an arrangement...

(a) whereby a director of a company or its holding company, or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company; or

(b) whereby the company acquires or is to acquire one or more non- cash assets of the requisite value from such a director or a person so connected,

unless the arrangement is first approved by a resolution of the company in general meeting and, if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company.

(2) For this purpose a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value is not less than [£ 2,000] but (subject to that) exceeds [£100,000] or 10 per cent of the company's asset value, that is...

(a) except in a case falling within paragraph (b) below, the value of the company's net assets determined by reference to the accounts prepared and laid under Part VII in respect of the last preceding financial year in respect of which such accounts were so laid; and

(b) where no accounts have been so prepared and laid before that time, the amount of the company's called-up share capital.

(3) For purposes of this section and sections 321 and 322, a shadow director is treated as a director.

321.((1) No approval is required to be given under section 320 by any body corporate unless it is a company within the meaning of this Act or registered under section 680 or, if it is a wholly-owned subsidiary of any body corporate, wherever incorporated.

(2) Section 320 (1) does not apply to an arrangement for the acquisition of a non-cash asset...

(a) if the asset is to be acquired by a holding company from any of its wholly-owned subsidiaries or from a holding company by any of its wholly-owned subsidiaries, or by one wholly-owned subsidiary of a holding company from another wholly-owned subsidiary of that same holding company, or

(b) if the arrangement is entered into by a company which is being wound up, unless the winding up is a members' voluntary winding up.

(3) Section 320(1)(a) does not apply to an arrangement whereby a person is to acquire an asset from a company of which he is a member, if the arrangement is made with that person in his character as a member.

[(4) Section 320(1) does not apply to a transaction on a recognised investment exchange which is effected by a director, or a person connected with him, through the agency of a person who in relation to the transaction acts as an independent broker.

For this purpose an "independent broker" means...

(a) in relation to a transaction on behalf of a director, a person who independently of the director selects the person with whom the transaction is to be effected, and (b) in relation to a transaction on behalf of a person connected with a director, a person who independently of that person or the director selects the person with whom the transaction is to be effected;

and "recognised", in relation to an investment exchange, means recognised under the Financial Services Act 1986.]

322.((1) An arrangement entered into by a company in contravention of section 320, and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) is voidable at the instance of the company unless one or more of the conditions specified in the next subsection is satisfied.

(2) Those conditions are that...

(a) restitution of any money or other asset which is the subject-matter of the arrangement or transaction is no longer possible or the company has been indemnified in pursuance of this section by any other person for the loss or damage suffered by it; or

(b) any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would be affected by its avoidance; or

(c) the arrangement is, within a reasonable period, affirmed by the company in general meeting and, if it is an arrangement for the transfer of an asset to or by a director of its holding company or a person who is connected with such a director, is so affirmed with the approval of the holding company given by a resolution in general meeting.

(3) If an arrangement is entered into with a company by a director of the company or its holding company or a person connected with him in contravention of section 320, that director and the person so connected, and any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an arrangement, is liable...

(a) to account to the company for any gain which he has made directly or indirectly by the arrangement or transaction, and

(b) (jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction.

(4) Subsection (3) is without prejudice to any liability imposed otherwise than by that subsection, and is subject to the following two subsections; and the liability under subsection (3) arises whether or not the arrangement or transaction entered into has been avoided in pursuance of subsection (1).

(5) If an arrangement is entered into by a company and a person connected with a director of the company or its holding company in contravention of section 320, that director is not liable under subsection (3) if he shows that he took all reasonable steps to secure the company's compliance with that section.

(6) In any case, a person so connected and any such other director as is mentioned in subsection (3) is not so liable if he shows that, at the time the arrangement was entered into, he did not know the relevant circumstances constituting the contravention.

4.172      As noted in paragraph 1.9 above, the main provisions of these sections were introduced by the Companies Act 1980^[268] following a number of DTI inspectors' reports of the 1970s. The section overrides provisions which enable directors to acquire assets from their company or to transfer assets to them. We are not aware that the provisions now cause any great hardship or inconvenience

Section 320

4.173      Section 320 prohibits an arrangement for the transfer of a non-cash asset of the requisite value between companies and directors or directors of their holding companies (including shadow directors) or persons connected with them,^[269] unless those arrangements have been first approved by a resolution of the company and (where the director is a director of its holding company) the holding company in general meeting. Assets are "of the requisite value" if at the time the arrangement is made, they are worth more than the lower of £100,000 or a 10% share of the relevant company's net asset value, subject to a minimum of £2,000.
4.174      The definition of "non-cash asset" is contained in section 739(1). It means any property other than cash (including foreign currency). Section 739(2) provides:

A reference to the transfer or acquisition of a non-cash asset includes the creation or extinction of an estate or interest in, or a right over, any property and also the discharge of any person's liability, other than a liability for a liquidated sum.

This provision extends the meaning of transfer and acquisition of an asset so as to include the creation of interests over assets,^[270] such as the grant of a lease over land. The final words cover the case where a payment is made to discharge a sum other than an unliquidated amount. This sum may be owed by any person, which would in the absence of contrary indication include the company itself. However it has been held that the discharge by the company of a liability for damages for breach of a service contract to a director does not require approval under this section.^[271] It also appears that the section does not apply to covenanted payments under a director's service agreement, such as golden parachute payments.^[272]

Section 321

4.175      Section 321 provides exceptions to the prohibition in section 320:

(1) approval is required only if the company is a company within the meaning of the Companies Acts^[273] and even then approval is not required if the company is a wholly-owned subsidiary of a body corporate wherever incorporated;

(2) approval is not required if the transfer is between members of the same wholly-owned group;

(3) approval is not required if the arrangement is entered into by a company which is in compulsory or voluntary winding up, unless it is a members' voluntary winding up;

(4) approval is not required if the arrangement is one whereby a member acquires an asset from the company in his capacity as a member, such as where the company makes a bonus issue of shares to him;

(5) approval is not required for a transaction effected by a director or a connected person on a recognised stock exchange through an independent broker as defined in section 321(4).

4.176      It has been said that the exception for intra group transactions does not adequately protect the assets of companies given that the same directors may be standing on both sides of the transaction.^[274] We think that this criticism is misplaced. Section 320 at most requires a shareholder resolution and this is unnecessary in the case of a transaction between members of a wholly-owned group as the exception recognises. The fourth exception has also been criticised on the basis that it does not prevent share issues to directors.^[275] Again we do not see this as a substantial criticism since that exception will only apply where the issue is to a director as shareholder, for example a bonus issue or a rights issue.

Section 322

4.177      Section 322 sets out the liabilities arising from contravention of section 320. First, arrangements in contravention of section 320, or linked transactions, are voidable at the instance of the company. However, the transaction is not void ab initio^[276] or illegal by reason of section.^[277] The right to recission is lost if one of the conditions in section 322(2) is satisfied. Thus for instance it is lost if the arrangement is affirmed by the company in general meeting within a reasonable period.
4.178      Directors and their connected persons who enter into the arrangement or a linked transaction, directors whose connected persons enter into such an arrangement or transaction and directors who authorise the arrangement or transaction are liable to account to the company for any direct or indirect gains made as a result,^[278] or indemnify the company for any resulting loss or damage.^[279] Under subsection (4), this liability arises irrespective of whether the relevant arrangement or transaction has been avoided and acts without prejudice to any other concurrent liabilities. ^[280]
4.179      A director who would otherwise be liable under subsection (3) because a connected person of his entered into a transaction or arrangement with the company has a defence if he can show that he took all reasonable steps to secure the company's compliance with section 320.^[281] Both connected persons and merely authorising directors have a defence if they can show that at the time the relevant arrangement was entered into they did not know of the relevant circumstances constituting the contravention of section 320.^[282]
4.180      The nature of the profit to be accounted for under section 322(3) depends on the circumstances.^[283] However it is now clear that the liability to indemnify the company against loss extends to any subsequent decline in the market value of an asset after its acquisition.^[284] This result is consistent with what the position would be under the general law if the director entered into a transaction in breach of duty.
4.181      The mischief to which sections 320-322 are directed is not simply to prevent acquisitions at an inflated value and disposals at an under value. As Carnwath J said in British Racing Drivers' Club v Hextall Erskine^[285] as to the purpose of the section:

It is necessary to look at the purpose of s 320. The thinking behind that section is that if directors enter into a substantial commercial transaction with one of their number, there is a danger that their judgment may be distorted by conflicts of interest. The section is designed to protect a company against such distortions. It enables members to provide a check. Of course, this does not necessarily mean that the members will exercise a better commercial judgment; but it does make it likely that the matter will be more widely ventilated, and a more objective decision reached.

The Stock Exchange Listing Rules

4.182      Chapter 11 of the Stock Exchange's Listing Rules sets out requirements for all transactions between a listed company and any of its directors (and other related parties).^[286]
4.183      When a transaction^[287] between a listed company, or a subsidiary, and a relevant "related party"^[288] is proposed,^[289] the principal requirements of Chapter 11 are that, subject to the exceptions in paragraph 4.184 below, the company concerned must:

(a) send a circular to its shareholders^[290] containing specific information in addition to full particulars of the transaction.^[291] The circular must also contain a statement by the directors (excluding any "related party" director) that:

... the transaction is fair and reasonable so far as the shareholders of the company are concerned and that the directors have been so advised by an independent adviser acceptable to the Exchange.

(b) obtain shareholder approval for the transaction either prior to it being entered into, or if that is conditional upon such approval, before its completion; and

(c) take all reasonable steps to ensure that the related party's associates abstain from voting on the relevant resolution, and ensure that the related party itself abstains.^[292]

4.184      The following transactions are exempted from Chapter 11:

(1) transactions of a revenue nature in the ordinary course of business;^[293]

(2) where the company does not have any listed equity securities;^[294]

(3) where the company is an overseas company with a secondary listing on the Exchange;^[295]

(4) transactions involving the issue of new securities either for cash, the offer being made on the same terms for all existing securities holders, or relates to the exercise of conversion or subscription rights in a listed class of securities or previously approved in general meeting;^[296]

(5) transactions involving the receipt of cash by a director or the issue of options to him under an employees' share scheme or long-term incentive scheme;^[297]

(6) transactions involving the grant of credit to or by a related party on normal commercial terms in the ordinary course of business or on no more favourable terms than those offered to employees;^[298]

(7) the grant of indemnities to directors;^[299]

(8) underwriting of a securities issue on normal commercial terms;^[300]

(9) joint investment arrangements which in the opinion of an independent adviser are no less favourable to the company than the related party;^[301] and

(10) small transactions, assessed according to a series of percentage ratio formulas.^[302] There are stipulated calculations for 5 different ratios.^[303] In relation to assets, for example, the percentage ratio is calculated by dividing the net assets that are the subject of the transaction by the net assets of the listed company.^[304] A small transaction is one where each of the percentage ratios is less than or equal to 0.25%.^[305]

4.185      There are key differences between the provisions in the Listing Rules and sections 320-322. These can be identified as follows:

(1) Rule 11.1(i) exempts all transactions "of a revenue nature"^[306] made in the ordinary course of business from any need for shareholder approval.^[307]

(2) The definition of "related party" differs from that of "connected person" in section 346.^[308]

(3) Rule 11.4 requires that a related party that is also eligible to vote on a relevant transaction approval resolution should abstain from doing so. There is no such requirement in sections 320-321.

(4) Rule 11.4 (c) requires that shareholder approval must take place prior to the transaction being either entered into or completed. There is thus no provision equivalent to that of section 322(2)(c).

(5) Rule 11.7 (d) exempts transactions involving employee share schemes and directors' long term incentive schemes. These exemptions are not present in sections 320-322.

AIM Rules

4.186      The AIM rules do not require shareholder approval of related party transactions.

The City Code

4.187      The City Code contains further restrictions on transactions by offeree companies, or "those in which control (as defined) may change or be consolidated",^[309] during the course of a takeover or merger offer. These apply whether or not the other party is related to the company.
4.188      Its Rule 21 sets out:

During the course of an offer, or even before the date of the offer if the board of the offeree company has reason to believe that a bona fide offer might be imminent, the board must not, except in pursuance of a contract entered into earlier, without the approval of shareholders in a general meeting:–

(a) issue any authorised but unissued shares;

(b) issue or grant options in respect of any unissued shares;

(c) create^[310] or issue, or permit the creation or issue of, any securities carrying rights of conversion into or subscription for shares;

(d) sell, dispose of or acquire, or agree to sell, dispose of or acquire, assets of a material amount;^[311] or

(e) enter into contracts otherwise than in the ordinary course of business.

The notice convening such a meeting of shareholders must include information about the offer or anticipated offer.

Where it is felt that an obligation or other special circumstance exists, although a formal contract has not been entered into, the Panel must be consulted and its consent to proceed without a shareholders' meeting obtained.

Overlap with section 316(3) and the effect of the definition of "non-cash asset" in section 739

4.189      As is noted at paragraph 4.35 above, there is some doubt whether a payment made in settlement of a claim for contractual damages, not requiring shareholder approval under section 316(3), requires approval under section 320. We seek consultees' views on this at paragraph 4.193 below. ^[312]

Options for reform

4.190      We set out below 9 options for reform in respect of sections 320-322 (including option 1 which proposes no change). The question whether these sections should be repealed in their entirety is considered at Part 9 below.^[313] Option 2 concerns conditional contracts and option 3 concerns the overlap with sections 312-316. Options 6, 7 and 8 suggest ways in which, effectively, shareholder approval under the section could be replaced and can be viewed as alternatives. Consultees may choose any number of the other options which concern administrative receivers and court appointed administrators (option 4), listed companies (option 5), and remedies (option 9). In considering the options for reform, consultees are asked to have regard to the principles set out in Part 2 above.

Option 1: No change

4.191      One option would be to leave sections 320-322 as they stand and without any amendment. We would be grateful if consultees would please tell us if there are any difficulties with these sections apart from those specifically mentioned below.

Consultees are asked:

(i) whether they are aware of any difficulties in the operation of these provisions which ought to be addressed; and

(ii) whether they would favour retaining sections 320-322 as they stand.

Option 2: Amend section 320 so that it does not prohibit a company from making a contract which is subject to a condition precedent that the company first obtains approval under section 320

4.192      A practical difficulty pointed out to us is that the section does not enable a company to make a provisional arrangement to buy or sell an asset if approval under section 320 is required. This puts the company at a commercial disadvantage as it may not be able to rely on the other party remaining willing to enter into the transaction in the period necessary to hold a shareholders' meeting. Our provisional view is that section 320 should be amended to make it clear that contracts are possible subject to a condition precedent, under which the company comes under no liability whatever unless shareholder approval is first obtained.

Consultees are asked whether they agree with our provisional view that section 320 should be amended so that a company is able to enter into a contract which only takes effect if the requisite shareholder approval is obtained.

Option 3: Amend section 320 to make it clear that it does not apply to covenanted payments under service agreements with directors or to payments to which section 316(3) applies

4.193      We have indicated above,^[314] that as a matter of policy we consider that section 320 should not apply to damages for breach of contract or to covenanted payments if they are outside sections 312-316. This is because those sections constitute the special statutory regime for approval of payments for loss of office. If it is considered that certain payments for loss of office need not be subject to approval by shareholders under those sections, then it would not seem appropriate for similar approval requirements to be imposed by the more general provision of section 320. It appears that this is the position under the law at present, but there remains some doubt.^[315] We consider provisionally that section 320 should be amended to make the position clearer.

Consultees are asked whether they agree with our provisional view that section 320 should be amended to make it clear that it does not apply to covenanted payments under service agreements with directors or to payments to which section 316(3) applies.

Option 4: A safe harbour for transactions with administrative receivers and court-appointed administrators

4.194      At the present time transactions between a director and a liquidator are exempt except where the company is in members' voluntary winding up. It has been suggested to us that there should be a similar exemption for transactions with administrators and receivers.^[316] We can see that in the case of administrative receivers it would have been an objection that it was possible that the receiver was appointed by the director or a connected person since that situation might facilitate the activities of "phoenix" companies, which become insolvent, and then transfer their assets to a new creature company of the directors so that they can carry on trading. However, since the Insolvency Act 1986 receivers have had to be insolvency practitioners. Accordingly this objection is less strong. The objection does not in any event hold good in the case of a court-appointed administrator. However, the position of adminstrative receivers and administrators is not entirely analagous to that of a liquidator since the appointment of a liquidator (except in a members' voluntary winding up) would involve insolvency, while the appointment of an administrative receiver or administrator may not do so and members may continue, therefore, to have an interest in giving approval.

Consultees are asked whether they consider that an exception should be permitted in section 321 for administrators or receivers.

Option 5: Give the Secretary of State power to exempt listed companies from section 320

4.195      The view can be taken that in the case of listed companies the Listing Rules adequately specify the sort of related party transaction for which shareholder approval is required. In these cases it can be argued that the protection provided by the Listing Rules or AIM rules for shareholders is more complete than that provided by sections 320-322 since it disenfranchises the director and his related parties from voting on the transaction in question if the matter has to be put to the shareholders in general meeting.
4.196      It would also mean that in those cases where the company did not obtain shareholder approval but ought to have done so, the remedies contained in section 322 would no longer be available. The sanctions for breaches of the Listing Rules have been explained at paragraph 1.25 above.

Consultees are accordingly asked whether the Secretary of State should have the power to exempt listed companies from sections 320-322.

Option 6: Dispense with the requirement for shareholder approval where the independent non-executive directors approve the transaction

4.197      We appreciate that cost and delay is involved in calling a meeting to obtain shareholder approval. Moreover the requirement for shareholder approval may prevent directors from entering transactions which would be in the company's interests.^[317] These disadvantages could be eliminated if the company had an independent group of non-executive directors to whom the task of approving the transaction could be delegated.
4.198      While this alternative would no doubt be convenient and cost saving, there are several dangers in it. In particular, the transaction is not subject to beneficial disclosure to shareholders. It would be necessary to define independence. We suggest that in this context independence means two things. It means freedom from any business or other relationship which would materially interfere with their independent judgement.^[318] It also involves the ability to bring an independent mind to bear on a problem.^[319] It cannot of course in this field mean "unpaid". The greater difficulty would be in ensuring that the independent directors had in fact decided the matter in an independent way.^[320] Moreover there may not be the same full disclosure as would be required in a circular to shareholders.
4.199      In addition there are other practical difficulties with this suggestion. The statute would have to say what is to happen if not all the non-executive directors are available to approve the transaction or only a majority do so or some are not independent for the purposes of this transaction. Our provisional view is that the disadvantages outweigh the advantages of this proposal and that it should not be adopted.

Consultees are asked whether they agree with our provisional view that section 320 should not be amended so as to provide that alternative approval could be provided by a specified minimum number of non-executive directors of the company.

Option 7: Deem payments approved if notified and members raise no objection to the proposed payment within a stipulated period

4.200      The benefits of this change would be that it might save the costs of a meeting in some cases. On the other hand, as already stated,^[321] if a meeting was required there would be a longer interval of time before it was held. There is also the problem of shareholder apathy. Shareholders may very well fail to consider the proposals with the result that the time for requiring a meeting passes by. In these circumstances the requirement for a meeting would not be an effective scrutiny of the transaction. We are provisionally against this proposal.

Consultees are asked whether they agree with our provisional view that section 320 should not be amended so as to permit a company to dispense with approval of the company in general meeting if notice is given to members and there is no objection from a specified proportion of members within a specified period.

Option 8: Provide that shareholder approval is not required if an expert reports that in his opinion the transaction is fair and reasonable

4.201      Again this option is intended to reduce the cost of convening and holding a meeting. But there are difficulties in it. In particular how could shareholders be satisfied that the expert had the appropriate expertise and was independent of the company? His report would have to be open to inspection by shareholders and the transaction and his advice would have to be reported in the next financial statements.
4.202      A more fundamental objection is we believe this; the object of the section is to enable shareholders to take the decision whether a transaction should go ahead if the director has a conflict of interest and the transaction meets other conditions. We do not see that the expert's report on the terms would really address the problem which is whether the company should go ahead with the transaction at all given the conflict of interest. The expert would have no expertise in this. For all these reasons, we provisionally reject this option.

Consultees are asked whether they agree with our provisional view that companies should not be able to obtain an independent expert's report as an alternative to having to obtain shareholder approval under section 320.

Option 9: Provide that the statutory consequences of breach apply only where the company suffers prejudice

4.203      This option would deal with the hardship that might occur if the transaction were not prejudicial to the company but the company nonetheless sought to enforce some of its remedies under section 322. For instance, it might choose to sue the director for an account of profits.
4.204      One of the difficulties of this option would be that it would make it necessary to show whether the transaction was beneficial. It would accordingly reduce the certainty of the legal position as a result of the transaction. In addition, as explained in paragraph 3.21 the liability of the director to account for profit is a powerful incentive to him to fulfil his duty. We are provisionally against this option.

Consultees are asked whether they agree with our provisional view that section 322 should not be amended to the effect that a company will have no remedy under the section where the defendant or defender shows that it was not prejudiced by the transaction.

Section 322A: Transactions beyond the directors' powers

322A.((1) This section applies where a company enters into a transaction to which the parties include...

(a) a director of the company or of its holding company, or

(b) a person connected with such a director or a company with whom such a director is associated,

and the board of directors, in connection with the transaction, exceed any limitation on their powers under the company's constitution.

(2) The transaction is voidable at the instance of the company.

(3) Whether or not it is avoided, any such party to the transaction as is mentioned in subsection (1)(a) or (b), and any director of the company who authorised the transaction, is liable...

(a) to account to the company for any gain which he has made directly or indirectly by the transaction, and

(b) to indemnify the company for any loss or damage resulting from the transaction.

(4) Nothing in the above provisions shall be construed as excluding the operation of any other enactment or rule of law by virtue of which the transaction may be called in question or any liability to the company may arise.

(5) The transaction ceases to be voidable if...

(a) restitution of any money or other asset which was the subject-matter of the transaction is no longer possible, or

(b) the company is indemnified for any loss or damage resulting from the transaction, or

(c) rights acquired bona fide for value and without actual notice of the directors' exceeding their powers by a person who is not party to the transaction would be affected by the avoidance, or

(d) the transaction is ratified by the company in general meeting, by ordinary or special resolution or otherwise as the case may require.

(6) A person other than a director of the company is not liable under subsection (3) if he shows that at the time the transaction was entered into he did not know that the directors were exceeding their powers.

(7) This section does not affect the operation of section 35A in relation to any party to the transaction not within subsection (1)(a) or (b).

But where a transaction is voidable by virtue of this section and valid by virtue of that section in favour of such a person, the court may, on the application of that person or of the company, make such order affirming, severing or setting aside the transaction, on such terms, as appear to the court to be just.

(8) In this section "transaction" includes any act; and the reference in subsection (1) to limitations under the company's constitution includes limitations deriving...

(a) from a resolution of the company in general meeting or a meeting of any class of shareholders, or

(b) from any agreement between the members of the company or of any class of shareholders.

4.205      Section 322A was inserted by the Companies Act 1989 to create liabilities in relation to transactions involving directors, which exceed the powers under the company's constitution. The ultra vires doctrine was abolished by sections 35 and 35A of the Companies Act 1985, as amended by the 1989 Act, both as regards the company or a person who deals with the company, with the result that both can acquire rights and obligations with respect to an act which is not authorised by the company's objects clause. The validity of an act cannot now be called into question on the grounds of a company's lack of capacity.^[322] Section 35A creates a statutory presumption that the power of the board of directors to bind the company or to authorise others to do so is free of any limitation under the company's constitution unless the other party is shown not to have been acting in good faith.^[323]
4.206      Section 322A(1) renders voidable at the instance of the company a transaction whose parties include a director of the company or its holding company, and which exceeds any limitation on the director's powers under the company's constitution.^[324]
4.207      A transaction within the section ceases to be voidable if:

(a) restitution is no longer possible;

(b) the company has been indemnified;

(c) rights acquired by a person not party to it who acts in good faith for value and without actual notice of the excess of powers would be affected by the avoidance; or

(d) the transaction is ratified by the company in general meeting by ordinary or special resolution or otherwise as the case may require.

4.208      Under section 322A(3), the other party to the transaction (if a director of the company or its holding company or a connected person of, or company associated with, a director) and directors who authorised the transaction, are liable to account to the company for any profit and to indemnify it against any loss. This applies even if the transaction is not avoided.
4.209      We are not aware of any deficiency in section 322A.

Consulteees are asked whether they are aware of any deficiency in section 322A.

Section 322B: Contracts with sole member directors

322B.((1) Subject to subsection (2), where a private company limited by shares or by guarantee having only one member enters into a contract with the sole member of the company and the sole member is also a director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract are either set out in a written memorandum or are recorded in the minutes of the first meeting of the directors of the company following the making of the contract.

(2) Subsection (1) shall not apply to contracts entered into in the ordinary course of the company's business.

(3) For the purposes of this section a sole member who is a shadow director is treated as a director.

(4) If a company fails to comply with subsection (1), the company and every officer of it who is in default is liable to a fine.

(5) Subject to subsection (6), nothing in this section shall be construed as excluding the operation of any other enactment or rule of law applying to contracts between a company and a director of that company.

(6) Failure to comply with subsection (1) with respect to a contract shall not affect the validity of that contract.

4.210      This section^[325] relates to a company limited by shares and having only one member. Where an oral contact is entered into between the company and a sole member director^[326] its terms must be either set out in a written memorandum or recorded in the minutes of the first directors meeting following the making of the contract.
4.211      The Twelfth Company Law Directive, which this section is designed to implement,^[327] sought to harmonise divergences that had occurred between member states permitting single-member private limited liability companies. The aim of the directive was to encourage enterprise amongst small firms. The directive allowed member states to take action to lay down restrictions on the use of single-member companies. In fact the preamble to the directive specifically states that contracts between a sole member and his company as represented by him must be recorded in writing. From the United Kingdom point of view, this provision is likely to have most relevance in the context of winding up or administration. Those contracts entered into, not in the ordinary course of business, will be of particular interest to the liquidator, hence the need for them to be adequately evidenced. If there is a breach of the section, the company and every officer in default is liable to a fine.
4.212      There is a parallel section in Part XI of the Act, dealing with oral decisions by a single member which have the same effect as a resolutions of the company in general meeting.^[328] These decisions must also be recorded. In default a criminal offence is again committed. Both sections provide that the transaction is not affected by a failure to comply with the section.
4.213      We are not aware of any deficiency in this section.

Consultees are asked whether they are aware of any deficiency in section 322B.

Sections 323 and 327: Prohibition on option dealing by directors and their near families

323.((1) It is an offence for a director of a company to buy...

(a) a right to call for delivery at a specified price and within a specified time of a specified number of relevant shares or a specified amount of relevant debentures; or

(b) a right to make delivery at a specified price and within a specified time of a specified number of relevant shares or a specified amount of relevant debentures; or

(c) a right (as he may elect) to call for delivery at a specified price and within a specified time or to make delivery at a specified price and within a specified time of a specified number of relevant shares or a specified amount of relevant debentures.

(2) A person guilty of an offence under subsection (1) is liable to imprisonment or a fine, or both.

(3) In subsection (1) ...

(a) "relevant shares", in relation to a director of a company, means shares in the company or in any other body corporate, being the company's subsidiary or holding company, or a subsidiary of the company's holding company, being shares as respects which there has been granted a listing on a stock exchange (whether in Great Britain or elsewhere);

(b) "relevant debentures", in relation to a director of a company, means debentures of the company or of any other body corporate, being the company's subsidiary or holding company or a subsidiary of the company's holding company, being debentures as respects which there has been granted such a listing; and

(c) "price" includes any consideration other than money.

(4) This section applies to a shadow director as to a director.

(5) This section is not to be taken as penalising a person who buys a right to subscribe for shares in, or debentures of, a body corporate or buys debentures of a body corporate that confer upon the holder of them a right to subscribe for, or to convert the debentures (in whole or in part) into, shares of that body.

327.((1) Section 323 applies to...

(a) the wife or husband of a director of a company (not being herself or himself a director of it), and

(b) an infant son or infant daughter of a director (not being himself or herself a director of the company),

as it applies to the director; but it is a defence for a person charged by virtue of this section with an offence under section 323 to prove that he (she) had no reason to believe that his (her) spouse or, as the case may be, parent was a director of the company in question.

(2) For purposes of this section...

(a) "son" includes step-son, and "daughter" includes step-daughter ("parent" being construed accordingly),

(b) "infant" means, in relation to Scotland, [person under the age of 18 years], and

(c) a shadow director of a company is deemed a director of it.

General

4.214      Section 323^[329] makes it a criminal offence for directors (including shadow directors) of a company to buy "put" and "call" options in listed shares or debentures in that company or a company of the same group. The prohibition extends to the spouses and minor children of directors.^[330]
4.215      In Part 9, we provisionally recommend the repeal of section 323. In this part we set out various substantive improvements which might be made if that provisional recommendation is not accepted.
4.216      Section 327 extends the prohibition in section 323 to spouses and minor children (not themselves being board members) or directors. In this section "director" includes a shadow director. However, it is a defence for a person charged under this section to show that he had no reason to believe his spouse or parent was a director of the company in question. This extension was first enacted in 1967. It does not derive from any recommendations of the Jenkins Committee but it can be inferred that the purpose was to prevent the mischief to which the prohibition was directed being circumvented by spouses and children dealing in options instead of the director. Section 327, like section 346, refers to spouses but not to persons with whom a director may be living as man and wife. We discuss under section 346 below in the context of connected persons whether the references to spouses and minor children should be extended to include cohabitants and natural children and other children of the cohabitant who is not a director.

Insider dealing

4.217      The Jenkins Committee considered that a victim of insider dealing by a director of a company "who, in any transaction relating to the securities of his company or of any other company in the same group, made improper use of a particular piece of confidential information which might be expected materially to affect the value of those securities" should have a civil remedy. However, this recommendation was not implemented. Indeed, until 1980,^[331] there was no specific statutory regulation of insider dealing. However, the Jenkins Committee recommendation on dealings by directors in options to purchase securities of their own company was implemented by section 25 of the Companies Act 1967, from which section 323 is derived. ^[332]
4.218      The Jenkins Committee thought that directors' dealings in put and call options should generally be prohibited because:

[a] director who speculates in this way with special inside information is clearly acting improperly, and we do not believe that any reputable director would deal in such options in such circumstances.^[333]

The Criminal Justice Act 1993

4.219      The Criminal Justice Act 1993 ("CJA"), Part V, implementing provisions of the European Council Directive Co-ordinating Regulations on Insider Dealing (89/592/EEC), now makes it an offence for an individual who has information as an insider,^[334] to deal, on a regulated market or whilst acting as or through a professional intermediary,^[335] in price-affected securities in relation to that information.^[336] An individual is also guilty^[337] of insider dealing if he encourages another to deal in the same circumstances or improperly discloses inside information to another.^[338]
4.220      Under section 60(1), the Act defines a "regulated market" as:

any market, however operated, which, by an order made by the Treasury, is identified (whether by name or by reference to criteria prescribed by the order) as a regulated market for the purposes of this part.

4.221      Currently, regulated stock exchanges in relation to the Act include major exchanges in EU states as well as NASDAQ in the USA, although the New York Stock Exchange is not included.^[339]
4.222      Section 323 however applies to the purchase of options whether on or off market.

The Stock Exchange Model Code

4.223      The Model Code,^[340] which is set out in Appendix E below restricts the freedom of directors in listed companies dealing in the securities of the companies concerned. The Model Code imposes "closed periods" within which directors cannot deal in the securities of their company, including options (although in some special circumstances options dealing is permitted).^[341] Rule 16.18^[342] of the Listing Rules requires companies to ensure that their directors, and employees and directors in the same group likely to have unpublished price-sensitive information, comply with a code no less exacting than the Model Code.
4.224      In Chase Manhattan Securities v Goodman,^[343] Knox J held that the obligation to operate internal dealing codes fell on companies and not on individual directors. Nevertheless, it was the view of Knox J that directors were under an obligation to the company to comply with the Model Code^[344] if aware of its terms, even in the absence of their company adopting a code of its own.^[345]

Options for reform

4.225      Our provisional recommendation is in fact that section 323 should be repealed, and this is discussed in Part 9 below.^[346] However, we put forward below two suggestions for substantive improvements on the basis that that provisional recommendation is not in due course adopted (options 2 and 3). We also include an option of no change (option 1).

Option 1: No change

4.226      It could be argued that section 323 should be retained as it has a more restricted application than the CJA. Section 323 and the Listing Rules are only applicable to companies listed on the Stock Exchange. The purchase of put and call options trading is highly geared trading in the company's securities,^[347] and is imprudent for directors.

Consultees are asked whether section 323 should be left unchanged.

Option 2: Make off-market dealings in options with inside information an offence

4.227      If the section is retained, another option would be to ensure that its provisions were reformed in order to be consistent with both the policy of the CJA and the Model Code requirements. Thus section 323 could be limited to making off-market dealing in put and call options with inside information a criminal offence. The overlap between the CJA and section 323 could then be reduced.
4.228      A disadvantage in relation to this option would be that even though the legislation would be more consistent, section 323 would become a third source for prohibitions on insider dealing and it would be illogical to restrict it to directors and for it not, for example, to apply to employees with access to unpublished price-sensitive information. Now that insider dealing is an offence, it may not be justified to retain section 323 in this restricted form.

Consultees are asked whether, if section 323 is not repealed, it should be amended so that it applies only to off market dealings in options on the basis of inside information.

Option 3: No change, but exempt dealings in options under a scheme for the benefit of employees

4.229      It has been suggested that the purchase of options from the trustees of an employee share trust should be exempted from any retained prohibition.^[348] Employee share trusts are common. The section does not apply to options to subscribe for shares^[349] and incentive schemes involving the grant of options to subscribe are therefore not affected. Arguably there is no reason why schemes which provide for options to purchase shares should not also be excluded. Indeed, they may well be preferable, because they do not involve the dilution of existing shareholdings since no new shares are required to be issued to participants. The exclusion would be limited to the purchase of options under schemes offering comparable benefits to directors and employees in general.^[350] Only an executive director could therefore benefit.

Consultees are asked whether, if section 323 is not repealed, it should be disapplied in relation to the purchase of options under a scheme for the benefit of employees.^[351]

Note 1   We also deal with s 327 in this part which extends the application of s 323; see para 4.216 below. We deal with s 311, which we provisionally recommend should be repealed in Part 9 (see paras 9.30-9.32 below).    [Back]

Note 2   With the exception of s 327 which is included in this part; see n 1 above.    [Back]

Note 3   Eg ss 322A and 322B (paras 4.209 and 4.213), and ss 343-344 (para 7.17).     [Back]

Note 4   In two cases we have not put forward options for reform, but simply asked consultees if they are aware of any deficiencies in respect of the sections. These are ss 322A and 322B; see paras 4.205-4.213 below.    [Back]

Note 5   See para 1.1 above.    [Back]

Note 6   See paras 9.3-9.28 below.    [Back]

Note 7   Ibid.    [Back]

Note 8   Ibid.    [Back]

Note 9   See para 9.33 below, where we provisionally recommend that the section should be repealed.     [Back]

Note 10   See para 1.12 above.    [Back]

Note 11   See para 3.30 above.    [Back]

Note 12   See the Table at para 3.52 above.    [Back]

Note 13   See para 4.172 et seq below.    [Back]

Note 14   See para 3.72 above.    [Back]

Note 15   See for example the question whether s 312 should cover covenanted payments, para 4.14 et seq below; and the question whether s 317 should impose a duty to disclose non-material interests, para 4.97 below.    [Back]

Note 16   See for example the question whether s 317 should contain a code of civil remedies for breach of the duty imposed by the section: see 4.106 below; and the question whether s 320 should prohibit conditional agreements: see para 4.192 below.    [Back]

Note 17   See for example the question whether s 320 should apply to payments which are within s 312-6: see para 4.193 below.    [Back]

Note 18   See for example the question whether s 317 should apply to sole director companies: see para 4.100 below.    [Back]

Note 19   See for example the consideration of the possibilities of informing shareholders and allowing them to call for a meeeting in paras 4.54 and 4.200 below, and the possibility of approval by independent non-executive directors of substantial property transactions.    [Back]

Note 20   Elements of all the sections, apart from s 312 which was introduced in 1947 on the recommendation of the Committee on Company Law Amendment 1945 (the "Cohen Committee") (see Cmd 6659, Recommendation VI, p 52), were present in the Companies Act 1928.    [Back]

Note 21   For the meaning of director see paras 17.2-17.3 below, which discusses the question whether these sections should apply to shadow directors.    [Back]

Note 22   Section 312.    [Back]

Note 23   Section 313.    [Back]

Note 24   See s 314(1).    [Back]

Note 25   Section 312; see Re Duomatic Ltd [1969] 2 Ch 365.    [Back]

Note 26   Section 314(2).    [Back]

Note 27   See Report of the Company Law Committee ("the Jenkins Report") (1962) Cmnd 1749, paras 92, 93, 99(h)(i) and (j).    [Back]

Note 28   [1978] AC 537, PC.    [Back]

Note 29   See para 4.12 above.    [Back]

Note 30   Para 92(a).     [Back]

Note 31   See para 93.    [Back]

Note 32   For example, because he has a claim under a quantum meruit.    [Back]

Note 33   [1978] AC 537, PC.    [Back]

Note 34   1997 SLT 1361.    [Back]

Note 35   [1964] VR 193; see Hudson J at p 199.    [Back]

Note 36   [1978] AC 537, 546.     [Back]

Note 37   Gower's Principles of Modern Company Law (6th ed, 1997) p 815.    [Back]

Note 38   This is considered below; see paras 4.25-4.27.     [Back]

Note 39   Cf section 319 post.    [Back]

Note 40   And in certain circumstances individual shareholders: see generally Shareholders Remedies (1997) Law Com No 246.    [Back]

Note 41   Eg on a takeover.    [Back]

Note 42   1997 SLT 1361; [1998] BCC 248.    [Back]

Note 43   1997 SLT 1361, per Lord Osborne at p 1365G-I.    [Back]

Note 44   "...there are many instances where well-known individuals, whose experience and reputation have been quickly recruited by outsiders, have been able to continue being remunerated during what would otherwise have been the balance of their contract. Nevertheless, judging from published information, this factor is by no means always taken into account". Letter A J Mezzetti, Times Business News, 4 October 1994.    [Back]

Note 45   See paras 4.59 and 10.40 below.    [Back]

Note 46   See the Hampel Report, para 4.10.    [Back]

Note 47   Hampel Report, para 4.10, pp 35-36. See the Scottish Law Commission's discussion paper on Penalty Clauses (1997) Scot Law Com No 103.     [Back]

Note 48   See section 316(3).    [Back]

Note 49   See B.3.5 in Appendix D below.    [Back]

Note 50   Rule 21, (d). "Material amount" is defined for this purpose in Note 2 to the Notes on Rule 21.    [Back]

Note 51   Rule 21(e).    [Back]

Note 52   See also Chapter 11 of the Listing Rules, referred to in para 4.182 below.    [Back]

Note 53   See para 4.23 above.    [Back]

Note 54   Gooding v Cater (unreported) 13th March 1989.     [Back]

Note 55   See para 4.193 below.    [Back]

Note 56   Section 426(2). Directors have a duty to supply the relevant information to the company, and in default are liable to a fine: s 426(7).    [Back]

Note 57   See s 314(1)(d) which speaks of "any other offer which is conditional on acceptance to a given extent".    [Back]

Note 58   See n 73 below.    [Back]

Note 59   See para 10.25 below.    [Back]

Note 60   See paras 9.22-9.28 below.    [Back]

Note 61   See para 10.37 below.    [Back]

Note 62   Para 2.17(1) above.    [Back]

Note 63   See para 4.28 above.    [Back]

Note 64   By "golden hello" payment we mean a lump sum payment made to a director to induce him to take up employment with the company.    [Back]

Note 65   But see the more detailed discussion in Part 9 below.    [Back]

Note 66   See section 319 and paras 4.153-4.171 below.    [Back]

Note 67   See paras 3.67-3.69 above.    [Back]

Note 68   This would be in conflict with our certainty principle in para 2.17(7) above.    [Back]

Note 69   See para 4.13 above.    [Back]

Note 70   See ss 317(6), 322A(1)(b) and 328(3)(b) for example.    [Back]

Note 71   Jenkins Report para 93.    [Back]

Note 72   Under the general law, the circular must give full and proper disclosure of the purpose of the meeting: Kaye v Croydon Tramways [1898] 1 Ch 358.     [Back]

Note 73   There is no provision for excluding any holder of shares of the same class, as there would be if the court convened a meeting under section 425 of the Companies Act 1985: see Re Hellenic & General Trust Ltd [1976] 1 WLR 123. For definitions of "associate", see s 430E of the Companies Act 1985 and the definition of "associate" in the City Code.    [Back]

Note 74   See above paras 4.30 - 4.32.    [Back]

Note 75   In para 10.40 below, we consider whether the payment of funds in breach of ss 312-314 should be a criminal offence.    [Back]

Note 76   Companies Act 1985, Sched 6, para 8.    [Back]

Note 77   Guinness plc v Saunders [1990] 2 AC 663, at 694E-F.    [Back]

Note 78   As amended by sections 60, 63(3) and Sched 3, para 25 of the Companies Act 1980 and (s 80 and Sched 2 of the 1980 Act so far as they affected the fine imposed by s 199(4) of the 1948 Act).    [Back]

Note 79   Before 1928, statute law, although dealing with the issue of directors' interest in contracts with the company, had not sought to impose any duty of disclosure. See s 29 of the Joint Stock Companies Act 1844, which disqualified the director from acting or voting as a director in relation to any contract in which he was interested, and required shareholders' approval of the same, and s 85 of the Companies Clauses Consolidation Act 1845, which disqualified a director with a conflict of interest from voting or acting.    [Back]

Note 80   See para 4.69 below.    [Back]

Note 81   Pursuant to provisions then found in s149(3) of the Companies Act 1929 and now in s 317(3), excluding the later added s317(3)(b), of the Companies Act 1985.    [Back]

Note 82   The Cohen Report, para 95, p 50. See also Recommendation V, p 52. Section 120 of the 1929 Act is now in s 382 of the 1985 Act.     [Back]

Note 83   Now s 317(4).    [Back]

Note 84   The Jenkins Report, para 95, p 33 and Recommendation (l), para 99, p 36.    [Back]

Note 85   The Jenkins Report; Recommendation (l), p 36.    [Back]

Note 86   Now s 317(3).    [Back]

Note 87   The Jenkins Report, para 95.    [Back]

Note 88   In particular because the director would be drawing part of his remuneration for managing the company "indirectly through the agency". See the Jenkins Report, para 96, pp 33-34.    [Back]

Note 89   Although by ss 15-24 of the Companies Act 1967, the contents of directors' reports were expanded to include declarations as to directors' interests in subsisting and pre-existing contracts: see s16(1)(c) of the 1967 Act (repealed by the Companies Act 1980, its provisions becoming part of s 54 of the 1980 Act).    [Back]

Note 90   Clause 47, subsections (1) and (2) of the Bill stated: (1) Subject to the provisions of this section, it shall be the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company (whether or not a contract coming before a meeting of the directors of the company) as soon as practicable to declare the nature of his interest to the other directors. (2) Where a director gives to the directors of the company a general notice stating that, by reason of the facts specified in the notice, he is to be regarded as interested in contracts of any description which may subsequently be made to the company, that notice shall be deemed for the purposes of this section to be a sufficient declaration of his interest, so far as attributable to those facts, in relation to any contract of that description which may subsequently be made by the company: but no such general notice shall have effect in relation to any contract unless it is given before the date on which the question of entering into the contract is first taken into consideration on behalf of the company.    [Back]

Note 91   See clause 47(4).    [Back]

Note 92   The Report of the Committee of Enquiry on Industrial Democracy (the "Bullock Report"), of January 1977, touched on the question of a director's fiduciary duty to the company in the context of outside interests, but only in the specific context of employee representatives on boards.    [Back]

Note 93   See The Conduct of Company Directors (1977) Cmnd 7037, paras 16-18, pp 4-5.    [Back]

Note 94   Changes in Company Law (1978) Cmnd 7291.    [Back]

Note 95   Interestingly, the Bill adopted the Jenkins Committee's "material interest" threshold; see clause 52(1)(a).    [Back]

Note 96   See ss 60, 63(3) and para 25 of Sched 3.    [Back]

Note 97   See ss 317(8) and 741(2) of the Companies Act 1985 and s 63(3) of the Companies Act 1980.    [Back]

Note 98   See ss 317(3)(b) and 346 of the Companies Act 1985 and para 25, Sched 3 of the Companies Act 1980, and para 4.115 below.    [Back]

Note 99   See ss 317(5) and (6) of the Companies Act 1985 and s60 of the Companies Act 1980.    [Back]

Note 100   See Law Com No 126 and Scot Law Com No 83 (1983) Cmnd 9114, Amendment No 50, pp 34-35.    [Back]

Note 101   Section 317(1).    [Back]

Note 102   Section 317(8).    [Back]

Note 103   Although the duty is one of disclosure, it is satisfied only by "declaration", apart from the instances in which the use of a notice is permissible. The degree of detail required to satisfy the requirement for disclosure will depend on the circumstances of the case. See Gary v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 PC.     [Back]

Note 104   Section 317(2) and (3). See also Guinness plc v Saunders [1988] 1 WLR 863.    [Back]

Note 105   Even if the benefit is only nominal: see Todd v Robinson (1884) 14 QBD 739, CA.    [Back]

Note 106   For the position in respect of interests of connected persons, see paras 4.110 and 4.115 below.    [Back]

Note 107   Including their own contract of service and any variation in it (see Runciman v Walter Runciman plc [1992] BCLC 1084 and, further ss 317(1), (5), (6) and (9) and s 330 of the Companies Act 1985) and transactions and arrangements described in s 330 of the Act. There is authority to suggest that that the section is not restricted only to contracts that come before the board (see Neptune v Fitzgerald [1995] 1 BCLC 352).     [Back]

Note 108   Section 317(5).    [Back]

Note 109   See s 730 and Sched 24 of the 1985 Act. The fine is unlimited on conviction on indictment, but limited to the statutory maximum of £5000 on summary conviction. See further Part 10 below.    [Back]

Note 110   Section 317(7).    [Back]

Note 111   Section 317(2)(a).    [Back]

Note 112   See definition in s 741(2) and para 17.11 below.    [Back]

Note 113   See ss 317(8) and 382(3).    [Back]

Note 114   A difficulty here is that a shadow director may not be aware of the point at which the board first considers entering the contract, particularly if that consideration is sufficiently informal not to be minuted.    [Back]

Note 115   Section 317(3)(a). Thus an interest in addition to membership of the other company (apart from a link with a connected person as envisaged in s317(3)(b)) will not be deemed sufficiently declared if made by general notice.    [Back]

Note 116   Section 317(3)(b). For the meaning of "connected persons", see para 4.110 below.     [Back]

Note 117   Section 317(8).    [Back]

Note 118   Section 317(4).    [Back]

Note 119   Taken from Palmer's Company Precedents (17 ed, 1956) p 556. Ireland Alloys Ltd v Dingwall & Others (unreported) 9 December 1997; Re BSB Holdings Limited [1996] 1 BCLC 155, 249-50.    [Back]

Note 120   SI 1985/805.    [Back]

Note 121   Castlereagh Motels v Davies-Roe (1967) 67 SR (NSW) 279.    [Back]

Note 122   [1968] 1 QB 549.    [Back]

Note 123   [1968] 1 QB 549; per Lord Denning MR at p 585, on the basis that the situation was analogous to non-disclosure in a contractuberrimae fidei; per Lord Wilberforce at p 589-591 and per Lord Pearson at p 594.    [Back]

Note 124   [1968] 1 QB 549 at p 594.    [Back]

Note 125   [1990] 2 AC 633. See also [1988] 1 WLR 863, CA for the contrasting view of Fox LJ.    [Back]

Note 126   Approving the text of Lord Pearson's speech at [1968] 1 QB 549, p 594D-G.    [Back]

Note 127   [1990] 2 AC 633, per Lord Goff, 697F-H.    [Back]

Note 128   At 694E.    [Back]

Note 129   [1991] BCC 620.    [Back]

Note 130   [1991] BCC 620, at p 627C.    [Back]

Note 131   [1991] BCC 620, at p 627D-E.    [Back]

Note 132   Rule 13.8.    [Back]

Note 133   Para 20, Appendix 1 to Chapter 13.     [Back]

Note 134   Para 20(a)(i) and (ii).    [Back]

Note 135   Para 20(b).    [Back]

Note 136   Para 20(c).    [Back]

Note 137   Para 20(d).    [Back]

Note 138   Para 20(e).    [Back]

Note 139   See the Cadbury Report paras 3.2-3.4, p 16.    [Back]

Note 140   See para 4.42, p 31.    [Back]

Note 141   See the Greenbury Report, para 1.12, Code of Practice Provision A.1 and Action Point 4.8.    [Back]

Note 142   See the Hampel Report, Principles II, 2.11, p 19, and IV, 4.11-13, p 36.    [Back]

Note 143   Materiality and independence from management are not further defined in Principle A.3.2, Part 2 or in provision B.2.2 in relation to non-executive directors, which echoes para 4.12 of the Cadbury Report. It should be noted that the Cadbury Report had recommended that whether a non-executive director had the necessary independence was a matter for the board (see para 4.12, p 22); but see also its comments on matters that impliedly undermine independence at para 4.13. See also, generally, Action Point 4.8 of the Greenbury Report.    [Back]

Note 144   Imperial Mercantile Credit Association v Coleman (1873) LR 6HL 189.    [Back]

Note 145   Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1.    [Back]

Note 146   [1992] BCLC 1085.    [Back]

Note 147   [1992] BCLC 1085, per Simon Brown J at pp 1093g-i and 1094c-f.    [Back]

Note 148   [1992] BCLC 1085, at p 1095h-i.    [Back]

Note 149   [1992] BCLC 1085, at p 1096e. The contract may, however, be voidable under the general law: see paras 5.69-5.71 below.    [Back]

Note 150   [1992] BCLC 1085, at p 1097b-d. This approach was taken by the Court of Appeal (obiter) in Lee Panavision Ltd v Lee Lighting Ltd [1992] BCLC 22, 33 c-d, and by Knox J in Re Dominion International Group plc (No 2) [1996] 1 BCLC 572, 600a.    [Back]

Note 151   [1995] 1 BCLC 352.    [Back]

Note 152   [1995] 1 BCLC 352, per Lightman J at p 359a.    [Back]

Note 153   [1995] 1 BCLC 352, per Lightman J at p 360c.    [Back]

Note 154   But, if he votes, there may be consequences under the general law: s 317(7).    [Back]

Note 155   Section 144 of the Companies Act 1993, which is set out in Appendix I below.    [Back]

Note 156   See s 232A of the Australian Corporations Law.    [Back]

Note 157   See para 6.20 of the Consultancy Report set out in Appendix L below.    [Back]

Note 158   Regulation 85 of Table A (as now in force) permits a director to be interested in a contract provided he discloses any material interest in it. See para 4.74 above. Section 232A of the Australian Corporations Law (referred to in para 4.91 above) refers to "material personal interest" of a director, but does not define this term.    [Back]

Note 159   See generally the discussion of materiality in Part 7 below, and compare the meaning of "material" contract for the purpose of the disclosure of material contracts in a prospectus in accordance with para 14 of Sched 4 to the Companies Act 1948. This was interpreted as meaning any contract which, "whether deterrent or not, an intending investor ought to have the opportunity of considering": see Buckley on the Companies Acts (13 ed, 1957) p 96 and the authorities there cited.    [Back]

Note 160   Set out in Appendix I below. The final category is other direct or indirect material interests (s 139(1)(e)).    [Back]

Note 161   "Contract" is defined as including all transactions and arrangements, whether or not constituting a contract. See s 317(5).    [Back]

Note 162   See Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] 1 BCLC 352, per Lightman J at p 359f-h.    [Back]

Note 163   Gower, p 629.    [Back]

Note 164   Brian R Cheffins, Company Law, Theory, Structure and Operation (1997) p 354.     [Back]

Note 165   The draft Bill to amend the Corporation Law published in Australia on 8 April 1998 disapplies the requirement for disclosure by directors of interests to single director companies: New Directors' Duties and Corporate Governance Provisions, s 13.     [Back]

Note 166   Compare section 322B: see paras 4.210-4.213 below.    [Back]

Note 167   Gower argues (p 629) that the plaintiff's argument in Neptune, that disclosure where there is a sole director should be to shareholders, "has a lot to commend it."    [Back]

Note 168   This should be expressly provided for in the statute because of s 310. See below paras 11.49-11.52.     [Back]

Note 169   See Runciman v Walter Runciman plc [1992] BCLC 1084.     [Back]

Note 170   Section 318: see below paras 4.119-4.152.    [Back]

Note 171   Section 319: see below paras 4.153-4.171.     [Back]

Note 172   Compare s 388(6) and see IRC v Educational Grants Association Ltd [1967] Ch 993.    [Back]

Note 173   Viz a group of companies consisting of a holding company and one or more subsidiaries, as defined in s 736 of the Companies Act 1985, as amended.    [Back]

Note 174   However the transaction may be caught by s 238 of the Insolvency Act 1986 (Transactions at an undervalue).     [Back]

Note 175   The terms "subsidiary" and "wholly-owned subsidiary" are defined in s 736(2) of the Companies Act 1985.    [Back]

Note 176   Set out above at paras 4.173-4.181. Cf ss 141-142 of the New Zealand Companies Act 1993, Appendix I.    [Back]

Note 177   Under the Hong Kong Consultancy Report recommendations, a special resolution would be necessary; see Appendix L, para 6.21.    [Back]

Note 178   See para 11.41 below.    [Back]

Note 179   [1992] BCLC 1085. See para 4.88 above.    [Back]

Note 180   See para 4.115 below.     [Back]

Note 181   See para 4.93 above.    [Back]

Note 182   SeeThe Financial Aspects of Corporate Governance; Guidance for Smaller Companies, CISCO, 1993, para 8, p 7.     [Back]

Note 183   Section 317(6))    [Back]

Note 184   See section 317(3) (b).    [Back]

Note 185   See para 4.64 above.    [Back]

Note 186   See paras 3.72 and 3.91 above.    [Back]

Note 187   Sections 318 to 319 below.    [Back]

Note 188   Cf s 237(4) of the Companies Act 1985.    [Back]

Note 189   Cf s 150(2) of the Companies Act 1948.    [Back]

Note 190   Either because the transaction or arrangement falls within paragraphs (a) to (d) of art 94 of Table A or other provisions to like effect applicable to the company, or because, as is common in private companies, directors are permitted by the articles to vote on any matter even if they are interested in it.    [Back]

Note 191   J E Parkinson, Corporate Power and Responsibility (1993) p 22.    [Back]

Note 192   See para 7.6 et seq.     [Back]

Note 193   See paras 4.81-4.82 above.    [Back]

Note 194   See FRS 8, para 17.    [Back]

Note 195   Subject to any appropriate need for confidentiality of the board's proceedings.    [Back]

Note 196   Para 2.17 (9) and (10).    [Back]

Note 197   Section 61.    [Back]

Note 198   The section only deals with contracts of service and not contracts for services: see para 4.137 below.    [Back]

Note 199   Including shadow directors: see s 318(6).    [Back]

Note 200   See s 318(10).    [Back]

Note 201   This is a question of fact. See De Beers Consolidated Mines Ltd v Howe [1906] AC 445.    [Back]

Note 202   Great Britain is defined as England, Scotland and Wales; see the Union with Scotland Act 1706, preamble, art I, vol 10, title Constitutional Law (Pt 1), as read with the Interpretation Act 1978, s 22(1), Sched 2, para 5(a), vol 41, title Statutes. Therefore the effect of s 318(3)(c) is that a company can have the information available for inspection at its principal place of business if (a) it is registered in England and Wales, and its principal place of business is either in England or Wales, and (b) if it is registered in Scotland, and its principal place of business is in Scotland.    [Back]

Note 203   This may prove to be in a director's interest should he wish to prove his status as an employee of the company. See Parsons v Albert J Parsons & Sons Ltd [1979] ICR 271.     [Back]

Note 204   The prescribed form is form 318: Companies (Forms) (Amendment) Regulations 1995, SI 1995/736, reg 3, Sched 2.    [Back]

Note 205   Inspection must be possible for a minimum of two hours each working day (ie excluding weekends and bank holidays) between the hours of 9am and 5pm. The person inspecting may copy any information made available for inspection by taking notes or a transcription of the information. See Companies (Inspection and Copying of Registers, Indices and Documents) Regulations 1991 (SI 1991 No 1988).    [Back]

Note 206   See RSC Ord 102, r 2(1). In Scotland a court order can be obtained by petition under the Rules of the Court of Session, Rule 14.2.    [Back]

Note 207   See s 318(9)).The contempt not only attaches to the company but also any director of the company responsible for its failure to comply with the court's order; see A-G for Tuvalu v Philatelic Distribution Corporation Ltd [1990] 1 WLR 926.    [Back]

Note 208   See s 318(8)(b) and (c).    [Back]

Note 209   A delay of 14 days or more.    [Back]

Note 210   See s 318(8)(a) and (c).    [Back]

Note 211   See s 318(5)(a).    [Back]

Note 212   See s 318(5)(b).    [Back]

Note 213   See Fawcett Properties v Buckingham County Council [1961] AC 636 HL, per Lord Morton of Henryton at 667.    [Back]

Note 214   Calendar months; see the Interpretation Act 1978, s 5, Sched 1, vol 14, title Statutes.    [Back]

Note 215   See s 318(11). However, directors of a company listed on the London Stock Exchange will need to ensure its adherence to the more extensive disclosure requirements of paragraphs 16.9 to 16.11 of the Listing Rules (September 1997 edition).    [Back]

Note 216   The Stock Exchange treats service contracts as including contracts for services.    [Back]

Note 217   At the registered office during business hours and at the annual general meeting, including at least 15 minutes before the meeting starts.    [Back]

Note 218   See s 318(7).    [Back]

Note 219   Cf s 318(11).    [Back]

Note 220   Although it should be noted that s 318(5), unlike s 318(1), requires that directors' names and the duration of their service contracts must be included in the memoranda held for inspection.    [Back]

Note 221   Note above the comments in relation to s 318(5).    [Back]

Note 222   See para 4.125(iv) above.    [Back]

Note 223   See para 4.23 above.     [Back]

Note 224   See paras (a) and (b) of r 12.43A of the Listing Rules, Appendix E below.    [Back]

Note 225   See para 1.    [Back]

Note 226   See para 4.    [Back]

Note 227   Including service contracts with subsidiaries.    [Back]

Note 228   Compare s 318(1) with the width of s 319(1) which applies to "any term of an agreement".    [Back]

Note 229   See s 319(7)(a).    [Back]

Note 230   This is because a non-executive director has a relatively limited degree of involvment in the company and the company does not exercise control over him. However, the characterisation of a non-executive director's letter of appointment as a contract for services, and thus not one of employment, will depend on the circumstances in each case. See O'Kelly and Others v Trusthouse Forte Plc [1984] 1 QB 90.     [Back]

Note 231   The statutory register only being accessible to members of a company under the provisions of s 318(7).    [Back]

Note 232   The equivalent exemption was in s 5, ch 2, para 42(a) of the Admission of Securities to Listing.    [Back]

Note 233   See Brian R Cheffins, Company Law, Theory, Structure and Operation (1997) p 664, n 83.    [Back]

Note 234   See Option 2, paras 4.165-4.168 below.    [Back]

Note 235   Note comments in the Hampel Report at para 4.9, pp 34-5.    [Back]

Note 236   See paras 11.53-11.57 below.     [Back]

Note 237   See r 16.11 above, para 4.126. But r 16.11(f) is limited to information relevant to the company's potential liability if the director's service contract terminates early.    [Back]

Note 238   Section 63(1) provided that shadow directors would fall within the definition of a "director" for certain purposes, including s 47.    [Back]

Note 239   (1977) Cmnd 7037.     [Back]

Note 240   Ibid, para 14, p 5.    [Back]

Note 241   See clause 47 of the 1978 Bill, as contained in Changes in Company Law (1978) Cmnd 7291, p 53-4.    [Back]

Note 242   Section 319(3).The shareholders' approval required is that of the company in general meeting, or, where the director is the director of a holding company, by resolution of that company in general meeting.    [Back]

Note 243   Not necessarily one to which the director is a party, thus ensuring that the section cannot be avoided by use of an agreement with a company controlled by the director.    [Back]

Note 244   Under a contract of service or for services: s 319(7)(a).    [Back]

Note 245   "Group" is defined in relation to the director of a holding company, as both that company and its subsidiaries; subsection (7)(b).    [Back]

Note 246   The subsection prevents a director who is coming to the end of a fixed-term 4 year contract (which the company cannot terminate by notice, or can only terminate by notice in specified circumstances), from for example, gaining another with the company on the same terms a year before the original contract's expiry date - effectively creating a 7 year period during which time the directors' employment cannot be terminated by the company by notice.    [Back]

Note 247   For the purposes of the section, approval is only required if the company is a company within the meaning of the Companies Act 1985, or a company registered under s 680 of the Act. Approval is not required if the company is a wholly-owned subsidiary of another body corporate.    [Back]

Note 248   Tolley's Company Law (p D50/10) suggests that the object of approval by members, to check the self interest of the board, might be defeated by a weighted voting rights article, such as that upheld by the House of Lords in Bushell v Faith [1970] AC 1099. However, weighted voting rights are not within the scope of this project.    [Back]

Note 249   The Companies (Inspection and Copying of Registers, Indices and Documents) Regulations 1991 (SI 1991/1998) does not apply to access to the documents held open for inspection by members under subsection (5)(a), see s 3(1) of the Regulations.    [Back]

Note 250   Any company which is not a public company, see s1(3) of the 1985 Act.    [Back]

Note 251   A company probably cannot approve the term by means of informal unanimous consent, even if members see a subsection (5) memorandum before giving consent. Cf Re RW Peak (Kings Lynn) Ltd [1998] 1 BCLC 193.    [Back]

Note 252   In harmony with the views of Buckley J inRe Duomatic Ltd, ibid at p 374F-G and the Court of Appeal in Re George Newman & Co [1895] 1 Ch 674, per Lindley LJ at p 686    [Back]

Note 253   The Cadbury Report, para 4.14, p 31.    [Back]

Note 254   The Hampel Report, summary point 24, p 60.    [Back]

Note 255   See also r 12.43A(c)(vi) of the Listing Rules in Appendix E below.    [Back]

Note 256   See para 9.3-9.28 below.    [Back]

Note 257   Hampel Report, para 4.9, p 35.    [Back]

Note 258   See Jason Nissé, "Cadbury Notice Period Broken by 60% of Directors", The Times, 25 September 1997 (Business News, p 26 ).     [Back]

Note 259   After Greenbury: Directors' Contracts and Compensation (1996) pp 16-17.     [Back]

Note 260   It is worth noting that the Greenbury committee's recommendations were not simply intended to apply to listed companies, although this corporate form was its main focus (see para 1.18, p 12. Compliance for listed companies was to be "to the fullest extent practicable"; see the Code of Best Practice, para 2.3, p 13). Compliance with the Code of Best Practice was also recommended to "others ... as they see fit" (see para 1.18, p 12).    [Back]

Note 261   Entirely funded by its membership of over 100 City firms.    [Back]

Note 262   CISCO normally defines "smaller quoted companies" as those not included in the FTSE 350 indices.    [Back]

Note 263   See "The Financial Aspects of Corporate Governance; Guidance for Smaller Companies", CISCO, 1993; and "Greenbury, The Smaller Company Perspective, Objectives for the next stage of corporate governance", CISCO, 1995.    [Back]

Note 264   See "Greenbury, The Smaller Company Perspective, Objectives for the next stage of corporate governance", CISCO, 1995, p 6.    [Back]

Note 265   See paras 4.161-4.162 above.    [Back]

Note 266   Cf para 4.54 above.    [Back]

Note 267   A like option could be given with respect to approval of the holding company, when that is required.    [Back]

Note 268   See ss 48 and 63(1). The re-enacted sections have been subject to amendment by the Companies (Fair Dealing by Directors)(Increase in Financial Limits) Order 1990 (SI 1990/1393) (which increased the financial limits in s 320(2)) and the Companies Act 1989 (which inserted s 321(4)).    [Back]

Note 269   In contrast with s 322A(7), where the arrangement is with a director or connected person jointly with another party outside the definitions in the section, s 320 would appear not to apply.    [Back]

Note 270   The question whether this wording includes the novation of a contract to acquire an asset was left open by the Court of Appeal in Re Duckwari plc (No 1) [1997] 2 BCLC 713 at 722. In that case the company (D plc) acquired either the benefit of the contract or the purchaser's beneficial interest in the property. On either basis the asset acquired was a non-cash asset for the purposes of s 739(2), and it was of the requisite value because the amount of the deposit paid by the purchaser exceeded 10% of the assets of D plc.    [Back]

Note 271   Gooding v Cater (unreported), 13 March 1989, Chancery Division.    [Back]

Note 272   See Lander v Premier Pict Petroleum Ltd 1997 SLT 1361. On the question of the overlap between s 320 and ss 312-316, see para 4.35 above and para 4.189 below. We recommend below that s 320 should be amended to make it clear that it does not apply to covenanted payments under service agreements with directors or to payments to which s 316(3) applies (ie bona fide payments by way of damages for breach of contract); see para 4.193.     [Back]

Note 273   Section 735(1), or if the company is a joint stock company which has been registered under s 680 of the Companies Act 1985.    [Back]

Note 274   See J H Farrar, N E Furey and B M Hanningan, Farrar's Company Law (3rd ed, 1991) p 418, n 17. The rationale behind the exception was the feeling that directors of a holding company would exert sufficient control over directors of its subsidiaries.    [Back]

Note 275   See Farrar's Company Law (3rd ed, 1991) p 417, n 4 (see also now 4th ed, 1998, p 411, n 19), referring to the criticism of the subsection by Leigh and Edey in Companies Act 1981 (1981) at para 376.    [Back]

Note 276   Thus assets received from the company will not be held by the recipient on trust (see Guinness v Saunders [1990] 2 AC 663, per Lord Goff at 698E). However, if the transaction is rescinded the company may retain equitable title sufficient to support a tracing claim (see El Anjou v Dollar Land Holdings plc [1993] 3 All E R 717 at p 743d-e). In Scotland a personal right of restitution of the property would be available based on unjustified enrichment. A tracing claim may be available at least against a director under the remedy of constructive trust (see Sutman International Inc v Herbage (unreported) 2 August 1991, Lord Cullen (1991 GWD 30-1772); Huisman v Soepboer 1994 SLT 684).    [Back]

Note 277   See Niltan Carson Ltd v Hawthorne [1988] BCLC 298, 322.    [Back]

Note 278   Section 322(3)(a).    [Back]

Note 279   Section 322(3)(b).    [Back]

Note 280   Section 322(4).    [Back]

Note 281   Section 322(5).    [Back]

Note 282   Section 322(6).    [Back]

Note 283   See Aggravated, Exemplary and Restitutionary Damages (1997) Law Com No 247, paras 3.28-3.32 and 3.59-3.63.    [Back]

Note 284   Duckwari plc v Offerventure Ltd, The Times 18 May 1998 (CA). The position is similar to the situation where a trustee makes an unauthorised investment.    [Back]

Note 285   [1997] 1 BCLC 182, 198.    [Back]

Note 286   Chapter 10 also contains provisions in respect of transactions concerning non-cash assets, particularly during takeovers or mergers, but unlike ss 320-322 and Chapter 11, is not specifically concerned with transactions involving directors or their connected persons.    [Back]

Note 287   "Transactions with a related party" means a transaction between the company (or a subsidiary) and a related party, arrangements for investment by the company (or a subsidiary) and a related party in the same undertaking or asset, and arrangements with controlling shareholders.     [Back]

Note 288   These include current and former directors and shadow directors and substantial shareholders. The full definition is set out in Appendix N below.    [Back]

Note 289   The variation or novation of an existing agreement is also subject to the requirements of r 11.4, even if the related party was not so classifiable when the original agreement was made. See r 11.6.    [Back]

Note 290   It may, in addition, also need to make a Chapter 10 announcement, if applicable; see r 11.14(a).    [Back]

Note 291   Rules 11.4(b) and 11.10 generally, but in particular 11.10(c) regarding the full particulars requirement.    [Back]

Note 292   Under the provisions of rr 11.4(d) and 11.5, the requirement to ensure that the related party abstains is absolute on the company, and is not conditioned by the taking of "all reasonable steps".    [Back]

Note 293   Rule 11.1 (a)(ii).    [Back]

Note 294   Rule 11.7(a).    [Back]

Note 295   See r 11.7 (b).    [Back]

Note 296   See r 11.7(c).    [Back]

Note 297   See r 11.7(d).    [Back]

Note 298   See r 11.7(e).    [Back]

Note 299   See r 11.7(f).    [Back]

Note 300   See r 11.7(g).    [Back]

Note 301   Rule 11.7(h).    [Back]

Note 302   See r 11.7(I), r 10.5 and r 11.8. The same percentage ratio calculations are used to determine transaction class (Class 3, 2, Super Class 1 etc) under Chapter 10.    [Back]

Note 303   Assets, profits, consideration to assets, consideration to market capitalisation and gross capital. See r 10.5(a) to (e).    [Back]

Note 304   See r 10.5(a).    [Back]

Note 305   Where the 0.25% de minimus threshold is exceeded in relation to one or more of the percentage ratios, but all are calculated to be less than 5%, a modified disclosure and approval system operates under Chapter 11; see r 11.8.    [Back]

Note 306   This phrase is not defined in the Listing Rules, but would appear to narrow the scope of the ordinary course of business transaction exemption only to those where a net gain will accrue to the company or its subsidiary.    [Back]

Note 307   See also the similar exemptions in r 11.7(e), (g) and (h).    [Back]

Note 308   See para 8.10 below.     [Back]

Note 309   Defined by r 4 as including all listed and unlisted public companies considered by the Panel on Takeovers and Mergers as resident in the UK, Channel Islands or Isle of Man, as well as certain categories of private companies.    [Back]

Note 310   It should be noted that the wording of s 739 of the Companies Act 1985, whilst dealing with the creation or extinction of rights or interests in property, does not deal with the creation of the property itself.    [Back]

Note 311   Guidance on the definition of "material amount" is contained in the Notes on r 21. Whilst the factors identified therein are not decisive, given that the Panel will only "in general, have regard" to them, it is notable that materiality is flexibly assessed according, for the most part, to a comparative test of the value of the asset transferred against the remaining assets of the offeree company.     [Back]

Note 312   There is also a question whether s 320 applies to covenanted payments under service agreements with directors (see paras 4.35 and 4.174 above) on which we also seek consultees views.    [Back]

Note 313   See paras 9.3-9.28 below.    [Back]

Note 314   See para 4.35.     [Back]

Note 315   See paras 4.35 and 4.189 above.    [Back]

Note 316   See Demite Ltd v Protec Health Ltd [1998] BCC 638, where it was held that section 320 applied to a transaction with an administrative receiver.    [Back]

Note 317   See para 3.66 above.     [Back]

Note 318   See the Cadbury report, para 4.12, p 22 with which the Hampel Report agreed: para 3.9, p 25.    [Back]

Note 319   See Potato Marketing Board v Merricks [1958] 1QB 317,335 per Devlin J.    [Back]

Note 320   Compare the approach in Smith v Croft (No 3) [1988] Ch 114.    [Back]

Note 321   Paragraph 4.171, above. As in relation to the option considered there, so here if the option were supported on consultation, it could be extended to approval by the holding company where that was required.    [Back]

Note 322   Section 35.    [Back]

Note 323   See s 35A(1), (2)(c).    [Back]

Note 324   It also extends to transactions between the company and a person connected with a director or a company associated with him as defined in Part X of the Companies Act 1985.    [Back]

Note 325   Inserted by the Companies (Single Member Private Limited Companies) Regulations 1992, SI 1992/1699, reg 2, Sched, para 3 as from 15 July 1992, pursuant to art 5, Twelth Company Law Directive [1989] OJ L395/40.    [Back]

Note 326   The provision does not apply to contracts entered into in the ordinary course of the company's business.    [Back]

Note 327   See generally the DTI's paper: Twelfth Company Law Directive, a consultative document, November 1991.    [Back]

Note 328   See s 382 of the Companies Act 1985.    [Back]

Note 329   Which re-enacts s 25 of the Companies Act 1967, as amended by s 42(1) and Sched 2 of the Companies Act 1976 and s 80(1) and Sched 2 of the Companies Act 1980.    [Back]

Note 330   See s 327, below.    [Back]

Note 331   Part V of the Companies Act 1980 introduced provisions making insider trading a criminal offence. These were subjected to minor amendment and re-enacted in the Company Securities (Insider Dealing) Act 1985. This was, in turn, repealed and replaced by the provisions of the Criminal Justice Act 1993.    [Back]

Note 332   Jenkins Report; Recommendation at para 99 (b), p 35.    [Back]

Note 333   Jenkins Report, para 90, p 31.    [Back]

Note 334   Insider is defined in s 57, subsection (2) which states that a person will have knowledge as an insider, or from an inside source, if they have it through "being a director, employee or shareholder of an issuer of securities" (s 57(2)(a)(i)). In relation to the s 327 extension, note a person may have information as an insider if one of the aforementioned group was the source of the information (s 57(2)(b)).    [Back]

Note 335   See s 52(3).    [Back]

Note 336   See s 52, and Sched 2 of the Act for the width of the types of securities within the purview of the offence.    [Back]

Note 337   Subject to the defences in s 53.    [Back]

Note 338   See s 52(2).    [Back]

Note 339   See Insider Dealing (Securities and Regulated Markets) Order 1994 (SI 1994/187) and the Insider Dealing (Securities and Regulated Markets (Amendment) Order 1996 (SI 1996/1561).    [Back]

Note 340   Listing Rules, Ch 16, Appendix.    [Back]

Note 341   See paras 14 and 15 of the Model Code.    [Back]

Note 342   See Appendix E below.    [Back]

Note 343   [1991] BCLC 897.    [Back]

Note 344   See Appendix E below.    [Back]

Note 345   [1991] BCLC 897 per Knox J at p 924-9.    [Back]

Note 346   See para 9.33 below.    [Back]

Note 347   For a small investment, the purchaser can make a large profit or incur a large loss. The effect of the s 323 prohibition on contracts is not dealt with in the Companies Act 1985 and falls to be determined under the general law. See also s 63(2) of the CJA, where different considerations apply. The Law Commission is reviewing the effect of illegality on transactions. See the Law Commission's 6th Programme of Law Reform; Law Com No 234, Item 4, p 29. The Commission hopes to issue a consultation paper in the second half of this year.    [Back]

Note 348   See the Model Code, para 14, which is set out in Appendix E.    [Back]

Note 349   See section 323(5).    [Back]

Note 350   Compare the definition of "employees' share scheme" in s 743, which provides: ... is a scheme for encouraging or facilitating the holding of shares or debentures in a company for the benefit of- (a) the bona fide employees or former employees of the company, the company's subsidiary or holding company or a subsidiary of the company's holding company, or (b) the wives, husbands, widows, widowers or children or step-children under the age of 18 of such employees or former employees.    [Back]

Note 351   Including former employees and near relatives as in s 743, see n 350 above.    [Back]