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Janet Dine, Criminal Law in the Company Context
Dartmouth, 1995, 218pp, ISBN 1-85521-342-7 Hb £39.50
Reviewed by Eva Lomnicka
Professor of LawKing's College, London.
Copyright © 1996 Eva Lomnicka.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.
Lawyers familiar with both criminal law and company law are relatively few in number and therefore any drawing together of these two strands must be welcome. Of course, some work has already been done on criminal law as it affects companies. In particular, others (for example the Law Commission (Law Com CP No 135) and Celia Wells (1993)) have given much thought to the difficult issue of whether and how companies should be criminally liable. There is also some discussion in the company law textbooks (although less so in the criminal law ones) of those crimes which are specific to the company law context. However, this work is about neither of these questions. It has a much less obvious and more radical theme.
As the Preface explains, the central concern of this book is what has now come to be known as "corporate governance". However, the issue is approached from the novel criminal law perspective. The work identifies penal rules as "a tool of corporate governance"(p 1) and examines some of the attempts of the criminal law to control behaviour, in particular that of managers, in the corporate context. These attempts are found wanting. The work endorses the view that the criminal process is not apt to deal with the complicated patterns of behaviour found in the corporate context. Inspired in part by the approach in the Money Laundering Regulations 1993 (which impose obligations on financial institutions to devise internal controls to prevent and detect money laundering) the work concludes that "the best method of controlling companies is to establish strong internal mechanisms rather than depend on penal rules"(Preface). This provides the springboard for a more general concluding discussion on corporate governance. Thus most of the book surveys various aspects of criminal law as it impinges on companies and their managers but ends with a wide-ranging and ambitious chapter on how the (civil) law should ensure that companies are managed properly.
The first part of the book examines a number of discrete areas where the criminal law seeks to control the behaviour of individuals in the company context. The areas covered are insider dealing, 'penalties' for fraudulent and wrongful trading, the disqualification of directors and money laundering.
Criminal lawyers may raise eyebrows at this list. Whilst insider dealing and certain money laundering activities are clearly criminal offences under the Criminal Justice Act 1993 and whilst the Companies Act 1985, s 458 renders fraudulent trading a criminal offence, wrongful (and fraudulent) trading enable the liquidator to make a civil claim for contribution against a defendant and the disqualification of directors often occurs in the context of civil litigation. However Dine regards the provisions on fraudulent and wrongful trading and those on the disqualification of directors as rules which "masquerade as civil rules but which are nevertheless penal in nature"(p 7). She justifies this view on the basis of a brief discussion on the nature of a crime which makes reference to the well-known debate featuring Glanville Williams, Ashworth and others on this question. Whilst issue may be taken with this rather cavalier definitional approach to the term 'penal', this would miss the point. Dine is demonstrating the failure of the law - and whether it be regarded as criminal law or civil law is largely irrelevant - to set the appropriate standard for corporate behaviour. Thus any preoccupation with the issue of whether the relevant law is 'penal' or not is not central to her thesis - although perhaps prompted by the title Dine has chosen for her work.
As well as referring to the theoretical debates surrounding the nature of 'crime', Dine also conducts a broad-brush survey of the various theoretical approaches to the nature of corporate behaviour. She takes the traditional line that English law favours the 'concession' theory, briefly explains the economists' approach as essentially based on exchange (and notes its limitations), notes that the 'political' view of companies focuses on the balances of power between the various players and finally concludes by citing the "autopoietic analysis"(p 13). This survey leads her to adopt a 'dynamic relations' theory which goes "beyond these theories to combine the good points of each, adding a practical viewpoint which examines the variations according to the peculiarities of any particular company"(p 14). The 'dynamic relations' theory is then used both as a measure against which the effectiveness of the various 'penal' provisions are tested and as the justification for the 'internal mechanisms' approach advocated by Dine as the 'way forward' in her concluding Chapter on corporate governance.
In her last Chapter - The Way Forward - Dine puts forward her contribution to the corporate governance debate. She rightly concedes the necessity of articulating the theoretical underpinning of any approach she advocates. She begins by noting the temptation to regulate corporate behaviour in order to effect 'social' and even 'moral' engineering and regards much of the 'penal' law she has examined as seeking (unsuccessfully) to further these goals. However, whilst acknowledging that the corporation, especially the international corporation, as a practical matter has an enormous impact on the environment (in its widest sense) in which it operates, Dine states that "it does not follow that corporation law holds the clue to social reform"(p 184). Thus Dine adopts the capitalist free market philosophy that company law - in the sense of laws governing corporate structure - should do no more than "provide a simple enabling framework with the minimum of restrictions on entrepreneurial freedom consistent with the prevention of major injustice"(p 183).
Consequently Dine, in common with many company lawyers (with the conspicuous and notable exception of Parkinson), argues for a limited role for 'company' law. It is there to encourage entrepreneurial endeavour, not to tackle the broader issues of corporate responsibilities to those 'stakeholders' Dine identifies elsewhere as having interests affected by corporate behaviour. Thus Dine leaves to others (although not, presumably, criminal lawyers) the difficult issue of how to ensure that companies behave in a socially responsible, rather than in merely an economically efficient, manner. However, Dine does acknowledge that 'mainstream' law, in particular mainstream criminal law, "properly interpreted"(p 185) does and should apply to corporate behaviour. Again, this leaves largely unexplored the important issue of what a 'proper' interpretation is and as Dine demonstrates in her Chapter on the application of the 'mainstream' Theft Act to companies, the peculiar nature of companies requires a company law-sensitive approach to corporate criminal liability. It is inevitable that wider considerations than those of economic efficiency, are going to be relevant here.
This view of the limited role of company law and the search for "internal mechanisms of control"(p 187) leads Dine to advance two proposals for regulating corporate behaviour.
The first looks to the shareholder as the requisite "internal control mechanism". Dine advocates the possibility (which, consistently with her 'enabling' view of company law, she argues should be optional) of imposing a duty on shareholders to use their votes to control management. Of course, as Dine acknowledges, non-management shareholders are (with some notable exceptions) generally notoriously reluctant to interfere with management and in public companies tend to vote with their feet instead. Hence the temptation to force them to take more interest and control. The suggestion is that non-management shareholders be polarised into those who have no voting rights at all (and retain limited liability) and those who have voting rights but only on terms. Those terms are that those "voting rights must be exercised unless the holder is willing to lose the right to limited liability"(p 189) (my emphasis), with the holder's liability "for the debts of the company" being "double the share value every time"(p 189) s/he fails to vote and being enforceable by any shareholder.
This proposal is clearly in its formative stage and many problems immediately occur. The only incentive Dine suggests for investors agreeing to take shares on the basis that they undertake a duty to vote and correspondingly risk losing limited liability if they do not, is that such shares should carry "a preference of some kind to make them attractive"(p 189). There must be doubts whether, especially in public companies where the discontented investor may always just exit, such 'voting' shares will ever be attractive, whatever the incentive. Moreover, for this to be an effective control mechanism, how to ensure that the shareholder takes the duty seriously rather than just rubber stamping the directors' resolutions? All the problems of assessing whether managerial decision-making is responsible, which Dine rightly identifies as the central problem of regulating corporate governance, would arise at the level of judging shareholders' voting decision-making, if the duty suggested is to have any meaning. And what of the majority of managerial decisions which are not - and cannot sensibly - be brought to the general meeting? Finally, the liability envisaged ("for the debts of the company"(p 189)) does not seem to cover the not infrequent cases of mismanagement which result in managers lining their own pockets. The "double the value of the share" measure of liability, although commendably straightforward and certain, is arguably just too arbitrary to command support. It also provides a disincentive to large shareholdings and thus in practice would vest voting power in the managers (who, under this proposal are to hold voting shares).
Such objections apart, Dine has addressed the important question of whether the 'way forward' in corporate governance is to vest more power in the shareholder and if so whether the imposition of some obligation on him/her to control management is an idea worth pursuing and refining.
Dine's second proposal is related to the first (although not dependent on it) and argues for a re-articulation of directors' duties in terms of two categories of shareholders' rights. Thus the distinction is drawn between a shareholder's rights 'in her shares' (i.e. the 'selfish' right to maintain the value of her shareholding) on the one hand and a shareholder's right 'in the company' on the other. This distinction is attributed to Professor Sheldon Leader (Leader 1995, p 85), although a similar one is evident in some of the literature trying to reconcile Foss v Harbottle, (1843) 2 Hare 461, and (what is now) Companies Act 1985, s 14 (see, for example, Pennington, 1995 p 867) and in the old case law on alteration of articles (see, for example, Hutton v Scarborough Cliff Hotel Co Ltd (1865) 2 Drew & Sm 521).
Dine echoes this debate by building on this distinction and puts forward a neat restatement of the law on directors' duties and their enforcement. Thus directors have "one overriding duty...to act bona fide in the interests of the company [and] this is the duty which protects the shareholders' rights in the company"(p 192). Breach of this duty, which is consequently also an interference with the second aspect of the shareholders' rights - rights 'in the company', gives rise to the usual consequences for breach of fiduciary duty. The duty may not be modified in advance by provision in the articles (Companies Act 1985, s 310) nor condoned subsequently by ratification by general meeting (a more controversial proposition, see below). In voting at general meeting, the shareholder is protecting his/her 'rights in the shares' and so any ratification should not affect any 'rights in the company' at stake (although it may provide evidence - especially if there is a majority of independent shareholders - that the company is being managed properly).
On the other hand, breach of the first aspect of shareholders' rights - rights 'in their shares' - is not, as such, a breach of fiduciary duty and so may be condoned in advance (by an exclusion clause in the articles - a situation where s 310 does not in terms apply, see Movitex v Bulfield [1986] 2 BCC 99) or subsequently by ratification. Further, it may not lead to the challenge of managerial decisions although it may give rise to the 'unfair prejudice' statutory remedy.
This restatement is attractive in its simplicity, coherence and symmetry. However, it is deceptively simple in hinging on the distinction between shareholders' rights 'in the company' and 'in the shares'. This distinction is easy to state but not so easy to draw. Indeed Dine (anticipating the creation of hostages to fortune perhaps!) makes little attempt to explain the difference, merely slotting case-law and examples into one or other category without more. Moreover, although the analysis is followed through into a consideration of the Companies Act 1985, s 14, the argument being that s 14 only gives a right of action in relation to 'rights in shares' (this being suggested as the explanation for the non-enforceability of 'outsider' rights or 'Hickman' principle), it is conceded that s 14 also protects rights 'in the company' in so far as the constitution is being upheld (see, for example, Quinn v Axtens [1909] AC 442). Further, the analysis requires violence to be done to the present state of the rule in (or rather exceptions to) Foss v Harbottle (supra). Dine's predictable solution is the replacement of the 'exceptions' by a statutory derivative remedy (p 203), (references to other Common Law jurisdictions where this has already occurred would have further supported her case), with ratification by general meeting providing evidence (only) that the conduct has been proper.
Nevertheless, the analysis has the merit of focusing attention on to the central question when scrutinizing directors' activity: which managerial activities should be impeachable (classified by Dine as a breach of shareholders' rights 'in the company') and which should stand, although giving rise to compensation (classified by Dine as a breach of shareholders' rights 'in the shares')?
This book review has concentrated on the corporate governance aspect of this work because, although the title and bulk of the text suggests that criminal law as it applies to companies is its central concern, an intriguing and thought-provoking part of the book is that aspect which suggests reforms to the present law on corporate governance. Dine admits that the work is a very personal view of the area, but it is none the worse for that, being a view informed by (for company lawyers) an unusual criminal law perspective and by the experience of contributing to bodies concerned with law reform.