The exercise of fiduciary powers for mixed purposes: A comment on Eclairs Group Ltd v JKX Oil and Gas plc


The proper purposes doctrine, also known as fraud on a power, is a cornerstone of the law of legal powers. The donee of a fiduciary power must exercise it only for the purposes for which it was conferred by the donor. For company directors, this rule is codified in s 171(b) of Companies Act 2006, which states that directors must “only exercise powers for the purposes for which they are conferred.”[1]

Directors, like other fiduciaries entrusted with the administration of another’s interests, enjoy a wide degree of authority that enables them to apply their business judgment in complex and rapidly changing contexts. Their decisions are often driven by several objectives and have multiple effects, proximate and remote. When a fiduciary is motivated by multiple purposes, all influential in different degrees, but some proper and some improper, the decision process is open to challenge. The judicial scrutiny of motives and purposes is a challenging task, akin to embarking on “a dark and unknown voyage across an exceedingly misty sea.”[2] What is the appropriate test for identifying the principal purpose? Is it possible to weigh all concurrent purposes and rank them in order of intensity? When improper purposes exist, is the decision liable to be set aside although the fiduciary exercised the power in complete good faith, with the sole aim of protecting the beneficiary’s interests?

In Eclairs Group Ltd and another v JKX Oil and Gas plc[3] the UK Supreme Court addressed these questions in the context of directors’ power to impose restrictions on voting and other rights attaching to shares. The decision clarifies the relation between the proper purposes rule and the duty to promote the success of the company, and suggests new developments regarding the test to determine the principal purpose. On the first point, the justices were in agreement that a genuine desire to protect the long term interests of the company will not validate the exercise of a power for a purpose that is outwith the range of purposes for which that particular power was granted. On the second point, the majority proposed, in obiter, a new test for identifying the principal purpose for which a power was exercised. When multiple purposes exist, it was argued, the principal purpose is the one but for whose presence the power would not have been exercised as it was. This is a departure from the current test, under which the principal purpose is the purpose about which directors felt the strongest. The other justices declined to express a conclusive view on the appropriate test, and appeared to hold strong reservations about the but-for test.

Eclairs, it is submitted, is a step in the right direction. The but-for test increases the certainty and predictability of directors’ exercise of powers, because it allows a decision to stand when it can be demonstrated that the directors would have adopted the same decision, had they placed appropriate focus on the permissible purpose. Nevertheless, this area of law remains uncertain until the but-for test is confirmed by the ratio decidendi of a Supreme Court decision.

The Facts

JKX Oil & Gas Plc was the parent company in a group whose main business consisted of development and exploitation of oil and gas reserves, primarily in Russia and Ukraine. The company was struggling, and the value of its shares fell to historically low levels. This made it vulnerable to hostile takeovers. The directors of JKX feared that two of the company’s minority shareholders, Eclairs Group Ltd and Glengary Overseas Ltd, planned to acquire control. Both these shareholders were controlled by Russian businessmen who had a reputation of corporate raiders.

In March 2013, Eclairs asked JKX to convene an extraordinary general meeting to consider ordinary resolutions for the removal of two directors and the appointment of three new directors. The proposed directors were associates of the two minority shareholders. JKX responded by issuing disclosure notices addressed to the minority shareholders and their controllers. The articles of association of JKX provided that the board had the power to issue a disclosure notice requesting information about persons interested in its shares, and the power to restrict the exercise of rights attaching to shares in the event of non-compliance. These powers were largely similar to those found in ss 793-797 of the Companies Act 2006. The disclosure notices requested information about the number of shares held, their beneficial ownership and any agreements or arrangements between the various persons interested in them, relating to the acquisition of shares in JKX, or to the exercise of any rights conferred by the holding of such shares. The responses came promptly. They admitted the existence of interests in JKX shares, but denied any agreements or arrangements. The directors considered that the responses were inadequate, because they believed that there were secret understandings between the addressees which they had not disclosed.

In April 2013, JKX convened the annual general meeting (AGM). The agenda included proposals for re-election of directors, and extending their powers to allot shares and disapply statutory pre-emption rights. In May 2013, Eclairs published several statements inviting the JKX shareholders to oppose the proposed AGM resolutions. Without the support of Eclairs and Glengary, the proposals requiring a special resolution were certain to fail, and those requiring an ordinary resolution were unlikely to pass.

Shortly before the AGM was due to take place, the JKX board resolved to exercise the power to issue restriction notices in relation to the shares held by Eclairs and Glengary, suspending their voting rights and restricting their transfer. Eclairs and Glengary challenged the board’s exercise of this power. They advanced several grounds, including breach of the proper purposes rule in s 171(b) of the Companies Act 2006. The only proper purpose for which the power to restrict shareholders’ rights could be exercised was to extract the relevant information. The board’s real purpose, the minority shareholders argued, was to ensure that the resolutions at the forthcoming AGM would be passed.

The Court Decisions

The High Court

The minority shareholders were successful at first instance.[4]

Mann J found that the directors had reasonable cause to believe that the responses to the disclosure notices were false or materially incorrect, because they failed to provide information on agreements or arrangements as to the exercise of voting rights. He also established that all directors shared a genuine desire to obtain the information which they felt had been withheld from them, and were at all times animated by an honest intention to act in what they perceived to be in the best interests of the company. Nevertheless, their exercise of the power to impose restrictive notices was improper.

After extensive cross-examination of most of the directors, the judge reached the conclusion that their principal purpose was to disenfranchise Eclairs and Glengary, so as to maximise the prospects of passing the AGM resolutions. The majority of directors did not regard the extraction of proper information as the main purpose of the power to impose restrictions. They believed they could use the power in what they conceived to be the best interests of the company, without a link to the extraction of information. In this case, their main objective was to hinder the cause of the raiders, with a view to benefit JKX in the long term.

Mann J disagreed with this approach. Although all directors genuinely believed that their decision was in the best interests of JKX, that did not change the fact that the power was exercised for an impermissible purpose. The only purpose for which the power to impose restrictions was conferred was to “provide a sanction or an incentive to remedy the default” in the disclosure.[5] The desire to benefit the company as a whole was not in itself sufficient for imposing restrictions, but could have been an appropriate objective “in conjunction with a more legitimate approach to the decision to impose restrictions.”[6]

Writing in obiter, Mann J went on to investigate what would have happened, had the directors confined themselves to the proper purpose of imposing restrictions as a means to compel the production of information. He found it “virtually inevitable” that that the directors would have reached the same decision and imposed the same restrictions.[7] The crucial difference between what had happened and the hypothetical scenario was that in the latter case the imposition of the restrictions would have been primarily motivated by a desire to induce the provision of information, coupled with a perception that it would be appropriate to prevent the minority shareholders from voting while they were withholding information that was relevant to the directors and the other shareholders. In the hypothetical case, the directors’ strong views about the dangers that the raiders posed to JKX’s long term interests would have been a secondary consideration, and would not have affected the propriety of their decision. Since the hypothetical case was not pleaded and did not arise until the final stages of the trial, Mann J did not allow JKX to raise it and to claim that they would have reached the same decision.[8] Consequently, he ruled that the board’s exercise of power was voidable and should be set aside.

JKX appealed and Eclairs cross-appealed. JKX did not contest the trial judge’s factual findings as to the directors’ principal purpose, but challenged his interpretation and application of the proper purposes doctrine. Eclairs challenged the decision as regards the validity of the disclosure notices and the directors’ cause to believe that the notices had been inadequately answered.

The Court of Appeal

The Court of Appeal unanimously rejected the cross appeal, but was divided on the proper purposes aspect.[9]

Sir Robin Jacob and Longmore LJ allowed the appeal, arguing that the proper purposes doctrine was not applicable to the directors’ power to disenfranchise shareholders. In their view, neither the statutory provisions of the Companies Act 2006 nor JKX’s articles of association limited the power to impose restrictions to the sole purpose of obtaining the requested information. When the board knows, or has reasonable cause to believe, that the information provided is false or materially incorrect, it has the power to restrict the voting rights of the shareholder, subject only to an overriding duty to act in the best interests of the company. In other words, failure to comply with a disclosure notice gives the directors a right to impose restrictions for any purpose which they in good faith consider to be in the interests of the company, including influencing the outcome of a forthcoming AGM. In the majority’s view, to restrict the power only to the purpose of obtaining information would mean to emasculate it and subvert the board’s constitutional authority to act in the best interests of the company.[10] This interpretation, the judges added, is not unduly harsh on shareholders. They can avert the restriction of their rights by simply providing accurate and timely information.[11]

In a long and forceful dissent, Briggs LJ rejected the majority’s arguments and defended Mann J’s analysis of the proper purposes doctrine. He stressed that directors, like trustees or other fiduciaries, must exercise their fiduciary powers for the purposes for which they were given. This rule is all the more important where the power is able to affect the constitutional balance of authority between shareholders and directors.[12] As regards the application of the proper purposes rule to the case at hand, Briggs LJ endorsed Mann J’s view that the directors’ principal purpose was improper. The exercise of the power was not validated by the concurrent existence of a subordinate but proper purpose, namely the desire to protect the company and its shareholders from the consequences of being kept in the dark about interests in the JKX shares.[13]

The Supreme Court

All five justices of the Supreme Court agreed to allow the appeal and restore Mann J’s decision but expressed different views on the proper course of action for identifying the principal purpose of a power.

Lord Sumption wrote the reasons for allowing the appeal, and the other justices concurred. He pointed out that the Court of Appeal erred in its interpretation of the purposes for which the power to impose restriction notices was granted. When the instrument granting the power is silent, the range of proper purposes is determined by looking at the context in which the power was granted and at its effects.[14] In the case at hand, all relevant circumstances point to the conclusion that the power to restrict the rights attaching to shares is subsidiary to the power to request information.[15] The Court of Appeal was wrong to regard it as independent from the need to obtain accurate information. The power to impose restrictions cannot be turned into a tool to manipulate the outcome of shareholders’ resolutions, or a weapon of defence against corporate raiders. This would upset the constitutional balance of rights between shareholders and directors, with broader implications on the proper operation of the capital market.[16]

In Lord Sumption’s view, the power to impose restriction notices has three closely related purposes: to induce the shareholder to comply with a disclosure notice; to protect the company and its shareholders against having to decide in the absence of all relevant information; and to impose a sanction on the addressee of a disclosure notice for as long as the non-compliance persists.[17] None of these purposes was dominant when the JKX board decided to restrict the minority shareholders’ rights. As the trial court established, the board’s main objective was to influence the outcome of the forthcoming AGM. Consequently, exercise of the power should be set aside, as per Mann J’s decision.

Lord Sumption’s analysis of the meaning and application of the proper purposes rule in the case of mixed purposes was the main point of disagreement between justices. Drawing on British and Australian precedents, he argued that, when a decision to exercise a fiduciary power is motivated by a mix or proper and improper purposes, the principal (or dominant, or substantial) purpose should be identified using a causal but-for test. The decision will be invalid if the improper purpose is causative, in the sense that, but for its presence, the power would not have been exercised.[18]

The but-for test for determining the most relevant purpose, Lord Sumption argued, has several advantages over the more conventional test, which equates the principal (dominant, substantive) purpose with the “weightiest” purpose, i.e. the purpose about which directors felt the strongest. First, the former test avoids the practical difficulties of the latter. When multiple concurrent purposes exist, it is difficult and impractical to weigh them and rank them in order of intensity.[19] Second, as a matter of principle and policy, a fiduciary power must be exercised only for the purposes for which it was given. When, as it is often the case, mixed purposes exist, the law allows the decision to stand as long as it has not caused injustice to the interests it seeks to protect. When injustice occurred, the evaluation of the decision inevitably moves “in the realm of causation.”[20] If without the improper purpose the impugned decision would not have been adopted, then it would be irrational to allow the decision to stand simply because the directors also had proper and weightier considerations in mind. Conversely, if both proper and improper motives existed, and the power would still have been exercised in the absence of the improper ones, there is no compelling reason to set the decision aside.[21]

In most cases, Lord Sumption conceded, the two tests will lead to the same result. The weightiest purpose is often causative as well. In Eclairs, however, the two tests led to different results.[22] The trial judge found that the weightiest purpose, namely the desire to influence the outcome of the AGM and defeat the corporate raiders, was improper, which rendered the decision voidable. He also found that the weightiest purpose was not causative. Had the directors applied their minds to the proper purposes of the power to impose restriction notices, they would have reached the same decision. Consequently, under a but-for test, the decision would probably have been allowed to stand. The latter scenario, however, was not pleaded in due course, and could not be taken into account.

Lord Hodge agreed unconditionally with the but-for test to the proper purpose rule, while Lord Clarke and Lord Mance (with whom Lord Neuberger agreed) declined to express a conclusive opinion. In their view, determining the test to be applied where multiple purposes exist requires further debate.

Lord Mance expressed “sympathy” with Lord Sumption’s but-for test, but remained sceptical about the rationales for adopting it.[23] He questioned Lord Sumption’s interpretation of the British and Australian cases that he invoked in support for the causal test, and disagreed that a causal approach has practical advantages over the principal (weightiest) purpose approach. In his view, it may be easier to identify the weightiest purpose than to determine how directors would have acted had they not taken into account improper considerations.[24] Furthermore, the evidential standard required to establish a causal link is unclear. Is probability enough or does the test require certainty that the decision would have been the same?[25]


Eclairs is illustrative of the most frequent scenario in which the proper purposes rule is invoked in company law: the exercise of a power affecting the balance of authority between directors and shareholders. In UK company law, the company’s constitution is essential in determining the distribution of decision-making powers between directors and shareholders. In contrast to other jurisdictions, where a board’s authority is provided directly by statute,[26] the Companies Act 2006 has no general provisions on directors’ powers. UK boards receive their powers from the shareholder body, through the provisions of the articles of association.[27] S 171 of Companies Act 2006 reinforces this contractual arrangement, by confining directors’ powers strictly to the purposes for which they were granted.

The board’s temptation to usurp the constitutional distribution of powers is more acute in two contexts. First, when the control of the company is disputed between competing groups, there is a real danger that the board will use its powers to maintain the status quo or to favour a particular group. Second, boards may be tempted to use their powers to undermine the shareholder franchise, by influencing the outcome of a general meeting. There is a long line of precedents relevant to these scenarios, forbidding directors to use their authority for the primary purpose of usurping shareholders’ rights.[28]

Although the danger of misusing the powers to usurp the constitutional balance of authority is real, the proper purposes rule must not unduly restrict directors’ discretion. The courts must be careful not to intervene in the company’s internal management when reviewing the business decisions of directors. It is well established, both in UK company law and elsewhere, that courts will not review the commercial merits of directors’ decisions.[29] Consequently, the test for determining if a power was exercised for proper purposes must balance the need to protect the constitutional allocation of powers inside the company with the need to shield directors’ decision making authority from judicial second-guessing. Taking into account both these considerations, it may seem appropriate to consider proper any purpose that directors believe, in good faith, to be in the best interests of the company and its members as a whole. This is the approach that the majority of the Court of Appeal took in Eclairs.[30]

Such a broad understanding of the proper purposes rule, however, is not supported by relevant authority. In Hogg v Cramphorn Ltd, Buckley J stated that directors’ belief that what the majority shareholders intended to do was detrimental to the interests of the company is irrelevant to the question of proper purposes.[31] Similarly, in Howard Smith v Ampol Petroleum, Lord Wilberforce stated that, in determining the range of proper purposes associated with a particular power, the duty to act in the best interests of the company is not directly relevant.[32] More recently, in Dryburgh v Scotts Media Tax Ltd, Lord Glennie examined the relevant precedents and concluded that directors are not allowed to rely on the duty to act in the best interests of the company when they used a power for a collateral purpose.[33]

The confusion between the two duties may have been caused by their historical interconnection. Before Companies Act 2006, directors’ core fiduciary duty and the proper purposes rule were often amalgamated in a compound duty to “act bona fide in what [the directors] consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose.” [34] Companies Act 2006 reformulates and separates the two duties, thus ending the earlier debates about their independence. S 171(b) codifies the proper purposes rule as a positive duty to exercise powers only the purposes for which they are conferred, as opposed to the negative equitable duty not act for any collateral purpose. The duty to act in the interests of the company is codified in s 172 as a duty to promote the success of the company. The two duties, although distinct, often overlap. Within the objective limits of a power, a director may use it for any purpose which he believes promotes the success of the company. Where a power is used for a collateral purpose, however, it does not matter whether the director honestly believed that in exercising the power as he did he promoted the success of the company, or whether the decision, objectively viewed, was in the company’s best interests.[35]

If the duty to promote the success of the company is not directly relevant to the proper purposes rule, how is the propriety of a purpose determined? The courts have answered this question by developing a four stage test: (1) identify the power whose exercise is challenged; (2) identify the proper purposes for which the power was conferred; (3) identify the substantial purpose for which the power was exercised; and (4) determine if that purpose was proper.[36] Steps two and three are particularly difficult to apply in a corporate context.

The main practical difficulty in applying step two is that directors’ powers are often granted in broad terms, to allow them to be used for a variety of profitable purposes and business opportunities. It is generally agreed that identifying the proper purposes of a power is a matter of interpreting the instrument granting the power and the context in which it was granted.[37] In company law, the interpretation of the articles of association is the main method by which courts determine if a particular purpose is proper. The delegated powers, however, do not have an intrinsic, exhaustive list of proper purposes. The constitution is rarely the product of detailed debates about the purpose of a specific provision or power. Most provisions are either adopted from the model articles or are broad, boilerplate statements.[38] In Howard Smith, Lord Wilberforce recognised this difficulty and acknowledged that it is impossible to enumerate exhaustively the proper purposes of a power.[39]

While step two requires an objective analysis of the source and context of the delegation of power, step three is a subjective exercise.[40] In determining the particular ends that the directors intended to achieve, the courts must take into account the all relevant circumstances that existed when the decision to exercise the power was made.[41] When the directors are motivated by more than one purpose, the test for legality is the primary or dominant purpose.[42]

The traditional understanding of the primary or dominant purpose is the purpose that weighted the heaviest in directors’ minds when they exercised the power.[43] In Eclairs, Lord Sumption questioned the practicability of the weightiest purpose test, by emphasising the difficulties associated with measuring the intensity of each purpose and arranging them in order of importance.[44] Lord Sumption’s view finds support in Australian jurisprudence and case law. In many cases where multiple purposes exist, it is argued, not even the decision maker is able to identify which purpose was the most influential in his mind. Consequently, it is artificial and meaningless to ask the court to evaluate the purposes and select a dominant one.[45] Allowing the courts to uphold or invalidate a decision based on what they consider to be the most influential purpose in directors’ minds may give judges the power to interfere with directors’ business judgment, which goes against the fundamental principle of judicial non-interference with a company’s management.[46]

The but-for test avoids these pitfalls. It neither requires an evaluation of the intensity of purposes, nor creates the danger of judicial second-guessing of business decisions. When directors are actuated by both proper and improper purposes, the proper purpose rule is breached only if there is an improper purpose which is causative, in the sense that, but for its presence, the decision would not have been taken as it was. In Eclairs, Lord Sumption relied on Whitehouse v Carlton Hotel Pty Ltd[47] as support for the causal test. Although the but-for test analysis was obiter in Whitehouse, numerous other Australian courts have applied this test.[48] The test was also applied by British courts, mostly in the context of trustees’ powers of appointment. The test has doctrinal support as well. After reviewing a significant number of authorities on the application of the proper purposes rule, the leading treatise on legal powers concludes that “the ‘but for’ test seems more appropriate and more consistent with the reported cases.”[49]

A causal approach to the proper purposes doctrine has close parallels to the fiduciary duty to take into account relevant considerations and omit irrelevant ones (the duty of genuine consideration).[50] This duty is not breached automatically when a relevant consideration is ignored, or when an irrelevant one is taken into account. A fiduciary will be in breach if it can be demonstrated that, but for his ignorance or misunderstanding of a relevant consideration, or but for the presence of an irrelevant consideration, he would have acted differently, or not at all.[51]


For the most part, the distinction between the weightiest and the causative tests for identifying the principal purpose may be irrelevant. The weightiest purpose will usually be causative as well. When the two tests lead to different results, as in Eclairs, identifying the most suitable test becomes a pressing concern. Lord Sumption’s interpretation of the proper purposes rule has strong intellectual appeal. Allowing a decision to stand when it can be proven that the same result would have been achieved if the improper purposes had been ignored enhances the certainty and finality of fiduciaries’ decisions and reinforces the general principle against interference with their exercise of discretion. The Supreme Court’s decision in Eclairs, however, could only suggest these developments in general terms. The trial judge investigated only tentatively the causal link between the improper purpose of aiming to influence the outcome of the AGM and the exercise of the power to impose restrictions, and refused to allow any point on causation to be raised. It is to be hoped that the Supreme Court will follow Lord Sumption and adopt the but-for test in the future.

[1] S 171(b) codifies the pre-existing law on the subject. See Re West Coast Capital (LIOS) Ltd [2008] CSOH 72, per Lord Glennie at [21].

[2] Ex Parte Hill (1883) 23 Ch D 695 at 704, per Bowen LJ.

[3] [2015] UKSC 71; [2016] 1 BCLC 1.

[4] Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2013] EWHC 2631 (Ch); [2014] 1 BCLC 202.

[5] [2014] 1 BCLC 202 at 265.

[6] Ibid. at 273.

[7] Ibid at 274.

[8] Ibid at 271.

[9] Eclairs Group Ltd and another v JKX Oil & Gas plc and others [2014] EWCA Civ 640; [2014] 2 BCLC 164.

[10] [2014] 2 BCLC 164 at 201-202.

[11] Ibid. at 201.

[12] Ibid. at 199.

[13] Ibid. at 197-198.

[14] [2016] 1 BCLC 1 at 18.

[15] Ibid. at 19.

[16] Ibid.

[17] Ibid. at 18.

[18] Ibid at 11-13.

[19] Ibid at 11.

[20] Ibid.

[21] Ibid.

[22] Ibid.

[23] Ibid. at 25

[24] Ibid.

[25] Ibid.

[26] See e.g. section 141(a) of the Delaware General Corporation Law.

[27] David Kershaw, Company Law in Context: Text and Materials, 2nd ed. (Oxford: OUP, 2012) 191.

[28] Fraser v Whalley (1864) 2 H & M 10; Cannon v Trask (1875) LR 20 Eq 669; Anglo-Universal Bank v Baragnon (1881) 45 LT 362; Piercy v S Mills & Co [1918-19] All ER Rep 313; Hogg v Cramphorn Ltd [1966] 3 All ER 420; Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126.

[29] See Carlen v Drury (1812) 1 Ves & B 154, 158, per Lord Eldon: “This court is not to be required to take the management of every playhouse and brewhouse in the Kingdom”. See also Andrew Keay, Directors’ Duties, 2nd ed. (Bristol: Jordans, 2014) 110-111; Geraint Thomas, Thomas on Powers, 2nd ed. (Oxford: OUP, 2012) 444.

[30] [2014] 2 BCLC 164 at 201-202.

[31] Hogg v Cramphorn Ltd [1966] 3 All ER 420 at 428.

[32] Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1134. See also Regentcrest v Cohen [2001] BCC 494, 514, per Jonathan Parker J.

[33] Dryburgh v Scotts Media Tax Ltd [2011] CSOH 147 at [92].

[34] Smith & Fawcett Ltd, Re [1942] 1 All ER 542 at 543, per Greene LJ. See also JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 at 173, per Chadwick LJ.

[35] Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598; Advance Bank v FAI Insurances (1987) 12 ACLR 118 at 137; Whitehouse v Carlton Hotel Pty Ltd (1987) 11 ACLR 715 at 721.

[36] Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1134; Madoff Securities International Ltd (in liquidation) v Raven and others [2013] EWHC 3147 (Comm) at [195]-[196].

[37] Peskin v Anderson [2001] 1 BCLC 372; Criterion Properties plc v Stratford UK Properties LLC and others [2006] 1 BCLC 729. Richard Nolan, “Controlling Fiduciary Power” (2009) 68(2) Cambridge Law Journal 293 at 299.

[38] Kershaw, supra note 27 at 395-396.

[39] Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1134 (“To define in advance exact limits beyond which directors must not pass is, in their Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated”). See also David Kershaw, “The Illusion of Importance: Reconsidering the UK’s Takeover Defence Prohibition’” (2007) 56(2) International & Comparative Law Quarterly 267 at 282-289.

[40] Nolan, supra note 37 at 299.

[41] Thomas, supra note 29 at 454.

[42] Hirsche v Sims [1894] AC 654, PC; Hindle v John Cotton Ltd (1919) 56 SLT 625; Mills v Mills (1938) 60 CLR 150, Aust HC; Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1131.

[43] [2016] 1 BCLC 1 at 10.

[44] Ibid.

[45] David Bennett, “The Ascertainment of Purpose when Bona Fides are in Issue: Some Logical Problems” (1989) 12(1) Sydney Law Review 5 at 7; Keay, supra note 29 at 101-102.

[46] Keay, supra note 29 at 101.

[47] Whitehouse & Anor v Carlton Hotels Pty Ltd (1987) 61 ACLR 715 at 721 (“As a matter of logic and principle, the preferable view would seem to be that, regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, the power would not have been exercised”).

[48] Keay, supra note 29 at 103-104.

[49] Thomas, supra note 29 at 454.

[50] Pitt v Holt and Futter v Futter [2011] 2 All ER 450 at 478-479.

[51] Thomas, supra note 29 at 550-551.

Posted in Uncategorized | Leave a comment

Are Corporations Gendered?

To the dyed-in-the-wool neoclassical law and economics scholar, thinking about business corporations in terms of gender attributes is pushing the reification metaphor a notch too far. An emerging corporate governance body of research, however, suggests that there are connections between values that are stereotypically associated with the masculine or feminine gender, and the values that directors and managers prioritise.  Directors who emphasise stereotypical masculine values such as power, achievement and competitiveness, are more shareholder oriented. Conversely, universalism, benevolence and concern with relationships, values associated with the feminine gender, correlate positively with a stakeholder approach. As the Anglo-American model of corporate governance moves away from unmitigated shareholder primacy towards a more long-term, stakeholder-inclusive approach, managers and boards of directors are expected to display more attributes belonging to the female gender and leadership stereotypes. This insight brings a new perspective on the multitude of recent legislative, regulatory and market-based initiatives aimed at increasing female representation in the boardroom and in executive positions.

Corporate personality and corporate values       

Neoclassical and institutional economics, which have been the dominant ideologies behind the Anglo-American model of corporate governance over the past few decades, attach little importance to the idea of separate corporate legal personality. Building on the visionary insights of Berle & Means, Coase, and Jensen & Meckling, the prevailing contemporary understanding of the corporation emphasises its contractual foundations. The corporation is neither a person, nor a thing capable of being owned, but a set of contracting relationships among individuals. References to its separate personality only obscure the essence of these transactions.[1]

Before the rise of the neoclassical theory of the firm, philosophers, political scientists and lawyers were engaged in seemingly interminable debates about the real or fictitious nature of the corporate personality. These controversies died down at the end of 1920s, when the corporate realism theory succumbed to a series of persuasive critiques.[2] In the recent years, however, the interest in realist ideas has been revived by issues such as corporate criminal liability, or the extent to which corporations should be given human rights, such as freedom of speech, freedom of religion, or the right not to provide self-incriminating evidence. Another current problem that echoes past controversies on corporate personality is whether corporations can be said to have interests and values.

The problem of corporate interests and values is often addressed from the shareholders versus stakeholders orientation of directors and managers. The shareholder-stakeholder debate is as old as the modern theory of the firm. Launched with the Berle-Dodd dispute of the early 1930s, the issue of whom directors and managers should serve continues unabated to this day.[3] The Anglo-American corporate governance has traditionally embraced the shareholder wealth maximisation perspective. Legislative and regulatory reforms over the past decades, however, have given more prominence to the interests of non-financial corporate stakeholders. These reforms include increased transparency on non-financial and sustainability issues, and fiduciary duties to consider the interests of non-shareholder constituencies. The shift towards a more inclusive stakeholder approach has affected the public perceptions and expectations regarding effective corporate leadership.

Corporate values and gender stereotypes

An emerging strand of research in corporate governance links the shareholder versus stakeholder interests orientation with feminine and, respectively, masculine attributes and leadership styles.

Research on gender stereotypes consistently identifies two distinct types of behaviour, labelled “agentic” and “communal”. The agentic qualities are associated with a masculine style and the communal qualities are regarded as feminine. The agentic stereotype refers to a self-interested, task-focused orientation and concern with mastery, dominance, and control. The communal stereotype refers to an interpersonal orientation and concern with relationships and the welfare of others.[4]

In the context of leadership roles, research has established the existence of a deeply-rooted perception that effective leaders are endowed with agentic qualities, such as ambition, confidence, self-sufficiency, and dominance, and display fewer communal attributes. The role of business executive, in particular, is thought to require agentic attributes such as task focus, decisiveness, and competitiveness. This perceived fit between what is managerial and what is masculine led to the “think manager – think male” effect, which has proven to be relatively durable since the early 1970s.[5]

These gender differences have also been found at boardroom level. Adams and Funk found that male and female directors are significantly different in terms of priorities and sets of values. Male directors are more concerned with power and task achievement, while female directors care more about universalism and benevolence.[6]  Furthermore, Adams et al. provide evidence that these differences in values between male and female directors correspond to a difference in shareholder and stakeholder orientation. Directors who emphasise stereotypical agentic values are more shareholder oriented.  Conversely the feminine communal leadership style correlates negatively with a shareholder wealth maximization approach. [7] Further research confirms these insights. Bear et al. show that firms with a higher percentage of female directors are more stakeholder oriented. They have more favourable work environments, higher concern for environmental CSR and a higher level of charitable giving.[8] Matsa and Miller provide direct evidence that Norwegian firms affected by gender quotas increased their employee costs and employment levels, while decreasing their returns to shareholders.[9]

Enlightened shareholder value and the androgynous board

In recent years, the “think manager – think male” phenomenon has shown signs of subsidence. Several factors have combined to create an emerging, androgynous leadership style.

At market level, the increasing presence and visibility of females in leadership positions are gradually altering perceptions about optimal leadership attributes.[10] At doctrinal level, there is a growing recognition that effective leadership requires a combination of the features associated with the masculine, task‐oriented and the feminine, relations‐oriented leadership styles. Thus, a new dimension to gender and leadership stereotypes has been added: the androgynous leadership style, incorporating both male and female qualities.[11]

The increased relevance of stakeholder concerns in Anglo-American corporate governance brings to the forefront the need to redefine the set of values on which the model of effective leadership is based. The board’s ability to nurture strong relations with the various corporate stakeholders has become a central part of its overall purpose and function. The relational function of the board is increasingly recognized as central in providing and maintaining resource networks that are essential for the company’s survival and success. Thus, the stereotypical feminine qualities of interpersonal orientation and concern with the welfare of others have become an essential requirement for an effective board.


[1] Michael Jensen and William Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (1976) 3 Journal of Financial Economics 305 at 310; Frank Easterbrook and Daniel Fischel, “The Corporate Contract” (1989) 89 Columbia Law Review 1416 at 1426.

[2] William Bratton, Jr., “The New Economic Theory of the Firm: Critical Perspectives from History” (1989) 41 Stanford Law Review 1471 at 1491.

[3] Adolf Berle, “Corporate Powers as Powers in Trust” (1931) 44 Harvard Law Review 1049; E. Merrick Dodd, “For Whom Are Corporate Managers Trustees?” (1932) 45 Harvard Law Review 1145; Adolf Berle, “For Whom Managers Are Trustees: A Note” (1932) 45 Harvard Law Review 1365.

[4] See David Bakan, The Duality of Human Existence: Isolation and Communion in Western Man (Boston: Beacon Press, 1966); Linda Carli and Alice Eagly, “Gender Effects on Social Influence and Emergent Leadership” in Gary Powell, ed., Handbook of Gender and Work (Thousand Oaks, CA: Sage, 1999) 203; Ronit Kark and Alice Eagly, “Gender and Leadership: Negotiating the Labyrinth” in Joan Chrisler and Donald McCreary, eds., Handbook of Gender Research in Psychology, vol. 2 (New York: Springer, 2010) 443 at 448-449.

[5] Richard Martell et al., “Sex Stereotyping in the Executive Suite: ‘Much Ado about Something’” (1998) 13 Journal of Social Behavior and Personality 127.

[6] Renee Adams and Patricia Funk “Beyond the Glass Ceiling: Does Gender Matter?” (2012) 58 Management Science 219 at 220.

[7] Renee Adams, Amir Licht and Lilach Sagiv, “Shareholders and Stakeholders: How Do Directors Decide?” (2011) 32 Strategic Management Journal 1331 at 1348.

[8] Stephen Bear, Noushi Rahman and Corinne Post , “The Impact of Board Diversity and Gender Composition on Corporate Social Responsibility and Firm Reputation” (2010) 97 Journal of Business Ethics 207 at 210.

[9] David Matsa and Amalia Miller, “A Female Style in Corporate Leadership? Evidence from Quotas” (2013) 5 American Economic Journal: Applied Economics 136.

[10] These initiatives include: non-profit organisations (such as Catalyst, The 30% Club, or 2020 Women on Boards), diversity awards (such as the Catalyst Award, or DiversityInc Top 50 Companies for Diversity), diversity indexes (such as Gender Diversity Index (GDI) of Fortune 1000 Companies) and board-ready female databases (such as Global Board Ready Women).

[11] Daewoo Park, “Androgynous Leadership Style: An Integration Rather than a Polarization” (1997) 18 Leadership & Organization Development Journal 166; Anne Koenig et al., “Are Leader Stereotypes Masculine? A Meta-Analysis of Three Research Paradigms”, (2011) 137 Psychological Bulletin 616.

Posted in Uncategorized | Leave a comment

The Benefit Corporation: From CSR Label to Hybrid Corporate Form

Corporate social responsibility is the new norm in business. With the rapid growth of socially conscious customers,[1] employees[2] and investors,[3] no company can afford to ignore CSR. Green, responsible, sustainable, ethical or socially conscious have become staple terms to describe products or business strategies. Businesses that are genuinely committed to corporate social responsibility find it increasingly difficult to distinguish themselves from competitors that make similar claims but do not actually share the vision. This problem, often referred to as “greenwashing,” is affecting ethically-minded consumers, investors, and businesses alike.

Third-party certification is an important remedy against greenwashing. In both Europe and the US, social and environmental labelling initiatives have multiplied in recent years.[4] These labels usually certify a specific product (e.g. “Organic” or “Fair Trade” coffee), facility (e.g. a “LEED” or “Energy Star” building) or line of business (e.g. “Rainforest Alliance” farms or forestry companies). They do not offer a complete picture of a company’s performance across all relevant environmental, social and governance indicators.

To address this gap, B Lab, a Pennsylvania-based not-for-profit organisation, has created a certification system for businesses wishing to be recognised as genuinely committed to social responsibility. In 2007, B Lab launched a certification programme that evaluates businesses (incorporated or non-incorporated) against a set of rigorous social, environmental, accountability and transparency standards. Unlike CSR certifications that target a particular product or line of business, the B Lab certification applies across all product lines and issue areas of the certified entity. Businesses that achieve the minimum performance standards and meet the legal requirements become certified benefit corporations (or certified B Corps).[5]

To date, over 1,200 businesses from 38 countries have the status of certified B Corporation.[6] These tend to be start-ups or small businesses, but a few house-hold names such as Ben and Jerry’s or Patagonia have also joined the B Corp family. Although increasingly popular, the B Corp certification has no legal status: it is simply a label provided by a private organisation, without any specific legislative framework or legal consequences attached to it. The B Corp certification is thus mainly a marketing tool that enhances the visibility of socially responsible businesses wishing to distinguish themselves from greenwashing competitors. It does not address the legal obstacles that mission-driven for-profit companies face in the US and elsewhere. Chief among these obstacles is the deeply ingrained view that the core role of managers of business corporations is to maximise shareholders’ wealth.

Fiduciary duties and the US constituency statutes

Milton Friedman, Nobel Prize laureate and one of the twentieth century’s most prominent advocates of free markets, famously stated that the one and only social responsibility of a business corporation is to increase its profits by all available legal means.[7] US corporate law largely reflects this view: the current legal framework is structured to ensure profit maximisation, not social responsibility.[8] The Michigan Supreme Court forcefully articulated this idea almost a century ago, in Dodge v. Ford Motor Company.[9] The company’s president and majority shareholder, Henry Ford, sought to use the corporate profits to subsidise car price reductions and to increase employment, instead of distributing dividends. Henry Ford’s vision is a textbook example of genuine CSR: the interests of customers and employees were ends in themselves, rather than mere means to shareholder wealth maximisation. This, however, was the very reason why the court found Henry Ford’s decision flawed:

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.[10]

The current American corporate law remains largely unchanged. A board’s decision to use retained earnings to finance price reductions or to increase employee salaries is immune from shareholder attack only if it is justified as a device to increase long-term shareholder wealth.

The constituency statutes adopted by a majority of US states over the past two decades have not redressed the balance between shareholders and other constituencies. The constituency statutes were adopted in response to the wave of hostile leveraged buyout transactions of the 1980s. These transactions were often highly detrimental for non-shareholder constituencies. The typical hostile acquirer replaced incumbent senior managers, sold off core corporate assets, laid off employees and increased significantly the corporate debt. Intense managerial lobbying led to the rapid adoption by state legislatures of non-shareholder constituency statutes.

These statutes grant directors the power (but, with very few exceptions, not the duty) to balance the interests of other corporate constituencies against the interests of shareholders in setting the corporate policy. The constituency statutes offer little in the way of genuine CSR. They neither displace shareholder wealth maximisation nor give directors the power to advance the interests of other stakeholders as ends in themselves. Moreover, none of these statutes grants any non-shareholder constituency the right to sue directors for failure to take their interests into account.[11]

Delaware, the most important corporate law jurisdictions in the US,[12] does not have a constituency statute. The Delaware Supreme Court has ruled that, in creating anti-takeover defences, the board may consider the interests of other constituencies only if there is a related benefit to the long-term shareholder value.[13] In a recent decision, the Delaware Court of Chancery reaffirmed that there is very little scope for genuine CSR in Delaware law, both in the regular course or business and in a change of control scenario.

eBay Domestic Holdings, Inc. v. Newmark[14] concerned the validity of the business model adopted by Jim Buckmaster and Craig Newmark, the founders of the free classifieds website Craigslist. Buckmaster and Newmark were majority shareholders and directors of Craigslist. Their business plan was to operate the company in the interest of the community as a whole, by maintaining nearly all classified advertisements free of charge. Although a for-profit business, Craigslist’s business culture and values placed customers ahead of shareholders. Buckmaster and Newmark adopted a series of protective devices (including a shareholder rights plan) which allowed them to protect their business vision against eBay, a disgruntled shareholder.

Chancellor Chandler held that, in most instances, genuine CSR is incompatible with the for-profit corporate form. In a for-profit corporation, a policy that does not seek to maximise shareholder value is inconsistent with directors’ fiduciary duties:

I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities. The corporate form in which Craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends […] Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form […] I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders.[15]

In light of these decisions, there is considerable uncertainty in the US corporate law as to when and to what extent corporate directors may consider the interests of non-shareholder constituencies. Hence the need for new legal solutions able to meet the unique needs of for-profit mission-driven businesses. Several alternative forms of business organisation have been created, such as hybrid not-for-profit corporations, low-profit limited liability companies (L3Cs), or flexible purpose corporations. None of these vehicles, however, has proven effective in serving the public interest and in meeting the needs of the entrepreneurs, investors, and consumers.[16] This is the gap that the registered B Corp, a newly introduced form of business corporation, aims to fill.

Registered B Corps: “Milton Friedman would have loved this” [17]

The certified B Corp programme launched by B Lab did little to alleviate the legal uncertainties regarding the compatibility between directors’ fiduciary duties and promotion of other constituencies’ interests. Something more was needed: a hybrid form of business organisation able to balance effectively the profit seeking and social benefit functions. Hence, B Lab partnered with Drinker Biddle and Reath LLP and drafted Model Legislation[18] for benefit corporations (often referred to as B Corps or registered B Corps).[19]

Certified B Corps and registered B Corps are two distinct aspects of the benefit corporation movement. The former is a marketing tool allowing mission-driven businesses anywhere in the world to be attested by B Lab as being socially responsible. The latter is a legally recognised form of for-profit corporation, available to companies with their registered offices in one of the US jurisdictions that have passed benefit corporations legislation.

Maryland was the first US state to pass benefit corporation legislation in 2010. Other states followed suit quickly. Currently, 27 states have passed benefit corporation statutes, and 14 other states are in the process of adopting them.[20] The benefit corporation statutes are placed within existing state corporation codes, so that the latter apply to benefit corporations in every respect except the matters explicitly covered by the former. There are no taxation benefits specific to registered B Corps.

To date, nearly 1600 benefit corporations have been incorporated across the US, including companies like Method Products, Ben and Jerry’s, Patagonia, Plum Organics, Greyston Bakery and Rasmussen College.[21]  In July 2013, Delaware became the 19th state to enact benefit corporation legislation. The Delaware B Corp is officially named “public benefit corporation” or “P.B.C.”, but is typically be referred to as benefit corporation or B Corp. Currently there are close to 200 benefit corporations in Delaware.[22]

The benefit corporation statutes vary from state to state, but they have similar core requirements with respect to purpose, accountability, and transparency:

  • benefit corporations must have as stated purpose the creation of a material, positive impact on society and the environment;
  • in discharging their fiduciary duties, directors must take into account, in addition to shareholders’ interests, a wide range of non-financial interests;
  • benefit corporations must report regularly on their overall social and environmental performance as assessed against a comprehensive, credible, independent, and transparent standard.[23]

The Model Legislation requires B Corps to have as stated purpose the creation of a general public benefit and, optionally, more specific public benefit purposes. The general public benefit purpose requires consideration of the effects that the business has on society and the environment. These include:

  • the effects on employees of the benefit corporation, its subsidiaries, and its suppliers;
  • the interests of customers;
  • community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or its suppliers are located;
  • the local and global environment.[24]

Examples of specific benefits include:

  • providing low-income individuals or communities with beneficial products or services;
  • protecting or restoring the environment;
  • promoting the arts, sciences, or advancement of knowledge.[25]

The idea behind requiring a general public benefit was to prevent the use of the B Corp form by corporations only interested in greenwashing. Without a general benefit requirement, some B Corps could choose only a narrow specific public benefit purpose and dismiss as irrelevant all other non-financial considerations when making decisions.[26]

Although directors must take into account the effects that their business decisions have on a wide range of stakeholders, these stakeholders are not owed any direct duties and normally have no enforcement rights.[27] The Model Legislation introduces a “benefit enforcement procedure” which specifies the circumstances under which a claim for failure to pursue the stated public benefit purpose, or a claim for breach of duty may be asserted against the B Corp or its directors or officers.[28]

The Delaware benefit corporation legislation differs from Model Legislation in several respects. First, Delaware requires companies to choose one or more specific public benefit purposes, rather than simply allowing them to do so.[29] Second, Delaware requires reporting to shareholders on a biennial rather than annual basis.[30] Finally, the Delaware statute does not include a special benefit enforcement proceeding. Enforcement of directors’ duties follows the general corporate law regime.

To B or not to B Corp

What are the advantages of becoming a registered B Corp, as compared to a regular for-profit corporation? From a corporate law perspective, there are several clear advantages.

First, in a takeover scenario, the target’s directors must consider the long-term interests of the benefit corporation, including the possibility that these interests may be best served by the continued independence of the benefit corporation.[31] This may not always be allowed in a regular corporation. The Craigslist case showed that mission-driven entrepreneurs running a regular for-profit company may not be able to maintain their business vision in the face of a hostile change of control.

In Delaware, a state without a constituency statute, in a change of control scenario the business judgment rule standard of review is replaced with the enhanced scrutiny standard. Under this standard, directors’ decision-making must satisfy the requirements laid down in Unocal[32] and Revlon[33]. Unocal holds that a board of directors may implement anti-takeover defences only if they have reasonable grounds to believe that the proposed threatens the target’s corporate policy and effectiveness (which includes the need to protect non-financial interests), and the defensive measures are proportional to the threat. In Revlon the Court declared that, when the sale or break-up of the company is inevitable, the target managers’ fiduciary obligations require them to maximise the value of the existing shareholders by seeking the highest price available. Under the Delaware benefit corporation statute, however, the board’s obligation to consider other constituencies and society as a whole does not go away in the context of a merger or acquisition. Even if a board concludes that it is in the interests of shareholders and other constituencies to sell the company, it cannot simply sell to the highest bidder, without considering which bidder is the most suitable to continue promoting the public benefit purpose.[34]

Second, B Corp statutes remove the existing ambiguities regarding directors’ ability to consider non-financial interests as ends in themselves when making business decisions. Despite the protection that the business judgment rule offers to regular business decisions, there is a widespread belief that directors’ options are constrained to acting only in the financial interests of shareholders. This impediment is removed by the new corporate form, which explicitly requires directors to take multiple interests into consideration when making decisions.[35]

Finally, the registered B Corp form offers to mission-driven entrepreneurs certain safeguards to maintain the public benefit focus over time. For example, the amendment of the constitutional documents to delete the public benefit purposes and terminate the B Corp status requires a super-majority of two-thirds or more of voting rights.[36]

Beside these legal benefits, registered B Corps reap the same marketing benefits as certified B Corps. They stand out in an increasingly confusing marketplace, by voluntarily committing to be legally bound by higher standards of corporate purpose, accountability, and transparency. 

The future of benefit corporations

The benefit corporation statutes have the potential to create a meaningful impact on the corporate social responsibility movement, by giving mission-driven entrepreneurs and managers the tools to create and enforce a long-term sustainable business strategy. But will the B Corp movement garner enough traction to achieve this potential? Several challenges lie ahead.

The first challenge is viability. Will B Corps prove sufficiently attractive for investors? Even socially responsible investors will look for a record of long-term returns or strong long-term prospects that give them confidence to part with their money. Sceptics doubt that registered B Corps will be able to compete with greenwashing regular for-profit corporations. Registered B Corp, they argue, are destined to remain small businesses, since it is very unlikely that such corporations will be able to bear the costs of an initial public offer and the costs of subsequent compliance with listing requirements.[37]

Another test that B Corps have to pass is that of a continuing genuine commitment to the public benefit. If, despite the safety measures aimed to prevent greenwashing, B Corps will be used as window-dressing to attract ethical investors and customers, the benefit corporation movement will rapidly lose credibility among socially responsible investors and policymakers.[38]



[1] NIELSEN, “Global Consumers are Willing to Put Their Money Where Their Heart is When it Comes to Goods and Services from Companies Committed to Social Responsibility” June 17, 2014

[2] Jeanne Meister, “Corporate Social Responsibility: A Lever For Employee Attraction & Engagement” Forbes, June 06, 2012

[3] Eurosif, “European SRI Study” (2014); US-SIF, “Report on US Sustainable, Responsible and Impact Investing Trends” (2014)

[4] See e.g. UNOPS, “A Guide to Environmental Labels” (2009)

[5] h


[7] Milton Friedman, “The Social Responsibility of Business is to Increase Its Profits” New York Times Magazine, September 13, 1970

[8] William H. Clark, Jr. et al., “The Need and Rationale for the Benefit Corporation: Why It Is the Legal Form That Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” White Paper (2013) p 5 (hereinafter “White Paper”)

[9] Dodge v. Ford Motor Company, 170 N.W. 668 (Mich. 1919)

[10] Ibid at 684

[11] Leo Strine, “Making It Easier For Directors to ‘Do the Right Thing’?” (2014) 4 Harvard Business Law Review 235 at 238-239 (hereinafter “Strine”)

[12] Delaware remains the chosen home of more than half of all US publicly traded companies; 65% of Fortune 500 companies are incorporated in Delaware. Delaware Division of Corporations, “Annual Report” (2013)

[13] Unocal Corp. v. Mesa Petroleum Co. 493 A.2d 946 (Del. 1985)

[14] eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010)

[15] Ibid. at 34

[16] For an analysis of these organisation forms see Annex B to the White Paper.

[17] Andrew Kassoy, co-founder of B Lab, cited in B Lab, “Maryland First State in Union to Pass Benefit Corporation Legislation” CSR Wire, April 14, 2010

[18] (hereinafter “Model Legislation”)

[19] To avoid confusion with certified B Corps, I will refer to benefit corporations as registered B Corps.


[21] (1589 as of 07 April 2015)

[22] (184 as of 07 April 2015)

[23] Model Legislation ss. 401-402.

[24] Model Legislation s. 301

[25] Model Legislation s. 102


[27] S. 365 (b) of the Delaware statute expressly specifies that directors owe no duty to stakeholders: “A director of a public benefit corporation shall not […] have any duty to any person on account of any interest of such person in the public benefit or public benefits identified in the certificate of incorporation or on account of any interest materially affected by the corporation’s conduct […] [A director] will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.”

[28] Model Legislation s. 305. This section broadens the categories of persons that can bring a derivative suit against the directors of a B Corp, to include directors, 5% owners of the parent company, and other persons to which such a right is granted in the constitutive documents of the benefit corporation.

[29] The Delaware Code s. 362 (a)

[30] The Delaware Code s. 366

[31] Model Legislation s. 301 (a) (1) (vi)

[32]Unocal Corp. v. Mesa Petroleum Co. 493 A.2d 946 (Del. 1985)

[33] Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 506 A.2d 173 (Del. 1986)

[34] Strine at 246

[35] Model Legislation s. 301 (a)

[36] Model Legislation s. 105 (a)

[37] Lois Yurow, “Benefit Corporations and the Public Markets – Will We Ever See a Public Benefit Corporation?” Governance and Accountability Institute, Sustainability Update, November 24, 2014

[38] Strine at 249

Posted in Uncategorized | Leave a comment

Recent Developments in Sustainability Reporting

A new Directive on sustainability reporting

On 29 September 2014 the EU Council adopted a new Directive concerning disclosure of non-financial and diversity information by large companies and groups. The Directive proposal was drafted by the European Commission in April last year, and adopted by the European Parliament this April. The new Directive amends the recently adopted Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, which replaced the so-called “Accounting Directives” (the Fourth Company Law Directive 78/660/EEC on the annual accounts of certain types of companies and the Seventh Company Law Directive 83/349/EEC on consolidated accounts). The new Directive will enter into force 20 days after its publication in the EU Official Journal, giving the Member States two years thereafter to transpose it into national legislation.

The new Directive imposes on large companies a “report or explain” obligation. The reporting obligation applies to “public-interest entities” (as defined by Art. 2(1) of Directive 2013/34/EU) having more than 500 employees, i.e. approximately 6000 large companies and groups across the EU. Companies concerned are required to disclose in their non-financial reports information concerning their existing policies on environmental, social, employee, human rights, anti-corruption and bribery matters, including a description of the outcomes of their policies, relevant non-financial key performance indicators and main risks related to these matters. Companies which do not pursue policies for these matters will have to provide a clear and reasoned explanation for their choice.

In the UK, the majority of the disclosure requirements of the new Directive are already covered by the duty to prepare a Strategic Report. Sections 414 A-E of the Companies Act 2006, introduced by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, impose on companies other than those subject to the small companies regime an obligation to prepare a Strategic Report. The Strategic Report must include, among other matters, a description of the principal risks and uncertainties facing the company and an analysis, using key performance indicators, of relevant environmental and employee matters. Additionally, quoted companies must include in their Strategic Report information about the company’s policies on environmental, employee, social, community and human rights matters as well as their policy on board diversity. The main change for UK companies introduced by the new Directive is the obligation to disclose the existing policies and outcomes on anti-corruption and bribery issues.

The Directive aims to strike a balance between constraining companies to be more transparent and ensuring an adequate degree of freedom on what and how to report. Companies will retain significant control on the extent of the information disclosed and the form in which it is made public. On the latter point, companies are free to choose the set of national or international non-financial disclosure guidelines that best suit their business.

Despite the recent proliferation of international reporting guidelines and standards, currently there is no generally accepted comprehensive international standard for disclosure of non-financial information. The sustainability reporting guidelines developed by the Global Reporting Initiative appear to be the most widely adopted non-financial reporting framework.[1]  Currently in its fourth update (G4), the GRI framework provides guidelines on reporting formats, areas of disclosure and key performance indicators for all organisations, large and small, across the world.[2]

The global context

The adoption of the new Directive is part of a global trend to move away from a purely voluntary disclosure of non-financial information towards a stronger emphasis on mandatory disclosure. A recent joint study by UNEP, KPMG and GRI showed that approximately two thirds of the existing national reporting standards are mandatory.[3] At the same time, the joint study revealed an emerging trend to view mandatory and voluntary disclosure as complementary, rather than exclusive options. Many reporting entities go beyond the prescribed minimum and provide additional sustainability reporting as dictated by their business environment. A recent study prepared for the European Commission, for instance, shows that almost 80% of the world’s 250 largest companies report on their sustainability.[4]

Given the current diverse international framework for sustainability reporting, as well as companies’ increased appetite for voluntary disclosure, what is the actual utility of the new “report or explain” obligation introduced by the recent Directive? The Impact Assessment study accompanying the new Directive identifies two main problems that the instrument aims to address. The first one is a market failure evidenced by the fact that “companies have not been able to provide an appropriate response to users’ and societal demand for non-financial transparency.”[5] The second problem is a regulatory failure: legislation at both EU and Member-State level is unclear or inconsistent in terms of the disclosure requirements imposed, creating a multitude of reporting practices and formats that make comparisons across the Internal Market very difficult.

The alleged market failure raises a related question: who are the main intended recipients of the non-financial information disclosed? In the UK this question is unambiguously answered by the Financial Reporting Council’s Guidance on the Strategic Report.[6] The strategic report should only contain information that is material to shareholders.[7] Its main purpose is to provide information to shareholders, to allow them to assess how the directors have performed their duty to promote the success of the company and to evaluate the past results and future prospects of the company.[8] At international level, a study carried by ACCA in 2010 across nine jurisdictions, covering both established and developing capital markets, unveiled that almost 90% of the surveyed preparers of sustainability reports considered shareholders and potential investors as the most important audience for their narrative reports.[9]

But are shareholders really interested in non-financial information? A particular class of investors certainly are: the socially responsible (or green or ethical) investors. The SRI movement has grown exponentially over the past decade in both the EU[10] and the US[11]. Do regular, profit-driven investors pay attention to non-financial information too? A 2008 study commissioned by ACCA and carried by David Campbell of Newcastle University and Richard Slack of Northumbria University[12] found that non-financial information is quite irrelevant for investment decisions of non-SRI institutional investors.

The Report canvasses the views that sell-side analysts in the banking sector hold on the utility of voluntary non-financial statements. The sell-side analysts are a vital link in the investment information supply chain. Their primary role is to interpret company reports and provide investment advice for buy-side clients and fund managers. They have significant influence on the ultimate decision of fund allocation. In fact, many investment houses impose on fund managers restrictions on investments that go against the explicit advice of the sell-side.[13]

The Report found that there is a general belief among sell-side analysis that narrative reporting was not immediately relevant in preparing forecasts and reports to the buy-side. Social and environmental reporting, in particular, was rarely read by analysts and “universally considered irrelevant and incapable of influencing a financial forecast”.[14] The reasons for the total insignificance of sustainability reporting include lack of numerical content, too general or too complex information, and an assumption that the clients are not interested in non-financial information.[15]

How do these findings relate to the idea of a failure in the market for non-financial information? One possible interpretation is that there is no actual breakdown in supply and demand that would require legislative intervention: the main addressees of this information, for the most part, do not value it. A positive externality, however, is created for other stakeholders, such as NGOs and other civil society organisations. Another explanation of the Report’s findings is the well-known problem of investor short-termism. Matters such as risk management policies or sustainability reporting are simply immaterial for short-term investors, although they are quire relevant for the company’s long-term financial performance. A recent extensive study carried by Robert G. Eccles, Ioannis Ioannou, and George Serafeim showed that, in the long term, high sustainability firms (i.e. firms having long-standing sustainability policies and active processes of stakeholder engagement) outperform low sustainability ones in terms of both stock market and accounting measures.[16]

Yet another way of interpreting the Report is that it points to the poor quality of the non-financial information being provided: narrative reporting on sustainability matters is not factored into investment decisions because the information supplied  is unreliable (not subject to independent verification) or insufficiently material, timely or comparable. [17]  This leads to the second problem identified in the Impact Assessment for the new Directive: the regulatory failure, consisting in the fragmentation of the existing legal frameworks and inadequate cohesion and comparability of reporting practices.

How effective is the new Directive?

Does the new Directive go far enough in its prescriptions in order to correct the assumed regulatory failure? The instrument’s preamble gives the concerned companies ample scope to choose the reporting framework it wishes from among the existing national and international guidelines: “undertakings subject to this Directive may rely on national frameworks, Union based frameworks such as the Eco-Management and Audit Scheme (EMAS), and international frameworks such as the United Nations (UN) Global Compact, the Guiding Principles on Business and Human Rights implementing the UN ‘Protect, Respect and Remedy’ Framework, the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, the International Organisation for Standardisation’s ISO 26000, the International Labour Organisation’s Tripartite Declaration of principles concerning multinational enterprises and social policy, the Global Reporting Initiative, or other recognised international frameworks.”[18]

This non-prescriptive approach to reporting frameworks is justified by a concern for flexibility, but it is difficult to see how it will solve the regulatory failure problem. The Commission could have perhaps prescribed, or recommended, one of the existing reporting frameworks, such as the G4 by GRI. There are many precedents at national level in this respect. EU Member States, such as Austria, Belgium, Denmark, Finland, Germany, the Netherlands or Sweden, and countries outside the EU, such as United States and Canada, have a formal reference to GRI in their governmental corporate responsibility guidance documents or policies.[19] In Sweden, for example, state-owned companies must present a sustainability report in accordance with the GRI guidelines.[20]

Another option could have been to publish custom-made sustainability reporting guidelines at the same time as the Directive. The Commission undertook to prepare guidelines on methodology for reporting non-financial information, including non-financial key performance indicators. These guidelines, however, will be published within two years after the entry into force of the Directive and will be non-binding.[21]

What is next?

The current developments in reporting show that there is a global trend towards more extensive and more meaningful narrative reporting. The improvements in the quality and scope of reporting are driven by both regulatory demands and market demands for transparency. The future of narrative reporting seems to be the consolidation of both financial and non-financial information in a single integrated report.  The recently established International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, standard setters, accountants and NGOs, is working towards a global framework for integrated reporting that would bring together financial, environmental, social and governance information in one report.[22] It is hoped that the integrated reporting practice will lead to sustained integrated decision-making and actions that consider the creation of value over the short, medium and long term.

[1] The European Commission, “Impact Assessment Accompanying the Document Proposal for a Directive of the European Parliament and of the Council Amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups” (2013) available at (“impact Assessment”) p 21.


[3] UNEP, KPMG, GRI and UCGA, “Carrots and Sticks: Promoting Transparency and Sustainability: An update on Trends in Voluntary and Mandatory Approaches to Sustainability Reporting” (2010), available at (“Carroets and Sticks”) p. 13

[4] Katelijne van Wensen, et al., “The State of Play in Sustainability Reporting in the European Union” (2011) available at

[5] Impact Assessment, p. 11


[7] The FRC Guidance, para 5.1

[8] The FRC Guidance, paras 4.1 and 4.4

[9] ACCA and Deloitte, “Hitting the Right Notes, But What’s the Tune?” (2010), available at



[12] David Campbell and Richard Slack, “Narrative Reporting: Analysts’ Perceptions of its Value and Relevance” (2008) (“Campbell and Slack”) available at

[13] Campbell and Slack, p. 6

[14] Campbell and Slack, p. 5

[15] Campbell and Slack, p. 27

[16] Robert G. Eccles, Ioannis Ioannou, George Serafeim “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance”,.in Luigi Zingales and James Poterba, Causes and Consequences of Corporate Culture (forthcoming 2014), available online at

[17] See e.g. UNCTAD, “Investment and Enterprise Responsibility Review: Analysis of investor and enterprise policies on corporate social responsibility” (2010), available at

[18] Paragraph 9 of the Preamble.

[19] “Carrots and Sticks”, p. 4

[20] “Carrots and Sticks”, p. 66.

[21] Article 2 of the new Directive.


Posted in Uncategorized | Leave a comment

Greenhouse Gas Emissions Trading: A Market in Financial Instruments?

Last Monday (June 9) our Centre had the pleasure of hosting Alfonso Martínez-Echevarría y García de Dueñas, Professor of Commercial Law and Director of the Research Centre for Financial Markets Law at CEU San Pablo University, Madrid, Spain. Professor Martínez-Echevarría’s thought-provoking paper tackled the legal nature of the gas emissions allowances under Spanish law. More specifically, the paper investigated whether the greenhouse gas emission allowances introduced by the Directive 2003/87/EC and implemented in Spain by Law 1/2005 should be considered financial instruments and therefore the trading of such allowances should fall under the supervision of the National Securities Market Commission (CNMV), Spain’s national financial services industry regulator.

Professor Martínez-Echevarría emphasised the relevance of the issue of proper supervision by presenting the cautionary tale of the 2006 collapse of the Spanish philatelic investment schemes Afinsa and Forum Filatélico. CNMV regarded these schemes as falling outside its supervision, since their object of investment was not a financial product traded in a financial market. The narrow approach to the role of CNMV vis-à-vis these schemes facilitated the creation of a speculative bubble that eventually collapsed, causing losses to hundreds of thousands of investors.

The remaining part of the presentation focused on the legal nature of the emission allowances. Under Spanish law, the greenhouse gas emission allowance is regarded as a patrimonial subjective right, transferable subject to the specific provisions of Law 1/2005. According to article 2 of the Law 24/1988 on the Stock Market, the notion of financial instruments includes derivative contracts, which are sometimes used to acquire emission allowances. This in itself does not mean that greenhouse gas emission allowances are financial instruments, as the financial instrument is the derivative contract. Nevertheless, Professor Martínez-Echevarría argued, greenhouse gas emission allowances can be considered “atypical” transferable securities, and this categorization may allow us to treat them as financial instruments. This label would trigger a closer supervision by CNMV in order to prevent excessive speculation and increased systemic risk.

Posted in Uncategorized | Leave a comment

Social Media and Shareholder Activism

The marked increase of shareholder activism over the past years is a well-known and intensely scrutinised phenomenon. Between 2010 and 2013, for instance, activist shareholder interventions increased almost 90% globally.[1] The continuing disagreement among corporate governance scholars about the effects of shareholder activism is equally well-known. Its supporters argue that shareholder monitoring and interventions play a key role in policing managers and improving corporate performance.[2] Its opponents claim that a strong shareholder voice disrupts the board’s main task of creating and implementing a long-term corporate business strategy.[3]

Activist shareholders use a variety of tools and channels to engage with the management and with their fellow share owners. Increasingly, they are turning to electronic platforms, such as Twitter, LinkedIn, YouTube, blogs or dedicated electronic forums.  The particular appeal of these platforms is their real-time impact.  They allow activists to participate in disputes or launch new causes almost instantly.

Twitter is one of the main social media channels for corporate communications by issuers and activist investors. And Carl Icahn, one of the wealthiest persons on Wall Street, is its most famous activist user. With over 160,000 followers gained in less than one year, Icahn has proven to be a master of social media. He openly declared at the outset his intention to use Twitter as a platform to get shareholders and lawmakers to understand “how really dysfunctional our corporate governance system is.”[4]

His Twitter activity over the past year proves that he may be well on his way to achieve this goal. His first twitter campaign opposed a management buy-out of Dell Inc., led by CEO Michael Dell and his private equity partner, Silver Lake Partners. Icahn used Twitter to post updates of the battle and links to press releases and letters to Dell shareholders. Although Icahn was ultimately unsuccessful,[5] his Twitter campaign drew the attention of hoards of other investors. As a result, in August 2013, when he tweeted that he acquired a large stake in Apple Inc. because he believed the company was “extremely undervalued”, the Apple stock jumped nearly 9 USD in less than 3 minutes.[6] By September 2013, the value was up 8.5%, adding nearly 36 billion USD in market value for the technology giant.[7] His next success was the appointment of two board members in Talisman Energy, a Canadian oil and gas company, without having to wage a proxy battle. In October 2013, Icahn announced via Twitter that he had purchased a stake in Talisman and that he “[m]ay have conversations with mgmt re strategic alternatives, board seats, etc.” Two months later he tweeted that he was “[h]appy to have reached an agreement with Talisman Energy.”

In addition to his Twitter account, Icahn uses his own web platform, Shareholders’ Square Table, to publish in-depth reports about his activist campaigns. According to its mission statement, Shareholders’ Square Table “is a platform from which we can unite and fight for our rights as shareholders and steer towards the goal of real corporate democracy… [O]ur periodic posts will discuss what can be done to change our current, dysfunctional system of corporate governance.”[8]

The now-defunct MoxyVote is another example of a dedicated shareholder activism website. Launched in 2009, MoxyVote was an electronic platform where small shareholders could gather to lobby or cast their votes electronically. The platform became very successful, drawing almost 200,000 users at its peak. Its users ranged from activist NGOs, such as As You Sow, a CSR organisation focused on environmental and human rights issues, to large issuers, such as Johnson & Johnson. The platform was successfully used by small shareholders in On2 Technologies, a technology developer. Using MoxyVote, small On2 shareholders rallied together and rejected a takeover bid by Google in 2009. This caused the internet giant to improve its offer by nearly 25%.[9] MoxyVote was closed in 2012 due to fees and complex voting rules.[10]

YouTube is yet another example. In 2007, Eric Jackson, an individual shareholder of Yahoo, posted videos on YouTube to voice his disagreement with the company’s business strategy. His videos drew the attention of other small shareholders and, ultimately, that of larger institutional investors. The collective effort led to the replacement of Yahoo’s chief executive, Terry Semel.[11]

The real-time impact of digital media shareholder activism is facilitated by the growing reliance on such channels among investors. A recent Digital Engagement Study conducted by FTI Consulting Inc. showed that 80% of institutional investors believe that shareholder activists will increasingly turn to digital media to launch campaigns against target companies.[12] The same study reveals that the majority of institutional investors continue to rely heavily on traditional disclosure methods (such as filings with competent authorities or press releases), with only 14% looking for information directly on social media. Nevertheless, 40% of institutional investors use social media to seek information about companies via third-party influencers, such as sell-side analysts, proxy advisors or other institutional investors. Furthermore, investors find digital communications 13% more insightful and 11% more motivating than traditional disclosure methods.[13]

Interestingly, the growing direct and indirect reliance of institutional investors on social and digital media channels is not matched at the other side by a strong social media presence of issuers. A more recent FTI study[14] shows that almost half of FTSE 100 companies are not using Twitter regularly to communicate their latest financial results. The 2013 FTI study also shows that only 11% of the surveyed institutional investors were confident that their investee companies are adequately prepared to counter digital attacks by activists.

The gap between investors’ growing appetite for social media and issuers’ relative lack of enthusiasm for these platforms could raise corporate governance issues. Very few companies have dedicated adequate resources to communicate via electronic platforms with key stakeholders before they are influenced by activist investors. The daily management of social media is usually left to the corporate communications department, with little or no involvement from investor relations or other departments that are better equipped to make real-time decisions with potentially significant financial implications.[15]

Icahn’s Twitter campaigns have shown that social media activism could put a target company on the spotlight almost instantaneously. This means intense scrutiny by a wide range of investors and stakeholders, looking at why the activist is targeting the company and what changes ought to be made. The management is placed under significant pressure to respond swiftly and to present its own view of the criticisms raised by activists. As Sandra Rubin, a Toronto-based strategic consultant highlighted, “it all comes down to a very important communications battle. Social media has become very, very important on that front.”[16]

[1] Linklaters, “Activist Investors Turn Up the Heat in Global Boardrooms” News Release, 11 November 2013

[2] Lucian Bebchuk is one of the most prominent supporters of shareholder activism. He is the director of Shareholder Rights Project, a clinical program run by Harvard Law School advising several institutional investors on a range of issues, including engagement with their portfolio companies.

[3] Martin Lipton, for example, a founding partner of Wachtell, Lipton, Rosen & Katz is an outspoken critic of shareholder activism.

[4]David Benoit  “Carl Icahn Wants to Create Twitter Movement” Wall Street Journal, 9 September 2013

[5] Abram Brown “Icahn Admits Defeat And Calls Off Campaign To Stop Dell Buyout” Forbes, 9 September 2013

[6] Philip Elmer-DeWitt, “Apple: The Carl Icahn Effect” CNN Money – Fortune, 13 August 2013

[7] David Benoit  “Carl Icahn Wants to Create Twitter Movement” Wall Street Journal, 9 September 2013


[9] Rhea Wessel “Activist Investors Turn to Social Media to Enlist Support” New York Times,  24 March 2011

[10] Ross Kerber “Shareholder Website Closing, Cites Complex Voting Rules” Reuters, 10 July 2012

[11] Mark Glaser, “How One Investor Used Social Media to Shake Up Yahoo” PBS Mediashift,  21 February 2008

[12] FTI Consulting, “Digital Engagement Study: Investor Views on Shareholder Activism” 6 November 2013

[13] Ibid.

[14] FTI, “A Social Divide in the City: Twitter for Financial Reporting Performance Index” 4 February 2014

[15] Lex Suvanto, Dan Webber and Gregory Marose “Countering Shareholder Activism: The Digital Opportunity” Edelman, 17 December 2013

[16] Sandra Rubin “Shareholder Activism’s New Age” Lexpert, February 2014

Posted in Uncategorized | Leave a comment

Board diversity as a corporate governance tool

On November 20, the European Parliament approved the European Commission’s legislative proposal to improve the gender balance in company boards. The proposed directive sets a minimum threshold of 40% of the under-represented sex in non-executive board-member positions in listed companies and a “flexi quota” (self-imposed targets) for executive directors, to be met by 2020. If the proposal becomes law, publicly listed companies with less than 40% of women among their non-executive board members will be required to adopt a selection procedure for board members, which gives priority to qualified female candidates. Small and medium-sized enterprises, while not bound by this requirement, will be encouraged to improve the gender balance at all levels of management and on boards.

Corporate board diversity (mostly in the form of gender diversity) has been a very dynamic area of corporate governance in Europe over the past decade. Norway is the frontrunner in the reforms promoting gender diversity, with a 40% quota of women on boards imposed on publicly listed companies since 2003. Several other European countries, including Spain, France, Belgium and Netherlands, have passed laws imposing quotas of women representation on board.

UK regulators preferred a soft law approach. The UK Corporate Governance Code recommends that board members be appointed “on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender” (principle B.2). In 2010, the UK Government commissioned Lord Davies to investigate the barriers preventing women from reaching senior decision-making roles in corporations. Davies’ report of 2011, with follow-ups in 2012 and 2013, maintained the soft law approach by recommending a voluntary, disclosure-based, strategy aimed to create a culture of diversity from within corporations.

Board diversity is, unsurprisingly, a very hot topic in academic research as well (for recent examples see Ferreira 2010; Broome et al., 2011; Dobbin & Jung, 2011). From a corporate governance perspective, however, the concrete ways in which board diversity contributes to better corporate governance and increased firm value are not altogether clear. The evidence drawn from empirical research is mixed and inconclusive. While academics may be suspected of being disconnected from the practical aspects of everyday life, business practitioners, it seems, are none the wiser. A recent study has shown that, despite showing an almost universal assent to the value of diversity in abstracto, corporate directors and officers have difficulty providing specific concrete examples of instances or ways in which diversity adds value to their boards (Broome et al., 2011).

The studies on the relation between board diversity and corporate performance have identified several main benefits and costs of diversity. On the benefits side, the positive business effects of board diversity include:

  • improved access to information, increased creativity and more effective problem-solving
  • better understanding of the marketplace, customers and suppliers
  • improved relations with employees, by signalling that the company values diversity and offers mentoring and advancement opportunities for all groups of employees
  • improved public image, by conforming to societal expectations

On the costs side, the potential downsides of diversity include:

  • decreased cohesion in the board, resulting in distrust, lack of cooperation and breakdown in communication
  • a lengthier and more costly decision-making process
  • decrease of quality of decisions, due to insufficient business expertise of directors chosen on diversity criteria
  • enhanced conflicts of interest by directors aiming to promote agendas or ideologies

From a corporate governance perspective, some of the most promising arguments in support of diversity are those linking diversity with directors’ improved ability to discharge their main duties. The first duty that comes to mind is the duty of care, skill and diligence (s. 174 of Companies Act 2006). The improved access to information, the diversity of viewpoints, and the greater scope for debates could increase the quality of business judgment and the outcomes of board deliberations.

Another example is directors’ duty to take into account the interests of relevant stakeholders, while promoting the success of the company as a whole (s. 172 of Companies Act 2006). Board diversity may help directors weigh more accurately the relevant considerations by helping to correct some of their prejudices and biases (Langevoort 2011). The different traits or characteristics associated with a certain ethnicity or gender create cognitive and behavioural diversity in the boardroom, which in turn may lead to a more balanced weighting of relevant considerations for each decision. Another way in which diversity could improve compliance with this duty is the difference between male and female directors in terms of self- and other- orientation: it has been argued that women directors have a greater “other-orientation” (Langevoort 2011), and hence are more committed to the development of stakeholder relationships and the long-term firm value.

Board diversity may also assist non-executive directors in discharging their oversight duty, requiring them to scrutinise the executive directors’ performance and the company’s system of financial controls and risk management (UK Corporate Governance Code, Principle A.4). A diversified board increases non-executives’ independence by reducing the probability of “groupthink”. Groupthink is a feature of homogenous groups, manifested in loss of individual creativity and independent thinking due to loyalty to group norms and desire for harmony (Janis 1972). Diverse boards undermine the homogeneity required by groupthink and reduce the likelihood of uncritical rubber-stamping of management’s decisions.

These avenues of research could bring important insights into the value of diversity as a corporate governance tool. In all advanced societies of today it is unacceptable to doubt the value of diversity, and rightfully so. In the context of corporate governance, the attempt to find a more concrete causal links between board diversity and good corporate governance does not call into question the intrinsic value of diversity within the firm. On the contrary, this exercise will provide contextual evidence to support diversity as an overarching value.



Lisa L. Broome, John M. Conley and Kimberly D. Krawiec, “Dangerous Categories: Narratives of Corporate Board Diversity” (2011) 89 North Carolina Law Review 759

Frank Dobbin and Jiwook Jung, “Corporate Board Gender Diversity and Stock Performance: The Competence Gap or Institutional Investor Bias” (2011) 89 North Carolina Law Review 809

Lisa M. Fairfax, “The Bottom Line on Board Diversity: A Cost-Benefit Analysis of the Business Rationales for Diversity on Corporate Boards” (2005) Wisconsin Law Review 796

Daniel Ferreira, “Board Diversity” in H. Kent Baker and Ronald Anderson, eds., Corporate Governance: A Synthesis of Theory, Research, and Practice (Hobioken, N.J: Wiley, 2010) 225-243

Irving L. Janis, Victims of Groupthink: A Psychological Study of Foreign-Policy Decisions and Fiascoes (Boston: Houghton Mifflin, 1972)

Donald C. Langevoort, “Puzzles about Corporate Boards and Board Diversity” (2011) 89 North Carolina Law Review 841.

Posted in Uncategorized | 4 Comments

Transatlantic Comparisons in Contract Law at Edinburgh Law School

From 30 August to 1 September a contract law conference took place at Edinburgh Law School. Entitled “Transatlantic Perspectives on Commercial Contract Law II”, this was the second such conference on this theme, the first having resulted in a book of the same name (available here:

The editors Martin Hogg (University of Edinburgh) and Larry Di Matteo (University of Florida) had invited guest speakers from the US and the UK. Speakers were grouped into twos, and were encouraged to take a comparative approach, commenting on their partner’s legal system in addition to their own. This allowed many of the speakers to make interesting observations on the approach of their counterparts: we don’t “do” law in the same way. An obvious difference lay in the use of case law. The US speakers noted how useful it was for UK lawyers to identify one or two high level authoritative cases. This was more difficult to do in a US context. The sheer number of cases on a given issue at State level was also a challenge for US lawyers. By contrast, many of the Scots lawyers lamented the lack of decided case law in their own system, looking with admiring eyes at some of the useful and interesting US cases. The conference also provided the opportunity for the all contributors to find out more about the UK’s European context, the Common European Sales Law being a significant point of reference.

Many excellent papers were given, not all of which can be commented on here. One of the interesting themes which emerged was the role of consent in a modern context. This was explored in several thought-provoking papers including “The Death of Consent?” by Peter Alces (The College of William and Mary School of Law) and “Offer and acceptance in modern contract law: a needless concept?” Shawn Bayern (FloridaStateUniversity of Law).

A particular highlight for this blogger was the way in which certain speakers took a classic case from the other legal system and provided their own “foreign” perspective. This was the approach of Mark Gergen (Berkley Law School, University of California) who analysed the Scottish case, White and Carter (Councils) Ltd v McGregor ([1962] AC 413). Interestingly, it seems likely that this case would have been decided in the same way in the US. Mark’s analysis of the “legitimate interest” and “not wholly unreasonable” tests was particularly thought-provoking, providing food for thought for the UK lawyers who have tended to criticise the outcome in this case.

Catherine Mitchell (HullLawSchool) and Blake Morant (Wake Forest University School of Law) provided excellent papers on interpretation of commercial contracts, Blake focussing his attention on the impact on the small business industry. The themes which emerged following discussion of these two papers were taken up later in the conference, when the participants were addressed by the Right Honourable Lord Hodge, UK Supreme Court. Lord Hodge provided his own thoughts on the reasons for continuing to exclude both prior communings and post-formation conduct in the interpretative exercise. It was clear that he was highly sensitive to one of the main criticisms levelled at the contextual approach, i.e. the increase in costs, identifying ways in which Scottish court procedure operated to help keep costs to a minimum. Almost every participant took up the opportunity to question Lord Hodge, both at the event and later over dinner.

Professors Hogg and DiMatteo are to be congratulated on their well-organised conference. The method adopted, of pairing contributors, worked well. Not only did participants learn about the “foreign” legal system, but also had cause to reflect on the merits and demerits of their own. Discussions were intensive, and much was achieved over the two days. The conference book which will finally emerge will undoubtedly be as valuable as the previous one.

Posted in Uncategorized | Leave a comment

Uncertainty in Commercial Contracts

Whilst it is understandable that parties may wish to conclude a contract leaving certain issues to be agreed at a later date, this might introduce the risk that the contract becomes void from uncertainty.  This important issue was considered by the Court of Appeal earlier this year in MRI Trading AG v Erdenet Mining Corporation LLC ([2013] EWCA Civ 156).

Essentially the dispute involved a sale of copper concentrates, in terms of which EMC, a Mongolian mining company, was the seller and MRI, a Swiss trading company, the buyer.  Disputes arose between the parties, and in 2009 they entered into arbitration.  The arbitration was terminated when they entered into a Settlement Agreement.  That Settlement Agreement bound both parties to enter into new contracts of sale.  One of those contracts of sale, the 2010 agreement, was the subject of the dispute eventually heard by the Court of Appeal.  Three clauses of this sale contract, clauses 6.1, 9.1, and 9.2 were, so EMC argued, so uncertain as to be agreements to agree, rendering the entire contract void.  In effect these clauses stipulated that the shipping schedule, and two deductions, the Treatment charge and the Refining Charge, were to be agreed during negotiations which normally took place between the parties annually.  The parties had entered into to arbitration to resolve this dispute.  Lord Justice Tomlinson, with whom Lords Justice Pill and McCombe agreed, found that the uncertainty in these clauses did not have this effect, and the contract was binding on the parties, thus overturning the arbitral award.

Court of Appeal Decision – Statement of the Law
Early in his judgment, Lord Justice Tomlinson referred the leading case Walford v Miles in which Lord Ackner confirmed that agreements to agree imposed no binding obligation ([1992] 2 AC 128).  Having thus set the scene he examined the terms of the arbitral award, in particular a quote from Lewison’s The Interpretation of Contracts which the Tribunal indicated was worth noting (quoted by Lord Justice Tomlinson at para 15):

“The effect of uncertainty may be that no contract comes into existence; or it may be that one provision in an otherwise binding contract is unenforceable.  Which of these two possibilities is likelier depends on the importance of the term which is uncertain.  The more important the term, the more likely it is that the contract as a whole is unenforceable.”

The arbitrators then considered two leading cases on uncertainty in commercial contracts, Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD ([2001] 2 Lloyd’s Rep 76) and BJ Aviation Ltd v Pool Aviation Ltd ([2002] 2 P & Cr 25).  In the former, Mamidoil, Rix LJ had summarised the law in a number of principles ([2001] 2 Lloyd’s Rep 76, para 69):

“ i) Each case must be decided on its own facts and on the construction of its own agreement.  Subject to that,
ii) Where no contract exists, the use of an expression such as “to be agreed” in relation to an essential term is likely to prevent any contract coming into existence, on the ground of uncertainty.  This may be summed up by the principle that “you cannot agree to agree.”

iii) Similarly, where no contract exists, the absence of agreement on essential terms of the agreement may prevent any contract coming into existence, again on the ground of uncertainty.

iv) However, particularly in commercial dealings between parties who are familiar with the trade in question, and particularly where the parties have acted in the belief that they had a binding contract, the courts are willing to imply terms, where that is possible, to enable the contract to be carried out. 

v) Where a contract has once come into existence, even the expression “to be agreed” in relation to future executor obligations is not necessarily fatal to its continued existence.

vi) Particularly in the case of contracts for future performance over a period, where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the courts will assist the parties to do so, so as to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain.  Certum est quod certum redid potest [translated in A.G.M. Duncan (ed) Trayner’s Latin Maxims, 4th edn, 1993, p. 76 as “That is certain which can be made certain].

vii) This is particularly the case where one party has either already had the advantage of some performance which reflects the parties’ agreement on a long term relationship, or has had to make an investment premised on that agreement.

viii) For these purposes, an express stipulation for a reasonable or fair measure or price will be a sufficient criterion for the courts to act on.  But even in the absence of express language, the courts are prepared to imply an obligation in terms of what is reasonable.   

x) The presence of an arbitration clause may assist the courts to hold a contract to be sufficiently certain or to be capable of being rendered so, presumably as indicating a commercial and contractual mechanism, which can be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, may resolve their dispute.”

Chadwick LJ also summarised the law into a number of principles in BJ Aviation.  Worthy of note are his suggestion that if “the parties must be taken to have intended to leave some essential matter, such as price or rent, to be agreed between them in the future…there is no bargain which the courts can enforce” ([2002] 2 P & CR 25, para 21).  If, however, the court is satisfied that the parties intended their bargain to be enforceable, it may imply a term that the price will be “fair”, “market” or “reasonable” ([2002] 2 P & CR 25, para 23). 

Court of Appeal – application of the law to the facts.
The arbitrators had erred in concluding that there had been no part performance in this case.  They had failed to take into account the overall commercial context, i.e. the Settlement Agreement and the fact that the parties had a long-term relationship (para 18).  Both parties had derived benefits from performing this contract for over a year.  The language of the Settlement Agreement also placed it beyond doubt that the parties intended their agreement to be legally binding.  It was certainly not indicative of a mere agreement to agree.  Lord Justice Tomlinson approved the approach of the judge at first instance where he identified the binding language used in the Settlement Agreement.  In particular use of the word “shall” was a “strong indicator that the parties did not intend that a failure to agree should destroy their bargain” (para 21).  Lord Justice Tomlinson also approved the approach of the judge at first instance where he carefully analysed Mamidoil, identifying the ways in which this particular case showed some factual similarities.  Given that both parties were familiar with the trade and had acted in a manner (objectively construed) that suggested they had a binding contract, (para 22). The contract should be upheld. This was particularly so given that EMC, the party arguing that the contract was not binding, had already received benefits from MRI’s performance (para 22).   Finally, the presence of an arbitration clause (para 22):

“…should have supported the conclusion that the agreement was sufficiently certain or capable of being rendered so, since it provided a commercial and contractual mechanism, which could be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, could resolve a dispute about a reasonable TC/RC or shipping schedule.”

In general, the arbitrators were subject to stringent criticism for the decision they reached, having failed to ask themselves what the parties’ intention was if agreement was not reached on the points in the clauses in question (para 24).

This case illustrates the extent to which a court will strive to give effect to a contract between commercial parties which is not only fully executed but has also been acted upon by both parties.  Such a contract can be valid notwithstanding the lack of agreement on specific terms.

Although the court did not specifically say so, the quotation with approval of the passage from Lewison’s The Interpretation of Contracts suggests that the court did not consider the factors on which agreement had not been reached, namely the shipping schedule, and two deductions, the Treatment charge and the Refining Charge, so significant as to constitute “essential terms” the lack of agreement of which rendered the contract void.  Both Rix LJ in Mamidoil and Chadwick LJ in BJ Aviation referred to the concept of such “essential terms.”  Exactly what constitutes an essential term may differ depending upon the particular commercial context.  This point can be illustrated by reference to older Scottish case law.  In R & J Dempster v Motherwell Bridge Engineering (1964 SC 308, per Lord President Clyde at 326) the Inner House did not consider lack of agreement over the price fatal to the conclusion of a binding contract.  In that case the commercial background, which involved shortages and quota systems in the industry, explained why agreement of the price could be delayed.  Thus the particular commercial circumstances may explain why the parties have failed to agree a price and need not completely rule out a finding that a binding contract has been concluded.  Lord President Clyde also considered it significant in that case that the parties had acted for over a year as though they had a binding contract (1964 SC 308 at 327).

The court treated the language of the document as significant: in fact, it carried out a very close analysis of the words used in order to reach the conclusion that the document was binding. 
Also worth noting is the availability of implied terms to resolve uncertainty in contract.  That solution was not applied here but is referred to in Rix LJ’s summary in Mamidoil.   As we have already heard today, the bar remains high in the implication of terms.  The term must be “necessary” in one of the senses expressed by Lord Hoffmann in the Belize case. 

Significantly this case reaffirms the proposition that it is possible for the parties to leave issues to be agreed in the future.  As stated by Rix LJ in Mamidoil, the courts “preserve rather than destroy bargains” ([2001] Lloyd’s Rep 76, para 69).   This is likely to be economically efficient: it may suit both parties to delay agreement of a specific issue to a later date.  It also upholds the parties’ intentions: if they intend to agree something later, there is no reason why the courts should prevent them from doing so. 

Also interesting is the effect of the arbitration clause.  By including such a clause the parties had provided a mechanism to deal with the consequences should they be unable to agree.  Thus the clause acts as an indicator that the parties intend to be legally bound. 


Posted in Uncategorized | Leave a comment

Of trusts and patrimonies

Patrimony and trust are paradoxical private law concepts. Fundamental in civil law and, respectively, common law traditions, they are shrouded in a dense fog of controversy. Combine them, and you get the perfect comparative private law symposium. The experiment, "a first in the history of the world" as our colleague Ken put it, took place last Friday, 3 May, under the auspices of the Edinburgh Centre for Private Law. It brought together a lively assortment of academics, practitioners and doctoral students, from Aberdeen, to Brisbane, to Montreal. The workshop explored the various ways in which the concept of patrimony has been used, or could be used, to create a civilian trust that is the functional equivalent of the common law trust.

The workshop featured five papers and a presentation, with a commentator assigned for each two-paper panel. Dr Peter Turner of St Catharine's College, Cambridge, started the day with a sobering question: what are we trying to achieve with a comparative trust analysis? Peter drew attention to the potential limits to the understanding of the trust that one may derive from a comparative analysis. Two important limitations stand out. First, different scholars may have different purposes when comparing trusts, and they may hold different views of what matters about comparative trust analysis. Second, trust is necessarily examined and discussed on different levels of abstraction, ranging from particular effects to their irreducible core. These are, indeed, potential obstacles in a meaningful dialogue between comparative lawyers, but they are just that: obstacles that could be avoided, rather than inherent limitations.

The next speaker, Professor Paul Matthews of King's College, London, flagged up another potential problem in associating the trust and patrimony concepts: how useful is it for the common lawyer to explain and understand the trust idea using the concept of patrimony? In other words, why adopt a patrimonial approach to trusts? Professor Matthews explained why a patrimonial approach to the common law trust would not work. First, the belief that the patrimony concept is necessary to explain the segregation of the trust fund from the trustee's own assets and liabilities is a mistake. Regarding the assets side, a trustee has no prima facie duty to segregate trust assets from his personal assets, or the assets of another trust of which he is trustee. On the liabilities side, there is no clear segregation either: in dealing with third parties, the trustee assumes liability personally. Many consequences flow from this, which cast doubt on the utility of patrimony as an explanatory tool for the common law trust, as it currently exists. Nevertheless, Professor Matthews conceded, patrimony may be brought into discussion as an organising concept de lege ferenda, if it could be used to bring about desirable changes to the existing rules.

Next, the discussion shifted north of the border. Dr Dan Carr of Edinburgh Law School, investigated the aims of the patrimonial theory in Scots law: is it a silver bullet, capable of explaining all the facets of the Scottish trust, or is it simply "the law of the instrument", i.e. a theory likely to be adopted by courts or the Scottish Law Commission because it is the established, dominant view? Dan made a startling revelation in his talk: there is no general theory of patrimony in the Scots private law. Therefore, even if the patrimonial theory is thought to be best available approach, more work must be done to explain this concept at general and specific levels. The underlying message of Dan's paper is that the patrimonial theory is only one of the potential explanations of the Scottish trust, and the nature of the trust in Scotland is far from being a closed matter.

The next paper brought about a change of tone. Ms Magdalena Raczynska from Anglia Ruskin University argued that the common law bare trust could be translated into a civilian special patrimony. Several similarities exist between the two concepts. Beneficiary's potential liability for trust debts is one of them. A key feature of the bare trust is that the trustee has no active duties to perform, except that of transferring the trust property at the beneficiary's direction. Since the beneficiary has the right to direct the bare trustee, the former may become liable towards the latter or a third party, based on a principal-agent relationship. In other words, the beneficial owner of trust property held in a bare trust could be liable with all his assets for claims incurred in relation to the trust property. This resembles the civil law scenario where the creditor of a person holding a special patrimony may be paid not only with the assets from the special patrimony but also with assets from that person's general patrimony (e.g. the general and special patrimonies that spouses hold). The civilian concept of special patrimony, however, is heterogeneous, and this may raise obstacles for a comparative lawyer.

Related to the notion of special patrimony, the concept of patrimony by appropriation is another example of a trust-patrimony overlap. Ms Alexandra Popovici, from McGill University and Université Laval, explained how the Quebec trust has been reconceptualised from a sui generis form of ownership, under the reign of the Civil Code of Lower Canada (1866) to a patrimony by appropriation, under the Civil Code of Quebec (1994). Under the latter code, the Quebec trust is conceived as an ownerless patrimony, in which the rights are appropriated to a purpose rather than held by a person. Rights, in other words, are now understood in two different manners: either they are subjective, that is exercised in their holders' own interest, or they are without holder and exercised by a person assigned for that purpose, the trustee. De-coupling rights from holders may have wide-ranging effects. Obligations, for instance, could be understood not as personal relationships but as patrimonial relationships in which the persons involved are just administrators. More importantly, by depersonalising rights and obligations the Civil Code may have stripped the traditional French notion of patrimony from its very essence, turning it into a mere legal universality.

The final presentation of the workshop showed that, despite its difficulties, patrimony may be the future of civilian trusts. Mr Emile Schmieman of the Ministry of Security and Justice of Netherlands discussed the legal, practical and political challenges of introducing a trust in the Netherlands. On the legal side, Emile argued that a trust could be fitted into the existing Dutch legal system by using the model of multiple patrimonies. This model may be the solution for a smooth integration of the trust, since Dutch law already recognizes instances of multiple patrimonies (e.g. in bankruptcy, partnerships or statutory administration of assets).

The workshop raised more questions than it answered. Patrimony may not be the silver bullet after all, and we may be mistaken in trusting patrimonies. But the day was a success for other, more important reasons. First, it showed that there is a vast scholarly appetite for discussing comparative trusts. Second, it drew attention to the fact that more debate is needed to fine-tune the civilian trusts conceptualized as patrimonies. And perhaps more importantly, it brought together lawyers from various walks of life, sharing a passion for the trust. 

Posted in Uncategorized | Leave a comment