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

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.


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.

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

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.

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.

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. 


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. 

Socially responsible investment at the University of Edinburgh

The University's approach to socially responsible investment was the object of a debate organized on the 3rd of April by EUSA and People & Planet. The discussion focused on the legality and feasibility of disinvesting from companies that are involved in unethical businesses, such as manufacturing of components for military drones, genetically modified foods, or fossil fuel companies. The panellists included Mr Julian Parrot, partner at Ethical Futures (a financial advisers firm specialising in ethical investments), Mrs Catherine Gilfedder, corporate social responsibility advocate at Reprieve (a London-based human rights organisation) and myself. The discussion was chaired by Mr Peter McColl, University Rector.

This debate is part of an ongoing campaign carried by People & Planet in conjunction with EUSA, aiming to steer the University towards a more ethical and sustainable investment strategy. The proposals advanced by the two organisations include the creation of an independent committee that would allow stakeholders throughout the University community to challenge investment decisions, and the right to have an elected student representative who will participate to the investment decision meetings. The campaign has also launched a petition calling for a review of the University's investment strategy. This movement is not without precedent in the University's recent history. In 2004 the University accepted a proposal of disinvestment from the tobacco industry, given the University's role as a major centre of medical research.

Two underlying themes emerged from this debate. On the one hand, there is the students' enthusiastic endorsement of the socially responsible investment / corporate social responsibility movement. There was a strong consensus among the participating students that the University should consider divesting from harmful companies and place its funds in companies involved in socially and environmentally beneficial activities. On the other hand, there are the legal restrictions, which raise difficult questions concerning the compatibility between trustees' duties and socially responsible investment strategies.

Institutional investors are dominant players in today's investor landscape. Their holdings amount to about 80% of the shares of listed UK companies. When organised as registered companies (such as insurance companies), institutional investors have free hand in considering ethical, governance and social (ESG) factors when deciding their investment strategy. Company directors have a duty to consider such factors when deciding how to promote the success of the company for the benefit of its members (s. 172 Companies Act 2006). The case of institutions organised as trusts (such as pension funds or mutual funds), however, is more ambiguous when it comes to ESG considerations. In the (in)famous case of Cowan v. Scargill [1985] Ch 270 at 286 Megarry VC argued that in a trust set up to provide financial benefits for the beneficiaries, the best interests of the beneficiaries are their best financial interests. Trustees of charities may exclude certain investments of questionable ethical nature, if such investments are contrary to the objects of the charity. Nevertheless, trustees must ensure that such exclusion would not create a risk of significant financial detriment (Harries v. Church Commissioners for England [1992] 1 WLR 1241 at 1247, per Nicholls VC).

The effect of screening out tainted investments is the crux of the problem for trustees of institutional investors. The standard investment criteria governing trustees' powers of investment require the creation of a diversified portfolio, with assets whose values fluctuate independently of one another. Screening out non-ethical fields, such as alcohol, tobacco, gambling, or weapons may leave trustees with insufficiently diversified portfolios, or may simply be bad business decisions. After all, ‘sin stocks' such as tobacco or weapons have been among the UK stock market's best performers in the early 2000s. Such stocks tend to generate stable and predictable cash flows and are considered safe investments in declining markets.

Recent developments in the law of fiduciary duties, however, may be a first step towards clarifying the extent of trustees' powers of investment. Following the recommendations of the Kay Review on UK Equity Markets and Long Term Decision Making the Law Commission undertook a review of the fiduciary duties of pension trustees, investment managers and other financial intermediaries with respect to investment decision-making. The terms of reference for this project mandate the Commission to evaluate the extent to which fiduciary duties permit or require such persons to consider, when developing or discharging an investment strategy, the following factors:

(a) factors relevant to long-term investment performance which might not have an immediate financial impact, including questions of sustainability or environmental and social impact;

(b) interests beyond the maximisation of financial return;

(c) generally prevailing ethical standards, and / or the ethical views of their beneficiaries, even where this may not be in the immediate financial interest of those beneficiaries.

The Commission's report, which is due in July 2014, will hopefully bring much needed clarifications for the socially responsible investment movement. Unfortunately, the Commission was empowered to draft a report with recommendations to the Government, but no draft bill adressing directly trustees' right to take into account ESG considerations when deciding on their investment strategy.

Business Valuation and the Delaware Court of Chancery

Last month we had the pleasure to welcome Moin Yahya as visiting scholar at our law school. Moin is Associate Professor at the University of Alberta Faculty of Law and former Commissioner at the Alberta Utilities Commission. With this occasion, Moin delivered a talk at the Edinburgh Centre for Commercial Law. His talk, entitled "The Law and Economics of the Equity Risk Premium: The Delaware Approach" provided fascinating insights into the process and methods used by the Delaware Court of Chancery in determining the fair value of a company.

The talk outlined recent developments on the appropriate measure of the equity risk premium (ERP), a concept that is central to the valuation of shares. More specifically, Moin discussed the recent case of Global GT LP and Global GT Ltd v. Golden Telecom, Inc., 993 A.2d 497 (Del. Ch. 2010), aff'd, 11 A.3d 214 (Del. 2010), in which the Delaware Court of Chancery replaced the historical market returns method of determining the ERP with the supply-side ERP.

The case concerns an appraisal proceeding under Section 262 of the Delaware General Corporation Law. Section 262 (h) provides that in the event of a merger, a stockholder of a Delaware corporation is entitled to an independent appraisal proceeding regarding the fair value of its outstanding shares. In December 2007, Vimpel-Communications (Vimpel), a major Russian provider of mobile telephone services, acquired Golden Telecom, Inc. (Golden), a Russian-based telecommunications company listed on the NASDAQ, at a price of $105 per share. Global GT LP, a minority shareholder in Golden, filed an appraisal rights claim with the Delaware Court of Chancery, believing that Golden was undervalued in the merger. Vimpel's expert claimed that Golden's value was $139 per share, while Golden's expert valued the company at $88 per share. The court carried an independent determination, and estimated the fair value at $125 per share.

Before commencing its own valuation process, the court had to address whether the merger price itself was an adequate statement of fair value. The court found that it was not, due mainly to the fact that the transaction was not carried at arm's-length. Vimpel's two largest stockholders were also the largest stockholders in Golden. Golden made relevant efforts to ensure that the merger price was fair: it appointed a special committee of independent directors to assess the merger; it obtained a fairness opinion from Credit Suisse stating that the $105 price was fair; it secured the unanimous approval of Golden's board of directors. Nevertheless, the court rejected the view that the merger reflected a market-tested price. 

The Delaware Supreme Court affirmed this view, arguing that "[s]ection 262(h) unambiguously calls upon the Court of Chancery to perform an independent evaluation of ‘fair value' at the time of the transaction" and that "[r]equiring the Court of Chancery to defer -conclusively or presumptively- to the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the statute and the reasoned holdings of our precedent."

In the second half of his decision, Vice Chancellor Strine applied the discounted cash flow (DCF) valuation method to determine the value of Golden, the same method used by both parties' experts. Although they used the same method, the experts disagreed on the value of several variables used in calculating a discount rate, including the equity risk premium (ERP), hence the different share values. The Court sided with the Global financial expert on this issue. After surveying the academic debate regarding the most accurate calculation of the ERP, the court refused to adopt "historic ERP", which had been the more commonly used ERP estimate up to that point, and noted that there is solid academic and professional support for the adoption of the "supply-side ERP".

For a non-US lawyer, Vice Chancellor Strine's decision looks like a chapter from a finance textbook, rather than a court decision. Valuation methods appear to be not a matter of law but one of commercial judgment, which courts should be reluctant to review or second-guess. When a court is confronted with issues of valuation, one would expect that the court rely on expert witnesses, drawn from the accountancy profession, rather than carry on its own, independent valuation.

The Delaware Court of Chancery, however, is no ordinary court. It is widely recognized as the US leading business court in terms of volume of business related cases. Its chancellors and vice chancellors have developed substantial expertise in corporate finance, including an ability to assess an expert's methodology and calculations. This explains why the Court of Chancery enjoys great flexibility, and is entitled to great deference, in conducting its independent appraisal of the fair value of a company.

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