- Rahul Singh
Monday, February 27, 2012
- Rahul Singh
Friday, February 24, 2012
Saturday, February 18, 2012
(continued from earlier)
The next argument was that any unfair prejudice claim under s.994 attracts a degree of state intervention and public interest such as to make it inappropriate for disposal by anything other than judicial process, independent of the nature of the claim or the company in this particular case. In response, the Court undertakes a historical analysis of the unfair prejudice claim, observing that since the 1980 Companies Act, the scope of the unfair prejudice claim has consciously been given a life independent of the relief of winding up on just and equitable grounds. Thus, although the two may overlap, the legislature has made a conscious effort to allow the unfair prejudice claim and reliefs under it, for reasons which may not apply to other shareholders in the same class as the claimant, or to creditors. Thus, the unfair prejudice claim is more ‘personalised’ than the winding up of the company on just and equitable grounds. The Court observed that while some of the reliefs sought under an unfair prejudice claim could affect third parties, it was not inherently a class remedy. In cases where it did affect third parties, the Court could impose limitations of the reliefs that could be claimed through arbitration.
This conclusion was apparently at odds with Exeter, which had held relied on an Australian decision in A Best Floor Sanding Party Ltd v Skyer Australia Party Ltd  VSC 170, to hold that the shareholders have an inalienable right to approach a Court for an unfair prejudice claim and had denied a stay. However, as the Court of Appeal here rightly points out, the applicable Australian statute was materially different from its English counterpart. It mere included unfair prejudice as an additional ground for winding-up, and not as an independent head of relief. Further, the reliefs sought there were for winding up and not merely a contractual dispute which formed the basis of an unfair prejudice claim. The Supreme Court of New South Wales in ACD Tridon Inc v Tridon Australia Pty Ltd  NSWSC 896 has also similarly narrowed the scope of the Skyer Australia decision, lending further support to this interpretation. The Court observes that certain company law issues like the rights of members; and the duties of directors, or the consequences of insolvency are not such as may be arbitrated. However, the Court observes that Exeter incorrectly extended the rationale of Skyer Australia beyond these limited cases.
Here, the Patten LJ observes that,
the determination of whether there has been unfair prejudice consisting of the breach of an agreement or some other unconscionable behaviour is plainly capable of being decided by an arbitrator and it is common ground that an arbitral tribunal constituted under the FAPL or the FA Rules would have the power to grant the specific relief sought by Fulham in its s.994 petition. We are not therefore concerned with a case in which the arbitrator is being asked to grant relief of a kind which lies outside his powers or forms part of the exclusive jurisdiction of the court. Nor does the determination of issues of this kind call for some kind of state intervention in the affairs of the company which only a court can sanction. A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholders’ agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties. The present case is a particularly good example of this where the only issue between the parties is whether Sir David has acted in breach of the FA and FAPL Rules in relation to the transfer of a Premier League player ... The statutory provisions about unfair prejudice contained in s.994 give to a shareholder an optional right to invoke the assistance of the court in cases of unfair prejudice. The court is not concerned with the possible winding-up of the company and there is nothing in the scheme of these provisions which, in my view, makes the resolution of the underlying dispute inherently unsuitable for determination by arbitration on grounds of public policy. The only restriction placed upon the arbitrator is in respect of the kind of relief which can be granted.
Having settled this point, the Court (following ACD Tridon) goes further to say that even in cases where a contractual dispute like the one here was being relied on as the basis of a winding up petition, the right to approach the court continued to be contingent on the underlying dispute being settled by arbitration. “The agreement could not arrogate to the arbitrator the question of whether a winding-up order should be made. That would remain a matter for the court in any subsequent proceedings. But the arbitrator could, I think legitimately, decide whether the complaint of unfair prejudice was made out and whether it would be appropriate for winding-up proceedings to take place or whether the complainant should be limited to some lesser remedy.”
Finally, the Court considered the third and fourth prongs of argument. The third was held as not being supported by the statute, while the fourth was rejected on the basis that while the clause was very broad, inherent limitations would be read in based on the arbitrability of the subject matter of the dispute.
In sum, this is an important decision on the extent to which a company law dispute may be arbitrated. Admittedly, the facts of the case played a crucial role in the conclusion arrived at. However, the analysis of the nature of an unfair prejudice claim, and the concept of arbitrability provides useful guidance for future issues of a similar nature.
(Note: It was helpfully pointed out by a reader that on 22 February, the UK Supreme Court refused Fulham leave to appeal against the UKCA decision.)
A recent post considered the relation between arbitration and company law, in the context of the inability of arbitration to develop the body of corporate law jurisprudence. Another fascinating area of substantive overlap, is the arbitrability of company law disputes, which the UKCA in Fulham v David Richards was called on to consider in relation to claims of unfair prejudice.
Given the fact-specific conclusion the Court arrives at, a slightly detailed explanation of the factual backdrop is mandated here. Fulham Football Club had filed an unfair prejudice petition in relation to the Football Association Premier League (which manages and regulates the English Premier League) (“FAPL”). FAPL is organised as a company, with the different football clubs in the English Premier League as its members. The claimant contended that the chairman of the FAPL Board had acted as an unauthorised agent in breach of the FA Football Agents Regulations by brokering the sale of a player owned by Portsmouth Football Club (Peter Crouch, for the benefit of those who follow football) who Fulham were interested in to Tottenham Football Club. Under the FA Rules, any player or club is prohibited from using or seeking to use the services of an unauthorised person to act in the capacity of an agent, representative or adviser to a club, either directly or indirectly, in the negotiations or arrangements of any transaction facilitating or effecting the transfer of the registration of a player from one club to another. When Fulham approached the FA for relief, they were informed that the issue would be put to a shareholders’ meeting. In the alternative, the FA asked Fulham to bring arbitration proceedings under the FA Rules. Fulham instead approached Companies Court, alleging that it was an implied term of the FAPL Rules that members of the board of the FAPL would comply with their fiduciary obligations and not act so as to prefer the interests of one member club over another. By way of relief, Fulham sought an injunction restraining Sir David from acting as an unauthorised agent or from participating in any way in negotiations regarding the transfer of players. In the alternative, it sought an order that Sir David should cease to be the chairman of the FAPL and such other relief as the Court thought fit. On the basis of the arbitration clause in the FA Rules which the clubs were bound by, the FA and Sir David sought a stay of the Court proceedings, under section 9 of the English Arbitration Act, 1996.
Against this factual backdrop, the court was called on to determine the arbitrability of this dispute, and to reconcile two earlier decisions of the High Court in Re Vocam Europe Ltd  BCC 396 and Exeter City Association Football Club Ltd. v. Football Conference Ltd.  1 WLR 2910, which had arrived at seemingly different conclusions. Although the High Court in this case followed Vocam and granted a stay, Fulham appealed on four principal grounds:
(a) the relief in an unfair prejudice claim would affect third parties and hence was not arbitrable;
(b) the very nature of the unfair prejudice claim was one which involved public interest and could not be resolved by a private contractual arrangement;
(c) the 2006 Act impliedly rendered the right to approach a Court for an unfair prejudice claim an inalienable right; and
(d) the arbitration clause here was too wide to be enforced.
The Court begins by clarifying that neither the Arbitration Act nor the Companies Act had anything which expressly indicated the arbitrability or otherwise of such a dispute. Hence, the decision turned on first principles of arbitrability, and the nature of an unfair prejudice claim, both very interesting and complex issues.
On the first issue, the Court admitted that usually, a decision on an unfair prejudice claim had consequences for several other shareholders who would not be parties. However, the special nature of the FAPL (discussed in paragraphs 47 and 48 of the judgment) meant that the nature of disputes were much more limited than in other private companies. Thus, the Court concluded that the nature of the relief it was seeking in this particular case was not one that would render it unarbitrable.
(to be continued)
Friday, February 17, 2012
Thursday, February 16, 2012
Sunday, February 12, 2012
Friday, February 3, 2012
… an investment in Facebook is really an investment in Mr. Zuckerberg: Facebook’s offering documents show he will retain control over Facebook even when it becomes one of America’s largest publicly traded companies.Although this seems to provide too much control to the founder, there is nothing unusual in this except for the fact that in this case the control rests with a single individual rather than a group of persons. As noted on the Deal Professor column:
Mr. Zuckerberg’s control is based on the structure of Facebook’s shares. Facebook is proposing to go public with a dual-class share structure. Public shareholders will purchase Class A shares that have one vote apiece. Mr. Zuckerberg, Facebook employees and current Facebook investors will hold Class B shares, which have 10 votes apiece. This is a deviation from the one share one vote norm followed by most publicly traded companies.
Mr. Zuckerberg is not alone in using this type of structure to maintain ownership of a prominent technology company. The founders of Google, Larry Page and Sergey Brin, set up a similar structure and retain voting control over Google.It appears therefore that deviations from the one-share-one-vote rule are becoming much more common than one would ordinarily imagine.
Yet they are two people who counterbalance each other, not a single individual.
Three other prominent company founders, Andrew Mason at Groupon, Mark Pincus at Zynga and Reid Hoffman at LinkedIn, have also adopted similar dual-class voting structures at their companies. At the time of those public offerings last year, Mr. Mason controlled 19.7 percent of the votes at Groupon, Mr. Pincus controlled 37.4 percent of the votes at Zynga and Mr. Hoffman controlled 21.7 percent of the votes at LinkedIn.
These companies, however, are much smaller than Facebook. And while their stakes are sizable, they do not entitle any of the three founders to remove and replace directors at will.
In the Indian context, after much back and forth regarding the desirability of permitting shares with differential voting rights, the Companies Bill recognizes the need for flexibility to companies and their founders to structure their shareholding along similar lines. However, SEBI continues to deny the issue of shares with “superior voting rights”.
As far as the governance structure of Facebook is concerned, one aspect that is highlighted in the Deal Professor column deserves attention:
Unlike most public companies, Facebook will not have a nominating committee for its directors comprising the independent directors on Facebook’s board. Instead, all of the directors will be selected by the board itself, a group that will be appointed by Mr. Zuckerberg. He can also remove and replace any director at any time.The company has sought to take advantage of an exemption under the relevant listing requirements to steer clear of some of the conventional corporate governance norms such as board independence and independent nomination of directors that act as a monitoring mechanism on the managers and controlling shareholders. Facbeook's registration statement filed the SEC states:
We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for publicly-listed companies.Given the high-profile nature of the company, its founder and the offering, it is not clear if such concerns regarding the governance of the company will either turn away investors, or force a discount on the valuation of the shares.
Because we qualify as a “controlled company” under the corporate governance rules for publicly-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function and has chosen to have the full board of directors be directly responsible for nominating members of our board, and in the future we could elect not to have a majority of our board of directors be independent or not to have a compensation committee. Our status as a controlled company could cause our Class A common stock to look less attractive to certain investors or otherwise harm our trading price.
Wednesday, February 1, 2012
More importantly, there seems to be some visibility as to nature of review that the Standing Committee may perform. Since the previous review was extensive in nature, reports suggest that only certain new clauses in the Bill inserted subsequent to that exercise will be reviewed this time around. All of these will have implications on the timing of the legislation, and whether the Bill is likely to be taken up for debate and vote during the forthcoming Budget session of Parliament.