The setting up by the Securities and Exchange Commission of Pakistan (SECP) of the Corporate Law Review Commission (CLRC) to update and upgrade it under former Chief Justice of Pakistan, Justice Ajmal Mian is a good sign. We need to pray, however, that the Commission is really enabled to complete its task, its recommendations are implemented and not allowed to gather dust.
Pakistan's Companies Ordinance, 1984 is seriously out-of-date. It is, by and large, an assembly of the UK Companies Act to 1984.
Though, the act on which the Ordinance is based, was given massive facelift in 1989, yet speaking about it the UK Trade Minister observed, "Too much of British company law frustrates, inhibits, restricts and undermines (the object) and... significant parts are outmoded;" "what was a source of competitive advantage in the 19th century, was now a source of competitive disadvantage." Professor Gower said, the Act was in a worse state than at any time this century and it was unlikely to provide a model in the future."
As the New Zealand Companies Act 1993 in its preamble clarifies, 'companies act is a legislation to reaffirm the value of the company as a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the spreading of economic risk, and the taking of business risks.' It is to business, as the shell is to the oyster; it is what goes on inside that count.
THE ORDINANCE'S LANGUAGE: The Ordinance is a relic of the 19th century legal drafting jargon of long winding sentences, plentiful semi-colons and lot many 'provided if' provisos, which impedes understanding by non-legal experts. Many jurisdictions have redrafted the companies' act in easy, accessible language in order to make it easier for modern users to find the provision that affects them and to understand it and to minimise the legal costs involved in running an incorporated business.
The trend setter classic instance in this behalf is Canada's corporation act. New Zealand also has replaced its act by an act in easy, accessible language. In its efforts to modernise the companies act, the UK as well is in process of replacing the outmoded legal by modern-day accessible language. (DTI, Company Law.
FLEXIBILITY AND ACCESSIBILITY: A consultative document, May 2004, p.9); (The Report of the Steering Committee of the Law Reforms Committee: Completing the Structure, ch. 2; Final Report paras.1.18-1.22.)
SHAREHOLDERS EQUITY: The Ordinance is silent on many issues that are highly relevant to the shareholders. Many listed companies thus show and continue to show negative equity for years together that exceeds its capital many times over. It is indeed a device crafted to keep minority shareholders belly-down as is evident from the fact that the directors extend (non-refundable) interest free loan to the company each year, remain confident about the company continuing as a going concern and prepare accounts on that basis.
THE ORDINANCE SHOULD PROVIDE SOME MECHANISM TO STEM THIS MALPRACTICE. SECTION 142 OF THE UK COMPANIES ACT, 1985 RELATING TO DUTY OF ON SERIOUS LOSS OF CAPITAL PROVIDES THUS:
(1) where the net assets of a public company are half or less of its called-up share capital, the directors shall, not later than 28 days from the earlier day on which that fact is known to a director of the company, duly convene an extraordinary general meeting of the company for a date not later than 56 days from that day for the purpose of considering whether any, and if so, what steps should be taken to deal with the situation.
(2) If there is a failure to convene an extraordinary general meeting as required by subsection (1), each of the directors of the company who
(a) knowingly and wilfully authorises or permits the failure, or
(b) after the expiry of the period during which that meeting should have been convened, knowingly and wilfully authorises or permits the failure to continue, is liable to a fine.
(3) Nothing in this section authorises the consideration at a meeting convened in pursuance of subsection (1), of any matter which could not have been considered at that meeting apart from this section.
Sweden has added to this the obligation to put the company in liquidation if the difficulty is not resolved within 8 months of the EGM.
In Sweden in the event of the shareholders equity falling below 50% of the amount of the share capital directors are required to call an EGM and to present a special balance sheet.
In Norway the Joint Stock Companies Act 1976 requires directors to call an EGM in the vent of loss of half of the share capital.
The AG (public company) regulatory regime in Germany provides that if there is a loss of 50% of the share capital the managing director must notify shareholders. Liquidation should be considered.
The Belgian Law on Commercial Companies mandates directors to call an EGM within 2 months should the capital fall by 50% or more.
GIVING SPACE AND SPINE TO SHAREHOLDERS VIS-À-VIS DIRECTORS: Presently, the directors do not owe duty to shareholder but they owe duty to the company and action for breach of duty by the directors therefore can be initiated by the company. But what is a company to which they owe duty?: the company a legal fiction that does only what the directors do (or bid it to do).
The extant law has put overwhelming impediments in shareholders' way to bring cases in the court of law against directors for their breach of duty - they need to prove that those who control and manage the affairs of the company are in fact the company itself, and that the board lacked independence, didn't inform itself, or didn't act in good faith." As a Chinese saying puts it, 'the hills' for them 'are high and the emperor is far away.' The irony is that the shareholders are owners and as described by Mark Anson, CEO of Hermes Pensions Management Ltd (Hermes), at an ICAEW event in Washington in December 2005 Share ownership embodies two important principles. First, the term shareowner reminds all interested parties - executives, directors, creditors - who are the ultimate owner of the company. Second, with the acknowledgement of share ownership comes the obligation to continue to exercise ownership rights in a public company. Being the residual claimholders, the shareholders are ideally placed to act as a watchdog. This is particularly important in listed companies, where minority's apathy may have harmful effects. Shareholders' influence will highly depend on the costs and difficulties faced. (Report of the High Level Group of Company Law experts on a Modern Regulatory Framework for Company Law in Europe, Brussels, 4 November 2002).
As Michael Caplan, Queens' Counsel, points out, most agree that the status quo needs to change.
The Swedish Companies Act 1975 allows holders of the 10% of the share capital to compel the company to take action for breach of duty.
REMOVAL OF DIRECTORS: The existing cumulative voting provision is borrowed from the US corporate law. It was devised to enhance the shareholders powers over the appointment of directors. It has been, however, so amended that the directors are better off and the shareholders are worse off than the pre-provision position
The US's State of Delaware law that is reproduced below, which is adopted by all other US States, provides that, if less than the entire board is to be removed, no director may be removed if the votes cast against such director's removal would be sufficient to elect such director, if cumulatively voted at an election of the entire board of directors is cited below:
SECTION 141 (K):
Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except as follows: (2) In the case of a corporation having cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against such director's removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors, or, if there be classes of directors, at an election of the class of directors of which such director is a part.
Section 181 of the Ordinance, reproduced below, however, has made significant alteration to it; it reads "a resolution for removing a director shall not be deemed to have been passed unless the number of votes cast in favour of such a resolution is not less than the minimum number of votes that were cast for the election of a director at the immediately preceding election of directors.
SECTION 181 OF THE ORDINANCE PROVIDES THAT:
-- A company may by resolution in general meeting remove a director appointed under section 176 or section 180 or elected in the manner provided for in section 178:
-- Provided that a resolution for removing a director shall not be deemed to have been passed unless the number of votes cast in favour of such a resolution is not less than:
-- (i) the minimum number of votes that were cast for the election of a director at the immediately preceding election of directors, if the resolution relates to removal of a director elected in the manner provided in sub-section (5) of section 178; or
-- (ii) the total number of votes for the time being computed in the manner laid down in sub-section (5) of section 178 divided by the number of directors for the time being, if the resolution relates to removal of a director appointed under section 179 or section 180. (Sections 179 and 180 respectively deal with directors appointed)
(SECTION 178 (5) OF THE ORDINANCE READS AS FOLLOWS: "The directors of a company having a share capital shall, unless the number of persons who offer themselves to be elected is not more than the number of directors fixed under sub-section (1), be elected by the members of the company in general meeting in the following manner, namely: (a) a member shall have such number of votes as is equal to the product of the number of voting shares or securities held by him and the number of directors to be elected; director have to muster votes equal to the minimum number of votes that were cast for the election of a director at the immediately preceding election of directors. The law being unjust and inequitable needs remedy.
SHAREHOLDERS RIGHTS: With the exception of France and the US, shareholders activists groups do not exist and the sufferings of minority shareholders are an international phenomenon.
The rights of shareholders need to be improved. Some jurisdictions have taken innovative measures to remedy the position in different ways in accordance with their national ethos.
Denmark's Companies Act 1973 allows provision in the articles of association for a committee of shareholders.
Swedish Companies Act 1976 permits holders of 10% of the shares to seek the appointment of special examiner or ask for special audit.
In Norway the Joint Stock Companies Act 1976 allows holders of 10% of shares to request EGM for special audit.
In Switzerland the Code on Contractual Obligations (Third Section) allows the holders of 10% shares to force EGM or seek dissolution from the court in the event of oppression. It also allows any shareholder to bring a derivative action.
In France the Law of July 24, 1966 that regulates regime governing public companies there allows minority shareholders owning 5% or more of the share capital to bring action on behalf of the company and have their resolutions put before the general meeting and the holders of 10% of the shares can demand information from the company and/or apply to the court for an investigation at the hands of an independent expert. In Greece the limit is 5%.
In Germany 1965 Stock Corporation Act allows 10% shareholders to call for a special audit.
In the Netherlands the Dutch Civil Code (Book 2) holders of 10% of the shares can force an EGM or petition the court for investigation.
Denmark's Companies Act 1973 in addition to the above provision in Germany as well allows 25% shareholders to seek an inspection of the company.
In Portugal the holders of 10% shares can demand written answers from directors and holders of 1% can inspect the books of the company.
(To be concluded)
Comments
Comments are closed.