Shareholder Directions and FTSE100 Directorss General Powers to Manage the Company and its Business

Abstract

Over the last two years, the Aiming for A Coalition has enjoyed success in using the directions power found in UK company articles of association, combined with the statutory right to move a resolution found in section 338 of the Companies Act 2006 (UK) to put resolutions directing the company prepare a report on responses to climate change at a selection of FTSE100 energy and mining companies. Yet analysis of meeting agenda for this index over the period from 2012 indicates this right has been sparingly used in the past by shareholders. An appendix to the paper traces the development of the general powers article and the rights of shareholders to add resolutions to the meeting agenda. The interpretation of these provisions in early cases before English courts suggests what appears to be a clear right given to shareholders to direct or regulate the board’s exercise of these powers is something more complex and not necessarily assured. While the current version of the model articles labels this power to direct the shareholders’ reserve powers, analysis of the meaning of reserve powers in case law questions whether this is a correct label to apply, given the case law says the reserve powers only come into existence in situations where there is no effective board. These situations typically arise in two ways: the board is unable to form a quorum due to the number of directors with the kind of conflict of interest that cannot be managed; or the board is unwilling to make the decision. Any resolutions moved successfully are binding on the company, so the ability of companies, investors and courts to be able to interpret these provisions correctly is critical. Section 1 of the paper examines this case law. To understand this problem in a 21st century context, section 2 of this paper provides an empirical analysis of the general powers of directors as found a sample of 94 FTSE100 articles of association. This analysis reveals a wide variety of drafting styles, calling into question the extent to which the existing case law interpretations of these general powers articles would still be valid. To illustrate the issues, section three examines the precedent case law in the context of two real life examples of resolutions moved under the directive powers: the direction to prepare a report on climate change moved at the 2016 AGM for Rio Tinto plc, and the direction to change the company’s strategy towards renewable energy moved at the 2016 AGM for Royal Dutch Shell plc. This analysis highlights in particular the explicit/implicit nature of the directions and how precedent case law would take into consideration the implicit nature of the request when examining whether the scope of the direction impermissibly undermines the directors’ powers. Yet shareholders in FTSE100 companies also have the right to move a matter (other than a resolution) at a general meeting. Given a resolution is a decision of the company because the attribution rules have been followed, a purported direction that encroached too far on the directors’ powers to manage the business could be added to the agenda as a non-binding proposal. Section four examines section 338A of the Companies Act 2006 (UK) via a real life example of a resolution, then a matter, to create a Shareholders’ Committee at the Royal Bank of Scotland plc, moved by ShareSoc and the UK Shareholders’ Association. Section five concludes the paper by examining the follow-up reports on the Aiming for A Resolutions at BP and Royal Dutch Shell released in late 2017 by ShareAction. While the responses of both companies are severely criticised in the reports, it merely confirms the analysis undertaken in this paper, namely while the explicit direction to report is clear, the implicit direction to undertake particular activities or make particular decisions is subject to board discretion.