Is the HBoS deal illegal?

Walk with me here, I've not quite got this pinned down, but I think I'm on the way.

I've already mentioned Hornby's £60,000 per month deal with Lloyds TSB if the deal goes through, and the very strange conditions in the Implementation Agreement. For the avoidance of doubt, Andy Hornby is a director of HBoS.

You see, I thought to myself "I wonder what the legal parameters are for directors?" What are they allowed to do, what is expressly forbidden, what is common law because of custom and repute, and so on. So I pondered where the best place to find such information would be. It came to me in a flash - my old mate Victor would know!

A fine man is Victor, there it is in glorious technicolour (I know, but I'm not American):

As a director, you have several duties:
...
To act in good faith to promote the success of the company for the benefit of its members. You must also have take into consideration employees, suppliers, customers, the environment and the community.
To carry out your duties with reasonable care and skill. Higher standards may be expected from executive directors who are responsible for an area in which they have a specialist or professional qualification.
...
To make sure that there is no conflict of interest and duty.
...
Not to benefit from a third party by reason of your being a director, or by doing or not doing something.
Not to act with intent to defraud creditors or for any other fraudulent purpose.
...
To carry out the statutory obligations imposed by the Companies Act 2006 and other legislation.

There's more in there, but this will do for a start. You'll note that directors should take into account, amongst other things, the community - that would be Edinburgh and Halifax primarily for HBoS.

More importantly, perhaps, is that duty to ensure that there is no conflict of interest (like writing your company into an impossible-to-escape Implementation Agreement), and the requirement not to benefit from a third party by reason of your being a director (surely a future sinecure is as important as anything else in this consideration?)

Then there's that requirement to be honest (not fraudulent) and to carry out the statutory obligations. In search of the truth, I set off on the long journey into the Companies Act 2006. I did so with some trepidation, considering just how much of a horrible beast the 1985 Act was, but it did not in any way prepare me for the full trauma of the 2006 Act - 1300 sections (that's not a typo, it's 1,300) and 16 schedules.

"Away an no be daft" I thought, and continued to peruse my extensive library (some people call it the internet) - I went to the obvious shelf (just above the flask of tea and the marmalade sandwiches), and peered in at the Companies House Guidance Booklets - pretty dry except for the bit in the Directors and Secretaries guidance which says:

A director’s general duties to the company are, for the first time, set out in the Companies Act 2006 but the relevant provisions are being commenced in two stages. Most of Chapter 2 of Part 10 of the 2006 Act (General duties of directors) was commenced with effect from 1 October 2007, but the sections relating to the duties to avoid conflicts of interest, not to accept benefits from third parties, and to declare an interest in a proposed transaction or arrangement with the company (and related provisions) will be commenced with effect from 1 October 2008. The general duties of directors were previously contained in case law. See the Department of Business, Enterprise & Regulatory Reform website www.berr.gov.uk for further details.

You can imagine how I felt.

If these provisions were not commenced until October 1st this year then there is a court argument to be had (let's not call it a legal argument, it's more like theatre) about whether the provisions should apply in this case, and you'd have to know a bit more about when the deals were offered and accepted than we currently do. We know, for example, that the Hornby deal was made public in early November, but when was it made?

I trudged off round the library shelves, pausing to move the economics textbooks into the fiction section, and found myself staring at the hallowed pages of the International Financial Law Review. Would it have anything on UK directors? Indeed it did. The information was much the same except for this titillating little piece:

A director (including a former director) must "avoid a situation in which he has a direct or indirect interest that conflicts or may conflict with the interest of the company". Directors are currently under a similar common law duty and can avoid liability for breach by obtaining the members' consent.

So it was a common law breach before it became a statutory breach - unless Hornby asked the shareholders for permission first. It's not definitive, though, and so it was back to the 2006 Act and started reading:

An Act to reform company law and restate the greater part of the enactments relating to companies; to make other provision relating to companies and other ...

And so it went on until I reached page 138 and the chapter on the general duties of directors where we find that the duties are based upon the common law rules and equitable principles and should be read as such.

A few specifics are often delicious:

175 Duty to avoid conflicts of interest
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

Like not be working for both sides of a takeover.

176 Duty not to accept benefits from third parties
(1) A director of a company must not accept a benefit from a third party conferred by reason of—
(a) his being a director, or
(b) his doing (or not doing) anything as director.

Would a £720,000 a year job with a third party count as a benefit? You can see how the case stacks up. Then this happens:

178 Civil consequences of breach of general duties
(1) The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.
(2) The duties in those sections (with the exception of section 174 (duty to exercise reasonable care, skill and diligence)) are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors.

It's a civil wrong rather than a criminal wrong, so shareholders have to sue. The deal breaks the law because Hornby's actions in accepting a third party benefit run exactly counter to the law. Further, the duty to exercise independent judgement as imposed by Section 173 is an obligation not to fetter the exercise of their powers of discretion - as the Implementation Agreement does.

See Boulting versus the Association of Cinematograph, Television and Allied Technicians from 1963.

Shareholders should be able to interdict the takeover in order to have the case examined properly. Derivative Proceedings are examined in section 265 and onwards. A shareholder can also petition the court under section 994.

Personally, I'm off to read the HBoS articles of association and then, just for a laugh, I'll read the Lloyds one.