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The agency problem in companies between directors and shareholders can never be resolved. It can only be minimized. Do you agree?
CONTEMPORARY ISSUES IN THE
LAW OF AGENCY
LAW 4010
DR S PERERA
QMUL
Objectives
!
!
!
!
!
!
Define
Discuss its creation in context of business and social
contexts
Discuss the authority of an agent
Rights and duties
Termination of agency contract
Issues in a business context
WHAT IS AGENCY?
PRINCIPAL
Authorizes
agent to act on
their behalf
Right and duties between
Principal and 3P unless…
AGENT
(employee/
independent
contractor)
Third Party
Examples of Agents
Companies:
Shareholders/ Board of
Directors
Contract between
company and
shareholders
Shops: Employer/ Shop
Assistant
Contract between Shop
and consumer
Real Estate Agency:
Realtor and sellers
POA: POA
holder and
attorney
Friend: ?
(gratuitous)
The Agency Relationship
!
!
!
Fiduciary
This means that is one based on good faith and trust
Once contract is made between principal and third partyagent has no role/responsibility. Only principal and 3P can
sue and be sued
!
!
Exception is if principal does not exist-agent liable
Exception if agent exceeds authority-can be liable (breach of
warranty of authority)
!
But no liability if (a) 3P knew/should have known of exceeding of
authority or (b) principal ratified
Can friends be Agents?
!
!
Chaudhry v Prabhakar [1989] 1 WLR 29, the Court of
Appeal found that a friend who had given advice on
buying a car was liable in the tort of negligence when it
turned out that the car the claimant bought was not
roadworthy. No fee was paid for the advice. The
defendant was not even a mechanic.
Court found that the defendant knew that the car’s
bonnet had been replaced and he should have asked the
seller whether the car had been involved in an accident.
The defendant did not and, as the claimant relied on his
advice, he was liable to compensate.
Can friends be Agents?
!
!
!
!
Burgess and another v Lejonvarn [2016] EHC 40
Here, the defendant (an architect) provided assistance to
the claimant (a friend and business contact) with the
landscaping of his garden.
However, the project went disastrously wrong and the
parties’ friendship took a turn for the worse. In fact, so
bad was the breakdown between the parties, the claimant
sought to recover the additional cost of completing the
project from the defendant.
LESSON: if formal agree on contract and fee; if less
formal make clear that advice not intended to be relied
upon
How is Agency created?
By express agreement
(written or verbal)
Necessity
Conditions
1.Emergency
2. In control of principal’s property
3. Impossible to obtain instructions
4. Good faith/best interests
Impliedly
Ratification
( employee)
Estoppel (by words or
conduct of principal)
• Conduct or words
• Reliance
• (apparent authority
Ratification
•
•
•
•
•
Express/conduct
Agent acting as agent
Within reasonable time
Adopt whole contract
Principal in existence at time
Estoppel
!
!
!
!
FREEMAN & LOCKYER -V- BUCKHURST PARK
PROPERTIES CA (1964)
The defendant company allowed one of its directors to act as
the Managing Director and to give instructions to the Plaintiff
to do work on its behalf.
Held: The fact that he had never been formally appointed as
Managing Director was of no consequence. The other
directors knew the facts, the Company had effectively held out
that individual as having the powers of the Managing Director,
and the fact that he may have gone outside his actual authority
did not affect the fact that he had apparent (or ostensible)
authority to do what he did, and the Company was bound.
Agency by estoppel
Agents authority
Actual (Express)
Actual
(Implied)
Apparent
Authority
• Express authority to carry out particular tasks
• e.g. POA
• Inferred usually from conduct
• In excess of express authority but can be entirely implied
• e.g. employee appointed to position and impliedly given the authority to act in
accordance with authority of position
• See case of Hely Hutchinson v Brayhead Ltd (1968) Chairman acted as MD although not
properly appointed as such
• Apparent authority arises from a representation (either expressed or through conduct)
made by a principal to a third party, that an agent has authority to act on his behalf, when
in fact he does not.
• So agent has no actual authority
• E.g. when authority has been revoked by Principal but 3P has not been informed
• (agency by estoppel)
Rights and Duties of Agent
Duties
Rights
To perform agreed tasks/
follow instructions
Right to remuneration
Exercise care and skill
Right to lien over agent
property
Duty to account
Right to claim indemnity
Avoid conflict of interest
Not to make a secret profit
(Boardman v Phillips (1967)solicitor to trust using
knowledge acquired to buy
shares himself)
Not to take a bribe
Maintain confidentiality
(usually commission) if commercial
agency – courts will imply
remuneration
Liability
If agent has actual
or apparent
authority
Principal
vicariously liable
Principal would
be bound
Termination of Agency
!
Operation of Law
!
!
!
!
!
Death
Bankruptcy of either party
Mental incapacity of either
Frustration- performance becomes impossible
Termination by Parties
!
!
!
Completion of task
Agreement
Revocation (sometimes not possible to revoke)
Contemporary Issues (1)
!
Ramsay v Love (2015)
!
!
!
!
!
!
Gordan Ramsay claimed that he was not bound by personal
guarantee given by CEO of company and his FIL without
authority.
CEO had entered into contract with Gary Love on behalf of
Ramsay’s company to buy premises if finished work met with
approval. Love sought guarantee (by Ramsay) and was given
one provided using electronic writing machine.
Ramsay claimed no authority given to CEO to give guarantee.
Held: wide remit to enter into a variety of commercial
contracts
Issues: electronic signatures, instant decision making
What kind of authority?
Contemporary Issues (2) in companies
Shareholders v
management
Shareholders v
controlling
shareholders
Shareholders v
other
stakeeholders
Contemporary Issues (3) LPAs
!
Lasting powers of attorney
!
https://www.gov.uk/government/publications/lasting-power-ofattorney-valid-examples
!
An LPA is a legal instrument allowing someone (the
‘attorney’) to make decisions for another person (the
‘donor’) because that person lacks mental capacity or for
another reason.
LPAs must always be registered by the Office of the Public
Guardian (OPG) before they can be used.
!
CONTEMPORARY ISSUES IN
LAW AND BUSINESS
COMPANY LAW
Lecture 2
Dr S Perera
School of Law
QMUL
OBJECTIVES
! Gain an overview of the types of Business Organisations
! Understand the agency conflict – between shareholders and directors of the
company.
! Be able to evaluate the roles of shareholders and management within a company
TOPIC OVERVIEW
!What are the different types of business organisations in the UK ?
!Focus thereafter is on companies:
!What is the role of Company Management-the directors?
!What is the role of shareholders in a Company?
!What is the agency conflict?
!What role does law play to minimise this conflict?
BUSINESS ORGANIZATIONS IN THE
UK
Sole Traders
LP
Non-Corporate
Partnerships
LLP
Business
Organizations
Listed on an
exchange/
quoted
Public (plc)
Corporate
Company
unlisted
Private (Ltd)
NON-CORPORATE FORMS OF
BUSINESS
Simple forms include:
! Sole trader
! Partnership
Sole Trader
!
!
!
!
!
little formality
a person runs a business and owns its assets personally
trader is personally responsible for contracts/obligations
personal assets are at risk when debts not paid
business income taxed as personal income
5
NON-CORPORATE FORMS OF
BUSINESS
Partnership
! Two or more persons carry ‘on a business in common with a view of profit’: Partnership Act 1890, s 1
! Forms by agreement in writing/oral. Few formalities
! Please note the Corporate Transparency and Register Reform which is taking place: https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/919356/corporatetransparency-register-reform-consultation-government-response.pdf
! Agency and contracting: Each partner is principal and agent for other partners: PA 1890, s 5. Each is
bound by acts of agents for normal business transactions.
! Exception – where counterparty knows that agent has no authority to act.
6
NON-CORPORATE FORMS OF
BUSINESS
Partnership
! Liability: No separate legal entity. Property purchased for business is partnership property: PA
1890, s. 20. If p/ship fails, its property is used to satisfy debts. If assets are inadequate,
creditors look to personal assets of partners. Partners share rateably in discharging debts. But if
assets of other partners are exhausted, the last solvent partner discharges remaining debts.
! Each partner is responsible for own tax affairs; thus, p/ship profits are divided and each partner
declares that much of the profit received as personal income.
7
NON-CORPORATE FORMS OF
BUSINESS
Partnership
! Protections: Given personal liability, partners are fiduciaries – must act in good faith and for
common good of p/ship. (But their more specific fiduciary duties can be altered by agreement.)
! Reconstitution and dissolution: P/ship dissolves every time a partner enters or exits; a new
agreement must be made. But p/ship agreement usually provides for continuance (‘automatic
novation’).
! When a partner leaves firm, (s)he can be released from liability for p/ship debts. But discharge
occurs only after notice to all creditors/clients: PA 1890, s 17.
! A partnership might be wound up also by agreement of partners. The partners realise firm’s
assets and discharge its debts (or appoint an insolvency practitioner to do so).
8
NON-CORPORATE FORMS OF BUSINESS
Hybrid organisations
! Limited Partnerships (LP)
! LP must be registered.
! Features active and passive partners.
! Non-managerial (passive) partners:
! cannot bind partnership to external obligations; but
! enjoy limited liability
! Limited Liability Partnerships (LLP)
! LLP’s main similarity to p/ship is in internal decision-making by partners as equals and in taxation
of profits.
! Otherwise:
! LLP is a body corporate
! Partners can limit liability for trading debts (but remain liable for torts they commit).
9
COMPANIES LIMITED BY SHARES
(THERE ARE OTHER TYPES BUT WE WILL ONLY FOCUS ON THOSE LIMITED BY
SHARES)
Shareholders own shares in the company
Their liability is limited to the amount, if any, unpaid on the shares held
by them’; s3(2) Companies Act 2006
Companies limited by shares may be public or private companies
2/1/22
10
PUBLIC (PLC) VS. PRIVATE
COMPANIES (LIMITED)
Public companies can sell their shares to the public and require a
trading certificate authorizing them to sell shares to the public
Private companies cannot sell their shares to the public (CA s.755)
2/1/22
11
PRIVATE COMPANIES
“Ownership is via shareholding.
“A share is a claim to certain rights regarding the co, usually (but not always) including rights to vote at
meetings and to share in dividends of the co.
“S/holders appoint directors to oversee running of the co; must be a minimum of 1
director. The director(s) then appoint persons to actually run the co – managers and
employees.
“The private company has a restricted ability to obtain finance for its operations. It
may borrow money from financial institutions; but may not raise money from the public
in general. Shares are not offered to the public and thus are not traded on open
markets.
12
PUBLIC COMPANIES
#It must be a co limited by shares. It can issue shares/securities to the general public
in accordance with Financial Markets and Services Act 2000; subject to regulation by
the Financial Conduct Authority (FCA).
#There is the potential for public co shares to be traded on a market, such as London
Stock Exchange. Such co’s will be subject to FCA’s Listing Rules
#LRs give ‘investors an accreditation indicating that those issuers adhere to a range of standards on
governance and investor protection’
#Even if these steps are not taken, public co is still subject to significant regulation
under CA 2006 reporting requirements. These provide protection for various
stakeholders – esp. creditors.
13
(1)WHY CHOOSE THE CORPORATE FORM?
Separate legal entity: co is a person in law separate from the owners/managers.
! Co holds property and facilitates its sharing.
! No need to re-transfer property with every change in membership.
! Co enters into contracts, can sue and be sued.
! This reduces personal risks for owners.
Perpetual succession: co is a legal person that continues until de-registered; it can continue
without ownership/management of original corporators.
! As a separate legal entity with perpetual succession, co can be a store of value and be bought and sold when
shares are transferable.
14
(2) WHY CHOOSE THE CORPORATE FORM?
S/holders typically have limited liability; those who bring actions against company cannot
go past it to reach into pockets of s/holders. Liability is limited to the amount outstanding on
value of shares. However, there are exceptions – eg, unlimited co.
Sole trader
Company form
Company
Assets
Creditor
Assets
15
(3) WHY CHOOSE THE CORPORATE FORM?
Specialised management (this is our focus doe today)
! S/holders provide capital and elect directors to run co.
! S/holders can invest in a number of co’s without need for constant oversight of all investments.
Potential economic benefits.
16
WHY CHOOSE THE CORPORATE FORM?
Other business forms
Sole trader
! Personally liable for business debts
Partnership
The company
One or more shareholders
Created by registration
! Two or more persons
! Members personally liable for business debts
Perpetual succession
LLP (Limited Liability Partnership)
Shareholders have limited liability
Trust
Allows separation of ownership and
management
! Two or more persons; ‘partners’ have limited liability for
trading debts
Separate legal entity
! Created by trust deed; property held by trustee on trust for
beneficiaries; trustee personally liable with right of
indemnity
17
DIRECTORS AND SHAREHOLDERS
Director
A person occupying the position as a
director
Executive
Non-executive directors
Directors are responsible for the
management of the company
For this purpose they may exercise all
the powers of the company;
Shareholders: or sometimes called members of the
company (when the company has no share capital)
and are the investors of the company.
#What is their role within the company?
#They have invested the capital
#What rights do they have?
#Right to vote (as a general meeting)
#Right to dividend (profits) when declared;
#Right to transfer their shares/exit : in private
companies this is always not possible
#Right to a residual return of capital (if
company is solvent)
WHAT IS THE AGENCY CONFLICT
OR THE AGENCY COST PROBLEM?
Agency costs arise due to
Agents i.e. self-serving
managers (directors) act in
their own interest and not in
the interests of the Principal.
Self interested
management
Passive
Investor
How does this arise?
Large or controlling
shareholders (also
the management)
Minority
shareholders
THINK
! Think of examples/illustrations of the agency problem
!E.g. remuneration of management
!How do you align the interests of agents with the principal (in a corporate setting)?
!Legal strategies
!Others
