corporate law Flashcards
(35 cards)
(4) Q1: define ESG Shareholder Activism
Process by which investors (institutional investors, hedge funds, retail shareholders) use their influence to push companies to adopt more sustainable and responsible practices
Key driver of ESG activism is climate change and carbon emissions
(Environmental, Social, and Governance (ESG) practices:
Refers to all non-financial fundamentals that can impact firm’s financial performance)
(4) Q2: describe 2 Key tactics that shareholder activists use to push for ESG related changes in companies
1. Shareholder Resolutions
Voted on at AGMs
Even if resolutions don’t pass they can pressure management to make changes
2. Public engagement and activism:
Use of media campaigns, public statements and direct engagement w executives to push for ESG improvements
(4) Q3: define Climate shareholder resolutions
Formal proposals submitted by shareholders requesting action or disclosure on climate related issues to be voted on at the AGM
Non-binding on the board in most cases
Typically focus on:
- improving climate risk disclosure
- aligning business strategies w Paris Agreement
- setting net-zero targets
- reducing carbon emissions
*Purpose:
allow shareholders to affect changes or exercise their rights and influence how company is run Influence board decisions on social issues (e.g. using renewable resources, minimising carbon footprint, global warming),
(State opinion of shareholders on matters that concern them, Mostly advisory but can advocate causes/changes)*
4) Q4: enumerate and briefly explain each of the 4 broad climate related ‘asks’ from investors as categorised by ClientEarth in the Guide
1. Ambition/commitment to net zero:
That companies set ambition/make commitment to becoming a net-zero business in their scope 1-3 greenhouse gas emissions by 2050 at very latest
2. Paris-alignment strategy / transition plan:
That companies develop, set, implement, report to shareholders on a strategy to align the business w goals of the Paris Agreement
such strategy to include metrics and short- , medium-, and long-term scope 1-3 greenhouse gas emission reduction targets
to be regularly reviewed and updated to reflect best available science
3. Say on Climate
That companies provide shareholders w opportunity to approve or vote down terms and implementation of the company’s Paris-alignment strategy (or ‘‘net-zero transition plan’’ / ‘‘climate transition action plan’’) by way of annual vote be that binding or advisory
4. Corporate Climate lobbying
That companies disclose details of their climate and energy policy lobbying, advertising and advocacy activities
And cease such activities where they are materially misaligned w Paris Agreement goals
Or in case of activities undertaken by industry associations cease or suspend company membership of that association
(4) Q5: enumerate and illustrate other techniques ESG activists can use to further their goals, aside from resolutions
1. Most cooperative (most used):
informal, private (‘‘behind the scenes’’) contacts w the company
Examples: private letters to board of directors Private discussions and negotiations w management
2. Mildly cooperative
Using their** right to ask questions** at shareholders meeting
In NL a more important technique than shareholder proposals
3. More confrontational:
**Public communications **meant to influence stakeholders, public opinion, and policy makers
Example: Press contacts like off-the record statements to the public (‘‘Dear Board’’) letters and press releases
Often combined w agitation through social media
**4. Confrontational extreme: **
Suing companies and their directors
Means of last resort
- results unpredictable, delayed and costly
Example:
Okpabi v Shell - UK
Milieudefensie v Shell - NL
ClientEarth v. Shell’s Board - UK
(4) Q6: explain tension between corporate law and role of ESG shareholder activist
- Corporate law doesn’t generally support an active role of shareholders on ESG matters
the Principle of division of distribution of powers in national corporate laws articulates how power is allocated b/w board of directors and shareholders in handling company’s affairs
**2. Policy and strategy **
(general incl. climate strategy)
fall under board of directors **competence **
All such related items may be added on AGM agenda only by board
- Shareholders right to add items to agenda of shareholders meeting must relate to matters that acc belong to competence of shareholders meeting
- Climate resolutions encroach on boards power
such that they can be **excluded **from agenda of shareholders meeting
*(Some boards refused to submit a climate resolution to shareholders vote on grounds that meeting is not the competent corporate body
Boards argue shareholders essentially trying to become involved in corporate policy and strategy abt environmental issues when proposing such resolution for AGM agenda)
*
(4) Q7: clarify how the incompetence of shareholders can be circumvented, w a brief explanation of each tactic
Resolutions can be formulated as implicit requests, framed as AoA amendment, or proposed for advisory or consultative vote :
**1. Implicit requests: **
Resolution that formally remains within scope of shareholder authority but that implies desire to go further
**2. Amendment to Articles of Association: **
Climate resolutions framed as am amendment of company AoA as this is generally power of shareholders meeting in many jurisdictions
Strongly recommended by experts (bc can bring change even if not ‘successful’)
**3. Advisory or consultative vote: **
Boards might have incentive to initiate such vote on climate or other ESG concerns
if only to avoid more far reaching proposals
If board legally allowed to put a non-binding climate resolution up for such vote it will be difficult for the board to refuse
(4) Q8: justify Importance of a prospective climate resolution, one that might not get required votes at AGM or one that might be withdrawn
'’The very prospect of a properly drafted resolution from well organised group of institutional investors can result in remarkably swift concessions from the company, even where previous attempts at engagement have failed.
At many companies, while boards may not yet fully appreciate the significant and manifold risks of climate change to their business, they may be quicker to appreciate the PR and reputational damage of fighting a reasonable request from shareholders (particularly where their companies have to carefully manage their ‘social licence’ to continue business activities at all)’’
(ClientEarth guide p. 10)
(4) Q9: specify the Jurisdiction where shareholders have no basic right to file a resolution and list the alternative options left for them
Jurisdiction:
The Netherlands
(Read ClientEarth guide pp. 38-39)
Alternative options:
- Persuade the company to voluntarily table a resolution for a vote
- Vote against directors
- Propose a ‘‘discussion item’’ be added to the AGM agenda
- Vote against discharging the board from liability in respect of the performance of their duties from the financial year just passed
(4) Q10: which of following is primary goal of ESG shareholder activism?
a. Maximising short-term stock prices
b. Promoting sustainable corporate practices
c. Increasing executive compensation
d. Reducing shareholder influence
b. Promoting sustainable corporate practices
(4) Q11: Which of following is NOT a common strategy used by shareholder activists?
a. Filing shareholder resolutions
b. Engaging in proxy voting
c. Conducting hostile takeovers
d. Public campaigns and advocacy
c. Conducting hostile takeovers
(4) Q12: summarise the 4 points that ClientEarth makes in its guide when analysing the ‘‘Investors right to file shareholder resolutions’’ (pp. 10 -12)
Applicable to many of the jurisdictions covered in the report
1. General power to manage the affairs of the company usually rests w the board
that can mean that in some jurisdictions the only legally permissible way of getting a climate-related resolution onto the ballot is to frame it as **amendment to the articles of association **(or bylaws) of the company
This is right explicitly granted to shareholders in almost every European jurisdiction
- In some jurisdictions there is a tension b/w the principle that boards have general competence to manage company, and the reserved right for shareholders to amend AoA of company
How these 2 legal concepts interact not always clear
- It is Recommended that investors should not seek to be **overly-prescriptive **when drafting climate related resolutions
Detail and clarity good but investors should only seek to set out framework within which board must act
- Investors should be wary of otherwise ambitious climate related resolutions becoming **diluted **during engagement process
(5) Q1: Enumerate the main functions of a board of directors
- oversees the operation of the company
- Supervises the executive management.
- Takes decisions of strategic importance.
(5) Q2: Enumerate the main differences between the two main types of boards
1. One-tier board
A board of directors
It has both management and supervisory functions
Prevalent in Anglo-American jurisdictions
2. Two-tier board
An executive board and a supervisory board
The executive board with management functions & the supervisory board with supervisory functions
Prevalent in countries belonging to the German legal tradition
(5) Q3: Describe in bullet points the two-tier board
1. Executive board:
- The overall direction of the affairs of the company
- The responsibility for the day- to- day business operations
- It represents the company in and out of court
- Directors may be liable to the company for breach of their duties
2. Supervisory board:
- Largely a control organ that participates in the management of the company only in limited circumstances
- Various information and inspection rights to fulfil its supervisory functions
- Certain limited decision rights that reach into the sphere of managerial decision- making
(5) Q4: In your own words, explain the rationale for the law to impose fiduciary duties on directors
Tied to concerns of use of power, shareholders trust managers w assets, prevents exploitation and abuse of power by imposing fiduciary duties
The core concern is a classic agency problem - law interferes in way to balance
shareholders cede control over corporate assets **to managers (directors and officers), who are charged with pursuing corporate profitability and shareholder wealth.**
As a result, shareholders become vulnerable to abuse at the hands of the managers, who may be tempted to use this power to pursue their own interests.
(Fiduciary definition: A fiduciary is someone who has undertaken to act for/on behalf of another in a particular matter in circumstances which give rise to relationship of trust and confidence
Directors referred to as ‘trustees / fiduciaries / agents of the shareholders)
(5) Q5: Define and elaborate on the two core duties owed by directors
1. Duty of care:
It deals with the** care, skill, and diligence **that a director is expected to employ in **managing **the company.
The focus of the duty of care is informed decision-making.
- Directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them.
A director is expected to take **reasonable precautions against reasonably foreseeable **harms.
2. Duty of loyalty:
It requires that directors act **honestly and in good faith **in the best interests of the company, typically, but not exclusively, defined in financial terms.
It deals with situations where a director’s** interest conflicts **with the interests of the company, for example:
- The director is a shareholder.
- The director is involved in a business, partner of the company.
- the director takes advantage of a business opportunity that could also be of commercial interest to the company.
(5) Q6: Specify at least three tasks that illustrate how directors discharge their duty of care when considering climate risks in their policies and strategies
1) Integrate
climate risks and opportunities into their governance roles.
2) Stay informed of and understand
the company’s general legal and regulatory obligations, as well as climate-related risks, opportunities and exposures.
5) Directors may be required to take expert advice in order to satisfy their duty of care.
(5) Q7: Based on the allegations made by ClientEarth against Shell’s directors, infer at least three instances when a director of an oil and gas company could be held liable for breach of duty
1) Failing to set appropriate targets, specifically targets about reducing scope 3 emissions and carbon intensity.
2) Significantly investing in the exploration, development and extraction of fossil fuel projects.
5) Failing to comply with a previous court decision
that ordered the company to reduce its group-wide CO2 emissions by 2030 or 2050, in particular by not using its “significant best-efforts” to reduce its indirect (scope 3) emissions.
(5) Q8: Define and elaborate on the ‘business judgement rule’
It is a standard of judicial review:
- A standard of review tells the reviewing court how to decide whether the actor should be held liable.
(Difference b/w standard and principle: standard tells how, courts function on many principles, standards can be principles)
- The courts in many jurisdictions will defer to directors’ knowledge and expertise in making business decisions, and directors are unlikely to face liability because of simply a bad decision.
It is a presumption in favor of the board:
- The board generally has the power and duty to make business decisions for the corporation.
- The business judgment rule provides a director of a corporation immunity from liability when a plaintiff sues on grounds that the director violated the duty of care to the corporation so long as the director’s actions fall within the parameters of the rule.
IN THE CONTEXT OF CLIMATE RISKS:
The business judgment rule may operate to protect directors where they take actions to ensure the long-term success of the company which may not be the most profitable in the short-term, and vice versa.
(5) Q9: Select one case (from those presented during the lecture) and describe it briefly, with a focus on the legal issue and the procedural history
- 2021 Milieudefensie vs. RDS (The Netherlands):
litigation case seeking to Challenge corporations actions/failure to act
At issue (legal grounds):
Whether private company violated a duty of care and Human Rights obligations by failing to take adequate action to curb contributions to climate change
Court of first instance in The Hague ruled in plaintiff’s favour:
Court ordered Shell to reduce CO2 emissions by 45% from 2019 levels by end of 2019
Shell appealed 2024:
appeal overturned
(5) Walloon Region’s Carbon Neutrality Statute - Legal advice Belgium
The Walloon region’s carbon neutrality statute introduces a legal obligation for businesses to contribute to the region’s climate goals. The statute outlines a phased reduction in CO₂ emissions, aiming for a 55% reduction by 2030 and 95% by 2050, while ensuring the transition remains just and equitable. This statute is critical for businesses in the region as it frames both the regulatory environment and expectations regarding climate change mitigation
Legal advice Belgium
(5)Fiduciary Duties of Directors
Fiduciary Duties of Directors
Under Belgian corporate law, directors owe fiduciary duties to the company, which encompass the following:
1 Duty of Care - Directors must act with the care of a normally prudent and diligent person. This includes considering the long-term impacts of climate change on the company’s operations, reputation, and sustainability. Failure to adequately address these factors could result in potential liability under general tort law.
2 Duty of Loyalty - Directors must act in the best interests of the company. This duty extends to making decisions that align with the company’s long-term sustainability and reputation. As climate change becomes an increasingly significant issue, this duty requires directors to consider the long-term environmental and financial implications of their decisions.
3 Duty to Act Within Powers - Directors must act within the powers granted by the company’s Articles of Association (AoA) and relevant laws. In light of the Walloon statute and growing emphasis on climate considerations, the AoA may need to be amended to explicitly empower directors to address environmental and sustainability concerns.
4 Best Efforts Standard - Directors are not required to achieve specific outcomes but must exercise “best efforts.” According to Article 2:56 of the Belgian Company and Associations Code (BCCA), directors are only liable for decisions that fall “manifestly outside the range” of what would be considered prudent by a reasonable person in similar circumstances.
Legal advice Belgium
(5) Key Risks and Potential Liabilities
- Liability under Article 2:56 of the BCCA
- Directors may be held liable for decisions that are manifestly imprudent, especially if they fail to consider emerging risks such as those related to climate change and environmental sustainability. This could lead to potential actions for breach of fiduciary duties. - Contractual Obligations
- Companies may face contractual liabilities if they fail to meet sustainability or climate-related goals as outlined in agreements with shareholders, investors, or other stakeholders. - Shareholder and Minority Shareholder Claims
- Shareholders, particularly minority shareholders, may pursue legal action against directors if they perceive that decisions regarding environmental sustainability have harmed the company’s long-term interests or violated fiduciary duties. Minority shareholders can initiate claims through mechanisms like a minority action (Article 5:142 of the Belgian Civil Code). - Creditor Claims
- Creditors may seek redress under the Belgian Civil Code if the company’s failure to address climate risks negatively impacts its financial position and ability to meet debt obligations.
