Authored By: Abhar Qais
Royal Holloway University of London
Introduction
The case of Criterion Properties plc v Stratford UK Properties LLC is one of the landmark cases in the history of UK corporate law, particularly with respect to directors’ powers and their fiduciary duties in relation to M&A. The case dealt with the “poison pill” defenses taken on often in hostile takeover defense arrangements. It raised critical questions as to the proper exercise of directors’ powers and the observance of their fiduciary duties. In resolving these issues, the House of Lords laid down guidelines on how corporate decisions should be made in compliance not only with statutory requirements but also with principles of the common law. For corporate lawyers, this case remains a significant reference in dealing with the intricacies of corporate governance in takeover situations.
Background of the Case
The dispute in Criterion Properties arose out of a joint venture agreement between Criterion Properties plc and Stratford UK Properties LLC, a subsidiary of Oaktree Capital Management LLC. At the heart of that agreement was a contentious “poison pill” agreement, entitling Criterion to compel Stratford to buy out its interest at a pre-agreed price upon the occurrence of certain trigger events. Those trigger events included either the resignation of certain officers or the launching of a takeover bid.
Stratford’s board demurred to this clause on grounds that its intention was to prohibit any takeovers, including such a takeover which may be in the best interests of the shareholders. Therefore, the clause went one step too far because of preventing valid bids and promotion of management interests at the expense of shareholder interests. Stratford proceeded to remove the managing director who had negotiated that provision and tried to void the agreement.
The legal issue central was whether or not the acts of the directors in implementing the poison pill were a proper exercise of their powers or, alternatively, amounting to a breach of fiduciary duties.
Legal Issues
The following critical legal issues arose for determination in the appeal:
Authority of Directors: Whether the directors had authority to insert a poison pill arrangement within the joint venture agreement; this involved determining the extent of delegated powers the directors enjoyed from the constitution of the company.
Fiduciary Duties: Did the directors act in good faith and in the interests of the company in adopting the poison pill clause? The question thus invoked the broader principles of loyalty and transparency in corporate governance.
Proper Purpose Doctrine: Was the provision issued for a proper corporate purpose, or was its purpose primarily to thwart potential takeovers and entrench management?
Judgment
The House of Lords, presided over by Lord Nicholls, reversed the decision and sent it for trial on the ground of whether or not there was a proper purpose action by the directors. The court, though giving no definite judgment, gave ample clarity on the principles involved regarding director conduct.
This point has, most clearly and recently, been expressed by Lord Nicholls that the directors should act bona fide and for the purposes for which those powers had been conferred upon them: “It is of paramount importance that directors exercise their powers bona fide and for the purposes for which they were conferred”[1]
The court emphasized that defensive mechanisms, such as poison pills, must be subject to strict scrutiny. Directors may not use such mechanisms to entrench themselves or defeat an otherwise legitimate takeover of the corporation. Instead, the long-term interests of the corporation and its shareholders must always be paramount.
Statutes and Common Law Principles Applied
Directors’ Fiduciary Duties
The case was about the fiduciary duties of directors, particularly the duty to act in the best interests of the company. Encapsulated in the Companies Act 2006, this duty demands that directors consider the long-term consequences of their decisions and the interests of shareholders and other stakeholders.[2] In Criterion Properties, the court was to consider whether the poison pill clause promoted these goals or frustrated them by preventing possible beneficial takeovers.
Proper Purpose Doctrine
The proper purpose doctrine is that as held in the case of Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC) directors can exercise their powers for proper corporate purposes. The Court held that whether the use of poison pill by the directors was an honest attempt to protect the company or sham, entrench incumbent management.[3]
Directors’ Authority
Directors should exercise their powers only within the authority granted to them by the company’s memorandum and articles of association, and the relevant legislation on the subject. The decisions made which impact the shareholders’ interests or the overall structure of the company should be in compliance with those documents. Recently, in Criterion Properties, the House of Lords explained that not only the directors should ensure that a specific decision is procedurally correct but also substantially possible.
Effects of Company Law
Short-run Influence
The decision in Criterion Properties had the immediate consequence of delineating the parameters of directors regarding takeover defense. The judgment emphasized that the directors should closely assess the implications of takeover defenses such as poison pills with care to ensure that they were not adopted in a way that unfairly restricted shareholder value and/or hindered legitimate bids for the target company. This case served as a cautionary tale for directors considering similar strategies, reinforcing the principle that corporate decisions must prioritize shareholder interests.
The judgment also sent a strong message regarding transparency in corporate governance. Companies were encouraged to put in place clear-cut protocols for adopting defensive measures, ensuring that such strategies could withstand judicial scrutiny. For shareholders, the decision offered greater confidence that their interests would not be sidelined by self-serving directors.
Long-Term Impact
Over the years, the case has shaped the City Code on Takeovers and Mergers, especially Rule 21, which relates to the directors’ actions in takeover offers.[4] The ruling emphasized that directors should not exercise their powers to defeat takeover offers absent express shareholder approval. This therefore ensured a more consolidated corporate accountability framework where directors would also be made to account by the shareholders in situations even of the highest stake.
The ruling in Criterion Properties thus developed the standards of corporate governance in the UK. Emphasizing the need to balance the use of defensive techniques and fiduciary duty, the case paved the way for efforts by companies to become more adept in dealing with takeover exposure. For corporate lawyers, this decision remains a seminal case as it offers an exciting view of the interplay between defensive strategies, fiduciary duties, and the rights of shareholders.
Analysis and Reflection
Significance of the Ruling
The decision of the House of Lords in the case of Criterion Properties further strengthened the principle that the directors should not exercise their powers irresponsibly, especially when there is a possibility of a change of control in the company. Full adherence to fiduciary duties and proper purpose by the House of Lords prevented the directors from favoring themselves or one group of stakeholders over the general interests of the company and the shareholders. This case has remained a critical reference point in corporate governance in the UK on how directors make complex decisions in high stake situations.
To the aspiring corporate lawyer, the case provides a template for testing the legality and propriety of defensive measures. It emphasizes that corporate decisions have to be taken not only in accordance with statute but also in a manner consistent with shareholder expectations, and directors are accountable for their conduct.
Application to Future M&A Cases
The decision in the case of Criterion Properties reminds the corporate lawyer conducting mergers and acquisitions that, first and foremost, there is a need to ensure that the actions of the company are within the acceptable legal and regulatory environment. Defensive measures such as poison pills must be carefully structured to avoid contravening fiduciary duties or frustrating shareholder interests. This case also represents the importance of transparency and accountability in corporate decision-making, especially regarding takeover bids.
The judgment also has implications for cross-border M&A deals. With globalization pushing companies in all directions, corporates have to understand disparate legal regimes and shareholders’ expectations. Criterion Properties puts in place a strong building block to handle such nuances that ensure directors remain committed to long-term value creation.
Possible Reform
The judgment in Criterion Properties has, no doubt, provided some certainty. Yet, it shows also the necessity for deeper reforms regarding corporate governance issues: this is, adding to more detail guidelines related to defensive mechanisms would clarify further how shareholders’ interest needs to be regarded. Moreover, such reforms through legislations can provide that if any directors employ any such defense, then it requires the increase of transparency by further details and disclosures.
The case has also raised questions about the role of shareholder activism in corporate governance. In a manner that shareholders remain vocal about their rights and expectations, companies do have to strike a balance among such demands and needs for strategic flexibility. Criterion Properties sets principles that can be quite useful as starting points in dealing with these challenges, encouraging the company in being more inclusive and transparent in its approaches toward governance.
Conclusion
The case of Criterion Properties plc v Stratford UK Properties LLC had one of the widest-reaching, profound effects on UK company law. This case was highly significant in deciding the issues of directors’ powers and fiduciary duties, laying down an important precedent on the measures which companies take to defend themselves against hostile takeover attempts. To future corporate lawyers, this case remains an indispensible tutor of the interaction between legal principles and corporate governance and shareholder interest in M&A transactions. Its lessons continue to mold the practice of corporate law by offering valuable insights into what directors can and cannot do in protecting the long-term interests of their companies.
This case further outlines that the corporate strategies remain within the precincts of law and morality as well as corporations should be responsible towards the stakeholders. As of this changing world of corporations, modern corporate governance fundamentally relays on the bedrock foundation laid down through principles evolved in Criterion Properties. In balance achieved by House of Lords, between discretion by directors to the protection for the shareholders, means corporate decision-making processes integrity not adversely affect by such defence mechanism.
Application of the Ratio Decidendi in Later Cases
Criterion Properties’ decision has been referred to and applied many times since the date, establishing its significance in corporate governance development. One important example is Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, in which the Supreme Court dealt with questions of directors’ powers and their adherence to the proper purpose rule. Here the directors of JKX Oil & Gas tried to fetter the shareholders’ voting powers by serving disclosure notices under section 793 of the Companies Act 2006. The shareholders challenged this on the grounds that the directors had acted for an improper purpose in trying to defeat the likely outcome of an imminent shareholders’ vote.
Lord Sumption in leading the Supreme Court applied the decision in Criterion Properties. The court held that directors must exercise their powers for the purpose for which the powers are conferred, and any deviation from that principle would automatically render their actions invalid. The decision in Eclairs Group brought out emphatically that the proper purpose doctrine is not simply a procedural check but a substantive constraint on the discretion of the directors. By giving effect to the reasoning in Criterion Properties, the court re-iterated the accountability of directors in corporate governance.
Another case which has been influenced by Criterion Properties is Sevilleja v Marex Financial Ltd [2020] UKSC 31. Although this case has been primarily concerned with the reflective loss principle, the proper purpose doctrine has been considered in assessing the conduct of directors. The Supreme Court, in its judgment, once again emphasized that directors must conduct themselves within the perimeters of their fiduciary duties, making decisions that coincide with what is in the best interests of the company and the shareholders. This further reliance on Criterion Properties shows its continued relevance in shaping the legal framework for directors’ conduct.
The principles set out in Criterion Properties have also been applied in cases involving cross-border transactions where the complexity of the international corporate law requires a robust framework in testing what directors have done. Clearly stating how directors are to exercise their powers, the case became a cornerstone in corporate governance and provided a useful guide in helping to negotiate some of the challenges thrown up by modern business environments.
Bibliography:
Companies Act 2006.
Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC).
City Code on Takeovers and Mergers (2023 ed).
Andrew Keay, Directors’ Duties (4th edn, Jordan Publishing 2016).
Paul Davies, Principles of Modern Company Law (10th edn, Sweet & Maxwell 2022).
LS Sealy and Sarah Worthington, Cases and Materials in Company Law (11th edn, OUP 2020).
John Lowry and Arad Reisberg, Pettet’s Company Law: Company and Capital Markets Law (4th edn, Pearson Education 2018).
D Milman, ‘Takeover Defence Tactics and the Proper Purpose Doctrine’ (2005) 26(2) Co Law 45.
T Clarke, International Corporate Governance (2nd edn, Routledge 2021).
[1] (Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [16]).
[2] Companies Act 2006 (c 46).
[3] Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
[4] City Code on Takeovers and Mergers, Rule 21.
