Skip to main content Accessibility help
×
Home

From balanced enterprise to hostile takeover: how the law forgot about management

  • Andrew Johnston (a1), Blanche Segrestin (a2) and Armand Hatchuel (a2)

Abstract

We show that professional management began to emerge in UK companies during the first half of the twentieth century, a development which was widely theorised and accepted. However, the managerially-led enterprise was accommodated rather than protected by company law, making it vulnerable to changes in the law. The Cohen Report of 1945 paid no attention to these developments, and led to the introduction, in the Companies Act 1948, of important, but previously little appreciated, changes in the name of enhancing the accountability of directors to shareholders. The shareholders’ statutory right to remove the directors by simple majority overturned existing structures overnight and was an important driver of the hostile takeover, which emerged shortly afterwards. This deprived management of the necessary autonomy to balance the competing interests at stake in the enterprise and to foster innovation. The emergence of the current system of shareholder primacy can be traced back to these developments.

Copyright

Corresponding author

*Corresponding author. Email: Andrew.Johnston@sheffield.ac.uk

Footnotes

Hide All

We are grateful to the following for comments and feedback on this article: Christopher Bruner, Robert Burrell, Brian Cheffins, Simon Deakin, Ewan McGaughey, Jo Maltby, David Millon, Marc Moore, John Quail, Navajyoti Samanta, Jeroen Veldman, participants in a 3CL seminar at the University of Cambridge and in a Management and Organisational History Seminar at the University of York, delegates at a SMART conference at the University of Oslo on ‘Sustainable Business Models’, and the anonymous referees. All errors remain our own.

Footnotes

References

Hide All

1 Percy, Lord Eustace The Unknown State 16th Riddell Memorial Lectures (Oxford: Oxford University Press, 1944).

2 Ireland, PProperty and contract in contemporary corporate theory’ (2003) 23 Legal Studies 453 at 501, emphasis in original.

3 Moore, M Corporate Governance in the Shadow of the State (Oxford: Hart, 2013) p 256.

4 Ibid, p 92; Easterbrook and Fischel say that ‘Unless there is a strong reason to believe that regulation has a comparative advantage over competition in markets in evaluating the effects of corporate contracts… there is no basis for displacing actual arrangements as “mistakes”, “exploitation,” and the like’: Easterbrook, F and Fischel, D The Economic Structure of Corporate Law (Cambridge, MA: Harvard University Press, 1991) p 32.

5 Deakin, SThe coming transformation of shareholder value’ (2005) 13 Corporate Governance: An International Review 11.

6 Blair, M Ownership and Control (Washington, DC: Brookings, 1995); W Lazonick ‘Profits without prosperity’ (2014) Harvard Business Review 46 (September).

7 Chandler, AD Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA: Belknap Press, 1990) pp 288289; Cheffins, BHistory and the global corporate governance revolution: the UK perspective’ (2001) 43(4) Business History 87 at 91; Cheffins, B Corporate Ownership and Control: British Business Transformed (Oxford: Oxford University Press, 2008) ch 9.

8 Hannah, LThe “divorce” of ownership from control from 1900 onwards: re-calibrating imagined global trends’ (2007) 49 Business History 404 at 417. See also Acheson, GG et al. ‘Corporate ownership and control in Victorian Britain’ (2015) 68 Economic History Review 911. For a critique of Hannah's account, see Cheffins (2008), above n 7, p 197.

9 Foreman-Peck, J and Hannah, LExtreme divorce: the managerial revolution in UK companies before 1914’ (2012) 65 Economic History Review 1217.

10 Florence, P Sargant The Logic of British and American Industry (London: Routledge, 1953) p 140.

11 Chandler, above n 7, p 240.

12 Lazonick, W Business Organization and the Myth of the Market Economy (Cambridge: Cambridge University Press, 2000) p 269.

13 Webb, for example, referred to ‘a hierarchy culminating in some form of General Manager or Managing Director, and reaching, in some cases, a high degree of complexity’: Webb, S, The Works Manager Today (London: Longmans, 1918) pp 45.

14 Urwick, L and Brech, EFL The Making of Scientific Management Volume II: Management in British Industry (London: Management Publications Trust, 1949) p 81.

15 Ibid, p 85. For further examples of early organisational diagrams see Sheldon, O Philosophy of Management (London: Pitman, 1923) pp 118 and 121.

16 See for example the case studies contained in Lewis, MJ et al. Personal Capitalism and Corporate Governance: British Manufacturing in the First Half of the Twentieth Century (Basingstoke: Ashgate, 2011); Richardson, MRapprochement and retribution: the divergent experiences of workers in two large paper and print companies in the 1926 General Strike’ in Richardson, M and Nicholls, P (eds) A Business and Labour History of Britain: Case Studies of Britain in the Nineteenth and Twentieth Centuries (London: Palgrave Macmillan, 2011) p 94.

17 Keeble, SP The Ability to Manage: A Study of British Management 1890–1990 (Manchester: Manchester University Press, 1992) ch 4; Chandler, above n 7, p 293; Khurana, R From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession (Princeton: Princeton University Press, 2007) p 138; Amdam, RPBusiness education’ in Jones, G and Zeitlin, J (eds) The Oxford Handbook of Business History (Oxford: Oxford University Press, 2008) pp 583585.

18 Mowery, DCIndustrial research 1900–1950’ in Elbaum, B and Lazonick, W (eds) The Decline of the British Economy (Oxford: Clarendon, 1986) pp 194199. However, Sheldon, above n 15, p 44 reported that, even in the UK, ‘Many large firms have now instituted research departments, for both applied and pure research’.

19 Coleman, DCFailings and achievements: some British businesses, 1910–80’ (1987) 29 Business History 1 at 5–6.

20 Shiman, DRManagerial inefficiency and technological decline in Britain, 1860–1914’ (1991) 20 Business and Economic History 89 at 92–94; Quail, JThe proprietorial theory of the firm and its consequences’ (2000) 3 Journal of Industrial History 1 at 8.

21 For an essential overview see Child, J British Management Thought: A Critical Analysis (London: Allen and Unwin, 1969) ch 3.

22 See for example Sheldon, above n 15, p 26.

23 Burton, FG The Commercial Management of Engineering Works (Manchester: Scientific Publishing Co, 1899) pp iv and 20.

24 Ibid, p 24. Armstrong notes the widespread use in Victorian England of salaried managers who ‘were often engineers by the standards of the day’: Armstrong, PChanging management control strategies: the role of competition between accountancy and other organisational professions’ (1985) 10 Accounting, Organizations and Society 129 at 138.

25 Webb, above n 13, pp 3–4. For the parallel debate in the US see for example Brandeis, LBusiness – a profession’ (1912 speech reprinted in Business – A Profession (Boston: Small, Maynard & Co, 1912)).

26 Elbourne, ET The Management Problem (London: Library Press, 1919).

27 Taylor, FW The Principles of Scientific Management (New York: Harper and Brothers, 1919) p 10.

28 Urwick and Brech, above n 14, pp 99–102.

29 Ministry of Reconstruction Scientific Business Management, Reconstruction Problems 28 (London: HMSO, 1919).

30 Child, above n 21, p 46; for a discussion of the parallel debates in the US see Kaufman, A, Zacharias, L and Karson, M Managers vs Owners: The Struggle for Corporate Control in American Democracy (Oxford: Oxford University Press, 1995) pp 114117; O'Sullivan, M Contests for Corporate Control (Oxford: Oxford University Press, 2000) pp 100102.

31 Tawney, RH The Acquisitive Society (London: G Bell and Sons, 1921) p 111. See also Marens, RRecovering the past: reviving the legacy of the early scholars of corporate social responsibility’ (2008) 14 Journal of Management History 55.

32 Burton, above n 23, p 28.

33 Sheldon, above n 15, p 46.

34 Knight, F Risk, Uncertainty, and Profit (Boston: Houghton Mifflin, 1921) p 269.

35 Berle, A and Means, G The Modern Corporation and Private Property (Piscataway, NJ: Transaction Publishers, 1991) pp 312313.

36 Gower, LCBCorporate control: the battle for the Berkeley’ (1955) 68 Harvard Law Review 1176 at 1190.

37 Quail, JVisible hands and visible handles: understanding the managerial revolution in the UK’ (2002) 5 Journal of Industrial History 1 at 5.

38 See Nichols, T Ownership, Control, and Ideology (London: George Allen & Unwin, 1969) pp 238239.

39 Keynes, JMThe end of laissez-faire’ (London: Hogarth Press, 1926). For further discussion of the reasons for shareholder passivity during this period see Cheffins (2008), above n 7, pp 123–130.

40 As Marris pointed out, shareholders could only remove a senior manager below board level by threatening to replace a majority of the directors with their nominees: Marris, R The Economic Theory of ‘Managerial’ Capitalism (London: Palgrave Macmillan, 1964) p 16. This was practically impossible before 1948.

41 Companies Act 1862, Table A, Art 65.

42 Companies Act 1906, Table A, Art 86; Companies Act 1929, Table A, Art 80.

43 Companies Act 1862, s 55 and Companies Act 1908, s 69(1) and (2). A special resolution also required a second meeting to confirm the decision by simple majority until 1929: see Companies Act 1862, s 51 and Companies Act 1908, s 69(2). The Companies Act 1929 dispensed with the requirement of a second meeting for a special resolution. As Mr Justice Cohen observed, the directors tended to hold all the proxies for the general meeting: see Minutes of Evidence Taken Before the Company Law Amendment Committee (London: HMSO, 1943–1944) para 7071.

44 Cheffins (2008), above n 7, pp 130 and 278. This had not been a listing requirement in 1906: see Rules and Regulations of the London Stock Exchange (London: The Stock Exchange, 1906) set out in Davis, L, Neal, L and White, ENHow it all began: the rise of listing requirements on the London, Berlin, Paris, and New York stock exchanges’ (2003) 38 The International Journal of Accounting 117, Appendix A.

45 Evidence of Samuel Cash, partner in Vizards Minutes of Evidence (1943–1944), above n 43, para 10191.

46 Guinnane, TW, Harris, R and Lamoreaux, NRContractual freedom and corporate governance in Britain in the late nineteenth and early twentieth centuries’ (2017) 91 Business History Review 227 at 244.

47 E McGaughey Participation in Corporate Governance (unpublished LSE PhD Thesis, 4 November 2014) p 84.

48 Hannah, above n 8, at 415–417.

49 Companies Act 1862, Table A, Arts 58, 60 and 61; Companies Act 1906, Table A, Arts 78, 80 and 81; Companies Act 1929, Table A, Arts 73, 75 and 76 (providing for re-election by default). Guinnane et al, above n 46, p 10 suggest that this was perhaps to ensure continuity in management of the enterprise.

50 Imperial Hydropathic Hotel Co v Hampson (1882) 23 CD 1; see also Report of the Committee on Company Law Amendment (Cm 6659, 1945) (Cohen Report) para 130.

51 In Guinnane et al's samples, 64% of their sample of companies registered in 1892 and 92% of their sample from Burdett's Stock Exchange Official Intelligence (1892) made provision along these lines: Guinnane et al, above n 46, at 244.

52 Companies Act 1906, Table A, Art 72; Companies Act 1929, Table A, Art 68. In Guinnane et al's (ibid) 1912 and 1927 samples virtually all companies adopted this provision. By default, the general meeting could remove a managing director or manager from his position by simple majority, with 44.9% and 62% of companies in Guinnane et al's 1912 and 1927 samples adopting this provision. Presumably the directors could simply reappoint the managing director or manager in the unlikely event of removal by the general meeting.

53 This was common where a business was incorporated for the first time: see Palmer, FB Company Precedents for Use in Relation to Companies Subject to the Companies (Consolidation) Act, 1908 vol 1 (London: Stevens, 1912) pp 981982.

54 Guinnane at al, above n 46, p 20.

55 Franks, J, Mayer, C and Rossi, SSpending less time with the family: the decline of family ownership in the United Kingdom’ in Morck, R (ed) A History of Corporate Governance around the World: Family Business Groups to Professional Managers (Chicago: University of Chicago Press, 2005) pp 595597 showing that, between 1919 and 1939, ‘on average, two thirds of the target directors remained on the target's board after the acquisition’.

56 See for example Hannah, L The Rise of the Corporate Economy (London: Methuen, 1976) pp 8687; Franks et al, above n 55, p 584.

57 Walker, JD and Watson, Investor's and Shareholder's Guide (Edinburgh: E&S Livingstone, 1894) pp 142143.

58 Stiebel's 1920 book simply stated that the articles ‘should empower the company to remove directors by extraordinary or special resolution’: see Stiebel, A Company Law and Precedents (London: Sweet & Maxwell Ltd, 2nd edn, 1920) pp 396 and 423.

59 Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34; Quin & Axtens Ltd v Salmon [1909] AC 442 at 443–444.

60 See the decisions of the Court of Appeal in both Cuninghame [1906] 2 Ch 34 and Quin & Axtens Ltd [1909] 1 Ch 311.

61 The Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89.

62 Hoyt v Thompson's Executors (1859) 19 NY 207 at 216, ruling that the directors’ powers are ‘original and undelegated’.

63 Charlestown Boot & Shoe Co v Dunsmore (1880) 60 NH 85; Manice v Powell (1911) 201 NY 194 at 200–201.

64 Hurst, JW The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (Charlottesville: University of Virginia Press, 1970) pp 7980.

65 Hutton v West Cork Railway Co (1883) 23 Ch D 654, per Bowen LJ in the Court of Appeal. See also Parke v Daily News [1962] Ch 927. Both these cases concerned the payment of gratuities to directors or employees after the company had ceased to be a going concern.

66 See eg Parkinson, J Corporate Power and Responsibility (Oxford: Oxford University Press, 1993) p 77.

67 The directors had very broad discretion to make expenditures aimed at conducting ‘the business to the most advantage’ where the company was a going concern: see Hampson v Price's Patent Candle Co (1876) 45 LJ Ch 437. In Evans v Brunner, Mond & Co [1921] Ch 359, this extended to funding scientific education in universities, considered by the directors to be essential for the business which ‘depended increasingly upon the advance of pure science. The company's greatest difficulty was to find men sufficiently equipped by their previous studies to undertake research work’. The limits of the principle were only reached in Tomkinson v South-Eastern Railway Company (1887) 35 Ch D 675, where the court ruled ultra vires a spending decision, rejecting as ‘extravagant’ the argument that ‘any expenditure which may indirectly conduce to the benefit of the company is intra vires’.

68 See for example M Moore ‘Shareholder primacy, labour and the historic ambivalence of UK company law’ (2016) University of Cambridge Legal Studies Research Paper Series No 40/2016; Mukwiri, JMyth of shareholder primacy in English law’ (2013) 24(2) European Business Law Review 217.

69 Moore, ibid, at 18.

70 Maitland, FWMoral personality and legal personality’ (1905) 6 Journal of the Society of Comparative Legislation 192; Laski, HThe basis of vicarious liability’ (1916) 26 Yale LJ 105 at 134; Laski, HThe personality of associations’ (1916) 29 Harvard Law Review 404. For discussion see Harris, RThe transplantation of the legal discourse on corporate personality theories: from German codification to British political pluralism and American big business’ (2006) 63 Wash & Lee L Rev 1421.

71 Keynes, above n 39.

72 Nichols, above n 38, pp 78–79; Ireland, PThe corporation and the new aristocracy of finance’ in Robé, J-P, Lyon-Caen, A and Vernac, S (eds) Multinationals and the Constitutionalization of the World Power System (Oxford: Routledge, 2016) p 80.

73 See Palmer, FB Company Law: A Practical Handbook for Lawyers and Business Men (London: Stevens, 1902) p 151. In 1906, the London Stock Exchange required listed companies to have a director shareholding qualification in their articles. Whilst no minimum level was specified, in practice it was set at a level representing ‘a substantial proportion of an individual director's wealth’: Campbell, G and Turner, JSubstitutes for legal protection: corporate governance and dividends in Victorian Britain’ (2011) 64 Economic History Review 571 at 582–583. Mandatory rules in this area were rejected by the Greene Committee (see Report of the Company Law Amendment Committee (Cmnd 2657, 1926) para 53).

74 Cheffins (2008), above n 7, p 255.

75 Ibid, p 295

76 Nichols, above n 38, pp 53–54; Keynes, above n 39.

77 For a rare example in which a managing director with a ten-year contract was ousted from his position by a holding company which had acquired all the shares in the company and altered the articles, allowing it to remove any director by notice, terminating his contract and giving him a right to damages, see Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701. For further discussion see McGaughey, above n 47, pp 83–84.

78 Quail comments that ‘A sharp line was drawn between the directors (seen as partial owners representative of the owners as a whole) and managers (seen as employees). Firms were viewed as sets of operations carried out by employees but initiated and supervised by directors in a manner analogous to the separate roles of politicians and civil servants’: Quail, above n 37, at 7.

79 Robb v Green [1895] 2 QB 315 at 317.

80 Davies, PL and Freedland, MThe complexities of the employing enterprise’ in Langille, G Davidov abd B (eds) Boundaries and Frontiers of Labour Law (Oxford: Hart, 2006) p 278.

81 For example, Companies Act 1862, Table A, Art 68 allowed the directors to delegate to individual directors or committees, who would remain subject ‘to any regulations that may be imposed on them by the directors’, paving the way for a distinction in practice between executive and non-executive directors.

82 See for example Scrutton J in Nelson v James Nelson & Sons Ltd [1913] 2 KB 471 describing the power given to the directors to appoint a managing director as ‘a very ordinary one in articles’.

83 Companies Act 1906, Table A, Art 72; Companies Act 1929, Table A, Art 68.

84 Directors would only be liable for ‘gross’ negligence, essentially a lack of good faith: Lagunas Nitrate Company v Lagunas Syndicate [1899] 2 Ch 392 per Lindley LJ.

85 In Craven-Ellis v Canons Ltd [1936] 2 KB 403 at 413–414, Greene LJ took the view that ‘A managing director is in a very different position to that of a mere manager since he is able to attend and vote at meetings of the board, and from the point of view of the company it was of importance that the person managing its affairs should be in a position to do this’.

86 See for example Burton , above n 23, p 5, noting that sometimes the roles of managing director and manager were combined, and that it was essential for full reporting to the board to occur.

87 In re Newspaper Proprietary Syndicate Ltd [1900] 2 Ch 349.

88 Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701; Goodwin v Brewster (1951) 32 TC 80.

89 Per Lord Reid in Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 All ER 725 at 738.

90 (1908) 99 LT 524.

91 In re County Palatine Loan and Discount Company. Cartmell's Case (1874) LR 9 Ch App 691 per Sir G Mellish LJ.

92 Manning, BThe American stockholder’ (1958) 67 Yale Law Journal 1477 at 1490.

93 Report of the Committee on Company Law Amendment (Cm 6659, 1945) (Cohen Report).

94 Cheffins (2008), above n 7, pp 344–345, noting that by 1969, retail investors no longer owned a majority of the shares of UK public companies. High tax rates encouraged individuals to sell their shares and invest in other, more tax-efficient assets, including pensions and life insurance: see ibid, pp 81–82 and 341–349.

95 Bircher, P From the Companies Act of 1929 to the Companies Act of 1948: A Study of Change in the Law and Practice of Accounting (Oxford: Routledge, 1991) pp 8090; Maltby, JWas the Companies Act 1947 a response to a national crisis?’ (2000) 5 Accounting History 31 at 38 and 47.

96 Cohen Report, above n 93, p 7.

97 Bircher, PCompany law reform and the Board of Trade, 1929–1943’ (1988) 18 Accounting and Business Research 107 at 116–117. References to the community and public interests in the mandate were considerably ‘watered down’: B Clift ‘The labour movement and company law reform 1918–1945’ (1999) Sheffield Political Economy Research Centre Research Paper No 1 pp 34–37.

98 The Cohen Report, above n 93, para 5, stated that its proposals for information disclosure would ‘ensure that as much information as is reasonably required shall be made available both to the shareholders and creditors of the companies concerned and to the general public’.

99 Ibid, paras 96 and 103.

100 Ibid, para 119. This recommendation was specifically targeted at protecting shareholders, who were lacking ‘information as to the financial position and results of the undertakings in which they are interested’.

101 Ibid, para 101. This was a particularly controversial topic, and much time was spent discussing it.

102 Ibid.

103 It did propose giving the courts power to require, and making it easier for shareholders to demand, a Board of Trade investigation into the management of the company where this was ‘in the public interest’: Cohen Report, above n 93, para 156. However, there was no proposal to allow any group other than the shareholders to demand an investigation, and discussions about the introduction of public shareholders (see for example Minutes of Evidence, above n 43, Appendix M at 169) or company commissioners (see for example ibid, para 8134) during the hearings made no impact on the final report.

104 Minutes of Evidence, above n 43, para 7038.

105 Ibid, para 9479.

106 See for example Mr Wilmot's description of shareholders as ‘proprietors of the business’ (ibid, para 1743) and his reference to the ‘original conception of control of the company by its proprietors’ (ibid, para 3682).

107 Clift, above n 97, p 44.

108 See Memorandum by the General Federation of Trade Unions Minutes of Evidence, above n 43, Appendix SS, and, for example, ibid, para 11274.

109 Company Law Amendment, Draft Questionnaire for Discussion, Cohen Committee Archive, CL3, BT 146/5.

110 Cohen Report, above n 93, para 5, emphasis added.

111 Ibid, para 7. The Committee's figures showed that, in a sample of large companies, 87.7% of the shareholders owned less than 300 shares (ibid, para 124).

112 Ibid, para 124.

113 Ibid, para 130.

114 Ibid, para 125.

115 Ibid, para 126, implemented by CA 1948, s 133.

116 Ibid, paras 132–134, implemented by CA 1948, s 136.

117 Under Companies Act 1929, s 114, shareholders owning not less than one tenth of paid up capital carrying the right to vote were allowed to requisition an extraordinary general meeting, and the requisition had to state objects of meeting. Directors had to comply within 21 days, failing which the requisitionists could convene it themselves, with the company repaying their costs. This allowed shareholders to propose resolutions, including special resolutions. However, the Committee concluded that this power had become ‘largely illusory because with the great increase in the number of shareholders it has become difficult for any single shareholder, or even for a group of shareholders, to seek the support of their fellow members’: see Cohen Report, above n 93, para 128.

118 Cohen Report, above n 93, para 128, implemented by CA 1948, s 140 with slight changes to the time periods.

119 Ibid, para 130.

120 See Minutes of Evidence, above n 43, Appendix X at 350.

121 Ibid, para 6038.

122 Cohen Committee Archive, CL 11A BT 146/5 (submission of by Stephen Gordon of Lawrence, Messer and Co).

123 Unfortunately, the minutes of the first 13 meetings of the Committee, BT 146/3 are missing from the National Archives.

124 Cohen Committee Archive, CL 72, BT 146/5.

125 Ibid, CL 102.

126 Ibid, CL 142 (memorandum circulated for consideration at meetings to be held on Tuesday 1 August and Wednesday 2 August, dated 14 July 1944, para 11(6)).

127 Ibid, BT 146/4 (minutes of thirty-second meeting, 6 September 1944).

128 Ibid, minutes of thirty-third meeting, 19 September 1944, para 1.

129 Ibid, CL187C [B], BT 146/11.

130 Minutes of Evidence, above n 43, para 10190 (Evidence of Samuel Cash, partner in Vizards).

131 Hannah notes that this could amount to as much as one tenth of the purchase price: Hannah, LTakeover bids in Britain before 1950: an exercise in business “pre-history”’ (1974) 16 Business History 65 at 72.

132 Cohen Report, above n 93, para 92.

133 Ibid. Ultimately CA 1948, s 193 introduced a rule requiring directors to disclose to, and obtain approval from, the general meeting for any payment made to them ‘by way of compensation for loss of office, or as consideration for or in connection with his retirement from office’. Failure to comply would result in the director holding the payment on trust for shareholders who sold their shares.

134 See for example the observation of Professor Goodhart that ‘it is possible… for directors to continue in office longer than may be desirable’ (Minutes of Evidence, above n 43, paras 5257 and 9481). Cohen pointed out that removal of life directors would require at the very least an extraordinary resolution (ibid, para 5148). See also the representations from the London Stock Exchange (ibid, para 6185 and Cohen Committee Archive, CL108A, BT 146/5).

135 Minutes of Evidence, above n 43, para 10194.

136 As Horace Samuel, who gave evidence to the Committee but did not discuss removal of directors, put it in his 1933 book, ‘Directorates thus tend to constitute the vested interest of a group, and being a vested interest, are almost as difficult to dislodge as the pocket-boroughs of the eighteenth century’: Samuel, H Shareholders’ Money (London: Pitman, 1933) p 120.

137 Hansard HC Deb, vol 438, cols 585–586, 6 June 1947.

138 Ibid, col 588.

139 Ibid, col 642 (Eric Fletcher, MP).

140 Hansard HL Deb, vol 146, col 969, 1 April 1947 (Viscount Maugham).

141 Hansard HC Deb, vol 438, col 619, 6 June 1947 (Sir Hugh Lucas-Tooth, MP).

142 Hansard HL Deb, vol 145, col 862, 24 February 1947.

143 Ibid, col 872.

144 Ibid, col 863.

145 Ibid, col 865.

146 Hansard HL Deb, vol 146, cols 727–728, 25 March 1947; HC Deb, vol 441, cols 194–195, 28 July 1947; HL Deb, vol 151, cols 955–975, 5 August 1947.

147 Maltby, above n 95, at 47 and 54.

148 As Bruner puts it, ‘stronger social welfare protection… permitted the UK corporate governance system to focus more intently on shareholders without precipitating social backlash’: Bruner, C Corporate Governance in the Common Law World (Cambridge: Cambridge University Press, 2013) p 143. For detailed discussion of the Labour Party's evolving approach to takeovers and mergers during the 1960s and 1970s, see ibid pp 151–160. It was only during the 1980s, with the rolling back of many of those reforms, as well as the weakening of trade unions, that those social consequences became clearer. We are grateful to an anonymous referee for suggesting this point.

149 Kahn-Freund, OCompany law reform: a review of the Report of The Committee on Company Law Amendment’ (1946) 9 Modern Law Review 235 at 245.

150 Dodd, EMReview: report of the committee on company law amendment’ (1945) 58 Harvard Law Review 1258.

151 Levy, AB Private Corporations and Their Control, vol I (Oxford: Routledge and Kegan Paul, 1950) p 167.

152 Gower, LCBSome contrasts between British and American corporation law’ (1956) 69 Harvard Law Review 1369 at 1381, 1389–1390 and 1396. However, he did not explicitly link the emergence of takeovers to CA 1948, s 184. As Bruner, above n 148, p 148 notes, Cohen himself, in a 1957 lecture, appears to have recognised that his committee's reforms ‘contributed to the rise of hostile takeovers’, although he did not explicitly refer to the contribution of the removal power.

153 Gower, above n 36, at 1185–1186.

154 However, this approach to management appears to have persisted among those managers in a Northern City interviewed by Nichols in 1961–1962: see Nichols, above n 38, ch 17.

155 This was the Bank of England's working definition of a takeover from 1959, included in ‘Take-over bids, note of meeting at Bank of England on Friday 10 July 1959’, cited in Roberts, RRegulatory responses to the market for corporate control in Britain in the 1950s’ (1992) 34 Business History 183 at 184.

156 Charles Clore launched the first hostile takeover bids in 1953 for the Savoy Hotel and Sears: see Chambers, DThe city and the corporate economy since 1970’ in Floud, R, Humphries, J and Johnson, P (eds) The Cambridge Economic History of Modern Britain vol 2 (Cambridge: Cambridge University Press, 2014) p 267.

157 Hannah, above n 131, at 67.

158 See JB Tabb Accountancy Aspects of the Takeover Bids in Britain 1945–1965 (unpublished PhD Thesis, University of Sheffield, 1968) p 10; Hannah, above n 131, at 71.

159 See Tabb, above n 158, p 11. In 1906, Lever exceptionally launched hostile bids for a number of his competitors who had refused to form a cartel with him, and another hostile bid was launched by John Knight Ltd in 1920.

160 In Guinnane et al's 1892 sample only one company required all directors to stand for re-election at each annual meeting: see Guinnane et al, above n 46, p 243.

161 Franks et al, above n 55.

162 Cohen Report, above n 93, para 92.

163 See eg Companies Act 1929, Table A, Art 77; Companies Act 1906, Table A, Art 83; Companies Act 1862, Table A, Art 63.

164 Guinnane et al, above n 46, p 244. Similarly, many companies provided that anyone seeking the office of director, except retiring directors or those chosen by the board, had to provide advance notice, potentially giving the directors ‘time to line up the votes to block anyone whom they did not favour from securing a seat on the board’: see ibid.

165 Clauses in the articles requiring consent of managing directors to particular decisions were enforced at the instance of a shareholder-director in Quin & Axtens Ltd v Salmon [1909] AC 442. This effectively limited the powers of the board, because as Lord Loreburn put it, ‘the directors cannot manage it in a particular way – that is to say, they cannot do certain things if Mr Salmon or Mr Axtens objects’ (ibid, at 443).

166 Guinnane et al, above n 46, p 244.

167 In the Court of Appeal decision in Quin & Axtens, Farwell LJ considered the provision in the articles to be ‘a most usual and proper requirement, because a business does require a head to look after it, and a head that shall not be interfered with unnecessarily’. The effect was that ‘to oust the directors, a special resolution would be required’: see [1909] 1 Ch 311 at 319.

168 For discussion see Bruner, above n 148, pp 39–40 and 208–209.

169 Hannah, above n 8.

170 CA 1929, ss 95 and 98 required companies to maintain and make public a register of members. However, s 101 provided that trusts of shares did not have to be entered on the register, making it difficult to identify beneficial ownership. The Cohen Committee made proposals to require nominee shareholdings to be indicated and beneficial interests of more than 1% to be disclosed (above n 93, paras 78–81), but these recommendations did not become law.

171 As in the bids by Daily Mirror for Amalgamated Press in 1958 and Viyella International for Jersey Kapwood in 1966: see Tabb, above n 158, p 191.

172 Ibid, at 188, identifying at least 13 partial bids between 1948 and 1965. For example, in its bid for Drake & Mount, Longman only offered to buy the first 10,000 shares tendered. There was no regulation of partial bids until the introduction of the City Code in 1968.

173 As in the bid of Westminster Bank for Diners’ Club Ltd in 1965: see ibid at 189.

174 As in the 1961 bid by City Centre Properties Ltd for Manchester Royal Exchange: see ibid at 192. The Revised Notes of 1963 required the bidder to disclose the level of acceptances, but this rule was subsequently broken by British Oxygen which declared its bid for Murex unconditional but delayed disclosure of the level of acceptances by six hours: ibid at 262.

175 Bull and Vice show how, provided they acted in good faith, a majority shareholder could then use their control to withdraw surplus cash from the company by selling assets to it: Bull, G and Vice, A Bid for Power (London, Elek, 3rd edn, 1961) p 227. The shareholder's ‘sell out’ right was not introduced until 1986.

176 See for example the bid by Broadmead for Murdoch & Co in 1957 or the 1958 bid by Reynolds for British Aluminium, in which Reynolds warned shareholders publicly that it was close to gaining control, and that once it had control of the company, it would instate a ‘prudent’ dividend policy: Tabb, above n 158, p 60.

177 In 1963, Courtaulds took control of Bairns-Wear Ltd and cut the dividend from 10% to 5%: see ibid at 246.

178 From a sample of 45 takeovers between 1947 and 1960 (which did not distinguish between voluntary and involuntary takeovers), Singh found that ‘around half’ of the directors of the acquired company were dismissed within two years of the takeover, but that ‘the incidence of dismissal seems on the whole to have little relationship either to the size or the profitability of the acquired firm’: Singh, A Takeovers: Their Relevance to the Stock Market and the Theory of the Firm (Cambridge: Cambridge University Press, 1971) p 149. These figures form a marked contrast to the findings of Franks et al, above n 55, in relation to takeovers between 1919 and 1939. We are unaware of any quantitative study of director removal during the UK 1960s takeover wave, but indirect support for the development of a new threat to the position of directors and management can be found in the growth of structural defensive measures between 1950 and 1965, a dynamic which came to an end as institutional investors mounted opposition to this (ibid p 603, Table 10.8), as well as the post-bid defensive measures in companies such as the Savoy Hotel, and those which came before the courts in Hogg v Cramphorn Ltd [1967] Ch 254. By the 1980s, board removal appears to have been routine following a hostile takeover: in a study of hostile takeovers in the UK from 1985–1986, Franks and Mayer found that 90% of directors were replaced within two years of the bid, whilst for accepted bids the figure was 50%: Franks, J and Mayer, CHostile takeovers and the correction of managerial failure’ (1996) 40 Journal of Financial Economics 163 at 167–168.

179 This appears to have happened for the first time in the takeover by Fraser of Binns in 1953. The directors held 29% of the shares, preventing Fraser from using the squeeze out rules (CA 1948, s 209 required the bidder to have acquired 90% of the shares), but they capitulated once Fraser acquired a majority of the shares, and sold their shares to him at the lower price of his first bid: see Bull and Vice, above n 175, pp 109–110.

180 The directors of the Savoy Hotel Ltd appear to have been the first to have tried this: see Bull and Vice, above n 175, pp 29–46.

181 For discussion of the scope of defensive measures under common law and under the City Code see Johnston, ATakeover regulation: historical and theoretical perspectives on the City Code’ (2007) 66 Cambridge Law Journal 422. One further possibility was to give the directors weighted voting rights on a resolution to remove them, as permitted by the case of Bushell v Faith [1970] 1 All ER 53. However, there is no evidence that this mechanism was used in the UK as a pre-emptive defence against hostile takeovers. If adopted on incorporation, this would reflect the agreement between the founders (and indeed such clauses are widely understood as a means of protecting agreements within quasi-partnership companies), but it would be difficult to introduce such a clause after listing, as this would require a special resolution to alter the articles, and institutional shareholders would be strongly opposed to a measure that would entrench board members. This hostility can be seen from their opposition to the use of non-voting shares, which were used for a brief period as a defensive measure during the 1950s and 1960s, but were gradually eliminated by strong opposition from institutional investors and disapproval from the stock exchange: Franks et al, above n 55, p 604. This hostility presumably explains why multiple voting rights are legally permissible but rarely seen in practice in UK listed companies: see Armour, J et al. ‘Law and financial development: what we are learning from time-series evidence’ (2009) 6 BYU L Review 1435 at 1459 fn 87, noting that there was ‘no legal or regulatory prohibition of multiple voting rights’ between 1970 and 2005.

182 In 1960, British Drug Houses responded to a bid by doubling its dividend, whilst in 1962, Waterlow & Sons Ltd responded by selling off its head office and distributing the proceeds to shareholders: see Tabb, above n 158, pp 61–62.

183 The first example of this appears to be the contested takeover in 1955 of Millspaugh by Hadfields. The rival bidder was defeated once Hadfields obtained a majority of the shares. See Bull and Vice, above n 175, pp 166–183.

184 Report of the Company Law Committee (Cmnd 1749, June 1962), Note of Dissent, paras 6 and 9 (Jenkins Committee).

185 Hannah, above n 131, at 69–71 and 75.

186 Ibid, at 70–71.

187 Bull and Vice, above n 175, pp 16–18. For details of marginal tax rates of top rate taxpayers during this period, see Cheffins (2008), above n 7, p 342.

188 The Wilson Report concluded that the extent of direct contact between institutions and companies ‘varies greatly’: see Committee to Review the Functioning of Financial Institutions (Cmnd 7937, 1980), para 900. In 1989, in a Bank of England discussion paper, Charkham concluded that while dialogue did occur ‘on occasion’, most shareholders had ‘all but abdicated’ their responsibilities under the system of ‘shareholder supremacy’: J Charkham ‘Corporate governance and the market for companies: aspects of the shareholders’ role’ Bank of England Discussion Paper No 44, November 1989, 4.

189 We are grateful to John Quail for suggesting this point. Franks et al, above n 55, p 586, highlight the importance of ‘the growing influence of institutional investors… in establishing the United Kingdom's unusually active market in corporate control’.

190 Hannah, above n 131, at 5 fn 69.

191 Jenkins Committee, Note of Dissent, above n 184, paras 4 and 7.

192 Cheffins (2008), above n 7, pp 76 and 363. At p 332, Cheffins notes that the new right of the majority to dismiss directors before the end of their term was stricter than the stock exchange requirements.

193 Bruner, above n 148, p 147.

194 Moore, above n 3, p 212.

195 In 1954, The Economist argued that if companies have financed themselves through retained earnings, but those ‘resources are successfully employed to yield their best economic return, the companies never will be will be, or need not be, “victims” at all, for the bidder will defeated. But if the assets are not yielding a proper return, then even the bidder who “merely” wishes to take possession of them will generally be performing an economic service to the community’: The Economist, 23 January 1954, p 254. In 1961, Bull and Vice approved of the argument that ‘the bidder makes the most efficient use of a company's assets’, whilst ‘many boards in the past have tended to adopt excessively long-term schedules’: Bull and Vice, above n 175, pp 25–26.

196 In 1953, the Bank of England had expressed opposition to the emerging hostile takeover, but by 1958 had given its approval: see Roberts, above n 155, at 187 and 191.

197 Jenkins Committee, above n 184, para 265.

198 Ibid, Note of Dissent, para 9: ‘Efficient directors who have treated their shareholders fairly and frankly should have little to fear from a raider’ and should not be allowed to protect themselves against this ‘remote risk’ by issuing non-voting shares and ‘converting themselves into a self-perpetuating oligarchy’.

199 Marris, RA model of the “managerial” enterprise’ (1963) 77 Quarterly Journal of Economics 185 at 190.

200 Manne, HGMergers and the market for corporate control’ (1965) 73 Journal of Political Economy 110.

201 Johnston, above n 181.

202 Segrestin, B and Hatchuel, A Refonder l'entreprise (Paris: Le Seuil, 2012).

203 Ireland, PDefending the rentier: corporate theory and reprivatization of the public company’ in Gamble, A, Kelly, G and Parkinson, J (eds) The Political Economy of the Company (Oxford: Hart, 2001) pp 144145.

204 Johnson, LNew approaches to corporate law’ (1993) 50 Wash & Lee L Rev 1713 at 1715.

We are grateful to the following for comments and feedback on this article: Christopher Bruner, Robert Burrell, Brian Cheffins, Simon Deakin, Ewan McGaughey, Jo Maltby, David Millon, Marc Moore, John Quail, Navajyoti Samanta, Jeroen Veldman, participants in a 3CL seminar at the University of Cambridge and in a Management and Organisational History Seminar at the University of York, delegates at a SMART conference at the University of Oslo on ‘Sustainable Business Models’, and the anonymous referees. All errors remain our own.

Keywords

From balanced enterprise to hostile takeover: how the law forgot about management

  • Andrew Johnston (a1), Blanche Segrestin (a2) and Armand Hatchuel (a2)

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed