Business Opinion: Last November the Director of Corporate Enforcement published a slim volume called The Principle Duties and Powers of Company Directors under the Companies Acts 1963-2001.
The document is the product of a consultative process carried out last year by Mr Paul Appleby and is a distillation of the various provisions of Irish company law governing the duties and obligations of company directors.
Section 2.5 will be of interest to anyone who is a shareholder in Alphyra, the electronic transaction company currently in the midst of a somewhat controversial management buyout. The section deals with directors' common law duties and lists three principles, the first of which is most germane.
It reads as follows: "Directors must exercise their powers in good faith and in the interest of the company as a whole. Directors must not abuse their powers. They must exercise their powers in what they honestly believe to be the interest of the company as a whole or the members as whole rather than in the interest of a particular member or members."
This raises the question as to whether the three executive directors of Alphyra - chief executive John Nagle, finance director John Williamson and chairman Jack McDonnell - broke this principle when they actively discouraged the US group First Data Corporation from making a rival bid to their €2.45 per share (subsequently increased to €2.70) management buyout.
The issue arises because of a statement from the three men - and seven other members of the Alphyra management - to First Data Corporation, warning that any bid the US company might make would be considered "hostile and most unwelcome".
There is an implication in this comment that if First Data Corporation did press ahead with its mooted €2.80 per share bid it would be actively resisted by the three directors.
The Alphyra management also made it clear that it would continue to act as a united group (whatever this means) should FDC trump their MBO.
On the face of it, by putting their name to such statements, the three executive directors of Alphyra have not adhered to all aspects of the principle outlined by the Office of the Director of Corporate Enforcement (ODCE).
It is fairly easy to arrive at this conclusion if you rely on the premise that in a contested takeover situation the interest of shareholders boils down to one issue only: price.
It is hard to argue that by discouraging rival bidders the executive directors of Alphyra were acting in a way that would get a higher price for the "members as a whole".
There is also the more complex issue of whether the directors are acting in the interest of the company. As the ODCE points out: "Perhaps somewhat surprisingly to many, a director's duties are usually owed in the first instance to the company and not to the members, creditors and employees of the company."
But before Alphyra shareholders start reaching for their lawyers they should bear a few things in mind.
The most important is that the ODCE document comes with a health warning. It emphasises that its "guidance cannot be construed as a definitive legal interpretation of the relevant provisions [of the Companies Acts]. Moreover, it must be acknowledged that the law is open to different interpretations. Accordingly readers should be aware that there are uncertainties in how the courts will interpret the law, particularly when the law is applied to the specific circumstance of specific companies and individuals".
This is self evident, really. If you were to adopt a very narrow interpretation of the common law duties of directors as defined by the ODCE then pretty much every type of management buyout could be considered against the law.
This is particularly the case at the moment when most of the management buyouts currently taking place on the Dublin market involve directors buying back companies they floated at much higher prices several years ago, while the exiting shareholders absorb very heavy losses.
More significantly, however, the Alphyra management team has taken legal advice and believes that its actions are legal and not a breach of its members' duties as directors.
There are also two independent non-executive directors on the Alphyra board who made it clear that they would welcome an offer from First Data Corporation.
Still, it might be helpful if the ODCE were to take a look at the issue in order to put the minds of Alphyra shareholders at rest. There is no doubt that a lot of shareholders are extremely unhappy with what has gone on.
One investor, the New York-based Kaufmann Fund which holds 7 per cent of Alphyra, is so incensed that it complained to the Takeover Panel.
The damage done to the reputation of the Irish market is considerable and presumably not without consequences for Irish companies that might seek to raise money in the US at some stage in the future.
One suspects that Kaufmann will be disappointed if it thinks that it will get satisfaction from the Takeover Panel.
Both the panel and the Irish Stock Exchange have not exactly been surefooted in their handling over the last few months of a number of issues thrown up by the current wave of public-to-private transactions, share buybacks and other corporate activities.
A number of inherent flaws in both the way these organisations are constituted and operate has left them looking weak and ineffective.
This stands in contrast to the pro-active and high profile approach taken by the Office of the Director of Corporate Enforcement in prosecuting breaches of company law.
A decision by Paul Appleby and his colleagues to start scrutinising some of the more controversial stock market transactions would go some way towards giving investors comfort that there does exist in this State an effective organisation that is capable protecting their interests.
jmcmanus@irish-times.ie
