An independent Barristers report into Directors at Nominet -
IN THE MATTER OF NOMINET UK
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OPINION
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A: Introduction
1) I am instructed to advise a group of members of Nominet UK ("Nominet") as to whether, on the material before me, I consider that current or former directors of Nominet may have acted in breach of their fiduciary duties in relation to certain events.
2) The matters I am asked to consider are allegations that Board members were involved in:
a) Making misleading statements to Nominet's members to the effect that the directors did not instigate government intervention in the company’s governance in 2008.
b) Inappropriately lobbying an independent reviewer for changes to recommendations in his review, which may have been of personal financial benefit to an individual director, and / or to deprive others of benefits; preparing misleading statements to members about editorial changes requested by directors.
c) Removing the Company Secretary’s access to company mailing lists after she had raised concerns about these issues as a whistleblower, providing reasons for the removal which were rejected by the Employment Tribunal; and refusing to inform the membership of the former Company Secretary’s concerns prior to a crucial vote on corporate reform, based on that independent review.
d) Failing to conduct proper internal investigations into directors’ conduct, and refusing to follow up on findings and evidence arising from an Employment Tribunal judgment.
3) My Opinion is based on the material that has been provided to me. This includes:
a) The letter from BERR in October 2008 ("the Hendon Letter") which suggested that Nominet should seek independent advice on its governance structure.
b) The Report of a Review by Professor Bob Garratt ("the Garratt Review") commissioned by Nominet following the Hendon Letter.
c) A "Question & Answer" document provided to members for the 2009 AGM ("The 2009 Q&A"). This document was edited by Mrs Lesley Cowley, the Chief Executive of Nominet,
d) The Judgment of the Employment Tribunal (Judge Byrne, Mr Cameron and Ms Maina) following the hearing of an unfair dismissal claim by the former Company Secretary, Mrs Emily Taylor, which dealt with various relevant factual matters. The Tribunal found that Mrs Taylor had been unfairly dismissed and awarded her £101,000.
e) Notes of the evidence from the Tribunal Proceedings.
f) A statement by Nominet to its members dated 16 August 2012 ("the August 2012 Statement")
g) A statement by present Nominet Chair, Baroness Rennie Fritchie, circulated on 11 October 2012 ("the Fritchie Statement").
h) Various other background documents to do with the dispute over Nominet's governance and the Garratt Review.
4) I should make it clear that I do not have any status as an arbiter of fact in relation to these matters. I base my Opinion on the material which is before me, giving particular weight, where relevant, to the conclusions of the Employment Tribunal, which received detailed evidence on the points it determined.
5) I should also note that the factual conclusions of the Employment Tribunal are not, in formal legal terms, binding as between Nominet and the relevant individuals. While some of the individuals concerned where witnesses, they were not formally parties to the proceedings and as such would be entitled to dispute those conclusions in any future proceedings. Nevertheless I give the findings significant weight, because they were based on a lengthy process involving detailed evidence. In many cases, the relevant facts were ultimately not in disputed because the Board members conceded them in cross-examination.
B: Allegation that misleading claims were made that directors did not instigate government intervention
6) The 2009 Q&A reads as follows on this topic:
Q: Did Nominet ask BERR to help deal with the member problem? What contact did Nominet have with BERR prior to the letter from David Hendon?
A: We became aware some time after the event that, following Nominet’s very public governance issues, some of our members and stakeholders expressed their concerns to BERR, who in turn asked to meet with our Chairman. It would not be appropriate for us to name those organisations.
7) The August 2012 Statement, responding a newspaper article on governance issues at Nominet, said:
The article also suggests Nominet instigated Government intervention into its governance. This is not the case. Two major organisations (an ISP and a major British trade body) had already been in contact with BERR prior to any discussions between Nominet and the Government. Again, Nominet took actions focussed on supporting the ongoing trust in .uk and that we believed supported the goals of our membership as a whole. As you would expect of an organisation responsible for a piece of critical UK Internet infrastructure, we maintain a constant dialogue with the Government – but all conversations on this matter post-date the initial raising of concerns by stakeholders.
8) The clear implication of that question and answer is that communications between BERR and Nominet in respect of "the member problem", in particular the Hendon Letter, were prompted by independent contact made by two stakeholders (who, I am instructed, are believed to have been BT and the CBI respectively) and not by Nominet itself.
9) However, it appears from the material shown to me that this was not the case:
a) On 30 April 2008, AGM Resolution 6, which had been proposed as a means of dealing with certain controversial issues, was defeated.
b) On 8 May 2008, representatives of Nominet met with representatives of the CBI and of BERR to discuss the issues.
c) I am instructed that BT did not even find out that Resolution 6 had been defeated until 12 May 2008.
d) In her witness statement to the Tribunal, Mrs Cowley said as follows:
71. When I returned to work in August 2008 we developed the initiative which became known as “Plan G”. This was essentially a scheme to involve BERR in applying pressure for constitutional change in the Domainers gained control of the Board. […] As far as I am aware, the need for such a plan only became a necessity following Jim Davies’ election to the Board and I was away ill immediately after this.
e) BERR then wrote the Hendon Letter to write to Nominet in October 2008.
f) Following the Hendon Letter, Professor Bob Garratt was appointed to review the structure and governance of Nominet.
10) On the basis of those facts, it would appear that (contrary to the most natural interpretation of public statements made by Nominet), Nominet did ask BERR to "help" with its structural problems, and that the impetus for the Hendon Letter did not come from (or did not come solely from) independent contact made with BERR by stakeholders. Rather, there was a scheme devised by the Board of Nominet, as described by Mrs Cowley in her witness statement, to involve BERR.
11) Mrs Cowley's evidence on cross-examination was that in the 2009 Q&A she was “finessing/massaging in order to avoid answering yes” to the question “Did Nominet ask BERR to help?”. That seems to me to be a recognition that the honest answer to that question would have been "yes".
12) I should also refer to the Fritchie Statement in that regard. In that statement, Baroness Fritchie indicates that she has explored the issues, and states that:
"I have also been reassured that the concerns raised by CBI and BT representatives immediately following the 2008 AGM were not concocted by Nominet.
From speaking directly to those involved, I have been reassured that in all cases, their views were independently-formed, and based on real worries about Nominet’s apparent inability to put its own house in order. Those involved with the Policy Advisory Body (PAB), including civil servants and the CBI, were further exposed to the extensive debates and divisions around Nominet governance. Their concerns reached a critical point following the 2008 AGM."
13) I note those comments. I am not aware of the "reassurances" given to Baroness Fritchie, and I note that her words are carefully chosen. It is one thing to say that concerns raised were not "concocted" by Nominet. That is rather different from suggesting, as was the case in the 2009 Q&A, that such concerns were raised by members prior to and independently of Nominet.
C: Allegation that Board members lobbied for changes in Independent Review
14) A first draft of the Garratt Review was produced in January 2009. I am instructed that the draft:
a) Supported the view that executive pay and rewards should be subject to a membership vote
b) Supported the view that directors' legal fees should be reimbursed.
c) Supported the view that Director of Legal and Policy should be made a full Board position.
15) However, when the Final Report was produced in March 2009, each of these proposals had been dropped by Professor Garratt. As I understand it, there was some controversy over these removals, and in particular whether members of the Board had requested or lobbied for their removal.
16) The 2009 Q&A attempted to address those concerns as follows:
Q: Did the Nominet Board see drafts of this report before it was published for consultation?
A: The Board did see drafts of the report as we were asked to provide feedback on any factual inaccuracies and we also had to respond formally to David Hendon at BERR and issue an update to our members and stakeholders.
Q: Did the Board request edits?
A: Any suggested editing was about correction of factual inaccuracies and/or stylistic – this was an independent review and readers will clearly see that the review was frank and to the point.
17) These matters were disputed by Mrs Taylor in the Employment Tribunal. Each of Mrs Cowley and Bob Gilbert (the former Chairman of Nominet) gave evidence to the Employment Tribunal that clearly acknowledges that they went considerably further than providing feedback on "factual inaccurancies" or "stylistic changes":
18) Mr Gilbert was directly asked whether the changes went beyond this, and answered straightforwardly "yes". He confirmed that these included changes relating to the three matters I have identified above.
19) Mrs Cowley denied making "suggested editorial changes", but said she made 27 comments, including on the three matters identified above, and that she accepted that the 2009 Q&A was "misleading" in this regard.
20) The Company Secretary, Mr Nick Wenban-Smith, was also cross-examined in relation to the 2009 Q&A, he gave the view that "it was not full enough it was too narrow it is not how I would have written that".
21) The Employment Tribunal found (at para 56) that "The Tribunal is satisfied having heard the evidence in this case that the amendments made were not simply factual accuracies or stylistic".
D: Were there breaches of duty in respect of misleading statements and the Independent Review?
22) I consider the question of breach of duty in relation to these two topics together, since they are closely linked.
23) The duties of directors are now codified by the Companies Act 2006, although the courts will continue to make considerable reference to the older case law in interpreting those duties. In this case, I consider the duties of principal relevance to be those contained in sections 172 and 175.
24) Section 172 provides that:
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to–
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
25) I note that Nominet is a company which falls within sub-section (2), in that its articles of association take specific note of its public purpose.
26) Section 175(1) provides that:
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
27) The allegations in relation to the relevant matter fall into three broad categories:
a) Procuring/Interfering in the independent review process per se
b) Possible conflict of interest in their involvement
c) Apparently misleading members as to what was happening
28) In relation to the allegations that members of the Board interfered improperly with the independent review, the principal question is whether in doing so they were acting in a manner which they considered in good faith was likely to promote the success of the company.
29) It does not seem to me that, in general terms, Board members breached that duty simply by involving themselves in the process of addressing the corporate governance concerns involving Nominet. It is clear from the background material, which I have read but need not go into, that there were genuine issues involving the way Nominet worked, and that those had a bearing both on its public purpose and its long-term future.
30) There is authority that, in very broad terms, where there is a struggle for control of a company, the Board should general adopt a passive role and should not seek to usurp the role of the shareholders as the ultimate decision-makers in such a dispute (Howard Smith v Ampol Petroleum [1974] AC 821).
31) However, provided that they act fairly and transparently, it does not seem to me that such a duty prevents directors from addressing the issues honestly, or from making proposals or recommendations to the members as to how such issues might be addressed in a manner which they consider is apt to promote the success of the Company.
32) Thus provided that they were clear about what they were doing, I do not see that there would necessarily have been anything wrong in the Board inviting BERR to make proposals or otherwise involve itself in relation to the governance of Nominet, if they thought this was likely to promote a practicable solution.
33) Likewise, I do not think there would have been anything wrong per se (subject to disclosure of their own conflicts of interest) in the Board being straightforward in recommending to shareholders that they did not agree with the proposal in relation to executive pay, Board composition and directors' legal fees. Such a statement would (I assume) have represented the Board's honest view as to the way forward.
34) It seems to me that the difficulties, and the potential breaches of duty in this case, arise because the Board members did not adopt such a straightforward approach. Rather, it seems that to a greater or lesser extent, their involvement was disguised by creating the impression that (i) the request for an independent review had come from BERR and was not prompted by the strategy subsequently described Mrs Cowley to the Employment Tribunal and (ii) the Independent Review would not be or had not been subject to substantive comment or intervention by the Board, when in fact it was.
35) As a result, it seems to me that the conclusions of the Garratt Report were presented to members on a basis which was at least partly incorrect as to their genesis and independence, that conflicts of interest were not properly disclosed, and after the event (particularly in the 2009 Q&A) members were misled as to the process. On the information available to me, it seems likely that there were breaches of fiduciary duty involved in that process.
36) I note that throughout the Garratt Review was billed as "independent" – from the initial announcement of the Review to Nominet members, right through to the discussion of its conclusions. The term "independent" is of course a broad one. I do not conclude that merely by using that term, the Nominet Board was indicating that it would not make (or had not made) any representations of substance to Professor Garratt. However, it does seem to me that from, in particular, the 2009 Q&A, that was the impression intended to be given to members.
37) In those circumstances, the conclusion of the Tribunal that the 2009 Q&A was misleading seems to be the correct one. Further, it seems very likely that those Board members involved in editing and approving the Q&A must have realised this was the case. I make particular reference to Mrs Cowley's evidence, which (while it refers to "massaging/finessing") tends to lead to the conclusion that she was aware of this.
38) I consider that a Court would be very likely to find that this approach was a breach of fiduciary duty. I have explained above that questions involving the constitution and control of a company are ultimately for its shareholders rather than its Board. In this case, that was also the avowed policy of Nominet, in commissioning the Garratt Review and in putting its conclusions to members. However, the combination of the Board's intervention in the substance of the Report, and its misleading denial of such involvement (along with its apparently misleading claim not to have been involved in procuring intervention from BERR) meant that those proposals were put to shareholders on an inaccurate basis. I find it very hard to see how that can be said to constitute acting in good faith to promote the success of the company.
39) I am fortified in that conclusion by general principles of equity and of the interpretation of fiduciary duties, to the effect that directors (who are fiduciaries) are expected to act with frankness and candour towards their beneficiaries. In Item Software v Fassihi[2004] BCC 994, Arden LJ explained:
"the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company. This duty of loyalty is the ‘time-honoured’ rule: per Goulding J in Mutual Life Insurance Co of New Yorkv The Rank Organisation Ltd [1985] BCLC 11 , at p.21g. The duty is expressed in these very general terms, but that is one of its strengths: it focuses on principle, not on the particular words which judges or the legislature have used in any particular case or context."
40) In that case, the Court of Appeal held that the duty extended to a requirement that a director confess any wrongdoing in relation to the company's affairs. The proposition that a director should not mislead members is more modest than that, and is in my view self-evident. The Courts have consistently been critical where directors have sought to mislead or reveal only half-truths when presenting proposals to members – see e.g. Kaye v Croydon Tramways [1898] 1 Ch 358.
41) I note that, as company secretary, Mrs Taylor raised concerns with the Board about their approach to the Garratt Review, and the Board elected not to share those concerns with members. I do not consider that they were necessarily obliged to do so – the principal function of the Company Secretary is to advise the Board and bring relevant matters to their attention, and is for them to decide how to deal with them. However, the fact that they were aware of those concerns and chose not to air them further supports the general conclusion above, that there was a desire to present a partial view to the members.
42) A further aspect to this is the apparent non-disclosure of conflicts of interests in relation to the proposals. In particular, I refer to the proposal contained in the draft Report, but not the Final Report, that executive pay be subject to member approval. It seems to me that (for obvious reasons) the executive members of the Board had an interest in ensuring that their pay was not subject to the additional requirement of member approval. In simple terms, it would make it easier for them to have a future pay rise approved. That was an interest which (in the words of s.175), could at least "possibly conflict" with the interests of Nominet, if the members formed the view that pay should be subject to such approval.
43) I have no basis for saying one way or the other whether the executive members were in fact motivated by self-interest in apparently lobbying Professor Garratt to remove this recommendation from his Report, or whether they had other factors in mind which were genuinely in relation to the interests of Nominet itself. However, it does seem to me that if they were involved in the formulation of the Report's proposal (or, ultimately, non-proposal) on this topic, that is a potential conflict which should have been disclosed to members so that they could form their own view. It seems to me that this was probably a further breach of fiduciary duty.
44) I have not considered in any detail what remedies might be available to Nominet in respect of these apparent breaches, if they could be firmly established. I am instructed that executive pay has been increased, and that the Chief Executive's pay has gone up approximately 33% in three years, with a further £150,000 in exceptional bonuses. I do not know whether this would have been approved had the requirement of member approval been adopted (or even whether members would have accepted that proposal had it been in the Garratt Report).
E: Removal of Company Secretary
45) I do not propose to repeat in detail the circumstances of Mrs Taylor's removal as Company Secretary, which are carefully summarised (with reference to the evidence) in the judgment of the Employment Tribunal. I draw attention only to the following key findings:
a) Mrs Taylor was removed from Nominet internal mailing lists while still in post (para 59.3).
b) Nominet acted in a way which was not "open and transparent" (para 59.4)
c) Nominet's actions were contrary to specific medical advice (para 59.5)
d) There was no "cogent basis" for the dismissal (para 59.7)
e) Mrs Taylor had made a legally "protected disclosure" (para 66)
f) She was treated in a way which "high handed and insulting" (Judgment on Remedy – para 10).
46) Mrs Taylor was awarded approximately £101,000 by the Tribunal
47) It seems to me that in principle it would be possible for mistreatment of an employee along these lines to constitute a breach of fiduciary duty by a director to his company. If such conduct is undertaken, for example, out of personal malice and in a manner which was liable to expose the company to financial claims, it would be a breach of the duty to act in good faith to promote the success of the company.
48) It might also be possible to establish that conduct in relation to the situation of a particular employee amounted to breaches of the duties of care and skill owed by directors under section 174 of the Companies Act 2006.
49) I am instructed that there may also have been concealment of relevant documents from the Tribunal in respect of which Nominet would have been under a duty of disclosure. Again, it seems to me that such conduct could in principle constitute a breach of duty.
50) However, while it is clear from the Tribunal's findings that the management of Nominet did not handle Mrs Taylor's case in an appropriate way, I think one would need rather than more that that to prove a breach of duty of the kind that I have described.
51) I note that the Tribunal did not make any clear findings of bad faith, or that witnesses had misled the Tribunal. In relation to disclosure of documents, the Tribunal does not appear to have made any finding (although it is not clear to me whether this was raised in the proceedings at the time). Further, we have an incomplete picture of Nominet's internal decision making. For example, we do not know what (if any) legal advice the Board was acting on.
52) In particular, it is important to note that the Tribunal proceedings were between Mrs Taylor on the one hand, and Nominet as a collective entity on the other. It was not necessary as part of the proceedings to show either that Nominet acted in bad faith or (importantly) to attribute that conduct to one or more individual directors. It is not possible, on the basis of the Tribunal's judgment, to disaggregate the decisions of the Board as a whole and attribute them in this way. In effect, the Board are held collectively responsible on behalf of the company.
53) In the circumstances, while I consider it quite possible that there may have been breaches of duty in relation to the treatment of Mrs Taylor, it would be difficult to draw any firm conclusion to that effect at this stage.
F: Follow up of findings and evidence arising from Employment tribunal
54) I am also asked to consider the conduct of the Board in the aftermath of the Employment Tribunal proceedings. In particular, as I have explained above, the Employment Tribunal proceedings contained findings of fact which suggest that members were misled, and that the corporate governance review process may have been to some extent polluted by this.
55) I am instructed that there are concerns that there has been no follow-up within Nominet in relation to all of this:
a) There does not appear to have been any internal investigation, let alone consideration of disciplinary action in relation to those involved.
b) A corporate lawyer has been appointed to consider certain matters, but that lawyer’s instructions by the serving company secretary expressly exclude investigation of any corporate governance issues.
56) I am instructed that in broad terms, Nominet's approach is that the matters raised in the Tribunal are now closed and have no further consequences.
57) At present, I do not have enough material to conclude that there is any breach of duty by members of the Board in adopting this approach. In particular, I am not aware of their full deliberations, or whether they have considered what action might be taken.
58) That said, if the approach taken really has been that the judgment in the Employment Tribunal means that there should necessarily be no further consideration of these matters, then that is legally misconceived. The Judgment is, no doubt, a resolution to the claim by Mrs Taylor against Nominet. However, where the evidence and findings in the Tribunal have raised cause for concern in relation to the integrity of the corporate governance review process, and the behaviour of individuals at Nominet, there is no reason why the Judgment should be the "end of the line" in that respect. Those are matters which the Board can fully take into account in relation to the general affairs of Nominet.
59) That is not to say that particular actions necessarily should or should not be taken (which would involve a number of considerations both of principle and of practicality); rather that the Board should consider those things with an open mind. It seems to me that to abdicate responsibility altogether might lead to a future allegation of breach of the duties owed under s.172 of the Companies Act 2006.
G: Conclusions
60) For the reasons set out above, I consider that, based on the material before me (which is necessarily limited) and my instructions, there would be a strong basis for a Court to conclude that there were breaches of fiduciary duty by members of Nominet's Board in relation to the corporate governance review process. While I do not consider that it would have been improper for the Board to advance views on that process and the relevant proposals, the evidence tends to the conclusion that members of the Board exercised an influence which was inconsistent with the manner in which the review was presented to members, and with its general presentation as being wholly independent.
61) It seems to me that in relation to the termination of Mrs Taylor's employment, there were clearly failings on the part of the management of Nominet acting as a whole. There may well have been breaches of duty by individuals, but at present it would be difficult to identify them with any clarity. The judgment of the Tribunal relates to the conduct of Nominet's management as a whole.
62) It would be wrong for the Board of Nominet to conclude that the Tribunal's Judgment represents and end to the relevant factual matters for all purposes. While it is an end to the employment claim, to the extent that the evidence and the Tribunal's factual findings raise issues about the corporate governance review process and the conduct of individuals within Nominet, those remain proper considerations for the Board in relation to Nominet's own internal affairs.
Alex Barden
Erskine Chambers
Lincoln's Inn
4 February 2013
Tuesday, 05 February 2013 09:14