Monday, 27 July 2009

JJB: the lowdown on the loan

Fashionista has been following the recent press coverage relating to Sir David Jones, current executive chairman of JJB Sports ("JJB"), and Mike Ashley, Sports Direct founder, with interest when it was revealed that Jones had taken a £1.5 million interest free personal loan from Ashley. The revelation of the existence and details of the loan has raised eyebrows across the industry as it raises questions of conflicts of interest because JJB and Sports Direct are competitors as well as Sports Direct also being a supplier of JJB. The controversy escalated further after Sir David and Ashley publicly clashed over whether or not the loan was made prior or subsequent to Sir David's appointment to the board of JJB, which is inherently important when considering conflicts of interest.

Further allegations regarding Chris Ronnie, the close personal friend of Ashley and suspended chief executive of JJB also emerged. Ronnie was dismissed from his post in March 2009 and The Times reported that Jones had meetings with Ronnie and Ashley to discuss Ronnie's severance settlement on two separate occasions after the loan had become overdue which could have created a conflict of interest in those negotiations.

The current law relating to directors duties is contained in the Companies Act 2006. 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." This duty is not infringed if the situation "cannot be reasonably regarded as likely to give rise to a conflict of interest" or if the matter has been authorised by the directors.

Additionally directors must declare their interests in proposed or existing transactions and arrangements with the company prior to that transaction or arrangement being entered into or "as soon as reasonably practicable". These duties apply equally to executive directors and non-executive directors.

Directors owe these duties to the company and as such only the company can enforce them, although in certain circumstances the shareholders can bring an action for breach of duty. In addition breach of certain of these duties is a criminal offence. Remedies for breaches of duty can include injunctions and damages and such breaches have also been held to be grounds for the termination of service contracts and for disqualification under the Company Directors Disqualification Act 1986.

Sir David has claimed that he told all JJB board directors about the loan and that as a non-executive director he "could not and would not influence decisions so the commercial transactions that went on between JJB and Sports Direct were not anything to do with [his] involvement". JJB's lawyers have asserted that Sir David "was in no way compromised by his dealings with Mr Ashley and Mr Ronnie because of the existence of the business loan from Mr Ashley".
Whatever the truth, Sir David got a vote of confidence from shareholders' at JJB's AGM on Friday when 98% voted in favour of his re-election to the board. In the meantime, Fashionista is enjoying following the on-going saga.