The dangerous blend of capacity, undue influence and significant business decisions

“Well, it makes you think. Maybe Dad isn't on it like he used to be.” - Shiv

Charles Russell Speechlys Succession Watch: Episode 2

This week on Season 4 Episode 2 of HBO’s Succession, we saw astonishingly the words “apology”, “Logan Roy” and “karaoke bar” used simultaneously in one significant scene. This was Logan's first in-person interaction with his estranged children since the Season 3 finale and left us wondering whether it was a last-ditch effort by "Hitman Santa" to maintain a grip on control? Or, more concerningly, whether it alerted us to red flags in relation to Logan’s capacity, decision-making ability, and as Kendall puts it his “total loss of judgment and control”?

The blood-lustful speech at ATN headquarters, the push to appoint Kerry as an ATN news anchor, and the cancelling of the crucial board meeting with new investors in favour of a face-to-face meeting with the exclusion of Gerri, Waystar Royco's General Counsel, are exploits that we haven't seen since Logan’s more volatile behaviour in earlier seasons where issues of capacity were raised. We will all recall how in Season 3, when Logan had a “make you go crazy” UTI infection ahead of the vital shareholder AGM, Shiv had to step in to take decisions on his behalf.

For clients facing concerns about capacity (whether in a loved one or business associate) this can be a very real and sensitive topic. It is crucial to understand any legal and practical considerations when navigating these issues.

A Legal Overview of Capacity

Under the laws of England and Wales, the Mental Capacity Act 2005 (MCA) sets out a two-stage test for capacity: (1) does the person have an impairment of the mind or brain; and (2) does the impairment mean the person is unable to make a specific decision when they need to. The MCA states that a person is only deemed capable of making a decision on the basis that they (1) understand the information given to them; (2) can retain and consider the information; (3) weigh up the information to make the decision; and (4) effectively communicate that decision.

This means that different decisions require different levels of capacity. There are various considerations to take into account for different types of decisions. For example, if Logan wanted to change his Will, perhaps to include a gift to Kerry or exclude Shiv, then he would need to have testamentary capacity (Banks v Goodfellow (1870)).  However, if Logan wanted to marry Kerry, he would need to have capacity to enter a marriage (which is a lower level of capacity than that needed to change a Will).

In the UK, this could raise an interesting dilemma for opportunists like Kerry. In particular, would they do better to focus their efforts on marrying Logan to benefit as his spouse on intestacy (especially as marriage can revoke any existing Will) or by bringing a 1975 Act claim, rather than pushing for him to make provision for her in his Will or the Family Trust (which could more easily be challenged on a capacity basis)?   If a person has entered into a marriage without capacity, then the marriage contract may be voidable and declared invalid by the Court (or through a statutory divorce process).  Here it would be the parties to the marriage (or someone else representing the party who lacked capacity) who would bring such an application.

Challenging Capacity

When concerns about capacity surround the existence of a Will, a person may enter a caveat on the estate at the Probate Registry which creates a 6-month window to investigate any grounds for contesting.

Should someone seek to challenge the validity of a decision made by someone who lacks capacity, an application can be made to the Court of Protection. If someone were to bring legal action to the Court of Protection on a person’s behalf because they lack capacity, that person should still be included in the proceedings, and the Court must consider the best way, to involve them in the court case. Medical evidence will also be required to confirm they lack capacity. Should a person be found to lack the requisite capacity to make decisions, and in the absence of a valid Lasting Power of Attorney, an application to the Court of Protection for a Deputyship may be required. For example, in cases where the person is incapable of making decisions regarding their property and financial affairs, a Deputy can help ensure this is managed and organised on their behalf. The Court also has power to order investigations and to undo gifting in circumstances where the donor lacked capacity to make gifts.

If you wished to challenge a decision a person made retrospectively, it is possible to obtain a capacity assessment which opines on the person’s capacity at the time the decision was made. It is preferable to refer to records which existed from before the contested decision, for example contemporaneous medical records, meeting minutes or notes taken by the solicitor or Will writer. If not, it is possible to rely on witness evidence which record the events that took place at the time.

Capacity of Company Directors

A company's legal capacity to enter into a contract or transaction is held by the Board of Directors, who act for the company and bind it into its legal arrangements (provided that adherence to the company's constitution and CA06 is observed). Any person authorised by the Company can enter into a contract on its behalf and this includes every Director and the Company Secretary.

Directors nonetheless must be capable of making these decisions in the first place. Under the MCA it is assumed that a person has capacity to make a decision themselves, unless it’s proved otherwise (and not purely on the basis that a decision is considered to be unwise). Common law tests for contractual capacity such as Hart v O'Connor and Boughton v Knight have various approaches depending on the factual situation. However, the shared position is that a Director, where acting alone but purportedly acting on behalf of a company, must be able to understand the nature of the contract they are entering into on behalf of the company for that particular situation. This degree of capacity can differ, but it is assessed at the time of execution of the contract or instrument. Crucially therefore, a contract made during a lucid interval by a Director who lacks mental capacity at other times will be valid. The effect of this approach is that Directors who lack capacity and enter into contracts create voidable, but not void, binding contracts. The voidability is dependent on the company proving that the other contracting party knew of the Director's lack of capacity, or knew of any circumstances which indicate they could be deemed to have known, at the time the contract was made.

For entrepreneurs and business owners, these issues can cause uncertainty and unpredictability in their business dealings within their own company, or with shareholders like the Roys and with other contracting parties like Lukas Matteson in the show. Financial and property affairs, operations and contractual obligations could be in jeopardy where Directors displaying mental capacity issues may still have legal capacity to bind the company in these crucial affairs. A UK private company’s Articles of Association will generally cater for Directors in such a scenario by providing that person’s directorship shall cease upon the company receiving the written opinion of the registered medical practitioner treating that director, stating they are no longer physically or mentally capable of continuing their role for more than three months. But if they don’t, business owners should assess whether unamended Articles are suitable for their needs, whether it may be necessary to amend their Articles, or whether to establish specific shareholder rights within a Shareholders Agreement to meet their particular situation.

As Waystar Royco looms towards its major board meeting decision next episode, a Director who may lack mental capacity initiates a separate question as to their ability to vote and take part in the decision-making process of the company itself. This will be dependant on the size of the board and any specific voting powers that may be included in the company’s Articles, for example a chairperson’s casting vote. Should a majority decision be made during a board meeting of the Directors, there would be no concern upholding the decision if there would have been the same majority where the vote of the Director who lacks capacity did not count. A company would however still be bound by a Director lacking capacity, whose vote on a decision was required for the resolution’s majority threshold to be passed. Any board concerned that a resolution may have been passed incorrectly may therefore need to remove that Director on the grounds discussed above, re-hold the board meeting and vote again to ensure that the decision effectively reflects the company’s intentions.

What about Trustees?

In the UK, a trustee who loses capacity may find himself being replaced by a new trustee, by an individual specified in the trust deed or the continuing trustees (section 36 Trustee Act 1925), the court (section 41 Trustee Act 1925), or the beneficiaries themselves in certain circumstances (section 19 TLATA 1996). The trust deed itself will also generally include provisions for a trustee to be removed or replaced where he has lost capacity.

In the context of the Roy family, it is also relevant to note where a trustee is also a beneficiary of the trust (like Logan) the continuing trustees would need to apply to the Court of Protection for permission to remove or replace them before doing so.

Undue Influence and Potentially Vulnerable Persons 

Undue influence arises where a relationship between two parties has been exploited by one party to gain an unfair advantage for the other. It is necessary to bear this in mind especially in cases where a person’s capacity is in question as concerns about capacity often go hand in hand with increased susceptibility to influence. This relationship must evidence the existence of ‘trust and confidence, reliance, dependence, or vulnerability’ on the one side, and ‘ascendancy, domination, or control’ on the other. Where lifetime decisions are concerned, the concept is broken down into two limbs: (1) actual undue influence which is deemed to be improper pressure/coercion; and (2) presumed undue influence where the type of relationship between the two parties raises a presumption that influence has taken place. If established, this transfers the evidential burden of proof onto the recipient/influencer. Where lifetime undue influence is proven, the person upon whom the influence was exerted is able to have the contract set aside. There is a different test for testamentary undue influence.

With actual undue influence, the evidence however must prove more than just mere persuasion and that the actions of the influencer has invaded the free violation of the other party, making the threshold for establishing actual undue influence very high. Cue flashbacks to Logan crashing the desultory karaoke bar with Kerry, who, for all intents and purposes proceeds to act as an interpreter for Logan when he attempts to convey his apology to his “needy love sponge” children. Could there be a red flag here? Could Kerry be exerting some improper level of influence over Logan? As, let’s not forget Kerry’s rather disastrous and very comical audition as an ATN anchor, could it be a sign of Kerry’s attempt to build a closer and dependent relationship with Logan, rising the ranks from “friend, assistant and advisor”.