Articles

Difference between shareholders and the board of managers/board of directors

April 2, 2023April 2, 2023
Difference between shareholders and the board of managers/board of directors

Author: Ibrahim Kaunda, Masters of Law and Legal Practice Course at the University of Law in London, 2022-2023.

Editor: Danai Daisy Chirawu, Erasmus Mundus Joint Masters in Human Rights Policy & Practice (2021-2023), The University of Gothenburg, University of Deusto, University of Roehampton & The Arctic University of Norway, Bachelor of Laws (With Honours) (LLBS) (2012-2016) – the University of Zimbabwe.

Abstract

The difference between the shareholders and directors is based on the formation and setup of the company. It is the basis of corporate governance where there is a separation of duties and responsibilities. Mainly the shareholders are the owners of the company or business they are they provide funds to the business in the form of capital. While the directors are the managers of the business, they are the decision-makers in the daily running of the business. While the shareholders have rights to their investments, the directors have responsibilities towards the shareholders and all the stakeholders.

Introduction

  • Background to the Study

Companies are of different types namely, Public Companies, Private companies, Limited by guarantee and Community interest companies. 

A “public company” is a company limited by shares or limited by guarantee and having a share capital–(a) whose certificate of incorporation states that it is a public company, and (b) in relation to which the requirements of this Act, or the former Companies Acts, as to registration or re-registration as a public company have been complied with on or after the relevant date. 

Since it belongs to the public and because of its nature, this type of company is heavily regulated.

While a private company is defined as a business firm which is run, controlled and operated by private individuals who are not civil servants or government employees. It is also known as a private limited company “A “private company” is any company that is not a public company.” Unlike a public company, a private company is less regulated. Therefore much of the discussions in this paper will base on private companies.

Under Company Law, the company consist of Directors and Shareholders. The Directors are the day-to-day managers of the business, and the shareholders through their shareholdings are financers and owners of the business and so to some extent, they have control over the company’s affairs. 

Shareholders are categorised into majority and minority. Minority owns minority stakes by holding lesser voting rights than the majority shareholders in the company. The company’s structure is what determines the category of shareholders, for example, minority shareholders can own many shares which have no voting rights, and therefore they cannot have much influence on the company’s matters. Whereas, Majority shareholders own the majority of the company’s voting rights shares, and therefore under the general rule, the will of the majority members of the company should prevail. Where the decision taken infringes on the member’s personal rights or it is illegal, the minority shareholder can bring an action against the majority shareholders. Lord Hoffman emphasised the importance of the minority shareholders’ rights when he said: 

The rights of minority shareholders are an important and rapidly developing branch of law. It raises difficult questions of principle: the conflicts between the letter and the spirit of the company’s constitution; between the sanctity of the bargain between shareholders embodied in the articles and the prevention of unfair treatment; between giving a remedy which is effective and allowing to become an instrument of abuse; between the attainment of fairness and the amount of money which the parties can afford to spend on litigation.

Since directors are charged with the governance of the company, they oversee the business’ direction. While they are entrusted with the shareholders’ investment, the shareholders expect their return on investment which comes in the form of dividends and capital growth. The directors also have responsibilities to take care and fulfil the interests of other stakeholders like the public at large, employees, government and many others. Now that the directors have responsibilities and duties towards the stakeholders, there are a number of guidelines (e.g. common law and equity, statutory law and corporate governance) and regulations were given to help them discharge their duties and fulfil their responsibilities smoothly and secure the interests of the stakeholders. 

Through the doctrine of judicial precedence at common law, the directors have duties towards the stakeholders which are mainly the shareholders. These duties have gradually developed through the traditional way of courts’ decisions which then became the formal source of law. The principles of the law of trust, in the eighteen and nineteen centuries, developed the common law and equitable analogy of directors’ duties which were owed to the company. This analogy was developed on the basis that directors are custodians of the company’s property and therefore they are agents of the company. However, this analogy was challenged by Professor Sealy as he asserts that comparing the director to the trustee cannot make the best analogy as the trustee has to preserve the trust property for the beneficiaries and therefore, they are not under any duty to make investments while the directors under their own management, are expected to make investments which may risk the company’s property through trade. He further said that the only similarity between the two is that they both have a fiduciary duty whereby the directors owe it to the company and the trustees owe it to the beneficiaries. 

In trying to clarify this analogy, Romer J. said: ‘It is sometimes stated that directors are trustees, this means no more than that, directors are in a fiduciary duty with the company when performing their duties’. While Lord Porter argued that; no doubt, directors are not trustees but they occupy a fiduciary position towards the company whose board they form. The main statute to be discussed in this paper is the CA 2006 which is at the heart of the analysis and discussions will be made to analyse the difference between directors and shareholders. Under this Act, the common law directors’ duties and shareholders’ rights were codified.

The purpose of this paper is therefore an exploration of the legal powers and duties of the directors towards the stakeholders, and the legal protection the shareholders’ interests have under the CA 2006. This paper aims to provide a detailed analysis of the CA 2006 and the shareholders’ rights and benefits from this Act. 

  • Background of  Company Law from 1856 to 1989

Since 1856, there has been a series of company law reformations and consolidations of the Acts. Many Acts which were passed in the late 1850s were consolidated into the first Companies Act of 1862. Not all laws affecting Company’s registration come from the Companies Act. There were also some new provisions which included the permission of registration of companies limited by guarantee. 

The overabundance of legislation makes the company law hard to use. This has therefore always been the reason for companies demanding the consolidation of the Company Laws. This has seen the development of the enactment of the last main four companies’ Acts namely: CA 1929, CA 1948, CA 1985 and the current one is CA 2006. The huge development of Company law in the 20th Century was brought about by CA in 1908 and it was this Act that introduced private companies. Before this Act, the only recognised type of company was the public company, but now 99.7 per cent of companies are private.

The CA 1948 created a new category of private companies which were known as ‘exempt private companies’. These companies had some privileges and were exempted from filing public accounts. However, this concept was brought to an end by the CA in 1967. This Act imposed the accounting and auditing requirements on all private companies. 

Another type of private company was created by the CA in 1981, and they were the ‘small’ and ‘medium’ companies. The companies had reduced disclosures and accounting requirements. All these Acts and other changes were consolidated into CA 1985 which also brought significant changes to Company law that were amended by the Companies Act 1989. When these amendments were made, some existing sections of the 1985 Act were replaced with new wording and new sections were added (e.g. CA 1985, sec3A is a section of the 1985 Act, but was actually passed in 1989). 

Just like the CA 1985, the CA 1989 was designed to consolidate the existing legislation, it, therefore, changed and amended a number of existing Acts of Parliament concerning the UK company law including CA 1985, Company Securities Act 1985, The Financial Services Act 1986, the Fair Trading Act 1973, the Policyholders Protection Act 1975 and the Company Directors Disqualification Act 1986. It also incorporated the existing European Union directives.

On the other hand, case law has also been a revolving process as far as company law is concerned. Cases have been developed in illustration of members’ rights, obligations of shadow directors, cases stressing the continued position of equitable principles fundamental to the statutory report of directors’ duties, new case law on the core directors’ duties of proper purpose and good faith, the duty of care and skill and the consequences of a breach of the no conflict purpose and also case law on substantial property transactions and ratification on a breach of directors’ duties.

1.3 The Companies Act 2006

The CA 2006 contain 305, 397 words. Apart from being enormous and the longest Act enacted in the UK, it is also the latest main Companies Act. It started with the announcement on the comprehensive review of the company Law by the Department for Business, Innovation and Skills (BIS), then the Department of Trade and Industry (DTI). In March 1998, the declaration was made by the Government that to promote competitiveness and contribute to national prosperity, an up-to-date framework for the governance of companies is required in the country. 

This resulted in the appointment of the Company Law Review Steering Group (CLRSG) to take charge of the project. It was instructed to study the whole of company law and come up with recommendations. In July 2001, CLRSG published its final report with the title ‘Modern Law for a Competitive Economy’. On 4 November 2005, after a long consultation, the Companies Bill was introduced into the House of Lords as an amending bill but was later withdrawn and reintroduced as a consolidating legislation.

After the discussion of the two white papers in the parliaments, the Act received royal assent on 8 November 2006 and on 1 October 2007. Three years after its enactment, it was fully implemented on 1 October 2009.

The CA 2006 came into existence with the aim of repealing, simplifying, modernising and consolidating the existing company law. Before this Act, the company law was found in various Acts like CA 1985, CA 1989 and the Companies Audit Investigations and Community Enterprise Act 2004. The concern was to make the law relevant to small businesses but this was not possible as the available laws were also applicable to both small and large companies. However, it was recognised and the consideration was made whereby it was agreed that the regulations which were burdensome to the small companies needed to be simplified. 

Shareholders’ Engagements

2.1 Enhancing Shareholder Engagement and a Long term investment culture

As mentioned above, this was aimed at holding companies more accountable to the shareholders. Following the CLRG’s analysis and finding that the company’s best performance is based on a clear understanding of roles and responsibilities and also effective communication and engagement between members and the directors, the government, therefore, proposed that transparent and accountability will help the shareholders to play a knowledgeable role in a company’s business. Emphasis would be made on the need to promote the success of the company for the benefit of the shareholders. This can only be possible by taking into account the long-term performance and broad interests like the employees’ interests and the company’s impact on the environment and community. In so doing, the theme was established based on these four pillars:

  1. Improving shareholder dialogue
  2. Enfranchising indirect investors
  3. Directors 

2.2 Improving shareholders’ dialogue

The economic long-term performance and prosperity of the company depend on the shareholders. Therefore, the efficient allocation of capital and investment decision depends on how much information they receive and how closely they are engaged in the business’s activities. Due to the complexity of the investment chain, communication and the exercise of ownership rights and responsibilities have been difficult. Steps have been taken by the government to encourage effective shareholder engagement and an efficient investment chain, including the requirement that directors’ remuneration reports for all quoted companies must be approved by shareholders. 

Sending copies of accounts and reports to the shareholders is one of the vital elements of business management. The CA 2006 in schedule five has provided how this should be done. With the right to request written hard copies, the shareholders’ communication like general meeting notices and annual reports will be done electronically, and members have a choice to access these documents through the company’s website. This has helped to reduce the costs to the company. This information is also available to all members which makes it easy and fast for members to have access to the business information. 

Under this new system, to ensure the shareholders have timely information, and to hold the directors accountable, the reporting cycle has been linked to the AGM which for public companies has been scheduled to be held within 6 months of the financial year-end. To encourage transparency, resolution and poll results for the general meeting will be publicised on the company websites.

The Government believes that there is a good case for improving voting disclosure and wants to see effective accountability by institutional investors. This will improve transparency and lead to better engagement with companies by institutional investors. 

2.3 Enfranchising indirect investors

This is specifically for shares held in a listed company through an intermediary. ‘Electronic sale of shares through an intermediary has been recommended as easier and cheaper’. It can also be a regulatory requirement. However, these indirect investors are not recognized as shareholders by law, therefore, risking losing their investments. The bill proposed that indirect investors must play a role. 

Under section 145, the indirect shareholder can appoint a proxy to act on his behalf. The proxy can exercise all the shareholder’s rights as provided in the Company’s article.

  • Exercising rights through proxy; on behalf of the indirect investors, the proxy can attend and speak at meetings and they can vote and exercise all rights as the shareholders can. 
  • Exercise of governance rights. The bill proposed that the indirect shareholders just as registered members will have legal rights to exercise governance rights. This has been provided in sections 152-153 CA 2006. 
  • Right to information power. The bill proposed that the secretary of state will have the power to force public companies to provide electronic information In addition. Section 146 provides the right to information of a proxy.

However, it should be noted that these rights cannot be enforced by the proxy. Only a member is entitled to enforce the rights. Unlike the previous regime whereby the indirect shareholders were not legally recognised, the introduction of these rights under CA 2006, has helped and allowed the indirect shareholders to be legally recognised and exercise their rights through proxy.

2.4 Shareholder’s general rights

Mainly the shareholder’s rights are set in the Company article. CA 2006 has provided some general rights which can be in some cases altered by the articles. Some of these rights are: Right to receive notice of a general meeting, the right to vote at the general meeting, the right to inspect minutes of a general meeting, and the right to be given a share.

Failure to meet this requirement, in default renders company officers liable for a criminal offence. 

In addition to these general rights, some rights are specifically attached to the class of shares for example: 

  • At least 5% of the company’s shareholdings have the following rights:
  • Rights under section 303 CA 2006, where a general meeting has not been convened for at least 12, to require it to be called. 
  • Under section 315 CA 2006, to receive and have the general meeting’s written statement circulated. If in default, the company’s officers commit a criminal offence if they fail to do this.
  • At least 10% of the company’s shareholdings have the right to have the company’s accounts audited under section 476 CA 2006.
  • At least 25% of the company’s shareholdings have the right under 283 to block a special resolution.
  • At least 50% of the company’s shareholdings have the right to pass or block an ordinary resolution or any decision which is not a special resolution i.e. majority shareholders’ decision. 
  • Shareholders with at least 75% of the company’s shareholding have the right to pass a special resolution.

These rights are part of the power which the shareholders have over the directors in the company.

Directors’ Duties

3.1 Directors’ duties at Equity and Common Law 

The Genesis of directors’ duty is the common law whereby the judgements were considered based on the facts of the case at hand. This was built up based on the doctrine of precedent whereby the cases were decided based on the decision of the higher court for a case of similar facts. Over a period of time, the decisions formed the law.

In the eighteenth and nineteenth centuries, policies were built whereby the directors were held to be owing equitable and common law duties to the company. The principle was built based on the equivalence of the law of trust whereby directors were seen as custodians of the company’s property and agency; however, some researchers criticised this analogy by saying that there were no similarities between trustees and directors. Romer J. in the case of Re City Equitable Fire Insurance Co wanted to know if the duties are imposed on directors and therefore can be equated to trustees but he clarified that this simply means nothing more than that as they owe fiduciary duties to their company. Professor Sealy argued by saying that the directors’ duties and the trustees’ cannot be compared because, under the law of Equity and trust, the trustees’ duties are to preserve the property for the beneficiaries while the directors have the responsibility to make investments with the company’s property under their own management. In the case of Regal Hastings v Gulliver, Lord Porter said that it is obvious that directors only occupy fiduciary positions for the company and are not trustees.

As already discussed, common law and equity which developed from numerous cases are the bases for the current directors’ duties. Except for one new section 175, these common law duties are now codified into seven general duties and can be traced from their origin. Their application and interpretation are similar to Equity and common law. These duties are based on the fundamentals of the company’s legal personality of a separate entity and that its actions are only through the agents and these agents are directors.’ The CA 2006 came to make the law clear and accessible.

3.2 The Concept of Directors’ Equitable Fiduciary duties

The concept of fiduciary as expressed in the case of Item Software (UK) Ltd v Fassihi, refers to trust and confidence. Since the directors act as trustees of the company, naturally, they assume a fiduciary position. It, therefore, requires that in exercising their powers, directors should always be honest as this is their primary duty to the company. This duty is now stipulated in S.172 CA 2006 as ‘Duty to promote the success of the company’. 

At common law, this is a subjective duty in the sense that, it is for the directors to decide what is in the best interest of the company. However, there is an objective element to it; it must be weighed whether the director holds a bona fide view that his action is in the best interest of the company. The court will assess all the elements of the case, affirm the nature of the power and its limits, and examine the significant purpose for which it was exercised. This was approved by Lord Wilberforce in the case of Howard Smith v Ampol Petroleum, In this case, the court held that the issue of more shares to Howard Smith by Miller Ltd’s directors was motivated by personal interests and not in the best interest of the company. 

When considering the interest of the company, the directors must also regard the interest of the creditors especially when the company is facing insolvency. The House of Lords emphasised this in the case of Winkworth v Edward Barn Development co Ltd in which Lord Templeman said: 

‘….where a company is insolvent, the interest of the creditors intrude….Directors owe a fiduciary duty to the company and creditors, present and future to ensure that its affairs are properly administered and keep the company’s property inviolate and available for the repayment of debts.’ 

Therefore, where the company is insolvent, the interest of the creditors is paramount as compared to those of the shareholders. 

 3.3 The Limitations of Directors’ Equitable Fiduciary Duty

Statutorily, the directors’ duty to regard the interest of the employees as stipulated in section 309 CA 1985 is subordinate and practically unenforceable. Even though the successful functioning of the company depends on the employees, the directors’ general duty to the employees has been ignored. Until the intervention of the UK’s first CA in 1985, the interests of the shareholders were dominating, and no reference was made to the interests of the employees.     

This unfairness and lack of balance for the company’s stakeholders were one of the stimulating events for a change. It was the principal reason that prompted the steering group to advance the need for change. In its argument, the steering group proposed that ‘the objective of the reform should be to achieve competitiveness and efficient creation of wealth for all participants’. The group pointed out that the current law is inadequate as it fails to recognise that ‘businesses normally generate wealth where participants operate harmoniously as a team and that managers should recognise the wider interests of the community in their activities.’ As a result, this need has been recognised in section 172 of CA which requires that when discharging their duties, directors should regard a list of factors affecting the business including the stakeholders. 

  •  The duty to Exercise Reasonable Care Skills and Diligence

Derived from the common law principle of negligence, directors are required to exercise reasonable care, skill and diligence failing which they will be liable and required to pay damages. The test under this duty was subjective as the judgment was based on the level of skills they have and not the qualifications. In the case of Re Brazilian Rubber Plantation, the court held that: ‘Directors are not bound to show any special qualification, can undertake the rubber company’s management without knowledge about rubber business with no responsibility in relation to that lack of knowledge, but when he proves to know that business, then he must prove it.’

Where he displays or shows to have special skills, however, in negligence, the director will objectively be liable for failing to meet the standard of those skills he displayed. It is worth noting that this test has depleted with time as it has lost its popularity. To provide a stable solution to the test, Romer J. in Re City Equitable Insurance co. set the following template in which he said:

  • Subjective test for skill– a director need not exhibit in the performance of his duties a greater degree of skills than may reasonably be expected from a person of his knowledge and experience.
  • Periodic attendance– a director is not bound to give continuous attention to the affairs of his company.
  • Entrustment to executives– a director is allowed to trust an official to perform such duties as can properly be entrusted to him in agreement with the articles. 

The fiduciary and directors’ duties of care, skills and diligence which are described as the general duties are codified and are available in sections 171 to 177 of CA 2006. Section 170 stipulates that these duties are owed by the director to the company only. This originates from the decision established by Lord Swifen-Eady J. in the case of Percival v Wright  as he held that ‘the directors of a company are not trustees for individual shareholders and may purchase their shares without disclosing pending negotiations for the sale of the company’s undertaking’, However, this is different where the company is under takeover bid, as it was held in the case of Platt v Platt [1992] that where there is a misrepresentation, the directors owe a duty to members personally.

The duty imposed under this section is that directors must act ‘in good faith’ to promote the success of the business for the benefit of shareholders. Lord Greene MR formulated this duty in the case of  Re Smith and Fawcett Ltd, by saying that; ‘directors of a company must act …bona fide in what they consider, not what a court considers is the interests of the company, and not for any collateral purpose.’ Section 172 CA 2006 contains two other sub-sections, the copy cut of common law, defines exactly the common law codified duty that the companies must run for the benefit of its shareholders. While the second part ‘is far more novel’. 

This second part requires that the directors should regard a long list of factors which include; the interest of employees, customers, suppliers and the impact the business’ operation has on the community or environment. This second element’s purpose is to bring change in the companies’ business conduct. ‘It aspires to make decision-making more enlightened advancing the aforesaid concept of enlightened shareholder Value’. 

This concept views that the members’ interests cannot be achieved without regarding other factors as already explained. Dodd said: ‘business is permitted and encouraged by law because it is of service to the community rather than because it is a source of profit to its owners.’ The difference in this section as compared to the ordinary common law duty is that it looks beyond the narrow focus of shareholders by regarding other stakeholders. However, the consideration of other stakeholders in decision-making as stipulated in S.172 (1) should be noted as their interests remain paramount. Commenting in the House of Lords, Lord Goldsmith said: “Success means what the members collectively want the company to achieve,” therefore, the consideration of other stakeholders is to be done only to promote the success of the company for the benefit of shareholders and the director will not consider these factors if doing so will conflict with his/her paramount duty.

In the case of Re City Equitable Insurance co, the court held that the expectation in the exercising of this duty is that of a person with the directors’ knowledge and experience.  However, this test was criticised as professor Sealy said: ‘This test permitted fundamentally poor directors to escape responsibility for company losses even when most reasonable people would have considered their decisions as negligent.’ Because of the way it was formulated, the courts recognised that this duty was too low; and that the action was appropriate to increase the standard. 

A stricter approach was adopted to raise the required standard for this duty. In setting the strict standard, the CLRSG declined to follow America’s business judgment rule for fear of penalising the directors for negligence where their actions were honest. On the other hand, the CLRSG fear that this rule may relieve the directors from negligent liability. 

All the same, the statutory duty under Section 174 CA 2006 was developed from the common law duty. Similarly, the standard of test in this section reflects that of wrongful trading as stipulated in the Insolvency Act 1986; Lord Hoffman also commented on this test as he said in the case of Re D’Jan of London Ltd that the common law directors’ duty of care is accurately stated in S.214 (4) of the Insolvency Act 1986. 

The duty of exercising a reasonable level of care, skills and diligence is illustrated in the case of Re D’Jan of London:

  1. The general knowledge, skills and experience that may reasonably be expected of a person carrying out the same functions as the director in relation to that company (an objective test) and;
  2. The general knowledge, skill and experience that the director actually has (a subjective test).

The government pointed out that limb (a) is the minimum standard required by the objective test on all directors’ duties. However, in exceptional circumstances where the director’s skills, experience and knowledge are greater, the expectation is that he must meet the same higher standards of care, knowledge and experience. While the subjective test in limb (b) states that the director’s performance will be based on the test that applies to all directors that are the test will be based on the knowledge, skills and experience the director has. This limb, therefore, explains that a director will be judged based on their background, experience and qualification and it works only to increase the director’s required care.

The CA 2006 combined these principles under the dual test of subjective and objective standards of care, skill and diligence. This means that the expectation from the director’s exercising of duty of care, skills and diligence is that of a person holding that similar directorship position.

3.5    Restatement of Directors’ Duties

A widespread debate arose amongst academic commentators at the beginning of reforming of the directors’ duties from common law to the statute. Deirdre Ahern supported the move by saying: ‘transfer of directors’ duties to a legislative scheme qualified as a major landmark in the evolutionary history of the duties’. 

The first consideration as already explained above was made by the English and Scottish Law Commissions in the year 1999 when a joint report was produced with the title ‘Company Directors: Regulating Conflicts of interest and formulating a statement of duties’. The aim was to make the directors’ duties more accessible, certain, consistent and understandable. 

The law commissions’ concern was to clarify the law surrounding the conflict of interest regarding the directors’ duty by reforming their duties from common law to statute to make it clear, certain, accessible, consistent and comprehensible. However, the backlash to the reformation was that the common law duties were considered flexible in the sense that they could easily adapt and fit into the changing commercial and economic conditions. At the same time, unlike statute law, common law duties could give room for expansion under the judicial system. 

The need to change the directors’ duties to statute won the support of the well-known sectors. In support of the Law Commission’s report, the CLRSG in their final report released in the year 2001 ‘Modern Company Law a Competitive Economy’ came out with these three recommendations:  

  • To deliver better simplicity on what is expected of directors and to make the law more available, which in turn will help to improve principles of governance.
  • To enable flaws in the common law to be corrected in significant areas where it  no longer matches to accept customs of modern business practice;
  • To make the expansion of the law in this area more probable (but without deterring its progress by the courts).

The UK government accepted and supported the need to incorporate the directors’ duties from common law into the new statute. However, to deal with the fear about the inflexibility of the statute law, section 173 (3) of CA2006 provides room for expansion or change of the law by the court where it says that only certain duties are set out in statute and the courts have the right to develop duties which are not yet expressed in the cases.  

The government of the United Kingdom accepted the Company Law Review Steering Group’s recommendation and agreed that the common law should be replaced by a written statutory statement of the legal duties of directors in a new Companies Act.

The relatively brief statutory statement of those duties in place of the previous situation whereby those duties had to be inferred from an elaborate body of case law would promote understating of the basic principles that will govern directors in fulfilling their duties. For example, the courts are free to develop the law regarding the directors’ duty to consider the interest of creditors which by now the CA 2006 has not yet fully tackled. On the other hand, section 170 (4) of CA 2006 provides that the statutory provisions shall be applied and interpreted in the same way as the common law and equitable principles.

Unlike at common law this simply means that in carrying out their various duties while holding office, it is a requirement that all directors should comply with the above-explained general duties as clearly set in the CA 2006. ‘They will be judged by reference to them if ever a matter comes to court.’ Where they have been guilty of breaching these duties, they can be required to pay damages or return to the company any wrongly taken property. To some extent, this can be seen as protection enough for the shareholders from the activities of their agents. Additionally, as provided in section 168 CA 2006, the shareholders have the power to remove the director by ordinary resolution before the expiration of their contract.

Shareholders’ Protection

4.1 Shareholder’s Protection under the Companies Act 2006

As already explained above, in  2, shareholders’ rights are generally set in the company’s articles and agreed upon depending on their requirements. However, the CA 2006 provides some general rights which can in some cases be altered or overridden by the companies’ articles or shareholders’ agreement. To begin with, the following are some of the shareholders’ protection before CA 2006:

4.2 Common Law Derivate Claims 

The company’s legal personality empowers the company to sue and to be sued on its own under the doctrine of separate personality. This was not the case under common law, as individual shareholders could not initiate an action on behalf of the company;  as the duty to take action on behalf of the company was vested in the board of directors. Lord Justice Greer emphasised this when he said that; ‘powers of management are vested in the directors, they and they alone can exercise those powers.’ According to Alan Digman and John Lowry, ‘if the law were to allow minority shareholders to unfettered standing to sue, there will be a risk of a multiplicity of suits and vexation litigation’ This left the minority shareholders weak as far as common law shareholders’ remedies are concerned. 

4.3 The rule in Foss v Harbottle

As already explained above, just like the director’s duties, before the CA 2006, common law was governing shareholders’ derivative claims. During this period of time, it was almost impossible for shareholders to initiate derivative actions due to the then general rule under company law that shareholders cannot sue for the wrongs done to their company. This principle emanates from the ruling established in the case of Foss v Harbottle. 

The impact of this rule on minority shareholders is that where the directors have done anything wrong to the company, the minority shareholders cannot sue or complain. This principle left the majority shareholders with the power to determine whether or not to bring the dispute before the court. This simply means that power is left with those who control the board or general meeting. However, as an exception to this rule, in the case of Edward v Halliwel, it was held that where the director has acted ultra vires or has done something illegal, and or where the director did not comply with a special procedure or where his personal right has been infringed, the shareholder is allowed to sue. With these rules, still, it was so difficult to bring derivative actions against directors as this exception was also uncertain. 

It is for that reason that the law commission and CLRSG in their report ‘Shareholder Remedies’ pointed out that ‘the law in this field is complex and obscure’ and that ‘a new derivative procedure with more modern, flexible and accessible criteria’ is required. ‘The common law severely limited a shareholder’s right to bring a derivative claim’.Therefore they recommended that the derivative action has to be put into statute and should be governed properly by clear and certain rules. This recommendation was later implemented and enacted into law under CA 2006. 

4.4 Derivative Claims under CA 2006 

In respect of the cause of action, under Part 11 of CA 2006, a member of the company can bring a derivative claim against a company director where an actual or proposed act or omission involving negligence, default, or breach of trust has taken place by the director. As compared to common law remedy, this is a wider derivative action procedure, and this is open to all members of the company regardless of their position or status in the company. As Kershaw put it; ‘to hold directors accountable for a breach of duty is an important aspect of regulating and controlling shareholder activity’. 

This is an important and effective way to push the company in a new direction and punish less or malfunctioning directors. Lord Megarry in Re Argentum Reductions Ltd held that shareholders have a locus standi to make an application where the directors are unable to act. Under this new derivative action, directors are in a difficult situation as it allows a single shareholder to take action in his own name where the director’s action infringes his individual right. Thus in the case of Pulbrook v Richmond Consolidated Co., it was held that where refusal for a shareholder’s vote in a general meeting was done wrongly or is based on the wrong ground, a shareholder may take an action. 

Some sectors have criticised that this new provision has not changed anything in the former regime of the common law because it is still difficult for one shareholder to bring an action against the company. However, to some extent, unlike the previous common law, the codified derivative action makes the law certain, easy and open to all members. 

4.5 Unfair Prejudice

The statutory form of unfair prejudice permits aggrieved shareholders to bring actions against the company. Under CA 2006, it says that:

A member of a company may apply to the court by petition for an order under this Part on the ground–(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. 

This section was part of CA 1985 under section 459. Many cases have also been decided in support of this provision. In the case of Re McCarthy Surfacing Ltd., the court in clarifying the unfair prejudice said: ‘‘payments of excessive remuneration or award of over-generous bonus payment may constitute to unfairly prejudicial conduct, especially in the circumstances where dividend payments to minority shareholders who are not appointed as directors have not been increased proportionally.’’ 

This is open to company members and applied strictly to protect the minority shareholders in the private company. It acts as an exclusion to the rule in Foss v Harbottle as explained above. It is strict mainly to protect its certainty. In Graham v Every, it was decided that dilution of the company’s shares was equivalent to unfair prejudice to the concerned members contrary to CA 2006’s section 994. 

4.6 Other Protections

Articles of Association: Regulates the relationship of the members i.e. contract between the company and members; it governs the internal procedures of general and board meetings, the conduct of the directors etc. As a matter of safeguarding their interest in the company, members have the power and rights to amend the articles of association. The protection of members’ interests in a company limited by shares is reflected in S.168 of the CA whereby a company may by ordinary resolution at a meeting remove a director before the expiration of his period in office, notwithstanding anything in an agreement between it and him. Section 190 states that some company activities must seek shareholders’ approval. However, ‘where the shareholders with voting rights have voted in favour of the decision, although not approved by all shareholders, the transaction will bind the company’.

As the powers to amend the Articles of association which govern the relationship between the company and its members rest with the shareholders who also have the power of passing a resolution to remove the director, it is reasonable to say they are protected.

Corporate Governance

5.1 A brief introduction to Corporate Governance

The procedure on how companies are governed is called corporate governance. Before the 1980s, corporate governance was not legally as important as it is now; it was not associated with the public interest. Governance was viewed as the company’s management which was supervised by the boards in which the directors were in charge of business order by providing balances and checks. The view was that shareholders as company owners together with the board members and directors, if they act in their best self-interest, other groups e.g. suppliers, creditors public at large and employees will benefit.

Schleifer and Vishny (1997) define corporate governance as the means whereby investors are ensured of getting their return on investment. While the Organisation for Economic Co-operation and Development (OECD) believes that good corporate governance should provide a structure for achieving and monitoring the company’s objectives, Sir Adrian Cadbury believes that a good corporate governance system should include the interests of all the stakeholders e.g. individuals, society and companies. 

Regardless of different groups’ and individuals’ understanding and perception, corporate governance is generally understood in a broad and narrow perspective, whereby the former is the inclusion of all the stakeholders i.e. the dependants, contributors and addresses the questions of the company’s actions, control of and the apportionment of its benefits and risks, the latter is mainly concerned with the board’s composition and shareholders’ participation in the company’s decision-making process. 

According to different corporate economies and institutional contexts in different countries, corporate governance systems have evolved in different ways in different countries. In the UK, the corporate governance principle for private companies has taken the view that Directors are the agents of the shareholders, and therefore must act in the interests of the shareholders which means maximising the return on their investment. 

This system has faced criticisms from different researchers for example Simon Deakin said that this is an ancient system which is based on the hostile takeover movement and not on law and economics. To others, this system has been seen as influential to governance systems, especially in economic transitional and developing worlds. While others see this system as de facto, i.e. the starting point for their corporate governance system. 

The shareholder primacy model was developed in the late 1950s and early 1960s through to the 1990s. This period was the post-war period when the hostile takeover movement began in the US and UK to restore the companies’ ownership and control to the shareholders. With this system, where the company was not performing, the managers were held accountable and consequently lost their jobs and assets from the little profit area were transferred to the location of the profitable investment. However, this system has resulted in the public losing confidence in corporate governance, as the world has seen the failure of the system at Enron and WorldCom in the US and Marconi in the UK and the nearly collapsing of the banking industry in 2007 and 2009. 

This has led attention to be given to the alternative stakeholder approach, which has also coincided with the coming of global corporate social responsibility (CSR); whose support is the broader theory whereby its concern is that of the long-term sustainability of employment in environmentally friendly operations. This led to the revision of the Company Law and as a result, the concept was embodied into the Companies Act 2006. 

6.2 Conclusion

In conclusion, The CA 2006 has set out the framework which the directors can follow in carrying out their duties. This is a clear demarcation of the difference between shareholders and company directors. The rights of shareholders have also been listed. These differences are giving out clear responsibilities and rights which the shareholders can rely on in court when grieved by the directors’ actions or omissions. This reflects on what conservative party’s spokesman Jonathan Djanogly said: ‘Ultimately, it will be for the courts to determine how far the new [directors’] duties extend as there is scope for interpretation and differing applications in practice.’

BIBLIOGRAPHY 

LEGISLATION 

  • Companies Act 2006
  • Companies Act 2006 Explanatory Notes
  • Companies Act 1989 
  • Companies Act 1985 

CASES 

  • Re City Equitable Fire Insurance Co [1925] Ch 407 
  • Regal Hastings v Gulliver [1942] UKHL 1
  • Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244. 
  • Howard Smith v Ampol Petroleum  [1974] AC 821  
  • Winkworth v Edward Barn Development co Ltd 1986] 1 WLR 1512
  • Re Brazilian Rubber Plantations and Estate Ltd [1911] 1 Ch 425 at 437
  • Percival v Wright [1902] 2 Ch 401
  • Re Smith and Fawcett Ltd [1942] CH 304
  • Re D’Jan of London Ltd [1994] 1 BCLC 561
  • Re D’Jan of London [1994] 1 BCLC 561
  • John Shaw & Sons (Salford) ltd v Shaw [1935] 2 KB 113.
  • Foss v Harbottle (1843) 67 ER 189
  • Edward v Halliwel [1950] 2 All ER 1064 
  • Graham v Every [2014] EWCA 191
  • Re McCarthy Surfacing Ltd [2008] All ER (D) 54

BOOKS

  • Bird J and Boyle A, Bird and Boyle’s Company law (8th Edn, Jordans Publishing 2011) 
  • Davies P and Worthington S, Principles of Modern Company Law (9th Edn, Sweet and Maxwell 2012) 
  • Dignam A and  Lowry J, Company Law (8th Edition, Oxford University Press 2014) 
  • French D, Mayson S and Ryan C, Company Law (29th Edn, Oxford University Press 2013)
  • Gower D, Principles of Modern Company Law (6th Edn, Sweet and Maxwell 1997) 
  • Miles R, Hildyard R and Boardman N, Annotated Companies Legislation (Oxford University Press 2010)
  • Pettet B, Pettet’s Company Law (3rd Edn, Pearson Publishing 2009).
  • Sealy L and Worthington S, Sealy’s Cases and Materials in Company Law (9th Edn, Oxford University Press 2010) 
  • Steinfeld A, Blackstone’s Guide to The Companies Act 2006 (Oxford University Press 2006)
  • Keay A, The Enlightened Shareholder Value Principle and Corporate Governance (Taylor & Francis Ltd 2014)
  • Kershaw D, Company Law in Context: Text and Materials (2nd Edn, Oxford University Press 2012)
  • Lacy J, The Reform of the United Kingdom Company Law (Cavendish Publishing 2002) 
  • Loose P, Griffiths M and Impey D, The Company Law: Powers, Duties and Liabilities (11th Edn, Jordan Publishing Limited 2011)
  • Bourne N, Bourne on Company Law (6th Edition, Routledge 2013)
  • Boxell T, A Practitioners Guide to Directors’ Duties and Responsibilities (3rd Edn, City and Financial Publishing 2010) 
  • Bingham A, Hicks & Goo’s Cases and Materials on Company Law (7th Edn, Oxford University Press 2011)

REPORTS 

  • Company Law Amendment ‘Greene Committee Report’ (1925), Cmnd 2657
  • Company Law Reform White Paper (CM 6456, March 2005)
  • Company Law Review Steering Group ‘Modern Company Law for a Competitive Economy: Final Report’ Department of Trade and Industry, 2001
  • Company Law Review Steering Group, ‘Morden company law: The strategic Framework 2001’
  • Company Law Review, Modern Company Law for a Competitive Economy: ‘the Strategic framework’, London, 1999
  • Law Commission ‘Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties’ (LAW COM No 261, 1999)
  • Law Commission, Shareholder Remedies (Law Com No. 246, Cm 3769, 1997)
  • Margaret Hodge MP, House of Commons Standing Committee D, 11 July 2006
  • Guidance on Key Clauses to the Company Law for a Competitive Economy: Developing the framework (Department of Trade and Industry 2000).
  • Department for Business, Innovation and Skills; ‘Evaluation of the Companies Act 2006, Executive Summary’ 2nd August 2010.

JOURNAL ARTICLES 

  • Dodd M, ‘For Whom are Corporate Managers Trustees?’ Harvard Law Review, (1932) 45 (7) LS 114
  • Ahern D, ‘Directors’ duties, dry ink and the accessibility agenda’ (2012) 128 LS 114
  • Keay A, ‘The duty of directors to exercise Independent Judgement’ (2008) 29 (10), LS 290
  • Keay A, ‘The Enlightened Shareholder Value Principle and Corporate Governance’ The Modern Law Review, (2013) 76(5) LS 940
  • Sykes P, ‘The Continuing Paradox: a Critique of Minority Shareholders and Derivative Claims under the Companies Act 2006’ Civil Justice Quarterly (2010) 29(2) 5.
  • Berg A, ‘The Company Law Review: Legislating Directors’ Duties’ Journal of Business Law (2002) LS 472
  • Lowry J, ‘Codifying the Corporate Opportunity Doctrine: The (UK) Companies Act 2006, International Review of Law’ (2012) 2012(1). 
  • Pryce – Brown T, ‘Directors’ duties and objectivity: A Semantic Obstacle’ The Company Lawyer, (2000) 21(10) LS 300 
  • Keay A, ‘Good faith and Directors’ Duty to Promote the Success of their Company’ The Company Lawyer, (2011), 32(5) LS 138
  • Sealy L, ‘The Directors as Trustee’ Cambridge Law Journal (1967) 25 (1) 83. 
  • Keay A, ‘The Duty to Promote the Success of the Company: is it fit for purpose?’ (2011) 32 (5) LS 7 
  • Robert Goddard, ‘Directors Duties’ Edinburgh Law Review (2008) 12 468.

WEBSITES AND BLOGS 

 

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