Company Law

        Statute also confers upon shareholders the power to remove a director from office by simple majority.On the face of it, this gives shareholders the final say on managerial matters. Directors are not obliged to follow shareholders’ instructions however they must be aware that by not complying with their wishes they may be removed.

In practice however, this power is limited. First, it is not in the shareholders’ interests to be constantly removing directors, causing disruption to its management. Second, there are various procedural requirements to be met. Third, the removal will not override the director’s contract of services whereby he is entitled to compensation.Furthermore the contract may contain generous indemnification clauses.Finally, there have been cases where this power has been circumvented by weighted votes in the articles in favour of the director therefore securing his remaining in office. The power of removal is not as wide as it may seem.        

        Directors also have fiduciary limitations upon them whilst carrying out their powers. As trustees, directors are in a position of control over other’s assets and have access to confidential information by virtue of their office.

        The overarching fiduciary duty owed to the company is that of care and skill. This ensures that the highest care will be taken whilst exercising the powers conferred on them by the articles. Originally, a director did not need “to exhibit in the performance of his functions a greater degree of skill than may reasonably be expected from a person with his knowledge and experience”. However, it seems that the expected standard is higher now after Lord Hoffman suggested that there should be an objective standard of care coupled with a subjective limb, ensuring higher standards for those that have greater expertise.

Reforms have also suggested an objective standard of duty of care for the future. This would equally ensure that more supervisory caution will be exercised by directors upon delegation.

The other limitation is the duty to act bona fide in the company’s best interests. Directors must not act in bad faith or give priority to their interests over those of the company.

This duty comprises various duties of which we shall consider a few.

        First, it should be noted that directors cannot act outside the scope of the articles. In such cases the common law renders the transaction void.

        Second, directors may not use their powers for purposes contrary to the articles. This restricts their ability to hide behind the articles when they have carried out a permissible activity but for an improper purpose, as for example to gain majority in a take over bid. The courts must investigate the director’s dominant purpose.

        Thirdly and importantly, directors may not exercise their powers whereby a conflict would arise between the company’s and their own personal interests, no matter how fair the transaction is. The common law is strict on this approach but the rule is not absolute. Directors may disclose their interest to shareholders to seek approval.

But this approach was not convenient for businesses, as the procedure was lengthy and embarrassing. It therefore became commonplace for companies to exclude the duty of conflict of interests in the articles. This severely undermined shareholder protection and despite the legislature’s attempt to redress the imbalance such clauses continued to appear in company’s articles. Vinelott J attempted to reconcile these conflicting authorities but the situation remains unclear.

Where directors’ duties are excluded by the articles statute imposes a duty to disclose the conflict to the board. Shareholders can expect to be protected by the “number, quality and impartiality” of the board. However, this is superficial. The articles may allow directors to vote for the ratification of their conflict. Furthermore, fellow directors may be lenient, as they may hope that an equally lax approach be taken towards them. Even the courts have allowed forgiveness for non disclosure to the board, by classifying it as a mere “technical breach.”

In serious cases where directors have made a profit from using corporate property or information for their benefit, they are disqualified from voting for ratification, as this would otherwise allow for them to make “presents to themselves”.Also, statute has introduced strict limitations regarding property transactions.But it is still a serious flaw that certain fiduciary duties can be excluded by the articles.

Shareholders also have discretion as to whether or not directors’ conduct should be excused. This does not interfere with directors’ managerial powers, as they are merely accepting decisions. In most cases a breach of the articles or of a fiduciary duty may be ratified by ordinary resolution even when the breach has been in bad faith unless it is unforgivable. Only transactions beyond the company’s capacity must be ratified by special resolution. 

Except in situations where directors have profited from a breach of duty, there is nothing to preclude them from voting as a shareholder in favour of ratification. In such cases, the law allows for certain remedies so as to protect abuse of the minority shareholding’s position.

When directors have abused their powers the majority shareholders may make a claim. The rule in Foss v Harbottle does not permit complaints to be made by the minority. This is to avoid excessive litigations and to protect the majority rule. However the rule allows for certain exceptions and when harm has been done to the company and the minority has been defrauded they may bring a derivative action. This is a personal claim on behalf of the company and the fraud involved is generally abuse of power. But in practice such action is rarely pursued for various reasons. The wrong must be serious, not a mere irregularitythat is ratifiable; the case law is unclear on the matter and has given conflicting decisions on similar issues. It seems that the conduct complained of must involve a high level of dishonesty and fraud.

Also, this equitable claim must be brought bona fide in the company’s best interests. Those complained of must be “in control”, a concept that remains unclear,and the remedy must be one of last resort.It has also been established that the majority of the minority must agree to take action thereby leaving the possibility of having a minority with no resort.

Most importantly the litigation costs must be borne by the claimant and whatever is recovered from the litigation will go to the company. The courts may allow indemnification,but it is unclear when it will be granted. This remedy is therefore not very helpful for an oppressed minority.

        Where a member’s individual interests have been infringed due to the manner the company’s affairs are being conducted, he may make a claim of unfair prejudice to protect the “rights, expectations and obligations” of those behind the company.This also has introduced a sense of equity to this area of the law where the conduct is unfair to the member. The courts have set out certain legitimate expectations belonging to shareholders, protected by statute. If the petition is considered by the courts they may order a remedy,generally that the shares be sold.

The law gives shareholders wide authority so as to restrain directors’ use of powers conferred upon them by the articles. However, these are merely theoretical due to the difficulties in exercising them and the courts’ aim to limit their interference with management exacerbates this. In practice the power belongs to the board and shareholders’ control is limited, especially when the former have a majority shareholding. But the law imposes heavy fiduciary duties on them that they must bear in mind as well as keeping the majority satisfied so as to stay in office. If the law were to impose too many limitations and liabilities upon them it would be to the detriment of the economy and lead to unnecessary litigations. The courts are not fit to regulate on these matters therefore the articles seem a good way to allow shareholders and directors to determine themselves the managerial style they wish for their company. The reforms however are to be welcomed, as they will present a clear account of director’s duties and end the possibility of certain being excluded by the articles. Some reforms may also have to be introduced in the light of the debates concerning corporate social responsibility and regarding the impact of the Human Rights Act 1998.

2224 words.

Bibliography:

● Gower and Davies, “Principles of Modern Company Law”, 7th edition (2003). (Referred to as G&D).

● LS Sealy, “Cases and Materials in Company Law”, 7th edition (2004).

● Janet Dine, “Company Law”, 5th edition (2005).

● Birds, Boyle, MacNeil, McCormack, “Boyle & Birds Company Law”, 5th edition (2004).

● Quigxiu Bu, “indemnity for derivative action”, Company Lawyer vol. 27 (2006).

● Claire Howell, “The company Law White Paper: a descriptive overview”, Company Lawyer vol. 26 (2005).

● Andrew Griffiths, “Directors’ Remuneration: constraining the power of the board”, Lloyds Maritime and Commercial Law Quarterly.

● Carla Munoz Slaughter, “Corporate Social Responsibility: a new perspective”, Company Lawyer Vol. 18 (1997).

● Sealy, Company Lawyer Vol. 22 (2001).

● Edmnuds and Lowry, “The continuing value of relief for directors’ breach of duty”, 2003, M.L.R 195.

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