The ability of shareholders to cast their votes in their own selfish interests does make ratification of directors wrongs a complex issue, as directors are often shareholders.

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The ability of shareholders to cast their votes in their own selfish interests does make ratification of directors wrongs a complex issue, as directors are often shareholders.

Directors have a common law duty (fiduciary duty) and statutory duty in that they must act bona fide in the interest of the company.  Whilst the company is solvent the best interests of the company will be to the interests of the company’s shareholders as a whole.  A director finding himself in a position of conflict does not automatically breach his duty, but he must resolve the conflict by exercising his discretion in the best interest of the company.  There is a common list of possible breaches of fiduciary duties: misappropriation of the company’s property; improper use of power for an improper purpose; abuse of discretion; allowing an interest and a duty to conflict.  

Shareholders have two separate rights.  The first is the value of their share (property interest) and the second is a right to participate in that value which is created by the company.  This gives them an interest to maintain the value of their shares and therefore have a right to vote selfishly and not necessarily consider the interests of the company.

Ratification is a process by which a director can avoid liability when it is shown that the company has ratified the wrong.  ‘Shareholder ratification operates as immunising company directors from the consequences of the breach’.  Where his conflicted position means that a director’s approval of a course of action may well put him in breach of a fiduciary duty to the company, he can be partially protected if the shareholders ratify the decision.  Most decisions taken by directors can be ratified by the shareholders, provided that they are not ultra vires to the company’s constitution and do not involve a fraud on the minority or the misappropriation of the company’s property in bad faith.  It has been recognised by the courts that there are some wrongs, which cannot be ratified, even though all the shareholders agree to it.  The overriding fiduciary duty of the director to act in the interest of the company cannot be ratified even through voting in a general meeting.

The nature of company law in the UK has proven to be a contractual theory, in which the wishes of the shareholders override the consideration of management, who has to act in the best interest of the company.  This seems to have been reinforced by s.1 Companies Act 1985 which indicates a superiority of shareholder status, suggesting they are allowed to manage the company in their own interests. This is a very restricted view though as it only accounts for the interest of the shareholders and not as the company as a whole.  The problem with this framework is that the best interest of the company seems to coincide with the interests of the shareholders as they can pursue personal interests.  Therefore directors and shareholders have a different duty which without doubt creates conflict.  The move towards the notion of a company as a ‘separate creature’ with its own interest and own entity separate from that of its shareholders is apparent, which should increase shareholder awareness of the company issues rather than just their own interests.  This change can be noted by the court’s attitude in insisting that the alteration to the articles of association should be bona fide for the benefit of the company and not just for the shareholders and an act which is not bona fide will be set aside.  It would therefore seem that where it was believed that the director’s power derived from the shareholder it is now understood that it comes from the company.  Conflict will needless to say arise when one person is both a director and shareholder.  

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Acting on a basis of dual capacity as a director and shareholder, seems to have emerged as an exception to the conflict of interest rule.  Directors cannot act against the company but as a shareholder they can vote in their own selfish interest.  Therefore if one was to have a majority shareholding, they could ratify their own wrong.  Basically, to act bona fide is the duty which should be abided by directors, however when they put on their shareholders hat they can then actually pursue personal interests irrespective of the company and the other shareholders.  An exception to this ...

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