Directors' Duties

Question 1

What is S.172 of the CA 2006?

Answer 1

• Duty of directors to ‘promote the success of the company for the benefit of its members as a whole’
  -> uphold reputation of company
  -> regard long-term outcomes
  -> think about employees, suppliers, customers in decision-making
  -> think about environment
  -> think about community
• Balances stakeholder theory (directors should consider broader impact of stakeholders) with shareholder primacy (directors act solely in shareholders’ interests)

Question 2

Do directors fully represent shareholders and their interests (S.172)?

Answer 2

YES:

• S.172 - directors must consider long-term outcomes + uphold reputation of company -> obvious benefits to shareholders
• S.172 - directors must ‘act fairly as between members of the company’ -> directors must treat shareholders equitably
  –> Re a Company (1986) determined fairness should be assessed objectively so directors genuinely consider all interests of shareholders, even minority shareholders, rather than act in their own preferences

NO:

• S.172 limited as courts use ‘Good Faith’ test -> directors only need to ‘honestly believe’ they are acting in company’s best interests ∴ difficult to prove breach of duty unless clear misconduct
  –> Subjective test: Re Smith & Fawcett Ltd [1942]: ‘directors must act bona fide in what they consider, not what a court may consider, to be company’s best interests’
  –> Objective test: Charterbridge v Lloyds [1970]: ‘whether an intelligent and honest director in same position could have reasonably believed actions benefited company’
  —-> despite objective element, test remains broad -> difficulty in finding directors responsible

Question 3

How else do shareholders hold directors accountable?

Answer 3

• Derivative action (CA 2006: S.260)
  -> shareholders take action on behalf of company (Foss v Harbottle (1843)) against wrongdoer (director, officer, etc.)
  -> individual who brings claim must obtain permission from court, limits frivolous claims but also limit’s effectiveness
  -> courts unlikely to intervene unless clear misconduct
• Unfair Prejudice Petition (CA: s994)
  -> Shareholders can seek personal remedies if company’s affairs are unfairly prejudicial to shareholders’ collective interests but also if personally harms their own financial or managerial position (Re Coroin Ltd [2013])
  e.g. directors divert company profits or refuse to declare dividends (Re Tobian Properties [2012])
  -> More relevant in private companies, where minority shareholders cannot exit by shares and have no other way to recover investment
  -> Court has wide discretion of remedies
  e.g. Buyout order -> majority shareholder required to buy minority’s shares at fair valuation (e.g. Re Bird Precision Bellows [1984])
  -> No need to show directors acted deliberately in bad faith, unlike s172
  BUT threshold still high:
  -> Petitioners must prove prejudice and unfairness e.g. Rock v RCO [2004] failed ∵ conduct unfair but not prejudicial
  -> Also, courts still reluctant to interfere unless serious misconduct is evident
• Shareholders elect directors at general meetings and remove directors by ordinary resolution (CA 2006: S.168)
  -> However, power of this depends on type/size of company
  e.g. Bushell v Faith [1970] - private company -> weighted voting rights meant directors kept control
  Also large companies -> ownership dispersed means directors in control (Berle + Means)
• Shareholder resolutions
  -> shareholders express views + direct company policy
  -> BUT, usually advisory, not legally binding (Automatic Self-Cleansing Cuningham [1906])

Question 4

Do directors fully represent stakeholders and their interests?

Answer 4

YES:

S.172
- Duty of directors to
-> think about employees, suppliers, customers in decision-making
-> think about environment
-> think about community

BUT,
- wording of s.172 -> ‘promote the success of the company for the benefit of its members as a whole’ primarily refers to shareholders
–> reinforces idea that stakeholders are secondary considerations
Also, requirement to ‘have regard to’ stakeholder interests is ambiguous
e.g. seen in R v HM Treasury [2009] where court held ‘having regard to’ does not create a mandatory duty but merely requires directors to consider stakeholder interests

NO:

• Lack of remedies to stakeholders if directors breach s.172
• Other sections not help stakeholders e.g. s.174 -> duty of care but not for stakeholder interests, e.g. s.175
• Failures:
  -> Carillion directors criticised in select committee for prioritising short-term shareholder interests, while failing to safeguard stakeholders -> but as they only have to ‘have regard’ to stakeholder interests, there were no legal repercussions
  -> Polluting companies goes against s.172 ‘regard to environment’ BUT, ClientEarth: 90% of UKs top 250 companies don’t have climate-related factors in financial accounts