Directors' Fiduciary Duties: Unthreading the Joints of Shareholder Ratification

Abstract

The concept of ratification of directorial breaches of fiduciary duties is riddled with inconsistencies and uncertainties. The authorities suggest first, that ratification in this sense is a matter that falls within the capacity and power of a majority of the shareholders, and secondly, that the effect of the ratification is to release the errant directors so as to extinguish the company's claim against them. This concept of ratification is premised on the trust concept of release. However, the application of the trust concept to the corporate context necessitates equating the company with the cestui que trust. This gives rise to obvious difficulties, as the company is not a homogeneous entity, and is far removed conceptually from the individual cestui que trust. This article submits that the better position to adopt would be to simply accept that ratification cannot have the effect of claim extinguishment or release in the area of breach of directors' duties. This task is better left to the discretion of the courts in the exercise of their general jurisdiction to relieve an errant director from the consequences of a breach of duty under section 727 of the Companies Act 1985.