- “Alas! good venturous youth, I love thy courage yet, and bold emprise; But here thy sword can do thee little stead. Far other arms and other weapons must be those that quell the might of hellish charms. He with his bare wand can unthread thy joints, And crumble all thy sinews.” (J Milton, Comus, a masque)
- Shareholder Remedies Law Com Report No 246 (TSO, 1997) (hereinafter “Shareholder Remedies”), para 6.15. See also Company Law Reform Cm 6456 (2005) (“CLR”), para 3.4 and Annex A—A Regulatory Impact Assessment, 277.
- Shareholder Remedies, para 6.84.
- Bamford v Bamford [1970] Ch 212, 238, per Harman LJ.
- RP Austin, “Fiduciary Accountability for Business Opportunities”, in PD Finn (ed), Equity and Commercial Relationships (Sydney, Law Book Co Ltd, 1987), 183.
- Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, 671, per Glass JA.
- Shareholder Remedies, para 6.85.
- The availability of which would be restricted only to breaches of directors’ duties: Modern Company Law for a Competitive Economy: Final Report URN 01/942 vol 1 (DTI, July 2001) (hereinafter “Final Report”), para 7.46.
- Final Report, para 7.46. See also Modern Company Law for a Competitive Economy: Completing the Structure URN 00/1335 (DTI, 2000) (“Structure”), para 5.85.
- There is certainly no shortage of academic comment on the difficulties. See, eg RJC Partridge, “Ratification and the Release of Directors from Personal Liability” (1987) 46 Cambridge Law Journal 122; K Yeung, “Disentangling the Tangled Skein: The Ratification Of Directors’ Actions” (1992) 66 Australian Law Journal 343; R Cranston, “Limiting Directors’ Liability: Ratification, Exemption and Indemnification” [1992] Journal of Business Law 197; J Payne, “A Re-examination of Ratification” (1999) 58 Cambridge Law Journal 604.
- PL Davies, Gower and Davies’ Principles of Modern Company Law (London, Sweet & Maxwell, 7th edn, 2003) (hereinafter “Gower”), 437.
- This is a problem that is more than conceivable in all but the single-member company, as evidenced by the unfortunate dispute in Barrett v Duckett [1993] BCC 778, which involved a family company with only two shareholders. See L Sealy, “No Relief for the Minority Shareholder” (1995) 16 Company Lawyer 178.
- See discussion at Section C2(c), below.
- Market mechanisms, such as hostile takeovers, have a recognised role in disciplining managers: see generally, R Romano, “A Guide to Takeovers: Theory, Evidence, and Regulation” (1992) 9 Yale Journal on Regulation 119, 129–31. However, these market mechanisms appear to work better, if not only, with respect to inefficient managers, as opposed to disloyal ones. In any event, the effectiveness of market forces, particularly in relation to day-to-day accountability and one-time breaches of duty, is limited: see I Ramsay, “Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action” (1991) 15 University of New South Wales Law Journal 149, 155.
- Eg Canada Business Corporations Act RSC 1985 c C–44, s 235.
- Companies Act Cap 50 (1994 rev edn), s 216B.
- A tangentially relevant issue is that of Companies Act 1985, s 310, which invalidate any provision “in a company's articles or in any contract with the company or otherwise” that seeks to exempt a director from liability for breach of duty. This complex issue is dealt with elsewhere and remains beyond the scope of this article. See Gower, 396–97 and articles cited therein.
- See generally Gower, ch 16; RR Pennington, Company Law (London, Butterworths, 8th edn, 2001), 709–41.
- A company cannot, however, adopt an act that it is prohibited from doing: see eg Re Exchange Banking Co, Flitcroft's Case (1882) 21 ChD 519 and Smith v Croft (No 2) [1988] 1 Ch 114. But ultra vires acts (ie acts that fall outside of a company's objects clause) may be adopted by special resolution: Companies Act 1985, s 35(3).
- [1877] 2 App Cas 366. See also Grant v United Kingdom Switchback Rlys Co (1888) 40 ChD 135; See generally, FMB Reynolds, Bowstead and Reynolds on Agency (London, Sweet & Maxwell, 17th edn, 2001).
- see Section C, below.
- For a recent example, see Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846. See also Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246; Re David Payne & Co Ltd [1904] 2 Ch 608; Hogg v Cramphorn [1967] 1 Ch 254; Bamford v Bamford [1970] 1 Ch 212.
- [1986] Ch 246.
- ibid, 295–96 (emphasis in original). See also the Court of Appeal decision of Criterion Properties plc v Stratford UK Properties LLC [2003] 1 WLR 2108, 2115 per Carnwath LJ. This general proposition was applied, but in deciding whether the company was entitled to a declaration that the third party was not entitled to enforce the contract, the Court of Appeal held that actual knowledge of the circumstances which gave rise to the directors’ breach of duty, which the third party admittedly had, was insufficient in itself to preclude the third party from holding the company to the contract. The correct test, according to the Court of Appeal, was the test of unconscionability derived from Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, and that was whether the third party's state of knowledge must be such as to make it unconsicionable for him to enforce the contract. On appeal to the House of Lords, Lord Scott of Foscote (with whom the other two Law Lords agreed) opined that the case turned on the authority issue and, as such, “the conscionability or unconscionability of [the third party's] behaviour in seeking to hold [the company] to the [contract] would… be irrelevant”: [2004] 1 WLR 1846, 1856. His Lordship also opined that knowledge that the contract was clearly contrary to the company's interests might well be relevant to the authority issue and “if a person dealing with an agent knows or has reason to believe that the contract or transaction is contrary to the commercial interests of the agent's principal, it is likely to be very difficult for the person to assert with any credibility that he believed the agent did have actual authority”: [2004] 1 WLR 1846, 1856.
- [1970] 1 Ch 212.
- AG v Davy (1741) 26 ER 531, per Hardwicke LC.
- Foss v Harbottle (1843) 2 Hare 461, 492.
- [1935] 2 KB 113.
- ibid, at 134.
- [1935] 2 KB 113, 134.
- The general meeting is generally assumed to have a residual power to act if there is no competent board who is able to exercise the managerial powers conferred on it: Barron v Potter [1914] 1 Ch 895. See also Foster v Foster [1916] 1 Ch 532. This “overlap” operates in one direction only, in the sense that in the reverse situation, where the general meeting cannot act, the board cannot step in. This is consistent with the view that the company's residual powers reside in the general meeting. Interestingly, the Court of Appeal of New South Wales has recently rejected the notion of reserve or residual powers in the general meeting: Massey v Wales (2003) 47 ACSR 1. See R Grantham, “The Reserve Powers of Company Shareholders” (2004) 63 Cambridge Law Journal 36.
- [1989] BCLC 100. See also LS Sealy, “Company Law—Power of the General Meeting to Intervene” (1989) 48 Cambridge Law Journal 26.
- [1989] BCLC 100, 106.
- Re Duomatic Ltd [1969] 2 Ch 365. The Duomatic principle appears to rest on the premise that the company is to be identified with its shareholders. The expressed will of all the shareholders is therefore that of the company; see R Grantham, “The Unanimous Consent Rule in Company Law” (1993) 52 Cambridge Law Journal 245.
- [1982] Ch 442.
- This view would require taking a broad view of the principle. Buckley J, in In re Duomatic Ltd [1969] 2 Ch 365, 373, had said: “I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be” (emphasis added). A straightforward interpretation of his Honour's words would suggest that the application of the Duomatic principle is itself subject to the division of powers as provided for in the articles. However, some cases, such as Cane v Jones [1980] 1 WLR 1451, take a broader view of the principle and hold that the unanimous act of the shareholders could transcend the division of powers stipulated in the articles and the general meeting may take decisions in this manner on matters which have been allocated to the board by the company's articles: see discussion in Ford's Principles of Company Law (online edition) para 7.590.
- [1982] Ch 442, 445.
- [1982] Ch 442, 453.
- [1982] Ch 442, 454.
- Bamford v Bamford [1970] Ch 212, 238, per Harman LJ.
- But see Gower, 438.
- [1983] Ch 258.
- ibid, 280–81 (italics supplied).
- Section 35(3) provides: “It remains the duty of the directors to observe any limitations on their powers flowing from the company's memorandum; and action by the directors which but for subsection (1) would be beyond the company's capacity may only be ratified by the company by special resolution. A resolution ratifying such action shall not affect any liability incurred by the directors or any other person; relief from any such liability must be agreed to separately by special resolution.”
- (1843) 2 Hare 461.
- (1843) 2 Hare 461, 468.
- ibid, 488.
- ibid, 482.
- (1843) 2 Hare 461, 505 (emphasis added).
- ibid, 505.
- Per Fry LJ in Re Cape Breton Co (1885) 29 Ch D 795, 812. See also Burland v Earle [1902] AC 83.
- Transactions involving the transfer of assets that exceed £100,000 in value to or from a company and involving a director are now subject to Companies Act 1985, s 320.
- Burland v Earle [1902] AC 83, 99, per Lord Davey.
- S Worthington, “Fiduciaries: When is Self-denial Obligatory?” (1999) 58 Cambridge Law Journal 500.
- (1885) 29 Ch D 795.
- ibid, 809. Wright J in In re Lady Forest (Murchison) Gold Mine Limited [1901] 1 Ch 582 expressed support for Bowen LJ's views but felt constrained by authority to hold otherwise: ibid, 589. But see DJ Conaglen, “Equitable Compensation for Breach of Fiduciary Dealing Rules” (2003) 119 Law Quarterly Review 246, 250.
- [1970] 1 Ch 212.
- ibid, 242.
- It has been argued that in cases of improper allotments, the breach of the duty to act for proper purposes on the part of the director is really an infringement of the member's personal right: Re a Company (No 005136 of 1986) [1987] BCLC 82. See also Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 14 ACLR 569. If so, such infringements will not be susceptible of ratification by a majority.
- [1970] 1 Ch 212, 242.
- Per Knox J in Smith v Croft (No 2) [1988] 1 Ch 114, 181.
- [1985] BCLC 237.
- ibid, 254 (italics supplied).
- Shareholders Remedies, para 6.87. See also Partridge, supra n 10, 122.
- [1983] Ch 258.
- ibid, 281.
- [1982] 1 Ch 204.
- ibid, 220.
- [1956] Ch 565, 574.
- (1843) 2 Hare 461. See KW Wedderburn, “Shareholders’ Rights and the Rule in Foss v Harbottle” [1957] Cambridge Law Journal 194, [1958] Cambridge Law Journal 93.
- Lord Wedderburn, however, posited that “beneath the two parts of it there is, after all, one ‘Rule in Foss v Harbottle’; and the limits of that Rule lie along the boundaries of majority rule”: ibid (1957), 194, 198.
- Burland v Earle [1902] AC 83, 93.
- MacDougall v Gardiner (1875) 1 Ch D 13, 25, per Mellish LJ.
- Wedderburn (1957), supra n 70, 194, 195. But see AJ Boyle, Minority Shareholders’ Remedies (Cambridge University Press, 2002), 6–7, where the cogency of this argument was doubted.
- See Comment, (1958) 33 New York University Law Review 71 where this observation was made.
- (1843) 2 Hare 461, 493. This aspect of the Rule has been under attack of late mainly because of the view taken in later cases that corporate litigation is a managerial decision which ought then to be taken by the board: see eg Breckland Group Holding Ltd v London and Southwark Properties Ltd [1989] BCLC 100.
- The “fraud-on-minority” exception to the Rule (or the common law derivative action) is notoriously difficult to establish, tied in as it is with the slippery concept of ratification.
- Eg Canadian Business Corporations Act, s 239; New Zealand Companies Act 1993, s 165; Australian Corporations Act 2001 (Cth), pt 2F.1A; Singapore's Companies Act Cap 50, s 216A; South African Companies Act No 61 of 1973, ss 266–68 and Hong Kong, which only just introduced a statutory derivative action with the gazetting of the Companies (Amendment) Ordinance 2004, passed 23 July 2004. The shareholder remedies-related provisions in Schedule 3 of the Ordinance came into force on 15 July 2005 (see Companies (Amendment) Ordinance 2004 (Commencement) Notice 2005): S McConnell and M Yeow, “Shareholder Activism in Hong Kong”, Asian Counsel September 2004, 35.
- See American Law Institute Tentative Draft No 6, 3. Also Cohen v Beneficial Industrial Loan Corp 337 US 541, 548 (1949), where the derivative action was characterised as the “chief regulator of corporate management”. See also RWV Dickerson, JL Howard and L Getz, Proposals for A New Business Corporations Law for Canada: Commentary vol 1 (Ottawa, Information Canada, 1971), observing that “the best means of enforcing a corporation law is to confer reasonable power upon the allegedly aggrieved party to initiate legal action to resolve his problem”: para 476; New Zealand Law Commission, Report No 9: Company Law: Reform and Restatement, para 86.
- The proposed statutory action has already been the subject of much commentary and will not be discussed here beyond this brief mention. See, inter alia, AJ Boyle, “The New Derivative Action” (1997) 18 Company Lawyer 256; BR Cheffins, “Reforming the Derivative Action: The Canadian Experience and British Prospects” (1997) 1 Company Financial and Insolvency Law Review 229; E Ferran, “Shareholder Remedies: The Law Commission Report” (1998) 2 Company Financial and Insolvency Law Review 235; J Poole and P Roberts, “Shareholder Remedies—Corporate Wrongs and The Derivative Action” [1999] Journal of Business Law 99.
- [1985] BCLC 237.
- See ensuing discussion below.
- Thus, in Bolton Partners v Lambert [1889] 41 Ch D 295, 306 Cotton LJ said: The rule as to ratification by a principal of acts done by an assumed agent is that the ratification is thrown back to the date of the act done, and that the agent is put in the same position as if he had had authority to do the act at the time the act was done by him.
- Per Lord Russell in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n, 150. See also J Lowry and R Edmunds, “Reflections on the English and Scottish Law Commissions’ Proposals for Directorial Disclosure” (2000) 5 Deakin Law Review 1, 10.
- LS Sealy, “Company-Directors’ ‘Duties’ and Exempting Articles” (1987) 46 Cambridge Law Journal 217, 218.
- See also Movitex Ltd v Bulfield [1988] BCLC 104.
- [1975] 2 NSWLR 666.
- [1967] Ch 254.
- [1970] Ch 212. In these cases, the shareholder ratification was only obtained after the issue of shares.
- [1970] Ch 212.
- [1975] 2 NSWLR 666, 681.
- [1988] BCLC 104.
- Not least being the fact that requiring prior consent or approval of the general meeting will encourage careful thought on the part of the directors before embarking on any venture. The fact that any breach may be ratified post the event certainly does not have this effect. In addition, certain duties, like the fiduciary duty of loyalty, requires that the director disclose in full and obtain prior consent and approval if he is to avoid being in breach. Allowing ratification after the fact merely encourages breach of the duty to disclose.
- In Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n, 150. It is interesting how much weight has been attached to this “obiter in the strictest sense, a cursory and irrelevant excursus unaccompanied by any consideration of fact or legal principle”: GR Sullivan, “Restating the Scope of the Derivative Action” (1985) 44 Cambridge Law Journal 236, 248.
- Depending on the specific duty breach, the errant director could be liable to compensate the company for its losses or to account to the company for any wrongful profit or gain received.
- Or, in other words, a negative litigation decision: HC Hirts, “Ratification of Breaches of Directors’ Duties: The Implications of the Reform Proposal Regarding the Availability of Derivative Actions” (2004) 25 Company Law 197, 198. See Section B2(b) above.
- In Regal (Hastings) Ltd v Gulliver, the action was in fact brought by the company which had come under the management of a new board of directors. Lord Russell, in saying that the defendant directors could have “protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting”, was therefore suggesting that such a resolution could have released the directors from their liability to account.
- Through a derivative action.
- [1970] 1 Ch 212.
- [1970] 1 Ch 212, 238 (italics supplied).
- [1986] 4 NSWLR 722. See J McKenna, “Kinsela and Anor v Russell Kinsela Pty Ltd (In Liquidation)” (1986) 15 Monash University Law Review 762.
- [1986] 4 NSWLR 722, 732 (italics supplied).
- See Partridge, supra n 10, 122 for a discussion on the lack of precision in the cases in distinguishing between the concepts of ratification (in the sense of release) and rescission.
- [1986] 4 NSWLR 722, 728.
- [1986] 4 NSWLR 722, 727.
- ibid, 733.
- For expositions on the nature of the proper purpose doctrine, see, inter alia, JR Birds, “Proper Purposes as a Head of Directors’ Duties” (1974) 37 Modern Law Review 580; SJ Burridge, “Wrongful Rights Issues” (1981) 44 Modern Law Review 40; LS Sealy, “‘Bona Fides’ and ‘Proper Purposes’ in Corporate Decisions” (1989) 15 Monash University Law Review 265; R Grantham, “The Powers of Company Directors and the Proper Purpose Doctrine” (1994–1995) 5 King's College Law Journal 16; R Nolan, “The Proper Purpose Doctrine and Company Directors”, in B Rider (ed), The Realm of Company Law (London, Kluwer Law International, 1998) 1.
- Sealy, ibid, 268. See also Grantham, ibid, 32; and Nolan, ibid, 12.
- [1970] 1 Ch 212.
- [1970] 1 Ch 212, 238 (italics supplied).
- [1970] 1 Ch 212, 237–238 (italics supplied).
- [1962] 1 WLR 86.
- [1962] 1 WLR 86, 108. See also JE Martin, Hanbury and Martin: Modern Equity (London, Sweet & Maxwell, 16th edn, 2001), 663–66 generally. See Partridge, supra n 10, 122, 126–29, who critiques the doctrine; and also Payne, supra n 10, 604, 607.
- V Brudley, “Revisiting the Import of Shareholder Consent for Corporate Fiduciary Loyalty Obligations” (2000) 25 Journal of Corporation Law 209, 217. See also Payne, ibid, who posits that “the smooth translation of these trust law principles is hindered by three important principles: the separate legal personality of the company, the concept of majority control and the idea that a vote is a piece of property”: 607.
- Brudley, ibid, 218.
- RN Leavell, “The Shareholders as Judges of Alleged Wrongs by Directors” (1960–61) 35 Tulane Law Review 331.
- [1909] AC 442.
- [1935] 2 KB 113.
- E Ferran, Company Law and Corporate Finance (Oxford University Press, 1999), 152.
- On the assumption that the articles adopt the standard form Article 70 in Table A, 1985.
- Other than litigation costs, there are indefinite costs, including employee loss of morale and deflection of time, and damage to corporate reputation. Further, even if the suit is victorious, the recoverable amount may not be worth the effort: see JD Cox, “Searching for the Corporation's Voice in Derivative Suit Litigation: A Critique of Zapata and the ALI Project [1982] Duke Law Journal 959, 960.
- [1988] Ch 114, 185.
- In Queensland Mines Ltd v Hudson (1978) 18 ALJ 1, the Privy Council also thought that the board could give informed consent to a director to exploit a corporate opportunity. Although the case is not strictly relevant to our discussion as it concerned a prospective assent so that there was no breach of duty on the part of the director and hence no liability to account, it nevertheless gave cause for the concern that breaches of directors’ duties “can now be forestalled or condoned by the simple expedient of obtaining the consent of boardroom colleagues who are often little more than ciphers”: GR Sullivan, “Going It Alone—Queensland Mines v Hudson” (1979) 42 Modern Law Review 711, 715.
- Per Vinelott in Movitex Ltd v Bulfield [1988] BCLC 104, 118–19.
- CRT O'Kelley Jr and RB Thompson, Corporations and Other Business Associations: Cases and Materials, 59 (Gaithersburg, Aspen Law & Business, 3rd edn, 1999), 395.
- In Equiticorp Industries Group Ltd (In Statutory Management) v The Crown (Judgment No 47) [1998] 2 NZLR 481, 729.
- Per Rich, Dixon and Evatt JJ in Furs Ltd v Tomkies (1935–36) 54 CLR 583, 599.
- Assuming that there remains on the board independent directors.
- 430 A 2d 779 (Del 1981).
- ibid, 787.
- Payne, supra n 10, 604, 608.
- O'Kelley and Thompson, supra n 125.
- Brudley, supra n 114, 218.
- Arguably, aside from the institutional investor, in respect of which, see discussion below.
- (1900) 27 AR 540.
- [1973] 1 WLR 1126.
- ibid, 1131–32.
- This includes any transaction or arrangement whether or not constituting a contract: s 317(5).
- See proposed new clause in CLR, pt B, draft clause B12.
- Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties (Law Com No 261; Scot Law Com No 173) Cm 4436 (1998), para 8.33. See also Lowry and Edmunds, supra n 84, 17, pointing out the difficulty of reaching a satisfactory definition of what interests should be considered “material”. The Commissions themselves accepted that materiality of information “cannot be exhaustively defined”: ibid, para 8.22. See also CLR, pt B, draft clause B12.
- There might be concern over keeping certain financial information confidential, for example.
- RN Leavell, “The Shareholders as Judges of Alleged Wrongs by Directors” (1960–1961) 35 Tulane Law Review 331, 352–53.
- These include insurance companies, pension funds and unit trusts: G Stapledon, “Analysis and Data of Share Ownership and Control in the UK”, available at www.dti.gov.uk/cld/staple.pdf, accessed on 15 April 2005. It is estimated that these institutional investors collectively account for about 70% of listed equities: Stapledon, ibid, 3.
- CLR, pt B, clause B6.
- See also Modernising Company Law Cm 5553 (2002) (“MCL”)—Draft Clauses, Cm 5553-II; R Goddard, “‘Modernising Company Law’: The Government's White Paper” (2003) 66 Modern Law Review 402; and P Koh, “Principle 6 of the Proposed Statement of Directors’ Duties” (2003) 66 Modern Law Review 894.
- North-West Transportation v Beatty (1887) 12 App Cas 589. See also Gower, 438; Payne, supra n 10, 604, 611.
- The only exception appears to be the obligation imposed on shareholders to vote “bona fide in the interests of the company as a whole” in respect of a resolution to alter the articles of the company: Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656.
- [1974] 1 WLR 1133.
- ibid, 1144.
- The authority for this proposition is said to be the case of North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589. However, the shareholder in the case was not voting to excuse his own breach of duty as director, there being no breach of duty, but was in fact voting to confirm (as was required by the Canada Joint Stock Companies Letters patent Act of 1869) a “bye-law” for the purchase of a steamer from him, that had been passed by the board of directors: ibid, 594–95. See Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1981] Ch 257, 310. See also LS Sealy, Cases and Materials in Company Law (London, Butterworths, 7th edn, 2001), 273–74.
- Wedderburn (1958), supra n 70, 93, 96. See also KW Wedderburn, “Derivative Actions and Foss v Harbottle” (1981) 44 Modern Law Review 202, 206.
- [1981] 1 Ch 257. See also LS Sealy, “Foss v Harbottle—A Marathon Where Nobody Wins” (1981) 40 Cambridge Law Journal 29 and GR Sullivan, “Restating the Scope of the Derivative Action” (1985) 44 Cambridge Law Journal 236.
- [1981] 1 Ch 257, 307.
- ibid (emphasis added).
- Mason v Harris (1879) 11 Ch D 97, 109 per James LJ. However, his Lordship considered that the court was without power to give directions for holding that such a meeting be held.
- Final Report, para 7.46. See also Structure, para 5.85. In support of this view, see C Baxter, “The True Spirit of Foss v Harbottle” (1987) 38 Northern Ireland Legal Quarterly 6 and GR Sullivan, “Restating the Scope of the Derivative Action” (1985) 44 Cambridge Law Journal 236.
- E Ferran, Company Law and Corporate Finance (Oxford University Press, 1999), 150. The CLRSG advocated the adoption of an “enlightened shareholder value” or the “inclusive” approach as the overall objective of company law, which would require the directors to act in the collective best interests of the shareholders: CLRSG, Modern Company Law for a Competitive Economy: Developing the Framework (URN 00/656, DTI, 2000), paras 2.21–26. It might be thought, then, that the proposal advocated in this paper would be inconsistent with the policy of shareholder primacy endorsed by the CLRSG. However, the “inclusive” approach focuses on the most efficient means to achieve “overall competitiveness and wealth and welfare for all” (ibid) and is intended to clarify the law in the area of directors’ duties. The “right” of shareholders to ratify a breach of the directors’ fiduciary obligations, which is rooted in the synonymy between shareholders and the company, is not a necessary concomitant of this. Indeed, the CLRSG's approach requires the director to take into account facts that include constituents beyond the traditional stakeholders (ie employees and and the Company Law Review, (2005) 26 Company Lawyer 98), which, in theory, should be irrelevant if the shareholders are indeed the “owners” of the company (in this regard, see P Ireland, “Company Law and the Myth of Shareholders Ownership” (1999) 62 Modern Law Review 32). This expanded “duty” must then mean, as Gummow J in Sycotex Pty Ltd v Baseler (1994) 13 ACSR 766, 785 observed, that there is “a restriction on the right of the shareholders to ratify breaches of the duty owed to the company”.
- See also Smith v Croft (No 2) [1988] Ch 114, 189, and DD Prentice, “Shareholder Actions: The Rule in Foss v Harbottle” (1988) 104 Law Quarterly Review 341.
- It might, of course, be argued that this would not be a problem if the concept of independence is less severely determined. But the very need to compromise the expected standard suggests that the concept is inherently unstable and might engender greater uncertainty and unpredictability: E Ferran, Company Law and Corporate Finance (Oxford University Press, 1999), 151. See also HC Hirts, “Ratification of Breaches of Directors’ Duties: The Implications of the Reform Proposal Regarding the Availability of Derivative Actions” (2004) 25 Company Lawyer 197, 211; Payne, supra n 10, 604, 622; Wedderburn (1981), supra n 151, 202, 208; Sealy (2001), supra n 150, 143.
- Sealy (1981), supra n 151, 32.
- RN Leavell, “The Shareholders as Judges of Alleged Wrongs by Directors” (1960–61) 35 Tulane Law Review 331, 353 n 140.
- DJH Greenwood, “Fictional Shareholders: For Whom Are Corporate Managers Trustees Revisited” (1995–96) 69 Southern California Law Review 1021. See also P Ireland, “Shareholder Primacy and the Distribution of Wealth” (2005) 68 Modern Law Review 49.
- Greenwood, ibid, 1081.
- ibid, 1082.
- [1986] Ch 246, 296.
- Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, 506, per Lord Hoffman.
- Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] 1 Ch 258, 290, per Dillon LJ.
- Professor Brudley used the term “volition” to succinctly refer to issues of informed consent: Brudley, supra n 114, 218.
- Payne, supra n 10, 604, 619.
- See Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1981] Ch 257, 307.
- A term Lord Davey, in Burland v Earle [1902] AC 83, 93, explained to mean “endeavouring directly or indirectly to appropriate… money, property or advantages which belong to the company or which other shareholders are entitled to participate”. It has been observed of the definition that “it would be hard to think of anything better calculated to mean all things to all people”: C Baxter, “The True Spirit of Foss v Harbottle” (1987) 38 Northern Ireland Legal Quarterly 6, 14, n 41.
- [1916] 1 AC 554, 564.
- [1942] 1 All E.R. 378.
- ibid, 150.
- Many academic commentators have raised this question. The observation that “a satisfactory answer, consistent with common sense and with the decided cases, is difficult (and perhaps impossible) to provide” was made in Gower, 439. See also Sealy (2001), supra n 150, 285–86.
- [1981] 1 Ch 257, 308. His Honour doubted the accuracy of the editor's note that “obtaining the approval of the… company in general meeting… would have been a mere matter of form, since [the directors] doubtless controlled the voting” in the 1942 report of Regal (Hastings) [1942] 1 All ER 378, 379. But see Sealy, ibid, 286.
- The editorial note in the 1942 report of the case suggested that the profit was made “with perfect good faith”: [1942] All ER 378, 379.
- Shareholders’ Remedies, para 5.12.
- The majority of the shares had been held by the director's father.
- Scott v Frank F Scott (London) Ltd [1940] 1 Ch 794. Clauson LJ described this right as a “right of property”: ibid, 797. But cf GR Sulllivan, “Restating the Scope of the Derivative Action” (1985) 44 Cambridge Law Journal 236, 248 n 98.
- [1967] 2 AC 134n, 137.
- [1941] AC 108, 112.
- [1967] 2 AC 134n, 146.
- It is questionable whether the duty to act bona fide in the interests of the company is a fiduciary duty. There are commentators on both sides of the fence: see eg RC Nolan, “The Proper Purpose Doctrine and Company Directors” in B Rider (ed), The Realm of Company Law (London, Kluwer Law International, 1998), 1; S Worthington, “Directors’ Duties, Creditors’ Rights and Shareholder Intervention” (1991) 18 Melbourne University Law Review 121.
- Brudley, supra n 114, 225.
- See S Worthington, “Fiduciaries: When is Self-Denial Obligatory?” (1999) 58 Cambridge Law Journal 500. See also R Teele, “The Necessary Reformulation of the Classic Fiduciary Duty to Avoid a Conflict of Interest or Duties” (1994) 22 Australian Business Law Review 99.
- In re The French Protestant Hospital [1951] Ch. 567, 570.
- DA DeMott, “Beyond Metaphor: An Analysis of Fiduciary Obligation” [1988] Duke Law Journal 879, 914.
- Per Cardozo J in Meinhard v Salmon 249 NY 458, 164 NE 545, 546 (1928).
- Ex Parte Bennett (1805) 32 E.R. 893, 897 (per Eldon LC)
- (1966) 56 DLR (2d) 117.
- ibid, 139.
- JR Brown, “Speaking with Complete Candor: Shareholder Ratification and the Elimination of the Duty of Loyalty” (2003) 54 Hastings Law Journal 641, 692. But see EM Dodd Jr, “Is Effective Enforcement of The Fiduciary Duties of Corporate Managers Practicable?” (1934–1935) 2 University of Chicago Law Review 194.
- Although such conduct may arguably be said to “benefit” the directors as it “satisfies management's personal preference for laziness, or non-exertion of effort, or for exertion of excess caution in making judgments on risk and return”: Brudley, supra n 114, 225.
- JC Coffee Jr, “New Myths and Old Realities: The American Law Institute Faces the Derivative Action” (1993) 48 The Business Lawyer 1407, 1426.
- [1956] 1 Ch 565.
- [1978] 2 WLR 73.
- [1956] 1 Ch 565, 576.
- [1978] 2 WLR 73, 80.
- [1956] 1 Ch 565, 571.
- It might also be argued, that Daniels, unlike Pavlides, was really a case of equitable fraud, where corporate property was misappropriated or disposed of. This disposal of corporate assets is considered impermissible and the breach cannot therefore be ratified: see Gower, 440 n 14. This distinction has however been criticised as a distinction without a difference: S Worthington, “Corporate Governance: Remedying and Ratifying Directors’ Breaches” (2000) 116 Law Quarterly Review 638, 654–55.
- Modern Company Law for a Competitive Economy: Developing the Framework (URN 00/656, DTI, 2000), para 3.77.
- Final Report, para 6.4 read with para 6.3.
- R Edmunds and J Lowry, “The Continuing Value of Relief for Directors’ Breach of Duty” (2003) 66 Modern Law Review 195, 196.
- ibid, 195.
- O'Neill v Phillips [1999] 1 WLR 1092, 1106.
- The question was Baxter, supra n 156, 14.
- Sealy (1981), supra n 151, 31.
- Difficult questions on the role and function of fiduciary duties, including whether such duties are contractual (and hence susceptible of being released) or some separate genus are beyond the scope of this paper. American academic comment on the issue provide fodder for thought: see eg V Brudley, “Contract and Fiduciary Duty in Corporate Law” (1997) 38 Boston College Law Review 595; S FitzGibbon, “Fiduciary Relationships are Not Contracts” (1999) 82 Marquette Law Review 303. My own view, and this is the premise from which I write, is that fiduciary duties go beyond contract, and are necessary because directors and fiduciaries are subject to very human failings: see eg Norris JA's dissent in Peso Silver Mines v Cropper (1966) 56 D.L.R. (2d) 117, 139. The function of the fiduciary obligation is therefore preventive and prophylactic, to encourage high and socially desirable standards of business ethics, and to guide the conduct of those in whose hands corporate power lie.
- See Final Report, paras 6.3, 6.4.
- Note, “The Nonratification Rule and the Demand Requirement: The Case of Limited Judicial Review” (1963) 63 Columbia Law Review 1086, 1103.
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Original Articles
Directors' Fiduciary Duties: Unthreading the Joints of Shareholder Ratification
Pearlie KohDepartment of Law, Singapore Management University.
Pages 363-399
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Published online: 27 Apr 2015
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