Durham E-Theses
Protection of minorities; employee participation;
directors' duties: analysis and reform
Chan, Chue Kai
How to cite:
Chan, Chue Kai (1981)
reform,
Protection of minorities; employee participation; directors' duties: analysis and
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2
PROTECTION OF MINORITIES; EMPLOYEE PARTICIPATION;
DIRECTORS' DUTIES - ANALYSIS AND REFORM
by
CHUE
KAI
ABSTRACT
The
CHAN
OF
THESIS
o b j e c t o f t h i s t h e s i s i s t o present
c o n t r o v e r s i a l aspects of English
company l a w c o n c e r n i n g
o f m i n o r i t i e s , employee p a r t i c i p a t i o n ,
critical
an a c c o u n t o f s e l e c t e d
evaluations o f existing
and d i r e c t o r s '
l a w and t o p r o p o s e
protection
d u t i e s , make
reform.
V a r i o u s ways o f e n f o r c e m e n t b y m i n o r i t y s h a r e h o l d e r s
r i g h t s i n t h e company a r e f i r s t
with
the conclusion
readiness
e x a m i n e d , a n a l y s e d and c r i t i c i s e d
t h a t although
r e c e n t l y t h e r e h a s been a g r e a t e r
on t h e p a r t o f t h e c o u r t s
t o i n t e r v e n e t o c o r r e c t abuse
o f m a j o r i t y power a n d u n f a i r n e s s , t h e r e i s s t i l l
p r o t e c t i o n f o r m i n o r i t y shareholders.
respect
of their
a need f o r
Reform i s t h e n
greater
proposed i n
o f t h e n e w l y i m p r o v e d " a l t e r n a t i v e remedy" i n c l u d i n g i n t r o -
duction o f contingent
f e e system.
N e x t , t h e p r e s s u r e s f o r and a r g u m e n t s o f e m p l o y e e
are examined.
Bullock's
proposals
and v a r i o u s c h o i c e s a r e t h e n
c u s s e d a n d v a r i o u s ways o f e m p l o y e e p a r t i c i p a t i o n
c o u n t r i e s a r e compared.
should
be i n t r o d u c e d .
tors'
d u t i e s and o t h e r
participation
dis-
i n different
I t i s c o n c l u d e d t h a t employee
participation
The i m p a c t o f e m p l o y e e p a r t i c i p a t i o n on d i r e c aspects i s then
F i n a l l y some a r e a s i n t h e f i e l d
examined.
of directors'
d u t i e s w h i c h have
been s u b j e c t s o f d e b a t e s o r w h i c h h a v e c a u s e d some d i f f i c u l t i e s a r e
e x a m i n e d and i t i s c o n c l u d e d
are very
t h a t roughly
directors'
duties of loyalty
s t r i c t w h e r e a s t h e i r d u t i e s o f c a r e d i l i g e n c e and s k i l l a r e
g u i t e l a x and w i t h some i n c o n s i s t e n c i e s i n t h e i r d u t i e s o f c a r e and
diligence.
I t i s then proposed t h a t t h e law should
classify
limited
companies i n t o t h r e e groups w i t h s e p a r a t e s t a n d a r d s o f d i r e c t o r s '
d u t i e s and t h a t i n t h e c a s e o f t h e l a r g e s t g r o u p o f c o m p a n i e s
P T 0
O
9
there
O
s h o u l d be an e v o l u t i o n
of managerial profession
o f e m p l o y e e d i r e c t o r s and
f o r b e t t e r enforcement
a watching committee
of d i r e c t o r s '
duties
with
the exception
be s e t up„
are also
Proposals
discussedo
PROTECTION OF MINORITIES; EMPLOYEE
PARTICIPATION;
DIRECTORS' DUTIES - ANALYSIS AND REFORM
by
CHUE
KAI
CHAN
S u b m i t t e d f o r t h e d e g r e e o f B.C.L.
a t U n i v e r s i t y o f Durham
The copyright of this thesis rests with the author.
No quotation from it should be published without
his prior written consent and information derived
from it should be acknowledged.
October 1981
CONTENTS
Page N o
Introduction
i
Chapter 1
Protection
1
Chapter 2
Employee P a r t i c i p a t i o n
46
Chapter 3
Directors' Duties
84
of Minorities
Summary o f C o n c l u s i o n s
139
Bibliography
141
0
-
1
-
INTRODUCTION
The
is
limited
liability
t h e overwhelmingly
company, m e a s u r e d b y v o l u m e o f t r a d e ,
predominant business
form
K i n g d o m as i n a l l o t h e r W e s t e r n economies..
emerged i n i t s modern f o r m
and
since that
facture,
time
after
In this
the f i r s t
i t has b e e n e m p l o y e d
i n t h e United
Companies A c t o f 1862
i n a l l f o r m s o f manu-
t r a d e and commerce b y c o m p a n i e s r a n g i n g
man b u s i n e s s
diversity
t o themulti-national
i s a misleadingly
simple
country i t
conglomerate.
premise,viz.,
from
t h e one
Linking
that
this
companies
a r e " d e m o c r a c i e s " g o v e r n e d b y d i r e c t o r s who a r e a n s w e r a b l e t o a
general
meeting of shareholders
dismissal.
with
armed w i t h t h e u l t i m a t e power o f
To d a t e much company l a w r e f o r m has been
attempting t o bring r e a l i t y
to this
the range o f d i s c l o s u r e t o shareholders
w h i c h h a v e t o be r e f e r r e d
their
Even w i t h i n
meeting.
e f f i c a c y o f these
fundamental
the limited
increasing
and t h e number o f m a t t e r s
t o the general
p e r s i s t about t h e p r a c t i c a l
importantly,
conception,
pre-occupied
But doubts
m e a s u r e s a n d , more
orientation.
focus
o f company l a w , w h i c h
until
t h e Companies A c t 1980 made n o t e v e n t h e most f o r m a l r e c o g n i t i o n o f
the i n t e r e s t s
interests
o f e m p l o y e e s , i t may be g u e r i e d w h e t h e r
are s u f f i c i e n t l y
p r o t e c t e d by d i s c l o s u r e p r o v i s i o n s
and
the exercise of m a j o r i t y rule.
to
what e x t e n t m i n o r i t i e s
claims
and i n t e r e s t s
t h e company.
occur
thesis w i l l
be a b l e
consider
t o assert
f o r t h e m s e l v e s and t h e company d e s p i t e t h e
The w o r s t
who a r e i n e f f e c t i v e
examples o f m i n o r i t y o p p r e s s i o n
i n t h e s m a l l e r c o m p a n i e s , and g i v e n
hopes, r e a l i s t i c
in
This
c a n and s h o u l d
o p p o s i t i o n o f a m a j o r i t y o r by those
of
shareholders'
or otherwise,
the present
t o encourage g r e a t e r
small businesses t h e p r o v i s i o n o f e f f e c t i v e
a n e c e s s a r y complement t o t h e f i s c a l
legal
control
tend t o
Government's
investment
p r o t e c t i o ni s
i n c e n t i v e s r e c e n t l y awarded
- i iin
t h e F i n a n c e A c t 1980.
Of more f u n d a m e n t a l c o n c e r n
law
c a n c o n t i n u e t o be so n a r r o w l y f o c u s e d
make an a c c o m m o d a t i o n w i t h
within
in
i s t h e q u e s t i o n w h e t h e r company
tion
i f t h e i n t e r e s t s of t h e employees
a r e t o be e f f e c t i v e l y p r o t e c t e d *
position
i n t h e m a r k e t and a f f o r d s
.far-reaching
affairs.
influence
in
I t has been a r g u e d
of
the working population
is
that i tf a i l s
tion
t o give
t h a t t h e r e a s o n why
i s not committed
the
w o r k f o r c e may
comes.
therefore
energy, imagination
t h o s e who
supply
p r e s e n t sad s t a t e
country.
the
political
a large
bring
section
system
satisfac-
primarily f o r the benefit
little
and a r e p r e p a r e d
The r e s t o r a t i o n o f c o n f i d e n c e o f
i n a t r e m e n d o u s amount o f
t o the enterprise
of industry
now
may
and
protection
improve the
and t h e e c o n o m i c p o s i t i o n o f t h e
t h a t t h e U n i t e d Kingdom have
joined
E u r o p e a n Economic C o m m u n i t i e s t h e q u e s t i o n o f e m p l o y e e
has become a l l t h e more
The w e l f a r e
o f t h e company,
are
represented
and
accountability
and
opportunities
t o our present
and l e g a l r e c o g n i t i o n
labour
Politically
participation
of
concentra-
and commonsense i f t h e y have t h e p o w e r ,
c o m m i t m e n t and i n c e n t i v e ,
of
The
employees r e a s o n a b l e s e c u r i t y ,
and i n v o l v e m e n t and i s o r g a n i s e d
r u n away when t r o u b l e
them many
e c o n o m i c , s o c i a l and
o f d i s t a n t s h a r e h o l d e r s who c o n t r i b u t e
to
recognition
o f c a p i t a l and l a b o u r i n modern c o m p a n i e s g i v e s them a
strong
for
l a b o u r and g r a n t some f o r m a l
t h e company s t r u c t u r e
the enterprise
o r w h e t h e r i t must
the duties
important.,
whatever the i n t e r e s t s w h i c h
t h e r e i n , u l t i m a t e l y d e p e n d s upon t h e q u a l i t y
o f i t s management,,
This leads t o a
consideration
w h i c h a r e and s h o u l d be i m p o s e d on company
t o e f f e c t i v e mechanisms
o f enforcement..
The f a l l i n g
r a t e o f o u r economy and h i g h u n e m p l o y m e n t i n r e c e n t y e a r s
highlighted
t h e r o l e and r e s p o n s i b i l i t y o f t h e manager.
directors
growth
have
- iii
These t h r e e a r e a s ,
considered
tion
together,.
f o r investors,
subjecting
liability
opinion
part
d u t i e s which
than precept
are conveniently
effective
20th
operate
on t h e l e v e l
t h a t company l a w w i l l
acceptable
century.
protec-
t h e w o r k f o r c e and
i n ensuring that the p r i v i l e g e
i s c o n f e r r e d on t e r m s
i n the late
topics,
achieving legitimacy with
rather
i t s full
discrete
I t i s o n l y by p r o v i d i n g
management t o l e g a l
of enforcement
played
though
-
have
of limited
t o informed
public
- 1 CHAPTER 1
The
PROTECTION OF MINORITIES
problems f a c e d by m i n o r i t y
shareholders, p a r t i c u l a r l y i n
p r i v a t e c o m p a n i e s , have l o n g been r e c o g n i s e d .
Owing t o t h e f a c t
t h a t under t h e p a t t e r n o f c o r p o r a t e c o n t r o l , m a j o r i t y
can
d e p r i v e m i n o r i t y s h a r e h o l d e r s o f any e f f e c t i v e v o i c e i n t h e
running o f the business,
shareholders w i l l
to
shareholders
t h e r e e x i s t s t h e danger t h a t
u s e t h e i r power t o f u r t h e r
thedetriment o f minority
Oppression
losses which a m i n o r i t y shareholder i n a p r i v a t e
s u f f e r s i n shareholder oppression
F r e q u e n t l y , when a s h a r e h o l d e r
expects
t h e i r own i n t e r e s t s
shareholders.
Losses owing t o Shareholder
The
majority
a r e sometimes c a t a s t r o p h i c .
i n v e s t s i n a p r i v a t e company, he
t o work i n t h e company on a f u l l - t i m e b a s i s .
practically
company
e v e r y t h i n g he owns i n t o
He may p u t
t h e company and e x p e c t t o
s u p p o r t h i m s e l f and h i s f a m i l y f r o m t h e s a l a r y he r e c e i v e s as an
i m p o r t a n t e m p l o y e e o f t h e company.
his
A s h a r e h o l d e r may a l s o f i n d
declare l i t t l e
withdraw
to
that his
t h e company has become p r a c t i c a l l y v a l u e l e s s .
commonly used o p p r e s s i o n
or
loses
p o s t i n t h e company, he may be i n e f f e c t d e p r i v e d o f h i s c h i e f
means o f income,.
in
Whenever a s h a r e h o l d e r
find
techniques
dividends.
An a g g r i e v e d
shareholder
find
wealth
cannot
i t difficult
f o r h i s s h a r e s i n t h e company, e s p e c i a l l y
where t h e r e a r e b i t t e r d i s p u t e s between p r i n c i p a l
A minority
One o f t h e most
i s not to declare dividends
t h e money he has i n v e s t e d , and he w i l l
a purchaser
investment
shareholders.
s h a r e h o l d e r may have a l l o r a s u b s t a n t i a l
part o f h i s
i n v e s t e d i n t h e company, and y e t he c a n n o t g e t back h i s
money i n v e s t e d w i t h o u t t h e c o n s e n t o f t h e v e r y p e o p l e w i t h whom
he
i s disputing.
It
i sd i f f i c u l t
or impossible t o estimate the extent o f the
economic l o s s (1) a r i s i n g
oppression.
bitter
o u t o f d i s s e n s i o n and
Many b u s i n e s s e s
a r e s e r i o u s l y damaged o r r u i n e d by
shareholder disputes.,
conflict,
These d i s p u t e s c a u s e q u a r r e l s and
loss o f a l o t of working
diminished confidence
shareholder
h o u r s , d i s r u p t i o n o f management,
i n the business
by t h i r d
parties,
and c o s t l y
litigation,,
D e r i v a t i v e a c t i o n s may be o n l y a p a r t o f a p r o l o n g e d s t r u g g l e
between m a j o r i t y
and m i n o r i t y
shareholderso
shareholder discovers or begins
of
the majority
additional
t o suspect
i n f o r m a t i o n from
ultimately
find
from a l e g a l
afterwards (2)) a
action
f o r either
and some o f t h e t e c h n i q u e s
problems o f shareholder oppression
uncooperative
better
and o p p r e s s i v e
from unfounded m i n o r i t y
e l i m i n a t i o n o f troublesome,
minority
used
and p e r h a p s h e l p them i n
somewhat more c e r t a i n t y h a r s h
treatment o f minority shareholders
p l a i n t s o r necessary
Thus
t h e w h o l e s t o r y and t h e j u d g e s and
so as t o h e l p t h o s e c o n c e r n e d o r t h e c o u r t s know
distinguishing with
actions
So i t i s p r o p o s e d t o s e t o u t b e l o w some o f
causes o f s h a r e h o l d e r o p p r e s s i o n
the
perhaps s e v e r a l l e g a l
i n t h e l a w r e p o r t s a l l t h e y need t o know a b o u t
shareholder oppression.
therefor
shareholder,
a s e t t l e m e n t o r compromise o u t o f c o u r t .
l a w r e p o r t s j u s t do n o t t e l l
lawyers cannot
attempt t o get
t h e company and t h e m a j o r i t y
s o l u t i o n , p r o b a b l y n o t any f r u i t
the
first
( w h i c h may be as l o n g as t e n y e a r s
s i d e b u t more l i k e l y
a minority
the f r a u d u l e n t behaviour
s h a r e h o l d e r , he p r o b a b l y w i l l
T h e r e may f o l l o w a r g u m e n t , t h r e a t s ,
and
After
com-
unreasonable
or
shareholders.
( 1 ) See g e n e r a l l y F.H. O'Neal, O p p r e s s i o n o f M i n o r i t y S h a r e h o l d e r s
( 1 9 7 5 ) pp.6-7
( 2 ) I n W a l l e r s t e i n e r v . M o i r (No.2) [197$
1 A l l E.R. 849;
[19757 Q.Bo 373; £19757 2 W.L.R. 389; 119S.J. 97 t h e m i n o r i t y
s h a r e h o l d e r had s t i l l t o p r o c e e d w i t h l e g a l p r o c e e d i n g s even a f t e r
10 y e a r s o f c o n f l i c t w i t h t h e m a j o r i t y s h a r e h o l d e r . The c a s e
i n v o l v e d , o f c o u r s e , a p u b l i c company.
- 3 Underlying
Causes o f S h a r e h o l d e r
Oppression
T h e r e a r e many u n d e r l y i n g c a u s e s ( 3 ) o f s h a r e h o l d e r
It
seems t h a t some s h a r e h o l d e r s
not appreciate f u l l y
They do
oppression.
i n s m a l l l i m i t e d companies
t h e c o n s e q u e n c e s o f f o r m i n g a p r i v a t e company ( 4 ) .
not understand
t h a t i n t h e absence o f s p e c i a l a r r a n g e m e n t ,
h o l d e r s o f a m a j o r i t y o f a company's v o t i n g s h a r e s c o n t r o l
companies s t a r t
as f i r m s w h i c h a r e l a t e r c o n v e r t e d
companies t o o b t a i n l i m i t e d
After
apply.
liability
i n c o r p o r a t i o n , the shareholders
r e l a t i o n s h i p has
occurred
They s t i l l
and
consider
However, i t i s company l a w ,
shareholders
as p a r t n e e s
that partnership rules continue
p a r t n e r s and
not p a r t n e r s h i p law,
to s t r i f e .
a c t as
p a r t n e r s , a r e s u r p r i s e d and
(6).
This
I n the f i r s t
that
such
they
o p i n i o n s o f t h e m i n o r i t y and
d e c i s i o n s w i t h shaky l e g a l
a whole r a t h e r than
such.
share-
Secondly
t o f o l l o w company p r o c e d u r e s l e a v i n g many company
families consider
to
themselves
place,
h u r t when m a j o r i t y
foundations.
f a m i l y c o m p a n i e s , some o f t h e s h a r e h o l d e r s
their
their
tendency
e x e r c i s e t h e power u n d e r t h e p r i n c i p l e o f m a j o r i t y r u l e .
s a c t i o n s and
c
that generally
l a b o u r i n g under t h e m i s c o n c e p t i o n
h o l d e r s d i s r e g a r d t h e w i s h e s and
they f a i l
(5)
assume t h a t no change i n
t h e m s e l v e s as
q u i t e o f t e n leads
Some
limited
i n some s m a l l p r i v a t e c o m p a n i e s t o r e g a r d
m i n o r i t y shareholders,
are s t i l l
into
i t .
o r some t a x a d v a n t a g e
governs the r e l a t i o n s h i p between s h a r e h o l d e r s
of
do
t h a t the business
to the shareholders.
and
tran-
I n many s m a l l
o r some members o f
b e l o n g s t o t h e f a m i l y as
Sometimes a l l o f
the
( 3 ) See g e n e r a l l y O'Neal, Chap.2
( 4 ) I n Re N o r t h End M o t e l s ( H u n t l y ) L t d . [191 Sj 1 NZLR 446 t h e
p e t i t i o n e r was a r e t i r e d f a r m e r and d i d n o t t a k e a d v i c e b e f o r e t h e
company was i n c o r p o r a t e d and was unaware t h a t u n d e r t h e a r t i c l e s
o f a s s o c i a t i o n t h e d e c i s i o n s o f d i r e c t o r s c o u l d be r e a c h e d by a
m a j o r i t y i n t h e case o f d i s p u t e .
( 5 ) See, e.g., Re W e s t b o u r n e G a l l e r i e s L t d . [\91lJ
A.C. 360;
[19727 2 W.L.R. 1289;
[1972J 2 A l l E.R.
492; 116 S.J. 412; w h e r e
t h e p e t i t i o n e r had been an e q u a l p a r t n e r w i t h one o f t h e r e s p o n d e n t s
b e f o r e t h e b u s i n e s s was i n c o r p o r a t e d i n 1958.
( 6 ) But see Re W e s t b o u r n e G a l l e r i e s L t d . [l913j
.A.C. 360.
_ 4 shareholders a r e descendants o f t h e o r i g i n a l
founder
f o u n d e r , and t h e
may have d i r e c t e d b y w i l l o r o t h e r w i s e t h a t
t h e business
be u s e d f o r t h e c o n t i n u e d s u p p o r t o f t h e b i g f a m i l y .
This outlook
l e a d s t o t h e u s e o f company a s s e t s b y s h a r e h o l d e r s o r t h e i r
loans t o shareholders o r t h e i r
f a m i l i e s w i t h o u t i n t e r e s t , m i x i n g up
of
company and i n d i v i d u a l
to
o f f i c e r s w i t h o u t f o r m a l board
to
observe
t h e separate
formalities.
the
seeds o f l a t e r
company b e l o n g s
reasoning
and
money and a s s e t s , payment o f c o m p e n s a t i o n
legal
a u t h o r i z a t i o n , and a g e n e r a l
failure
e n t i t y o f t h e company and company
T h i s l a x h a n d l i n g ( 7 ) o f t h e company's a f f a i r s
sows
dissention.
Some c o n t r o l l i n g
the
families,
s h a r e h o l d e r s and company managers f e e l
t o those
that
s h a r e h o l d e r s who w o r k f o r i t ( 8 ) .
Their
i s t h a t as t h e y do t h e work and b e a r t h e b l a m e , i f a n y ,
responsibility,
i t i s t h e y who s h o u l d be e n t i t l e d
of
t h e p r o f i t s o r gains o f t h ebusiness.
to
i g n o r e t h e r i g h t s o f t h o s e who o r i g i n a l l y
or
later
acquired ownership
With
t o a l l o r most
t h i s view,
they
tend
i n v e s t e d i n t h e company
i n i t b u t who do n o t c h o o s e t o p a r t i c i -
pate i n t h erunning o f t h e business.
N e x t t h e r e a r e some p e r s o n s who see and s e i z e o p p o r t u n i t i e s t o
enhance t h e i r power and i n f l u e n c e and i n c r e a s e t h e i r w e a l t h .
f i n d ways i n t h e f i n a n i c a l ,
of
business
a d m i n i s t r a t i v e , and l e g a l
e n t e r p r i s e s t o t a k e advantage o f t h e i r
They
intricacies
fellow
share-
h o l d e r s and c o l l e a g u e s , c a u s i n g d i s s e n s i o n (9)„
Some s h a r e h o l d e r s r e c e i v e t h e i r
company by i n h e r i t a n c e o r g i f t
sometimes
i n a small
private
and do n o t have an o p p o r t u n i t y t o
choose t h e i r f e l l o w s h a r e h o l d e r s
these shareholders
interest
(10).
P e r s o n a l i t y clashes
between
occur.
( 7 ) See e.g. Re J e r m y n S t r e e t T u r k i s h B a t h s L t d . [1911]
1 W.L.R.
1042 w h e r e e.g. even a f t e r t h e p e t i t i o n e r s were e n t e r e d on t h e
r e g i s t e r o f members o f t h e company as a d m i n i s t r a t o r s o f a d e c e a s e d
member, no n o t i c e o f g e n e r a l m e e t i n g s was e v e r g i v e n t o them.
( 8 ) See g e n e r a l l y O'Neal, 2.09.
( 9 ) See g e n e r a l l y O'Neal, p.12
( 1 0 ) See t h e r e l a t i o n s h i p b e t w e e n t h e a u n t ( d e f e n d a n t ) and n i e c e
( p l a i n t i f f ) i n Clemens v . Clemens B r o s . , L t d . [\91t>]
2 A l l E.R. 268.
- 5 Sometimes a m i n o r i t y s h a r e h o l d e r w a n t s t o w i t h d r a w
company i n o r d e r t o g e t c a s h ,
business.
from the
e . g . when he w a n t s t o e n t e r
B u t t h e d i f f i c u l t y o f v a l u i n g an i n t e r e s t
another
i n b u s i n e s s can
s t a r t o r c o n t r i b u t e t o d i s s e n s i o n b e c a u s e v a l u a t i o n o f an
i n business
i s n o t an e x a c t s c i e n c e ; i t i n v o l v e s many s u b j e c t i v e and
c o m p l e x f a c t o r s and c o n s i d e r a t i o n .
shareholder
are equal
naturally
business,
takes t h e view
t h a t a l l shares
i n t h e company
than m a j o r i t y
to receive twenty percent, o f the t o t a l
the majority shareholder feels
i n t e r e s t cannot
of
F u r t h e r , whereas t h e m i n o r i t y
i n v a l u e so t h a t i f he h o l d s , s a y , t w e n t y p e r c e n t , o f t h e
s h a r e s , he e x p e c t s
the
control
shares.
t h e company, m i n o r i t y
shares
are worth
d i s p o s e o f h i s shares
return
the
pensate
b u t i s unable
may show h i s d i s s a t i s f a c t i o n b y r e f u s i n g t o
situation
shareholder
t h i n k s i s f a i r o r even a t a p r i c e a l i t t l e
f o r t h e t r o u b l e caused, t h e former
a t the price
l o w e r t o com-
t h i n k s , by t h e l a t t e r .
The o u t c o m e i s an a t t e m p t t o o p p r e s s a s h a r e h o l d e r who
w a n t e d t o l e a v e t h e company
I n order
t h e m a j o r i t y s h a r e h o l d e r may i n
seek ways t o g e t r i d o f t h e m i n o r i t y
former
buyer
share-
o r even by a c t i v e l y o b s t r u c t i n g company o p e r a t i o n s .
e s c a p e an u n p l e a s a n t
less
More o f t e n t h a n n o t t h e o n l y p r o s p e c t i v e
a m i n o r i t y i n t e r e s t i n a p r i v a t e company i s t h e m a j o r i t y
cooperate
to
value of
that since a minority
h o l d e r , and a m i n o r i t y s h a r e h o l d e r who w a n t s t o w i t h d r a w
to
interest
originally
voluntarily.
T h e r e a r e a l s o c a s e s w h e r e a s h a r e h o l d e r who a l s o h o l d s a
d i r e c t o r s h i p and t h e c h i e f
the
business
views
executive position
i n a one-man, a u t o c r a t i c manner.
i n a company
He d i s r e s p e c t s t h e
o f h i s c o - d i r e c t o r s and c o m p l e t e l y d i s r e g a r d s u s u a l
procedures
and c o u r t e s y , r e s u l t i n g
runs
company
i n quarrels with other strong-
m i n d e d p e r s o n a l i t i e s among t h e s h a r e h o l d e r s
(l).
When a company
( 1 ) I n Re H.R. Harmer L t d . / l 9 5 9 / 1 W.L.R. 6 2 ; / l 9 5 8 / 3 A l l E.R. 689;
103 S.J. 73 a man and h i s two sons f o r m e d a company. A l l t h r e e w e r e
d i r e c t o r s b u t t h e f a t h e r was a p p o i n t e d c h a i r m a n and l i f e d i r e c t o r .
The f a t h e r d i s r e g a r d e d r e s o l u t i o n s o f t h e b o a r d o f d i r e c t o r s , assumed
powers w h i c h he d i d n o t p o s s e s s and e x e r c i s e d them a g a i n s t t h e w i s h e s
of h i s sons.
- 6 has
no p a r t i c u l a r need f o r an a s s e t , t h e o t h e r s h a r e h o l d e r s
acquiesce,
may
p e r h a p s f o r a l o n g t i m e , i n i t s use by one s h a r e h o l d e r
f o r h i s own u s e .
Conflict
d e v e l o p s , h o w e v e r , when t h e company
needs t h e a s s e t back b u t t h e s h a r e h o l d e r w a n t s t o c o n t i n u e t o
enjoy the p r i v i l e g e
(2).
man company o c c u p i e s
paying a r e n t which
property.
F o r e x a m p l e , one s h a r e h o l d e r i n a t w o -
vacant r e a l
p r o p e r t y owned by t h e company,
i s f a r below t h e market
The o t h e r s h a r e h o l d e r a c q u i e s c e s
believing
that eventually
o r t h a t t h e company w i l l
years pass,
t h e occupant
develop
will
rental
value o f the
i n this
privilege,
pay a s u i t a b l e
the property or s e l l
it.
i t becomes i n c r e a s i n g l y c l e a r t h a t t h e o c c u p a n t
rental
As t h e
intends
t o r e t a i n h i s a d v a n t a g e b e c a u s e he r e s i s t s any a t t e m p t t o i n c r e a s e
the r e n t a l
to reflect
the market
property.
The r e l a t i o n s h i p b e t w e e n t h e s h a r e h o l d e r s
so much t h a t each i s a n x i o u s
value o r t o improve
or s e l l the
deteriorates
to get r i d of the other ( 3 ) .
The Memorandum and A r t i c l e s o f a company and o t h e r documents
in writing
business
f r e q u e n t l y do n o t c o v e r a l l a s p e c t s o f t h e s h a r e h o l d e r s '
bargain.
T h e r e a r e c a s e s where i m p o r t a n t
arrangements
among s h a r e h o l d e r s i n some s m a l l p r i v a t e companies a r e o r a l ( 4 ) .
They a r e sometimes n o t h i n g more t h a n vague u n d e r s t a n d i n g s ,
even d e f i n i t e l y
stated o r a l l y .
never
M i s u n d e r s t a n d i n g o f t h e terms o f
( 2 ) See, e.g. Re W e s t b o u r n e G a l l e r i e s L t d . /19737 A.C. 360;
/19727 2 W.L.R. 1289; (19727 2 A l l E.R. 492; 116 S.J. 412 where
t h e p r e m i s e s o c c u p i e d by t h e company, and f o r w h i c h i t p a i d t h e
r e n t , w e r e a l s o used f o r an a n t i q u e b u s i n e s s c a r r i e d on p e r s o n a l l y
by one o f t h e r e s p o n d e n t s .
( 3 ) I n Re W e s t b o u r n e G a l l e r i e s L t d . /19737 A«C. 360 t h e p e t i t i o n e r
made a number o f p r o t e s t s w h i c h w e r e f o l l o w e d by a f u r t h e r d e t e r i o r a t i o n i n t h e r e l a t i o n s h i p b e t w e e n t h e p e t i t i o n e r and t h e two
respondents.
F i n a l l y , i n 1969, an o r d i n a r y r e s o l u t i o n a t an e x t r a o r d i n a r y g e n e r a l m e e t i n g was p a s s e d t o remove t h e p e t i t i o n e r f r o m
h i s o f f i c e as d i r e c t o r .
( 4 ) See t h e c r u c i a l b u t much d i s p u t e d a g r e e m e n t t h a t t h e s h a r e
c a p i t a l s h o u l d be h e l d c o n s t a n t l y i n t h e r a t i o o f 51:49 by t h e
d e f e n d a n t s and t h e p l a i n t i f f r e s p e c t i v e l y i n P e n n e l l and O t h e r s
v. Venida I n v . L t d . & O t h e r s .
The c a s e has so f a r been u n r e p o r t e d .
F o r t h e f a d t s t h e r e o f , see S.J. B u r r i d g e (1981) 44 M.L.R. 40.
- 7 the
original
can
lead t o b i t t e r dispute r e s u l t i n g
It
agreement o r o f subsequent agreements m o d i f y i n g i t
i s unsafe
t o r e l y on o r a l
i n shareholder
oppression.
a s s u r a n c e s by t h e m a j o r i t y
share-
h o l d e r b e c a u s e t h e y may l a t e r be o p p o r t u n e l y f o r g o t t e n by t h e
majority
s h a r e h o l d e r o r b e c a u s e p e r s o n s who s u b s e q u e n t l y
acquire
c o n t r o l o f t h e company may r e f u s e t o h o n o u r them.
Provision of insufficient
b e g i n n i n g may l e a d t o e v e n t s
attribute
the
t o the business
at a later
t o shareholder oppression.
point.
each.
funds
stage which
cause o r
An example w i l l
Two s h a r e h o l d e r s each r e c e i v e 1,000 s h a r e s
The b u s i n e s s
i s hard pressed
A's e s t a t e c a n n o t
or i s unwilling
ate
pressure
the financial
advances f u r t h e r
1,000 s h a r e s .
funds
illustrate
o f £10
when one s h a r e h o l d e r , A, d i e s .
t o p r o v i d e any f u n d s
to allevi-
and o n l y t h e o t h e r s h a r e h o l d e r , B,
t o t h e company, r e c e i v i n g i n r e t u r n
The company s u b s e q u e n t l y
another
p r o s p e r s ; and B, now t h e
majority shareholder, receives substantial
company.
at the
remunerations
On t h e o t h e r h a n d , d i v i d e n d s a r e n e v e r
from the
d e c l a r e d , and A's
e s t a t e r e c e i v e s no r e t u r n on i t s i n t e r e s t i n t h e company ( 5 ) .
The w i d e s p r e a d
competent l e g a l
oppression.
during
a d v i c e a l s o c o n t r i b u t e s t o t h e number o f s h a r e h o l d e r
The a t m o s p h e r e o f o p t i m i s m
the i n i t i a l
sibility
r e l u n c t a n c e o f t h e small businessman t o o b t a i n
stages
f o r a business
and g o o d w i l l w h i c h
u s u a l l y o b s c u r e s t h e pos-
o f f u t u r e d i s s e n s i o n and c o n f l i c t s among
Furthermore,
even i f t h e s h a r e h o l d e r s
f u t u r e disagreement,
prevails
the shareholders.
foresee the p o s s i b i l i t y o f
they are r e l u c t a n t
t o seek l e g a l
advice to
(5) I n Re J e r m y n S t r e e t T u r k i s h B a t h s L t d . A1971/ 1 W.L.R. 1042;
/19717 3 A l l E.R. 184; 115 S.J. 4 8 3 ; A and B were t h e o n l y s h a r e h o l d e r s and d i r e c t o r s o f a p r i v a t e company. B d i e d i n 1 9 5 3 , w i t h
the company t h e n h a v i n g l i a b i l i t i e s o f £ 2 0 , 0 0 0 and a s s e t s o f o n l y
£1,700.
I n 1954 A a p p o i n t e d C a d i r e c t o r and a t a b o a r d m e e t i n g
t h e y a l l o t t e d a f u r t h e r 100 £1 s h a r e s t o A, t h e e f f e c t o f w h i c h
was t o g i v e A a 75 p e r c e n t .
i n t e r e s t i n t h e Company, and B's
e s t a t e a 25 p e r c e n t , i n t e r e s t .
The b u s i n e s s p r o s p e r e d u n d e r A's
leadership.
S u b s t a n t i a l d i r e c t o r ' s and management f e e s w e r e p a i d
o u t t o A d u r i n g t h i s p e r i o d o f p r o s p e r t y . No d i v i d e n d s w e r e e v e r
paid.
I n 1969, B's a d m i n i s t r a t o r s a p p l i e d t o c o u r t f o r a s s i s t a n c e .
- 8 p r o v i d e a g a i n s t t h e c o n t i n g e n c y because t h e y are t o o busy o r f e e l
e m b a r r a s s e d t o r a i s e such q u e s t i o n s i n a s i t u a t i o n w h i c h
the
best mutual
To
do
t r u s t and good
will.
t h e s e c a u s e s one may add t h a t u n f o r t u n a t e l y some
not f u l l y understand
holder oppression
the s i t u a t i o n s which
give r i s e
the
t e c h n i c a l p r e c a u t i o n s which
necessary t o p r o t e c t m i n o r i t y
shareholder oppression
lawyers
t o share-
and a r e n o t t h o r o u g h l y f a m i l i a r w i t h
c o m p l e x and sometimes h i g h l y
of
calls for
interests,
by f a i l i n g
rather
are
t h u s i n c r e a s i n g t h e number
t o g i v e competent l e g a l
advice.
Oppression Techniques
Some o f t h e t e c h n i q u e s
controlling
holders
shareholders
(6) which
a r e most f r e q u e n t l y used b y
i n a company t o o p p r e s s m i n o r i t y
share-
are:
W i t h h o l d i n g o f d i v i d e n d s i s one o f t h e most f r e q u e n t l y
techniques.
By d e c l a r i n g no d i v i d e n d s a t a l l ( 7 ) o r l i t t l e d i -
v i d e n d s , m a j o r i t y s h a r e h o l d e r s may f o r c e a m i n o r i t y
sell
holder i s i n financial
income from d i v i d e n d s .
difficulty
when a m i n o r i t y
t o repay
t h e widow o f a f o r m e r e m p l o y e e o r a p e r s o n
loans o r i s t r y i n g
Even i f t h e m i n o r i t y s h a r e h o l d e r
during
share-
and i s h i g h l y d e p e n d e n t upon
i s employed o u t s i d e t h e company who i s h a r d p r e s s e d
creditors
The
The m i n o r i t y s h a r e h o l d e r may be a f o r m e r
e m p l o y e e who has r e t i r e d ,
any
shareholder t o
h i s i n t e r e s t a t c o n s i d e r a b l y l e s s than i t s f a i r v a l u e .
e f f e c t o f dividend w i t h h o l d i n g i s mostly f e l t
who
used
t o s e t up a n o t h e r
i s not i n f i n a n c i a l
t h e p e r i o d o f d i v i d e n d w i t h h o l d i n g , he i s s t i l l
r e t u r n on h i s i n v e s t m e n t .
by h i s
business.
difficulty
deprived o f
To make m a t t e r s w o r s e , i f c o r p o r a t e
( 6 ) See g e n e r a l l y O'Neal, Chap. 2 and T, Hadden, Company Law &
C a p i t a l i s m ( 2 n d edn.) p.240.
( 7 ) I n Re W e s t b o u r n e G a l l e r i e s L t d . /1973]
A.C. 360; Fl912] 2 W.L.R.
1289; and i n Re J e r m y n S t r e e t T u r k i s h B a t h s L t d . f\91l]
1 W.L.R.
1042; [1911]
3 A l l E.R. 184; 115 S.J. 483; no d i v i d e n d s w e r e e v e r
paid.
- 9 e a r n i n g s a r e p l o w e d back i n t o
the business,
increase the size of h i s investment
c o n s e n t w h i l e h i s r e t u r n on
with
little
majority
shareholders
is still
nil.
o r no r e t u r n f o r an
p e r i o d on an e v e r - i n c r e a s i n g i n v e s t m e n t
m a r k e t , a m i n o r i t y s h a r e h o l d e r may
i s to
i n t h e company w i t h o u t h i s
the investment
the prospect of g e t t i n g
the e f f e c t
f o r which
relunctantly
Faced
indefinite
t h e r e i s no
sell
out to the
at whatever p r i c e they are w i l l i n g
A n o t h e r t e c h n i q u e i s t o remove a m i n o r i t y
p o s i t i o n s o f employment and management ( 8 ) .
ready
to
shareholder
A minority
pay.
from
shareholder
sometimes i n v e s t s a l a r g e share o f h i s w e a l t h t o o b t a i n h i s m i n o r i t y
interest.
in
no
may
join
t h e company e x p e c t i n g t o p a r t i c i p a t e
the company's a f f a i r s
director.
and
He
He
may
as an i m p o r t a n t employee and
g i v e up o t h e r employment w i t h
s e c u r i t y f e a t u r e s t o work f u l l
income o t h e r t h a n h i s s a l a r y .
d i v i d e n d s o r pays o n l y s m a l l and
e m p l o y e e o f i t who
i s dismissed
actively
p e r h a p s as a
accumulated
t i m e f o r t h e company.
seniority
He
may
have
I f a p r i v a t e company does n o t
infrequent dividends, a
pay
shareholder-
f r o m employment i s e f f e c t i v e l y
denied
a n y t h i n g more t h a n a t o k e n r e t u r n on h i s i n v e s t m e n t even t h o u g h
i n v e s t m e n t may
of
be
substantial
a d i r e c t o r s h i p may
holder.
A shareholder
may
accept
he
well
(9).
Furthermore,
losing
the
be o f c o n s i d e r a b l e c o n s e q u e n c e t o t h e
in this
situation,
a majority's offer
t h i n k s the p r i c e o f f e r e d
t o buy
hard pressed
the
prestige
share-
f o r money,
h i s s h a r e s even
though
i s f a r l e s s than the value o f the
shares.
( 8 ) See, e.g., Re W e s t b o u r n e G a l l e r i e s L t d . / l 9 7 3 j A.C.
360;
/1972J 2 W.L.R. 1289; [1912]
2 A l l E.R. 4 9 2 ; " l l 6 S.J. 412; w h e r e t h e
p e t i t i o n e r was removed f r o m h i s o f f i c e as d i r e c t o r by t h e o t h e r two
d i r e c t o r s o f t h e company who t o g e t h e r h e l d m a j o r i t y s h a r e s .
Therea f t e r t h e p e t i t i o n e r c e a s e d t o have any p a r t i n t h e management o f
t h e company's a f f a i r s and, s i n c e no d i v i d e n d s were p a i d , he a l s o
ceased t o p a r t i c i p a t e i n t h e p r o f i t s .
I n E l d e r v . E l d e r & Watson
1952 S.C. 49; 1952 S.L.T. 112 two s h a r e h o l d e r s i n a s m a l l f a m i l y
company s u f f e r e d o p p r e s s i o n a t t h e hands o f o t h e r s h a r e h o l d e r s who
had used t h e i r v o t i n g power t o remove t h e p e t i t i o n e r s f r o m t h e i r
o f f i c e s as d i r e c t o r s and f r o m t h e i r employment as s e c r e t a r y and
f a c t o r y manager r e s p e c t i v e l y .
( 9 ) See i m m e d i a t e l y a b o v e , n . ( 8 ) a b o u t Re W e s t b o u r n e G a l l e r i e s L t d .
- 10 Majority
s h a r e h o l d e r s may cause a company t o pay them o r
members o f t h e i r
f a m i l i e s o r other r e l a t i v e s excessively high
s a l a r i e s o r fees f o r s e r v i c e s rendered
i m p o r t a n t employees.
as d i r e c t o r s , o f f i c e r s o r
The payment o f e x c e s s i v e
s a l a r i e s o r fees
r e d u c e s t h e n e t a s s e t s v a l u e o f t h e company and so l e a d t o an
understatement
o f t h e company's e a r n i n g power.
e a r n i n g power o f t h e company w o u l d
minority
This
affect the selling
apparent
price of the
interest.
Sometimes m a j o r i t y s h a r e h o l d e r s d r a i n o f f c o r p o r a t e
profits
by h a v i n g o t h e r c o r p o r a t i o n s t h e y own p e r f o r m s e r v i c e s f o r t h e
company u n d e r management o r s e r v i c e c o n t r a c t s w h i c h
s i d e r a b l y h i g h e r than t h e f a i r
s e t fees con-
value o f t h e services rendered
(10).
Some c o n t r a c t s d e p r i v e a company o f c o n s i d e r a b l e p r o f i t s by d e l e gating
t o a n o t h e r company p e r f o r m a n c e
f u n c t i o n which
In
t h e former could p r o f i t a b l y handle
practice majority
techniques
o f an i m p o r t a n t
business
itself
(Do
s h a r e h o l d e r s u s u a l l y combine s e v e r a l
t o oppress o r e l i m i n a t e m i n o r i t y
shareholders.
Legal Redress f o r M i n o r i t i e s
H a v i n g seen some o f t h e c a u s e s and t e c h n i q u e s o f s h a r e h o l d e r
oppression,
l e t us examine t h e l e g a l
redress f o r m i n o r i t i e s ,
which
i s b e s t c o n s i d e r e d u n d e r a number o f headings,,
R e d r e s s a t Common Law and E q u i t y
A t common l a w and e q u i t y one o f t h e main i m p e d i m e n t s t o t h e
obtaining of relief
principle
the
by m i n o r i t y
shareholders
t h a t i n t h e absence o f f r a u d , u l t r a
courts w i l l
notinterfere
i n theinternal
i sthe well established
vires or i l l e g a l i t y
management o f c o m p a n i e s
( 1 0 ) See Re J e r m y n S t r e e t T u r k i s h B a t h s / l 9 7 l 7 1 w.L.R. 1042 where
the c o n t r o l l i n g d i r e c t o r s a p p o i n t e d N e v i l l e s T u r k i s h Baths L t d . o f
w h i c h t h e y w e r e s h a r e h o l d e r s t o be g e n e r a l managers o f some o f t h e
b u s i n e s s e s o f t h e company i n q u e s t i o n and where f o r 9 y e a r s N e v i l l e s
r e c e i v e d p r o f i t s o f £13,524 f o r managing t h e company's T u r k i s h b a t h s .
(1) See g e n e r a l l y H, C h e s t e r m a n , S m a l l B u s i n e s s e s ( 1 9 7 7 ) p p . l 6 5 - 6
0
- 11 and
will
allow
the majority rule to p r e v a i l .
review d i r e c t o r s '
fixing
decisions
salaries, declaring
contracts,
of
or withholding
or otherwise f i x i n g
authorizing
b u s i n e s s p o l i c i e s and d e t e r m i n i n g
The c o u r t s
are not concerned
with
I t i s the business
t h e s h a r e h o l d e r s and t h e d i r e c t o r s ( 2 ) .
as i t p r e c l u d e s t h e c o u r t s
business e f f i c a c y , the r u l e i s a sine
the courts'
stitute
of
dividends,
management o f t h e a f f a i r s o f t h e company.
Insofar
be
w i l l not
i n s e l e c t i n g o f f i c e r s and e m p l o y e e s ,
t h e c o u r s e o f company a f f a i r s .
the
The c o u r t s
from i n v e s t i g a t i n g i n t o
gua n o n , b e c a u s e i t c a n n o t
f u n c t i o n t o t a k e management d e c i s i o n s
t h e i r opinions
and t o s u b -
f o r t h o s e o f t h e d i r e c t o r s and t h e m a j o r i t y
t h e members.
The r u l e i s a l s o
which states
r e f e r r e d t o as t h e r u l e i n Foss v .
Harbottle
t h a t i f t h e d u t y t o be e n f o r c e d i s one owed t o a com-
pany, t h e n t h e p r i m a r y remedy f o r i t s e n f o r c e m e n t i s an a c t i o n by
t h e company a g a i n s t
those i n d e f a u l t
The m a j o r i t y r u l e was r e s t a t e d
Halliwell
(4).
b y J e n k i n s L . J . i n Edwards v .
( 5 ) t o be as f o l l o w s :
"The r u l e i n Foss v . H a r b o t t l e ,
First,
as I u n d e r s t a n d
i t , comes t o
the proper p l a i n t i f f
i n an a c t i o n
no
more t h a n t h i s .
in
r e s p e c t o f a wrong a l l e g e d
t o be done t o a company o r
association
o f persons i s prima f a c i e
association
o f persons i t s e l f .
t h e company o r t h e
S e c o n d l y , where t h e a l l e g e d
w r o n g i s a t r a n s a c t i o n w h i c h m i g h t be made b i n d i n g
company o r a s s o c i a t i o n
on t h e
and on a l l i t s members by a s i m p l e
m a j o r i t y o f t h e members, no i n d i v i d u a l member o f t h e company
( 2 ) S h u t t l e w o r t h v . Cox B r o s . & Co. (1927/ 2 K.B. 9; 96 L.J.K.B.
104; 136 L.T. 337; 43 T.L.R. 8 3 .
( 3 ) ( 1 8 4 3 ) 2 H a r e 461
( 4 ) See g e n e r a l l y K.W. W e d d e r b u r n ( 1 9 5 7 ) C.L.J. 194; ( 1 9 5 8 ) C.L.J.
93; A. B o y l e ( 1 9 8 0 ) 1 Co. Law 3; A. Barak ( 1 9 7 1 ) 20 I.C.L.Q. 22;
S.M. Beck ( 1 9 7 4 ) 52 Can. B. Rev. 159.
( 5 ) [l9S0] 2 A l l E.R. 1064, 1066.
- 12 is
a l l o w e d t o m a i n t a i n an a c t i o n i n r e s p e c t o f t h a t m a t t e r
for
of
the simple reason t h a t ,
i f a mere m a j o r i t y o f t h e members
t h e company o r a s s o c i a t i o n
done, t h e n c a d i t
The
r u l e has
i s i n f a v o u r o f w h a t has
quaestio."
s i n c e been e x t e n d e d
t o cover a l l cases
w h a t i s c o m p l a i n e d o f i s some i n t e r n a l
o p e r a t i o n o f t h e company.
v. Gardiner
been
irregularity
Thus M e l l i s h L . J .
said
where
i n the
i n Mac
Douqall
(6):
"If
the t h i n g complained o f i s a t h i n g which i n substance
the
m a j o r i t y o f t h e company a r e e n t i t l e d
t o do, o r i f some-
t h i n g has been done i r r e g u l a r l y w h i c h t h e m a j o r i t y o f t h e
company a r e e n t i t l e d
been done i l l e g a l l y
entitled
t o do r e g u l a r l y , o r i f s o m e t h i n g
w h i c h t h e m a j o r i t y o f t h e company a r e
t o do l e g a l l y ,
i t i s no use
the
outcome o f w h i c h i s o n l y
and
then u l t i m a t e l y
to l i t i g a t e
t h a t a m e e t i n g has
about i t ,
t o be
the m a j o r i t y gets i t s wishes.
be b e t t e r i f t h e r u l e i s a d h e r e d
s t a n c e s h a l l be e n t i t l e d
to that i f i t i s a
t o have t h e i r w i l l
Though t h e c o u r t s o f t e n
treat
company, i t i s n o t c l e a r why
regard
under
called,
I t would
which the m a j o r i t y are the masters o f , the m a j o r i t y
the
has
thing
i n sub-
followed."
t h e s e c a s e s as w r o n g s done t o
the courts should not
instead
t h e w r o n g s as b r e a c h e s o f t h e r i g h t s o f each s h a r e h o l d e r
t h e c o n t r a c t e s t a b l i s h e d by t h e memorandum and a r t i c l e s
v i r t u e o f s e c t i o n 20 o f t h e Companies A c t 1948.
I t may
the
advantages
c o u r t s have been i n f l u e n c e d by t h e p r a c t i c a l
rule
of
be
by
that
of the
i n Foss v . H a r b o t t l e i n s t e a d o f g i v i n g w e i g h t t o p u r e q u e s t i o n s
principle.
The p r a c t i c a l
member w e r e p e r m i t t e d
advantages
t o sue anyone who
are; (a) I f every
had
injured
individual
t h e company
t h r o u g h a b r e a c h o f d u t y , t h e r e c o u l d be as many a c t i o n s as
there
are
shareholders»
there
(6)
( 1 8 7 5 ) 1 Ch. D
Legal proceedings would never cease,
Q
13; 45 L . J . Ch.27; 33 L.T.
and
5 2 1 ; 24 W.R. 118.
- 13 w o u l d be enormous w a s t a g e o f t i m e and money.
member c o u l d sue a p e r s o n who c a u s e d l o s s
company t h e n r a t i f i e d
legal
hold
( b ) I f an i n d i v i d u a l
t o t h e company, and t h e
t h a t person's a c t a t a general meeting, the
p r o c e e d i n g s w o u l d be q u i t e u s e l e s s , f o r a c o u r t
that the w i l l
of the majority
majority;
Rule
rule greatly strengthens the positions
indeed, i f there
naturally
prevails.
Exceptions t o M a j o r i t y
The m a j o r i t y
will
o f the
w e r e no e x c e p t i o n s t o i t , t h e m i n o r i t y
w o u l d be c o m p l e t e l y i n t h e i r hands ( 7 ) .
It
may be s t a t e d
t h a t a s u i t by a s h a r e h o l d e r i n s t e a d
t h e company i s a l l o w e d i n t h e f o l l o w i n g f i v e
circumstances:
( i ) Where t h e a c t c o m p l a i n e d o f i s u l t r a
or
v i r e s t h e company
illegal.
(ii)
Where t h e a c t c o m p l a i n e d o f c a n o n l y
a special
by
o f by
or extraordinary
a simple
(iii)
v a l i d l y be done b y
r e s o l u t i o n , b u t i n f a c t has been done
majority.
Where t h e p e r s o n a l r i g h t s o f t h e i n d i v i d u a l member have
been i n f r i n g e d .
( i v ) Where t h o s e who c o n t r o l
fraud
t h e company a r e p e r p e t r a t i n g
a
on t h e m i n o r i t y .
( v ) Where t h e i n t e r e s t s o f j u s t i c e r e q u i r e
dispensed
t h e r u l e t o be
with.
Except t h e f i f t h
exception, the other four exceptions
could
be r e d u c e d t o one t h a t a s h a r e h o l d e r c a n s u e , n o t w i t h s t a n d i n g t h e
majority
r u l e , w h e r e w h a t he c o m p l a i n s o f c o u l d n o t be v a l i d l y
ratified
or effected
by an o r d i n a r y
Exceptions ( i i i ) ,
require
more
r e s o l u t i o n (8)
( i v ) and ( v ) a r e o f more i m p o r t a n c e and
discussion.
( 7 ) L.C.B. Gower, P r i n c i p l e s o f Modern Company Law,
( 8 ) See Gower, p.645.
( 4 t h ed„) p.644.
- 14 1.
Personal
R i g h t s o f Members
A member can sue f o r w r o n g s done t o h i m s e l f i n h i s c a p a c i t y
as a member ( 9 ) .
Some o f t h e i n d i v i d u a l
r i g h t s o f a member a r i s e
f r o m t h e c o n t r a c t b e t w e e n t h e company and h i m s e l f w h i c h i s i m p l i e d
on h i s b e c o m i n g a member ( 1 0 ) and some f r o m t h e g e n e r a l l a w .
Under t h e c o n t r a c t i m p l i e d f r o m h i s m e m b e r s h i p , a member i s
entitled,
f o r e x a m p l e , t o r e c e i v e d i v i d e n d s w h i c h have been d u l y
d e c l a r e d o r w h i c h have become due u n d e r t h e a r t i c l e s
have h i s c a p i t a l
( 1 ) ; and t o
r e t u r n e d i n the proper order o f p r i o r i t y
i n the
w i n d i n g up o f t h e company o r on a d u l y a u t h o r i s e d r e d u c t i o n o f
capital
( 2) .
Under t h e g e n e r a l
a reasonable
l a w , he i s e n t i t l e d ,
f o r e x a m p l e , t o have
o p p o r t u n i t y t o speak a t g e n e r a l m e e t i n g s ( 3 ) ; and t o
t r a n s f e r h i s shares ( 4 ) .
I n a case a b o u t a p e r s o n a l
S i r George J e s s e l M.R.
r i g h t o f a member b e i n g
infringed,
remarked ( 5 ) :
"He i s a member o f t h e company, and w h e t h e r he v o t e s w i t h t h e
m a j o r i t y o r t h e m i n o r i t y he i s e n t i t l e d
recorded
- an i n d i v i d u a l
right
t o have h i s v o t e
i n r e s p e c t o f w h i c h he has a
( 9 ) Pender v . L u s h i n q t o n ( 1 8 7 7 ) 6 Ch. D. 70; 46 L . J . Ch. 317;
25 W.R.Dig. 64; Edwards v . H a l l i w e l l £l950] 2 A l l E.R. 1064;
/"l9507 W.N. 537; 94 S.J. 8 0 3 .
( 1 0 ) S e c t i o n 20 o f t h e Companies A c t 1948 p r o v i d e s t h a t t h e
memorandum and a r t i c l e s s h a l l b i n d t h e company and t h e members
t h e r e o f t o t h e same e x t e n t as i f t h e y r e s p e c t i v e l y had been s i g n e d
and s e a l e d by each member, and c o n t a i n e d c o v e n a n t s on t h e p a r t o f
each member t o o b s e r v e a l l t h e i r p r o v i s i o n s .
( 1 ) Wood v . Odessa W a t e r w o r k s Co ( 1 8 8 9 ) 42 Ch. D. 636; 58 L . J .
Ch. 628; 5 T.L.R. 596; 1 Meg. 265; 37 W.R.
733.
( 2 ) G r i f f i t h v . P a g e t ( 1 8 7 7 ) 5 Ch. D. 894; 46 L.J.Ch. 493; 25 W.R.
523. See a l s o R a y f i e l d v . Hands [1960] Ch. 1 ; [19SQ] 2 W.L.R. 8 5 1 ;
102 S.J. 348; [ 1 9 5 8 / 2 A l l E.R. 194; Re B r i t i s h Sugar R e f i n i n g Co
( 1 8 5 7 ) 3 K & J 408; 26 L.J.Ch. 369; 5 W.R.
379.
( 3 ) W a l l v . London and N o r t h e r n A s s e t s C o r p o r a t i o n A 8 9 8 / 2 Ch.
469; 67 L.J.Ch. 596; 79 L.T. 249; 14 T.L.R. 547; 47"W.R. 219.
( 4 ) Re S m i t h K n i g h t & Co., Weston's Case ( 1 8 6 8 ) 4 Ch. App. 20;
38 L.J.Ch. 49; 19 L.T. 337; 17 W.R. 62. See a l s o H u t t o n v . West
Cork R l y . Co. ( 1 8 3 3 ) 23 Ch. D. 654; H e n d e r s o n v . Bank o f A u s t r a l a s i a
( 1 8 9 0 ) 45 Ch. D. 330; 59 L.J.Ch. 794; 63 L.T. 597; 6 T.L.R. 424;
2 Meg. 3 0 1 .
( 5 ) Pender v . L u s h i n g t o n ( 1 8 7 7 ) 6 Ch.D. 70 a t 80.
right
t o sue.
T h a t has
nothing
i n Foss v . H a r b o t t l e
has
a right
t o say,
you
shall
record
belonging
t o my
to record
my
2.
my
as
institute
senses i n w h i c h t h e
first
i n c o n t r o l of
loss of
the
are
allowed
a g a i n s t them and
plaintiff.
as
the
t h a t i t may
have a l a r g e r c l a i m
The
to b r i n g
bound by
to r e l i e f
term
t h i s case i s i n f a c t ,
against
the
' f r a u d on
minority,
as
as
form.
J o i n d e r o f d e r i v a t i v e and
personal
recently
the
extent
such
(6)
company's
as
nominal
j u d g e m e n t , and
cannot
company w o u l d have i f i t
the
minority'
i s used i n
i n d i v i d u a l s or
i n name, on
i s thus a personal c l a i m
indirectly
In
the
the
institute
the m i n o r i t y
some a c t i o n o f m a j o r i t y .
as w e l l
minority'
a derivative action
the
than the
brought i n representative
Until
refuse
refuse to
defendants to assert
have been wronged d i r e c t l y by
asserted
' f r a u d on
company j o i n e d , u s u a l l y
be
second sense where t h e
claim
i f you
t h e company w h e r e
company and
company name and
the wrongdoers j o i n e d
were the
minority,
property
t h e u n r e m e d i e d w r o n g t o t h e company.
cases the m i n o r i t y
d e f e n d a n t , so
term
i s i n f a c t a f r a u d on
proceedings i n the
rights
or
He
you."
two
bear the
like
cases.
l e g a l proceedings
There are
legal
that l i n e of
i n t e r e s t i n t h i s company, and
Minority
The
the q u e s t i o n
t h a t i s a r i g h t of
the
wrongdoers are
the
vote,
F r a u d on
i s used.
with
and
with
'Whether I v o t e i n t h e m a j o r i t y
vote I w i l l
t o compel
t o do
that raised
you
in
15
and
may,
the
but
collectively,
The
fraud
minority.
need n o t
The
be,
Claims
t o w h i c h d e r i v a t i v e and
personal
( 6 ) A l t h o u g h i t s f o r m has l o n g been u s e d , t h e t e r m " d e r i v a t i v e
a c t i o n " has o n l y r e c e n t l y r e c e i v e d j u d i c i a l r e c o g n i t i o n i n t h e
U n i t e d Kingdom. See L o r d D e n n i n g M.R. i n W a l l e r s t e - i n e r v. F l o i r
(No. 2) (1975.7 1 A l l E.R.
849, 857.
I t seems t h a t t h e t e r m i s now
e s t a b l i s h e d ; see P r u d e n t i a l A s s u r a n c e Go. L t d . v. Newman I n d u s t r i e s
L t d . And O t h e r s (No.2) {19807 3 W.L.R. 543,
565.
- 16 claims could
be j o i n e d i n one and t h e same a c t i o n was
o b s c u r e ( 7 ) , b u t has now been c l a r i f i e d
r e c e n t case o f P r u d e n t i a l
t o a great
somewhat
extent
A s s u r a n c e Co. L t d . v . Newman I n d u s t r i e s
L t d . And O t h e r s (No.2) ( 8 ) . I n t h a t c a s e t h e p l a i n t i f f
three
claims,
one d i r e c t , one d e r i v a t i v e and one
V i n e l o t t J . was o f t h e o p i n i o n
give
rise
t h e r e was
by t h e
brought
representative.
that a given set of f a c t s
could
t o b o t h d e r i v a t i v e and p e r s o n a l c l a i m s and r u l e d
no o b j e c t i o n
to the three
claims being joined
that
i n one
action.
Usually
where t h e r e
c a s e s c o n c e r n i n g f r a u d on t h e m i n o r i t y a r e o n l y
i s fraud
and where
concepts are then i n v o l v e d ,
c o n v e n i e n t t o c o n s i d e r them
allowed
the wrongdoers are i n c o n t r o l .
namely
'fraud'
Two
and ' c o n t r o l ' and i t i s
separately.
(a) Fraud
From t h e d e c i d e d c a s e s i t i s n o t p o s s i b l e
c e r t a i n t y what c o n s t i t u t e s
The
'fraud'
character
I t covers c e r t a i n acts
i n t h e w i d e r sense ( 9 ) .
direct misappropriation
I t i s clear
o f company a s s e t s i s f r a u d
n e g l i g e n c e by d i r e c t o r s i s n o t c o v e r e d by t h e t e r m .
need n o t p r o v e t h e e l e m e n t o f d e c e i t
the courts
preferred
in
Prudential
voting
rise
(7)
(8)
(9)
(10)
(1)
i n the s t r i c t
have n o t been g u i d e d by any c l e a r
of a
that
( 1 0 ) , b u t mere
The
minority
sense.
And
p r i n c i p l e , b u t have
to consider the nature of the transaction
each c a s e .
any
i n a f r a u d on t h e m i n o r i t y .
t e r m i s used somewhat l o o s e l y .
fraudulent
to state with
or complaint
R e c e n t l y i t has been r e m a r k e d by V i n e l o t t J . i n t h e
case t h a t f r a u d
lies
power n o t i n t h e c h a r a c t e r
i n t h e use by t h e m a j o r i t y o f
of the act or transaction
their
giving
t o t h e cause o f a c t i o n ( 1 ) .
As t o t h e p o s i t i o n p r e v i o u s l y , see Gower, p.655, n.99
[ l 9 8 0 j 3 W.L.R. 543; /"1980/ 2 A l l E.R. 8 4 1 .
Gower, p.616.
E.g. M e n i e r v . H o o p e r s T e l e g r a p h ( 1 8 7 4 ) L.R. 9 Ch. App. 350.
[ 1 9 8 0 ] 2 A l l E.R.841,862See a l s o b e l o w , p . I l l
(b)
Control
Traditionally
entitled
t h e r u l e i s t h a t "a m i n o r i t y
t o proceed i n a r e p r e s e n t a t i v e
show when c h a l l e n g e d
the
17 -
j o i n d e r o f t h e company as p l a i n t i f f
and h a s f a i l e d " .
i n formally
the proceedings ( 3 ) .
traditional
( 2 ) How-
test i s a majority
of thevoting
company i n q u e s t i o n b u t c o n t r o l l e d
have
asking t h e d i r e c t o r s
As t o w h a t c o n s t i t u t e s
i n P a v l i d e s v« J e n s e n ( 5 ) w h e r e t h e d i r e c t o r s
the
t o secure
a r e t o be t h e d e f e n d a n t s , t h e c o u r t s
r e c o g n i s e d t h a t t h e r e i s no p o i n t
to i n s t i t u t e
i f he i s u n a b l e t o
t h a t he h a s e x h a u s t e d e v e r y e f f o r t
e v e r where t h e d i r e c t o r s
the
action
shareholder i s not
stock
control,
(4).
Thus
d i d n o t own s h a r e s i n
t h e b o a r d o f a company w h i c h
owned s h a r e s i n t h e company i n q u e s t i o n , D a n c k w e r t s J . r u l e d
he
was n o t s a t i s f i e d
i n these circumstances t h a t t h e defendant
d i r e c t o r s had such c o n t r o l
action
in
control
sense.
caused some d i f f i c u l t y
voting
But V i n e l o t t J . h e l d
established
that
where " t h e
that
c o n t r o l by t h e w r o n g d o e r s
s h a r e h o l d e r c o u l d be a l l o w e d
He i s o f t h e o p i n i o n
sufficiently
shareholders'
c a s e b e c a u s e t h e w r o n g d o e r s t h e r e d i d n o t have
i s n o t necessary t o e s t a b l i s h
action.
a minority
test of control
i n the traditional
before a minority
is
as t o j u s t i f y
This t r a d i t i o n a l
thePrudential
voting
it
(6).
that
thecontrol
to bring
a derivative
e l e m e n t w o u l d be
p e r s o n s a g a i n s t whom t h e a c t i o n
s o u g h t t o be b r o u g h t on b e h a l f o f t h e company a r e shown t o be
a b l e b y any means o f m a n i p u l a t i o n o f t h e i r
to ensure t h a t t h e a c t i o n
In ascertaining
position
i n t h e company
i s n o t b r o u g h t by t h e company." ( 7 )
t h e view o f t h e m a j o r i t y
i n t e r e s t s o f t h e company t h a t t h e c l a i m
whether i t i s i n t h e
be p u r s u e d , V i n e l o t t J .
( 2 ) F e r g u s o n v . W a l l b r i d q e [193 57 3 D.L.R. 6 6 , 83.
( 3 ) Gower, p.650.
( 4 ) M e n i e r v . H o o p e r ' s T e l e g r a p h Works ( 1 8 7 4 ) 9 Ch.App.350,353.
( 5 ) [ 1 9 5 6 / Ch. 565.
( 6 ) [19561 Ch. 565, 577.
( 7 ) [1980/ 3 w.L.R. 543, 5 8 4 .
is
- 18
of
the o p i n i o n t h a t the r u l e
s h o u l d be
reqard votes cast or capable
have an i n t e r e s t w h i c h
company „ „ „ .
general meeting
register
that "the court w i l l d i s -
o f b e i n g c a s t by s h a r e h o l d e r s
directly
I f shareholders
conflicts with
having
are nominees, t h e c o u r t w i l l
look behind
reason
n o t have r e g a r d
why
the c o u r t should
which
determine
in
i s submitted
that
this realistic
suits
shareholders
and
system t o f u r t h e r
directors
following
on
(a)
the
two
their wrongful
( 9 ) b e c a u s e e.g.
J.
nowadays
the
and
few
v o t e i n person
use
the
at a
proxy
aims ( 1 0 ) .
t h e p r i n c i p l e o f f r a u d on
been a p p l i e d a p p e a r t o f a l l
classes
(8)
( a ) F r a u d on
( l ) w i t h i n one
t h e Company and
the
of
the
(b) t r u e
Fraud
Minority.
F r a u d on
The
i n the
'the i n t e r e s t s of
i n d e f a u l t might
Most o f t h e c a s e s i n w h i c h
m i n o r i t y has
upon t o
approach o f V i n e l o t t
o f a p u b l i c company a t t e n d and
g e n e r a l meeting
circum-
advance f o r t h e p r o t e c t i o n o f m i n o r i t i e s
t h e needs o f modern t i m e s
good
s h o u l d be b r o u g h t . "
a s c e r t a i n i n g t h e t r u e m a j o r i t y ' s v i e w on
company' i s a n o t h e r
relied
whether i t i s t r u l y
i n t e r e s t s o f t h e company t h a t p r o c e e d i n g s
the
T h e r e seems no
t o any o t h e r
show t h a t t h e m a j o r i t y c a n n o t be
i n a d i s i n t e r e s t e d way
the
the
t o t h e b e n e f i c i a l o w n e r s t o see w h e t h e r t h e y a r e
i s sought . . . „
It
the i n t e r e s t of
a m a j o r i t y of votes i n
p e r s o n s a g a i n s t whom r e l i e f
stances
who
t h e Company
l e a d i n g case o f t h i s
t y p e i s Menier v. Hooper's
Works ( 2 ) w h e r e t h e m a j o r i t y o f t h e members o f A Co.
members o f B Co.,
and
at a meeting
o f A Co.
Telegraph
were a l s o
t h e y passed a
resolution
(7)
[19807 3 W.L.R. 543,
584.
( 8 ) I b i d , a t p.583.
( 9 ) B u t see K.W. W e d d e r b u r n ( 1 9 8 1 ) 44 M.L.R. 202.
( 1 0 ) See a l s o A t w o o l v . M e r r y w e a t h e r ( 1 8 7 6 ) L.R.
5 Eq„ 464n; 37
L.J.Ch. 35 w h e r e t h e d e f e n d a n t o f f e r e d an i n d e m n i t y t o some s h a r e h o l d e r s who v o t e d a g a i n s t t h e r e s o l u t i o n a u t h o r i s i n g p r o c e e d i n g s .
( 1 ) C f . Gower, p.616.
( 2 ) TT874) 9 Ch.App. 350; 43 L.J.Ch. 330; 30 L.T. 209; 22 W.R.
396.
t o c o m p r o m i s e an
action
f a v o u r a b l e t o A Co.
A Company was
the
passing of
minority.
the
The
-
a g a i n s t B Co.
I t was
entitled
19
held
that a minority
t o have t h e
r e s o l u t i o n by
i n a manner a l l e g e d
the m a j o r i t y
a r r a n g e m e n t w h i c h had
minority
as w e l l
as
to
be
shareholder
of
compromise s e t
a s i d e because
was
a fraud
been made was
m a t t e r s a f f e c t i n g t h e w h o l e company, t h e
to the
to
one
on
concerning
i n t e r e s t i n which
the m a j o r i t y .
the
belonged
S i r W.M. James
L.J.
remarked i n t h a t case ( 3 ) :
"The
d e f e n d a n t s , who
h a v e made an
affecting
have a m a j o r i t y o f
a r r a n g e m e n t by
as w e l l
as
them i n c o n s i d e r a t i o n
advantages.
the
The
m a j o r i t y has
divided
of
w o u l d be
so
the m a j o r i t y
s h a r e h o l d e r s say
assets of
exclusion
might d i v i d e
of
that everything
and
t h a t the m i n o r i t y
s h o u l d have n o t h i n g
the
c a s e t o be
so,
i t a p p e a r s t o me
share o f
which the
The
that
the b e n e f i t s
court
can
do
ascertained
it,
and
M e n i e r case p r i n c i p l e was
a contract
I
company,
to
with
them,
it.
majority
Assuming
have
the m i n o r i t y .
have a r i g h t
given to
followed
If
t o have
i n Cook v.
construction
114
put
their
in
them."
names t o c o n s t r u c t
( 3) /1874/ 9 Ch.App.350 a t
353.
( 4 ) [1916] 1 A.C.
554; 85 L.J.P.C. 161;
less,
think
f o r them i n t h e b e s t way
a railway
i n t h e i r own
t o do
expense o f
the
given
then the
the m i n o r i t y
t h a t case the d i r e c t o r s o f
obtained
must be
bill,
t h e i r pockets a t the
that
done, b e c a u s e i f
the whole assets of
i n the
in effect
the m i n o r i t y .
pass a r e s o l u t i o n
alleged
with
t h e company, more o r
and
as
to
f o r themselves c e r t a i n
a s h o c k i n g t h i n g i f t h a t c o u l d be
something i n t o
In
the
the
between themselves, t o the
it
They have d e a l t
their obtaining
minority
matters
i n t e r e s t i n which belongs
t o the m a j o r i t y .
of
company,
w h i c h t h e y have d e a l t w i t h
t h e w h o l e company, t h e
the m i n o r i t y
shares i n the
L.T.
Peeks
(4).
company
a
636.
railway.
- 20 The c o n t r a c t
was o b t a i n e d as a r e s u l t o f a b r e a c h o f t r u s t by t h e
d i r e c t o r s , who t h e n used t h e i r v o t i n g powers t o pass a r e s o l u t i o n
of
t h e company d e c l a r i n g
contract.
I t was h e l d
the c o n t r a c t
could
t h a t t h e company had no i n t e r e s t i n t h e
by t h e P r i v y C o u n c i l
belonged i n e q u i t y
not validly
that the benefit of
t o t h e company, and t h e d i r e c t o r s
use t h e i r v o t i n g power t o keep i t t o t h e m s e l v e s .
More r e c e n t l y
i n Daniels v. Daniels (5) the m i n o r i t y
h o l d e r s o f a company b r o u g h t an a c t i o n
t h e two d i r e c t o r s
and
t h e company.
the
i n s t r u c t i o n s o f t h e two d i r e c t o r s , who were t h e m a j o r i t y
holders,
sold
Their
against
share-
c o m p l a i n t was t h a t i n 1970 t h e company, on
t h e company's l a n d
the w i f e o f t h e o t h e r ,
t o one o f t h e d i r e c t o r s , who was
f o r £4,250 and t h a t t h e d i r e c t o r s knew, o r
o u g h t t o have known, t h a t t h e s a l e was a t an u n d e r v a l u e .
years l a t e r
directors
as
the wife
sold
t h e landed property
summons and h e l d
But the c o u r t
as an
dismissed the
t h a t t h e e x c e p t i o n t o t h e r u l e i n Foss v . H a r b o t t l e ,
a minority
s h a r e h o l d e r t o b r i n g an a c t i o n
pany f o r f r a u d where no o t h e r
cases where, a l t h o u g h
ment o f t h e company.
against
remedy was a v a i l a b l e , s h o u l d
t h e r e was no f r a u d
b r e a c h o f d u t y o f d i r e c t o r s and m a j o r i t y
alleged,
there
a cominclude
was a
shareholders t o the d e t r i -
Ternpleman J . o b s e r v e d a t p.413:
"The a u t h o r i t i e s w h i c h d e a l w i t h
s i m p l e f r a u d on t h e one hand
g r o s s n e g l i g e n c e on t h e o t h e r
which a r i s e s where, w i t h o u t
fraud,
do n o t c o v e r t h e s i t u a t i o n
t h e d i r e c t o r s and m a j o r i t y
shareholders are g u i l t y o f a breach o f duty which
the
The
t o o k o u t a summons t o s t r i k e o u t t h e s t a t e m e n t o f c l a i m
abuse o f t h e p r o c e s s o f t h e c o u r t .
and
Four
f o r £120,000.
d i s c l o s i n g no r e a s o n a b l e c a u s e o f a c t i o n o r o t h e r v / i s e
enabling
share-
company, and t h a t b r e a c h o f d u t y n o t o n l y
t h e y owe t o
harms t h e company
( 5 ) [1978.7 1 Ch. 406; £.9 78.7 2 W.L.R. 73; /1978/ 2 A l l E.R. 89;
( 1 9 7 7 ) 121 S.J. 605. See a l s o B.A.K. R i d e r ( 1 9 7 8 ) 37 C.L.J. 270;
D.D. P r e n t i c e ( 1 9 7 9 ) 43 Conv. 4 7 .
-
but
benefits
the d i r e c t o r s .
21
I n t h a t c a s e i t seems t o me
d i f f e r e n t considerations apply.
sue i f t h e r e i s f r a u d ,
the
action
themselves.
as f r a u d
seem t o me q u i t e
that
s h a r e h o l d e r s can
they cannot
and t h e d i r e c t o r s
on t h o s e d i r e c t o r s
I t would
i s so h a r d
I f minority
I see no r e a s o n why
of the majority
c o n f e r s some b e n e f i t
-
though
sue where
without
and m a j o r i t y
fraud,
shareholders
monstrous - p a r t i c u l a r l y
t o p l e a d and d i f f i c u l t
t o prove
- i f t h e con-
2 Hare 4 6 1 ,
f i n e s o f t h e e x c e p t i o n t o Foss v . H a r b o t t l e ,
drawn so n a r r o w l y t h a t d i r e c t o r s c o u l d make a p r o f i t
were
out of t h e i r
negligence.
L o r d H a t h e r l e y L.C. i n T u r q u a n d v . M a r s h a l l , L.R.
Ch.App. 3 7 6 ,
opined
t h a t s h a r e h o l d e r s must p u t up w i t h
4
f o o l i s h or
unwise d i r e c t o r s .
Banckwerts J . i n P a v l i d e s v. Jensen
1956
1 Ch.
that
extends
565
accepted
t o d i r e c t o r s who
the forbearance of shareholders
a r e "an a m i a b l e
a n c i e n t and modern, abound.
one t h i n g ; t o p u t up w i t h
set of lunatics."
To p u t up w i t h
d i r e c t o r s who
Examples,
foolish directors i s
a r e so f o o l i s h t h a t
they
make a p r o f i t o f £ 1 1 5 , 0 0 0 odd a t t h e e x p e n s e o f t h e company i s
something
entirely different.
from Alexander
benefiting
v. Automatic
i n t h e i r own
P a v l i d e s v . J e n s e n ([1956]
t h e company)
remedy may
2 Ch.
fraudulently
themselves
[1900]
may
be
gleaned
2 Ch.
56
(directors
[1916J
1 A.C. 554
(direc-
f a v o u r ) and f r o m d i c t a i n
(directors appropriating
s h a r e h o l d e r who
assets
has no o t h e r
use t h e i r p o w e r s , i n t e n t i o n a l l y o r
or negligently,
i n a manner
which
a t t h e expense o f t h e company."
From t h e c a s e s d i s c u s s e d
the
565
i s that a minority
sue w h e r e d i r e c t o r s
unintentionally,
benefits
T e l e p h o n e Co.
t h e m s e l v e s ) , f r o m Cook v . Peeks
tors d i v e r t i n g business
of
The p r i n c i p l e w h i c h
above and i n t h i s f i e l d ,
i t seems t h a t
a u t h o r i t i e s show t h a t e x c e p t i o n t o Foss v . H a r b o t t l e a p p l i e s n o t
o n l y where t h e a l l e g a t i o n
i s that
t h e d i r e c t o r s who c o n t r o l
pany have i m p r o p e r l y a p p r o p r i a t e d t o t h e m s e l v e s
advantages which belong
a com-
money, p r o p e r t y o r
t o t h e company o r , i n b r e a c h
of t h e i r duty
- 22 t o t h e company, have d i v e r t e d
t o have been g i v e n
allegation
business t o themselves which
t o t h e company, b u t more g e n e r a l l y
i s t h a t d i r e c t o r s , though b e l i e v i n g
that
ought
where t h e
they were n o t
d o i n g a n y t h i n g w r o n g , a r e i n b r e a c h o f d u t y t o t h e company, i n cluding
of
p e r h a p s t h e i r d u t y t o e x e r c i s e p r o p e r c a r e , and as a r e s u l t
t h a t breach o b t a i n
some b e n e f i t .
( b ) T r u e F r a u d on t h e M i n o r i t y
We a r e c o n c e r n e d h e r e w i t h
classic
illustrations of this
a true fraud
on t h e m i n o r i t y .
t y p e o f c a s e s a r e Brown v . B r i t i s h
A b r a s i v e Wheel Co. ( 6 ) and D a f e n T i n p l a t e Co. L t d .
Steel
majority
capital
thef i r s t
o f t h e s e , a company r e q u i r e d
o f shareholders holding
b u t would only
t i o n s f o r a sale
posed t o a l l o w
failed
more c a p i t a l .
98% were p r e p a r e d
do so on c o n d i t i o n
r e m a i n i n g 2% w o u l d s e l l
that
v. L l a n e l l y
Co. ( 7 )
In
the
The
A
t o p r o v i d e more
that theminority
t h e i r shares t o t h e m a j o r i t y .
holding
Negoia-
and an a l t e r a t i o n t o t h e a r t i c l e s was p r o -
themajority
t o buy o u t t h e m i n o r i t y .
t h e a l t e r a t i o n was d e s i g n e d
p u l s o r i l y what they c o u l d
t o allow
themajority
I t was h e l d
t o do com-
n o t do by a g r e e m e n t and was n o t f o r t h e
b e n e f i t o f t h e company as a w h o l e .
The Brown case was f o l l o w e d
L l a n e l l y s t e e l Co.
in
i n Dafen T i n p l a t e
t h a t case t h e p l a i n t i f f
Co. L t d . v .
company was a s h a r e -
h o l d e r i n t h e d e f e n d a n t company and p u r c h a s e d i t s s t e e l f r o m
When i t s t o p p e d b u y i n g
i t s s t e e l f r o m t h e d e f e n d a n t and s e t up i t s
own s t e e l p l a n t , an a r t i c l e
of
it.
providing
f o r t h e compulsory
acquisition
t h e s h a r e s o f any member was passed by t h e d e f e n d a n t company.
( 6 ) [19197 1 Ch. 290; 88 L.J.Ch. 143; 120 L.T. 529; 35 T.L.R. 268;
63 S.'J. 3~73.
( 7 ) [ 1 9 2 0 / 2 Ch. 124; 89 L.J.Ch. 346; 123 L.T. 225; 36 T.L.R. 4 2 8 ;
64 S.J. 446
- 23
Peterson
was
J. set aside
the a r t i c l e
remarking
t h a t i t was
wider
n e c e s s a r y t o p r o t e c t t h e i n t e r e s t s o f t h e company b e c a u s e i t
enabled
the m a j o r i t y
t o a c q u i r e t h e s h a r e s o f any
There a r e , however, cases g o i n g
shareholder.,
the o p p o s i t e d i r e c t i o n ,
o f w h i c h i s S i d e b o t t o m v . K e r s h a w , L e e s e & Co. L t d , ( 3 )
case the a r t i c l e concerned p r o v i d e d
of
t h e s h a r e s o f any
shareholder
bona f i d e
and
competitor.
brought
an
f o r the b e n e f i t
c o m p e t i t o r s and
t i n g u i s h e d on
for
events.
On
upheld.
of the
t h a t B and
22 o c c a s i o n s
t o add
f o r the shareholders,
the b e n e f i t
dis-
t h e r e was
only
Failure
specified
to account f o r the
t o a c c o u n t was
not
so
more g r o u n d f o r r e m o v a l o f
signed
by
valid,
and
the
permanent
of several
a l l the o t h e r
t h e a l t e r a t i o n was
was
i n t e r e s t s o f t h e company and
for
from
Brown c a s e was
year B f a i l e d
one
o f Appeal h e l d t h a t
t h e a l t e r a t i o n was
i t was
(Maidenhead), L t d . (9)
removed on one
i n one
t h e company as a w h o l e and
was
protected
some o t h e r s were t o be
d i r e c t o r , namely a w r i t t e n r e q u e s t
it
competitor-
g r o u n d s f o r r e m o v a l o f a d i r e c t o r , and
a r t i c l e s were a l t e r e d
Court
a
that
acquisition
held that
the a r t i c l e
B r o s . & Co.
c o u l d o n l y be
the s p e c i f i e d
The
was
In
one
majority.
company's money r e c e i v e d by h i m .
The
b u t i t was
o f t h e company t o be
t h e a r t i c l e was
provided
d i r e c t o r s who
plaintiff
the f i n d i n g o f f a c t t h a t
the b e n e f i t
articles
f o r the compulsory
The
action,
I n S h u t t l e w o r t h v . Cox
of
than
one
the
a
directors.
f o r the b e n e f i t
Bankes L . J .
remarked
of
that
n o t t h e c o u r t , t o say w h a t was
i n the
the c o u r t should
unless
such t h a t on
reasonable
men
not i n t e r f e r e
could consider i t
o f t h e company ( 1 0 ) .
( 8 ) f l 9 2 0 ] 1 Ch. 154; 89 L.J.Ch. 113; 122 L.T. 325; 36 T.L.R. 45;
64 S.J.
114.
( 9 ) ( 1 9 2 7 / 2 K.B. 9; 96 L.J.K.B. 104; 136 L.T. 337; 43 T.L.R. 83.
( 1 0 ) C f . D a f e n T j g p l a t e Co. v. L l a n e l l y S t e e l Co. (19207 2 Ch. 124
w h e r e P e t e r s o n J . was o f t h e o p i n i o n t h a t t h e onus o f p r o o f l a y on
t h o s e s u p p o r t i n g t h e r e s o l u t i o n and t h e t e s t was an o b j e c t i v e one
and n o t w h a t t h e s h a r e h o l d e r s h o n e s t l y b e l i e v e d .
- 24
In
Allen
-
v . G o l d R e e f s o f West A f r i c a
( 1 ) , the m a j o r i t y
were
held e n t i t l e d
t o a l t e r t h e a r t i c l e s so as t o g i v e t h e company a
l i e n on f u l l y
paid
prior
s h a r e s even f o r d e b t s w h i c h had been
incurred
to the passing of the resolution,,
F u r t h e r m o r e , i n G r e e n h a l q h v . A r d e r n e Cinemas L t d . ( 2 ) t h e
a r t i c l e s o f a p r i v a t e company p r o h i b i t e d
an o u t s i d e r
value.
i f a n o t h e r member was
The m a j o r i t y
willing
caused
was
was
them a t a
t h e s a n c t i o n o f an
h e l d by t h e C o u r t o f A p p e a l
ordinary
t h a t the a l t e r a t i o n
bona f i d e and v a l i d a l t h o u g h as a r e s u l t t h e m i n o r i t y
holders lost
In
t h e more r e c e n t c a s e o f Clemens v . Clemens B r o s . L t d . ( 3 )
s h a r e h o l d e r met w i t h more l u c k .
There
p o s a l s t o i n c r e a s e t h e s h a r e c a p i t a l o f t h e company w h i c h
i n the m i n o r i t y
were h e l d
It
would
power b e i n g r e d u c e d
i s i n t e r e s t i n g to note t h a t although Foster J. i n the
the Greenhalqh
was
shareholder's voting
pro-
t o be o p p r e s s i v e .
Clemens case p u r p o r t e d
cases.
share-
t h e i r r i g h t s of pre-emption.
however, t h e m i n o r i t y
result
fair
t h e a r t i c l e s t o be a l t e r e d so as t o
p e r m i t a t r a n s f e r t o any p e r s o n w i t h
It
t o buy
shareholder, w i t h a view to t r a n s f e r r i n g h i s
s h a r e s t o an o u t s i d e r ,
resolution.
a t r a n s f e r o f shares t o
t o a p p l y t h e same p r i n c i p l e s as t h o s e i n
c a s e , o p p o s i t e c o n c l u s i o n s w e r e r e a c h e d i n t h e two
But perhaps
much a f f e c t e d
i t i s o f i m p o r t a n c e t o n o t e t h a t E v e r s h e d M.R.
by t h e bona f i d e s o f t h e m a j o r i t y
c a s e b e c a u s e t h e p u r c h a s e r was
company a t a f a i r
price
(4).
i n the
Greenhalgh
b i d d i n g f o r a l l the shares o f the
Had
t h i s f a c t been d i f f e r e n t , t h e
d e c i s i o n m i g h t have been d i f f e r e n t .
0
n
the contrary
i n t h e Clemens
( 1 ) [ l 9 0 0 j 1 Ch. 656; 69 L.J.Ch. 266; 82 L.T. 210; 16 T.L.R. 213;
7 Mans. 417, 48 W.R. 4 5 2 .
( 2 ) f l 9 5 l ) Ch. 286; [ 1 9 5 0 / 2 A l l E.R. 1120; 94 S.J. 855.
( 3 ) T1976) 2 A l l E.R. 268.
See a l s o b e l o w , p p . 4 0 - 1 ; G.R.
Sullivan
( 1 9 7 7 ) 41 Conv. (N.S.) 169.
( 4 ) /1950/ 2 A l l E.R. 1120, 1128.
case t h e predominant m o t i v e
Thus F o s t e r J .
"But
o f t h e a u n t was
to i n j u r e the
niece.
the r e s o l u t i o n s
have
remarked:
I c a n n o t escape t h e c o n c l u s i o n
been f r a m e d so as
that
t o p u t i n t o t h e hands o f M i s s Clemens and
f e l l o w d i r e c t o r s c o m p l e t e c o n t r o l o f t h e company and
the p l a i n t i f f
than
25
to
o f h e r e x i s t i n g r i g h t s as a s h a r e h o l d e r
per c e n t , o f t h e v o t e s
u n d e r a r t . 6.
They a r e
ensure not o n l y t h a t
and
greatly
s p e c i f i c a l l y and
the p l a i n t i f f
can
her
deprive
with
reduce her
more
rights
c a r e f u l l y designed
to
never get c o n t r o l o f
company b u t t o d e p r i v e h e r o f w h a t has
been c a l l e d
her
the
negative
control."
From t h e c a s e s d i s c u s s e d
that
the courts w i l l
above and
not i n t e r f e r e w i t h
the conduct Gomplained of
with
as a c o m m e r c i a l e n t i t y .
The
little
may
be e x e r c i s e d
from m o t i v e s
own
individual interests with
i t appears
decisions
aimed i n a
o r no b e n e f i t
difficulty
the p r i n c i p l e that a shareholder's
should
majority
is deliberately
manner a t t h e m i n o r i t y ,
the a r t i c l e s
in this field,
unless
discriminatory
t o t h e company
i n t h i s area i s to
reconcile
vote i s a r i g h t of property
or promptings
that
o f w h a t he c o n s i d e r s
his
t h e p r i n c i p l e t h a t t h e power t o a l t e r
be e x e r c i s e d bona f i d e f o r t h e b e n e f i t o f
the
company as a w h o l e .
A general
It
is difficult
principle.
in
Principle
nation,
to formulate a general
fraud
on
the
minority
I t a p p e a r s t h a t a number o f c o n s i d e r a t i o n s a r e
determining
minority.
?
the q u e s t i o n o f what w i l l
constitute
a fraud
These w o u l d i n c l u d e bona f i d e s , mala f i d e s ,
oppression,
appropriation
o f company a s s e t s
relevant
or
on
discrimibenefits,
advancement o f t h e i n t e r e s t s o f t h e company as a w h o l e , and
p u r p o s e s ; a l l t h e s e w o u l d be
derations.
Gower ( 5 ) has
( 5 ) Gower, p.62 3.
relevant
the
but not c o n c l u s i v e
proper
consi-
s u g g e s t e d t h a t t h e r e seems t o be
a
general
principle
that
"bona
fide
3.
Interests
From
"where
f o r the benefit
time
must
-
always e x e r c i s e
o f t h e company
to time
such
of justice
an e x c e p t i o n .
L t d . And
Others
of authority
has been
itself
where
described
(No.2)
(6) Vinelott
J.
a case should
its
members, f o r w h i c h
acters,
rights
arise
t o which
Lord
Cottenham
619,
635
be
found
nical
rules
rule.
another
I n Foss v. H a r b o t t l e
i n such
that
t o a c o r p o r a t i o n by
remedy r e m a i n e d ,
corporators i n their
character
corporate
character
cases, would
some o f
except
private
the protection
the principle
(L.C.) i n W a l l w o r t h
and o t h e r
would
no a d e q u a t e
i n their
cannot but think
in
i n Foss v. H a r b o t t l e , 2 Hare
of injury
by i n d i v i d u a l
and a s k i n g
observations
V.-C. s a i d , a t p . 4 9 2 :
"If
of suit
the rule
as a f l e x i b l e
S i r James Wigram
that
of
charthose
they
were
entitled,
so f o r c i b l y
laid
down b y
v. H o l t
apply,
and
s u p e r i o r t o any d i f f i c u l t i e s
r e s p e c t i n g t h e mode i n w h i c h
(1840) 4 Myl. &
the claims
arising
of
Cr.
justice
out of
tech-
corporations are required
sue."
In
Edwards
at
p.1067, o f t h e e x c e p t i o n
V, H a l l i w e l l
rule
the
of j u s t i c e . "
interests
93 L o r d
fl980.7
Davey,
and
[1950]
an i n f l e x i b l e
(6)
sug-
the opinion:
strand
to
dispensed
i n P r u d e n t i a l A s s u r a n c e Co.
two cases a r e c o n s i s t e n t w i t h
I
t o be
V i c e - C h a n c e l l o r Wigram
"These
461
the exception
require the rule
Recently
v . Newman I n d u s t r i e s
expressed
powers
whole."
t h e c o u r t s have suggested
I n Foss v. H a r b o t t l e i t s e l f
gested
as a
their
of Justice
the interests
with."
Ltd.
the majority
26
that
i n stating
3 W.L.R. 5 4 3 ;
2 A l l E.R.
that
1064 J e n k i n s
i s showed
i tw i l l
the rule
be r e l a x e d w h e r e
I n Burland
v. Earle
the "elementary"
/l980/
"that
2 A l l E.R.
rule,
841.
L.J. said,
i s not
necessary i n
[1902]
A.C. 8 3 ,
that
the court
would
not
within
do
t h e i r powers,
so";
but
redress
as
interfere with
".
the
lordship
rule
shown f o r s a y i n g
behalf
in
of
that
an
not
examining
previous
borne out
by
p a n y was
It
is
and
should
fairly
can
admit
a majority
b u t where
some o t h e r
unless
can
cases,
this
interests of
be
v.
Jensen
noted
rejected
that
this
plaintiff,
on
where
reason
allowed
can
t o sue
be
be
on
defeated
behalf of
and
to the
fraud
rule
the majority
^1956]
on
this
that
as
the
of
of
carefully
not
being
to the
fraud
personal
on
the
protection
where
the
act
nor
personal
be
i n Foss v. H a r b o t t l e .
3 W.L.R. 2 2 4 ;
this
the
complained
the courts should
i t is difficult
exception
for
be
to admit
minority
rights
the m i n o r i t y
remedial
com-
fraudulently.
the m i n o r i t y
jurisdiction
rule, in practice
of
arise
protection
to
not
the
after
the wrong
some d e g r e e o f
cases might
statutory
admission
case
together with
provides
exception
exception
i t i s submitted,
565;
to
not only
justice will
pursued
In that
the
p r i n c i p l e , the c o u r t s have
/"19 5 67 Ch.
S.J.
452.
are
( 7 ) D a n c k w e r t s J«,
c l a s s i f i e d as
the
to
pursued."
on
(7)
100
t o be
done n e g l i g e n t l y ,
exception
case f o r the
the minority
ought
cases,
relief
neither
these
apply
Nevertheless,
rights;nor
In
may
authorities..
be
the
exception
g e n e r a l , which
statutory
t h e c o m p a n y m u s t be
action
"true"
be
allegedly
minority.
of
the
i n an
p.582:
which
i n Pavlides
that
at
that
action
rule,
jurisdiction
t o say
t h e company t h e
company w i l l
But
narrow
no
acting
only."
or
are
companies
i n f a c t has
V i n e l o t t w e n t on
relevant
wrongdoers
the
"and
t o a company
facia
. . the
added:
stated
a wrong
a prima
His
he
t h e management o f
invoked.
able
Thus
to
while,
exception
to establish
jurisdiction.
2 A l l E.R.
518;
a
Minority
Redress
Most
o f t h e cases
majority
The
the
and
power
majority.
what
involving
facts
the
that
and
faith
ratification
And
there
the courts
may
be
prefer
by
b r e a c h by
the majority
no c l e a r
ratified
who
the
may
each
right
f o r the benefit
usually
form
majority.
be
abused
principle
and what
t o examine
the voting
fides
p r i n c i p l e concern
o f some d i r e c t o r s
seems t o be
t r y to reconcile
p r i n c i p l e o f bona
t h e Menier case
of that
of ratification
breaches of duties
appears
-
and R a t i f i c a t i o n
a b r e a c h o f d u t y o f good
the
28
may
by
governing
not (8),
case on
I t
i t s own
and m a j o r i t y
rule
with
o f t h e company as
a
whole,
Gower
(9) argues t h a t
company's p r o p e r t y ,
if
i t c a n be
their
where
action
i n t e r e s t s o f t h e company.
not
a c t bona
of
be
authorise
being
fraud
on
(10),
i s submitted
ratification
by
the
provided
onus
on
by
that
1
Gower s
stated
that
the majority
the majority
either
the
fide i n
the directors
heavier,
( 8 ) See b e l o w , p p , 1 1 0 - 5
( 9 ) Gower, p.619
( 1 0 ) I b i d . , p.619
( 1 ) I b i d , , p.619
or
a
or dishonesty
do
breaches
resolution
retrospectively,
o f t h e company,
'fraud'
(1).
arguments about r a t i f i c a t i o n
immediately
at general
i f there
against
t o p r o v e bona
the
majority
p a s s e d bona
prospectively
than deceit
the majority
company w o u l d be
was
by
Gower a r g u e s t h a t
to act i n fraud
sense
t h e c o m p a n y as
crimination
ratified
Where, however,
Further,
meeting cannot,
i n a wider
minority
this
appropriate
i n t h e i n t e r e s t s o f t h e company, t h e i r
the directors
used
It
fide
ratified
a general
c a n be
shown p o s i t i v e l y t h a t
the
cannot
the directors
above
also
meeting of true
i s a prima f a c i e
the m i n o r i t y ,
fides
apply
of
to
fraud
case o f
in practice
on
disthe
i n the i n t e r e s t s of the
It
h a s been commonly
portation
a
Co. v . B e a t t y
majority
in
(3)
meeting
was n o t
fraudulent
as a d i r e c t o r ,
from
bringing
view
because he remarked
Ltd.
"As
a derivative
between
i n general
use o f the
aside unless
proposition
holder
a
by
Lords
ruled
the
"In
from
Russell
the
i n Regal
that
the
been
(Hastings) Ltd.
o f Killowen
said,
o f his
shareholder
(No.2)
resolution
(4):
a
that
general
other
authorised
passed by
will
not
a majority
meeting
does not
be set
That
share-
in relation to
owe a n y f i d u c i a r y
doubt on the
v. Gulliver
not
have been
Thus V i n e l o t t
v. Gulliver
a t p.150,
is
shareholders."
cast
would
contract
being
votes,
Assurance
an i m p r o p e r one.
involved
ratified.
they w i s h e d , have p r o t e c t e d
(2)
(3)
789;
(4)
(5)
(6)
(7)
in
(Hastings) Ltd.
directors
votes
was a b r e a c h
shareholder which
the
case has also
that
o r transaction
shows i s t h a t
principle
he i s
canusehis
case o f P r u d e n t i a l
& Others
case
votes
proposition
a minority
t o have been
company o r t o t h e
transaction
Regal
his
i n which
Prudential
some t h a t
had
follows
t o the
but
c o n t r o l l i n g shareholder's
in exercising
The
Ltd.
meeting,
i t i s shown
transaction
duty
recent
3eatty's
the
Trans-
But V i n e l o t t J . has a d i f f e r e n t
a company a n d a m a j o r i t y
ratified
the
vires,
action.
v . Newman I n d u s t r i e s
for
North-West
an a c t
t o prevent
i nthe
that
a director
or ratify
orultra
in order
I see i t a l l t h a t
or
i sa u t h o r i t y
t oconfirm
duty
Co.
considered
s h a r e h o l d e r who i s a l s o
general
which
(2)
29 -
[\96lJ
that
the
view
(6)
(5)
the
held
House o f
liable
t o account
J . commented
(7):
2 A.C. 1 3 4 . . . L o r d
directors
themselves by a r e s o l u t i o n
" c o u l d , had
(either
See K.W. W e d d e r b u r n ( 1 9 8 1 ) 4 4 M.L.R. 2 0 2 ,
209.
( 1 8 8 7 ) 12 App.
C a s e . 589;
56 L.J.P.C. 1 0 2 ;
57 L . T . 4 2 6 ;
36 W.R. 6 4 7 .
See a l s o b e l o w , p p . 1 1 0 - 5
Ll9Q0] 3 W.L.R. 5 4 3 ,
570.
See a l s o b e l o w p . I l l
F o r e x a m p l e , See G o w e r , p . 6 1 7 .
[ 1 9 4 2 ] 1 A l l E.R. 3 78;
£.96 77 2 A.C. 1 3 4 n .
£19807 3 W.L.R. 5 4 3 , 5 6 8 .
3 T.L.R.
antecedent or
meeting."
at
I t i s suggested
[1942]
been
1 A l l E.R.
report
controlled
which
voting
Lord
and,
general
of
of
precisely
the
Privy
case
the
Gulliver
ratification
of
is
welcomed,
t o be
i s one
breaches of
would
of
not
be
have
directors)
in
the
controlled
the
the
speech
of
defendant
a resolution
not
control
the
Regal
in
of
the
case,
inconsistent
Peeks
(8)
breaches of
duty
first
and
illuminating
i t i s perhaps
ratification
supplement
equity,
protection
The
had
v i e w on
i n Cook v .
instance
by
with
about
duty
fraud
on
the
as
Regal
the
the
thought
protection
Companies A c t s
and
in
to
note
many o f
his
shareholders of
minority
are
the
Prudential
that
his
statements
directors'
merely
obiter
dicta.
Relief
of
minorities
have p r o v i d e d
provided
some
by
common
additional
(10)„
Alternative
Under
the
the
judgement
important
only
majority
Statutory
and
in
report
"would
nothing
that
t h e m s e l v e s by
they
the
directors
passage
general
(9).
concerning
law
see
contemplated
directors'
V i n e l o t t J's
To
defendant
defendant
this
in
resolution
I can
in his
Council
Although
decision
(the
because
is right
decision
of
the
note
in
votes."
v.
some
he
m i g h t have p r o t e c t e d
V i n e l o t t J.
of
the
I understand
(Hastings) Ltd.
effect
that
since
that
shareholders
editor's
voting,,"
Killowen,
meeting
majority
If
as
Regal
the
379,
the
-
the
in
form,
indicates
Russell
directors
by
378,
a mere m a t t e r o f
doubtless
the
subsequent) of
30
Remedy
section
75
of
the
Companies Act
1980
(8)
[ 1 9 1 6 ] 1 A.C. 554; 85 L.J.P.C. 1 6 1 ; 114 L.T.
( 9 ) E.g.
see G o w e r , p„617„
( 1 0 ) F o r D e p a r t m e n t o f T r a d e I n v e s t i g a t i o n s , see
replacing
s.210
636.
below,
pp.132-7
of
the
31 -
C o m p a n i e s A c t 1 9 4 8 a member c a n p e t i t i o n
other
than
discussed
a winding-up
later
Section
order
i nt h i s
Chapter
petition
where
a n y member c o m p l a i n e d
being
conducted
position
scope
circumstances
that
other
than
the affairs
i n a manner o p p r e s s i v e
t o be
that
a member
a winding-up
o f t h e comapny
t o some p a r t
order
were
o f t h e members
The s e c t i o n was i n t r o d u c e d t o s t r e n g t h t h e
o f the minority
judicial
relief
(1)„
the court f o rr e l i e f
himself).
subsequent
certain
210 o f t h e C o m p a n i e s A c t 1948 p r o v i d e d
could
(including
under
the court f o r
shareholders
d e c i s i o n s tended
i n private
tolimit
companies,b u t
i t s u s e f u l n e s s and
(2).
As i n t e r p r e t e d
by t h e c o u r t s s e c t i o n 210 h a d t h e f o l l o w i n g
weaknesses .
In
be
"oppressive".
"the
"a
a s.210 p e t i t i o n ,
dictionary
visible
violation
lack
isolated
Further
they
Thus,
would
position
from
o f the condition
invoked.
this
definition
departure
o f probity
An
Various
and f a i r
t h e a l l e g e d conduct
complained
definitions
term
of this
o f burdensome, harsh
the standards
of fair
d e a l i n g anda
and "an element o f
dealing" (5).
a c t was n o t s u f f i c i e n t
i f a director
f o r s e c t i o n 210 t o be
were
t o take
excessive
n o t amount t o o p p r e s s i v e
conduct
unless
t oretain
that
as a m a j o r i t y
shareholder
a series o f oppressive
amounted
advanced,
and w r o n g f u l " ( 3 ) ,
offair
play"(4),
were
o f must
acts would
t o a chain o f events
which
remuneration,
he used h i s
remuneration (6)
n o t be s u f f i c i e n t
continued
right
unless
up t o t h e
( 1 ) S e e a l s o s e c t i o n s 5, 7 2 , 1 6 4 a n d 1 7 2 o f C o m p a n i e s A c t 1 9 4 8 ;
T.E. C a i n , C h a r l e s w o r t h & C a i n ' s Company Law ( 1 1 t h e d . ) p . 3 8 2 .
( 2 ) S e e g e n e r a l l y H. R a j a k ( 1 9 7 2 ) 35 M.L.R. 156„
( 3 ) p e r V i s c o u n t S i m o n d s i n S.C.W.S. v . M e y e r [ l 9 5 9 j A.C. 3 2 4 , 342
( 4 ) L o r d C o o p e r i n E l d e r v . E l d e r & W a t s o n L t d . , 1 9 5 2 S.C. 4 9 , 5 5 .
( 5 ) L o r d K e i t h i n E l e e r v . E l e e r & W a t s o n L t d . , 1 9 5 2 S.C. 4 9 , 6 0 .
( 6 ) Re J e r m y n S t r e e t T u r k i s h B a t h s L t d .
1 9 7 1 1 W.L.R. 1 0 4 2 .
presentation
The
merely
32 -
o f the p e t i t i o n ( 7 ) .
s e c t i o n was n o t a v a i l a b l e
where
the allegations
b a d management a n d i n e f f i c i e n c y .
were
I n Re F i v e M i n u t e
about
C a r Wash
S e r v i c e L i m i t e d ( 8 ) , some 15 a l l e g a t i o n s
as t o t h e c o n t i n u o u s b a d
management o f t h e managing d i r e c t o r
insufficient
oppression.
"The
mere
manner
to
There Buckley
fact
i n which
the
to
policy
trustee
tion
member
o r t oefficiency,
does
not lead
with
o r disapproval o f
whether on grounds
however w e l l
relating
founded."
representative or
o f a member o f a c o m p a n y c o u l d
s e c t i o n 210 w h e r e h e h a d n o t b e e n
bring
registered
a
peti-
as a
(9).
The
petitioner
pany were b e i n g
h a d t o show a l s o
conducted
members, i n c l u d i n g
fered
affairs
confidence i n
nor can resentment a t
whether o r not a personal
i n bankruptcy
under
are conducted
dissatisfaction
o f t h e company's
was d o u b t f u l
affairs
he i s oppressed;
o u t - v o t e d ; n o r mere
conduct
It
important
kind
a small
directors
capacity
Therefore
unless
(10).
s.210 c o u l d
oppressive
o f t h e com-
t o some p a r t o f
The o p p r e s s i o n
n o t be i n v o k e d
e.g. where
company h a d been
t h e r e was a l s o
a s a member.
the a f f a i r s
must be s u f -
as members, and n o t , e.g. b y them a s
o f oppression,
private
that
i n a manner
himself
by the p e t i t i o n e r s
directors.
in
t h e company's
to constitute
a t p.751:
a member o f a c o m p a n y h a s l o s t
the conclusion that
being
the
that
J . said
were
Although
this
the minority
removed
present
t odeal
from
w i t h one
shareholder
the board o f
oppression
o f him i n h i s
was n o t e x p l i c i t
i n the section
( 7 ) S e e a b o v e , p . 3 1 , n.(6)»
( 8 ) £1966] 1 A l l E.R. 2 4 2 ; [1966J 1 W.L.R. 7 4 5 ; 110 S . J . 3 4 7 .
( 9 ) S e e Re J e r m y n S t r e e t T u r k i s h B a t h s L t d . (1970] 1 W.L.R. 1 1 9 4 .
B u t .cf_. Re M e y e r D o u g l a s P t y L t d . [1965] V.R. 6 3 8 .
( 1 0 ) E l d e r v . E l d e r & W a t s o n 1 9 5 2 S.C. 4 9 ; Re L u n d l e B r o s . L t d .
Cl965] 2 A l l E.R. 6 9 2 ; a n d Re W e s t b o u r n e G a l l e r i e s L t d . [1910]
3 A l l E.R. 3 7 4 .
itself,
this
Under
33
a d d i t i o n a l requirement
section
210
the
been o p p r e s s i v e
the
making of
a winding-up order
and
equitable
(1).
conduct but
Sometimes i t i s t e m p t i n g
appreciated
ences
in finding
business
and
enquiries
with
the
unlikely
courts
ought,
and
the
court
courts
b e t w e e n m a j o r i t y and
f o r ensuring
L.J.
said
"It
i s not
the
company.
be
itself
the
far
the
a
just
That
sorry
of
t o see
the
the
court
the
the
so
whether
the
the
v
0
Cox
court
courts
go
prepared
in
that
expertise
concerns which others
may
and
Ltd.
affairs
directors . . .
this
be
Indeed
& Co.
t o manage t h e
beyond
of
company's
should
settlement.
and
dividends
I t i s most
part
Brothers
to
at court
i t i s advisable
necessary
commercial
frivolous
i t t o pay
m i n o r i t y shareholders
lack
exper-
shareholder's
attendance
active a
have
company's
t o be
to enable
i s f o r shareholders
management o f
b e t t e r than
as
take
in Shuttleworth
business
shareholder
in i t s investigation.
would
courts, which
to
just
judges
directors against
personal
r a i s e s the question
the
to
i t i s submitted,
to order
a s s i s t the
t h a t the
there
justify
t h a t i t was
average
happening
t o r a i s e money so
t h a t the
should
the
show t h a t
f a c t s would
view
o f t e n operated
conflicts
Scrutton
which
the
i s too
This
machinery
form
accepted.
only
ground
actions
company
by
the
is really
affairs.
resolved
t h a t the
motive of
The
to
what
on
must n o t
proper
i t s profits
directors
to
difficulty
out
also
been w i d e l y
t h a t the
and
detriment.
order
the
had
petitioner
had
not
-
and
take
(2):
of
I
upon
understand
does."
( 1 ) Re B e l l a d o r S i l k L i m i t e d [1965J 1 A l l E.R. 6 6 7 .
See a l s o
Re
R i c a G o l d W a s h i n g Co„ ( 1 8 7 9 ) 11 Ch. D. 43; Re O t h e r y C o n s t r u c t i o n
Ltd.
T 1 9 6 6 J 1 A l l E.R.
145; Re E x p a n d e d P l u g s L t d . £19667 1 A l l
E.R.
887.
( 2 ) [19277 2 K.B.
9 a t 23-4„
B u t t h e r e i s some i n d i c a t i o n t h a t t h e
c o u r t s h a v e now t a k e n a m o r e p r o t e c t i v e a t t i t u d e i n f a v o u r o f t h e
minority.
See e . g . E b r a h i m i v . W e s t b o u r n e G a l l e r i e s L i m i t e d
[1912]
2 A l l E.R.
492;
[ 1 9 7 3 J A.C.
360; P r u d e n t i a l A s s u r a n c e Co. °Ltd. v .
Newman I n d u s t r i e s L t d . & O t h e r s ( N o . 2 ) £19807 3 W.L.R. 543.
There were few instances
invoked,
section
the
indicating
section
judicial o
that
any actual
the affairs
Accordingly
show
that
o r proposed
as
a condition
been, conducted
that
would
i s unfairly
t o him.
illegality
tioner
c a n now c o m p l a i n
act o r omission
i s now made c l e a r
necessary
the winding
o f t h e company (
b e so p r e -
u p o f t h e company
t h e p e t i t i o n e r has
o r have
i s" u n f a i r l y
as o p -
actual
rights.
prejudicial"
h a s n o t t o show
Thirdly
o r proposed
as a c o n t i n u i n g course
personal
him-
f o r the petitioner
Thus t h e p e t i t i o n e r
a single
that
a t least
o f t h e company a r e b e i n g ,
o r invasion o f legal
as w e l l
under the
prejudicial to
(including
Furthermore,
the affairs
actual
o r omission
justify
i n a manner w h i c h
t o "oppressive"
a n y member o f a com-
on i t s b e h a l f ) i s o r would
of intervention.
t o show o n l y
that
o f t h e company a r e b e i n g o r
i t i s no l o n g e r
the facts
Accordingly
t o r e m o v e some o f
f o r an o r d e r
o f t h e members
an a c t o r o m i s s i o n
to
it
(3).
(4)„
i n a manner w h i c h
o f some p a r t
o r that
including
posed
be r e f o r m
t o the c o u r t by p e t i t i o n
on t h e ground
interests
self)
s e c t i o n 210 was s u c c e s s f u l l y
75 o f t h e 1 9 8 0 A c t p r o v i d e s
have been conducted
act
there should
w e a k n e s s e s o f s e c t i o n 210
p a n y may a p p l y
now
i n which
75 o f t h e C o m p a n i e s A c t 1 9 8 0 w a s e n a c t e d
Section
the
that
34 -
the peti-
prejudicial
o f conduct.
Fourthly,
r e p r e s e n t a t i v e s and t r u s t e e s i n
(3) P e t i t i o n e r s succeeded i n S c o t t i s h C o o p e r a t i v e Wholesale S o c i e t y
v . M e y e r [ 1 9 5 9 J A.C. 3 2 4 ; [ 1 9 5 8 ] 3 W.L.R. 4 0 4 ; 102 S . J . 6 1 7 ; £ 1 9 5 8 /
3 A l l E.R. 66 a n d Re H.R. H a r m e r L t d . [ 1 9 5 9 7 1 W.L.R. 6 2 ; [ 1 9 5 8 7 3
A l l E.R. 6 8 9 ; 103 S.J. 7 3 .
(4) W i t h t h e enactment o f s.75 t h e ' f r a u d o n t h e m i n o r i t y ' remedy
may b e much
less
used
i n f u t u r e by m i n o r i t y shareholders.
( 5 ) I t i s p e r h a p s i m p o r t a n t t o t a k e n o t e o f c e r t a i n r e m a r k s made b y
Wa1 t o n J . i n N o r t h e r n C o u n t i e s S e c u r i t i e s L t d . v . J a c k s o n & S t e e p l e
Ltd.
f l 9 7 4 j 1 W.L.R. 1 1 3 3 , 1 1 4 4 : " . . . a l t h o u g h i t i s p e r f e c t l y
t r u e t h a t t h e a c t o f t h e members, i n p a s s i n g c e r t a i n s p e c i a l t y p e s
of r e s o l u t i o n s , b i n d s t h e company, t h e i r a c t s a r e n o t t h e a c t s o f
the
company . . . t h e d e c i s i o n s t a k e n a t such m e e t i n g s a n d r e s o l u t i o n s passed t h e r e a t a r e d e c i s i o n s taken b y and r e s o l u t i o n s
p a s s e d b y t h e members o f t h e company a n d n o t b y t h e company i t s e l f
. „ . The f a c t t h a t t h e r e s u l t o f t h e v o t i n g a t t h e m e e t i n g ( o r a t
a s u b s e q u e n t p o l l ) w i l l b i n d t h e company c a n n o t a f f e c t t h e p o s i t i o n
that i n voting ( t h eshareholder) i s voting simply i n exercise o f h i s
own p r o p e r t y r i g h t s . "
A l t h o u g h i n many s i t u a t i o n s t h e m e m b e r s ' r e s o l u t i o n s w i l l c a u s e t h e c o m p a n y t o a c t , o r o m i t t o a c t . t h e r e may
be r e s o l u t i o n s w h i c h do n o t r e s u l t i n a n y a c t i o n b e i n g t a k e n b y o r
-
35 -
b a n k r u p t c y who h a v e n o t y e t b e e n r e g i s t e r e d
c o m p a n y b u t t o whom
by
operation
1980
to
Act.
grant
orders
F i f t h l y , without
bringing
section
the
of
civil
pret
will
fall
be i n t e r e s t i n g
an o r d e r
that
to bring
that
that
the court
seems t h a t
first
company's p r o p e r t y
conduct
civil
authorising
should
i s prejudicial
behalf
the court
proceedings
will
i n the
would
inter-
When a l l o w i n g
proceedings under
see t o i t t h a t
or settle
a t a wholly
under
than on t h e m i n o r i t y .
t o which
the shareholder bringing
the section
provision
f o r c o s t s o f t h e subse-
prejudicial".
legal
the omission,
This
o f t h e c o m p a n y a n d how t h e c o u r t
to bring
may
i n t h e name a n d o n
t o see t h e e x t e n t
the legal
a
the section,
i t should n o t
preceedings
t h e same.
does n o t h e l p where
t h e d i r e c t o r s o f a company have
alleged
t o make
a l l the conditions f o r
o n t h e company r a t h e r
at l i b e r t y t o discontinue
It
power
t o be b r o u g h t
party.
to petition
way, l i a b i l i t y
shareholder
shareholder
i s submitted
omit
or rectify
a third
instead
t h e meaning o f " u n f a i r l y
minority
general
the court
proceedings
t o comply w i t h
action,
I n this
name a n d o n b e h a l f
be
the act,
t o i n s t i t u t e proceedings
a minority
75 o f t h e
powers
75 o f t h e 1 9 8 0 A c t a n d t o a s k f o r a n o r d e r
t h e company „
will
unable
a derivative
minority
allow
it
from
a n d may a u t h o r i s e
a minority,
quent a c t i o n
It
to the court's
t o i t s continued
t h e name o f t h e c o m p a n y a g a i n s t
enables
transmitted
t h e f u t u r e c o n d u c t o f t h e company's a f f a i r s and
t h e company t o r e f r a i n
of,
or
t h e new s e c t i o n
t h e p u r c h a s e o f t h e company's s h a r e s ,
complained
in
under
prejudice
and i n a d d i t i o n
regulating
requiring
order
shares have been t r a n s f e r r e d
o f l a w may p e t i t i o n
relief,
as members o f t h e
grossly
inadequate
i t i s alleged
negligently
price
sold the
(6) since the
t o a l l t h e m e m b e r s , n o t some
( 6 ) E „ g . i n a c a s e l i k e P a v l i d e s v . J e n s e n [ 1 9 5 6 ] C h . 565 ;
3 W.L.R. 2 2 4 ; D-956] 2 A l l E.R. 5 1 8 ; 1 0 0 S . J . 4 5 2
part
/l956j
of
the
members.
judicial
It
75
To i n v o k e
t o some p a r t
is regretable
o f the
unfairly
1930
Act
o f the
that
members
there
p r e j u d i c i a l conduct
officer
conduct.
I n many f a m i l y
shareholders
look
available
companies
in
several
private
on
also
his
such
company
is usually
emoluments o r f e e s
i nthe
salary,
his
becomes v u l n e r a b l e
It
over
of
the
immobility
1948
75 o f t h e
1948 A c t .
the
companies, t h e
than
c a p a c i t i e s as
themselves often
dependent
that
for his
or director.
members g e t
company y i e l d s
are
act
a member i n a
living
Typically,
their
So i f a s h a r e h o l d e r
there
1980 A c t
The c o u r t s
on b e i n g
Act.and
and they
the
the
shares o f
i s deprived o f
no r e t u r n
and he
to exploitation.
i s t o be hoped
section
from
employment r a t h e r
more o r l e s s
i nthe
a s member,
i t i s u n r e a l i s t i c t o draw a
as an o f f i c e r
investment
private
Further,
form o f s a l a r y .
capacity
member s u f f e r e d
capacities.
p a y s no d i v i d e n d s ;
against
T h e m e m b e r s o r some o f t h e m
and o f f i c e r s ,
and o v e r l a p p i n g
a company
profits
his
directors
i n section
t o a member
o f members i n t h e i r
members, d i r e c t o r s , a n d o f f i c e r s .
usually
the
t o remunerative
roles
h a s t o be p r e -
provision
i r r e s p e c t i v e o f the
I n those
the
wrong
i s no e x p r e s s
companies o r small
forward
between
the
(7).
o r c r e d i t o r i n which
payments.
distinction
section,
t o make r e l i e f
director,
dividend
the
36 -
confronted
new s e c t i o n
will
not
be j u d i c i a l
s i m i l a r t o those over
retreated
with
should
into a state
d i s c r e t i o n under
be a b l e
timidities
s e c t i o n 210
o f nervous
s.210 o f t h e
t o make c l e a r
to the
( 7 ) A p a r t f r o m c a s e s suchas P a v l i d e s v . J e n s e n [1956] Ch. 5 6 5 ;
£ 9 5 6 j 3 W.L.R. 2 2 4 ; ( 1 9 5 6 J 2 A l l S.R. 5 1 8 ; 1 0 0 S.J.
4 5 2 ; i t seems
t h a t t h e a r g u m e n t t h a t a w r o n g h a r m s n o t o n l y 'some p a r t
of the
members b u t a l l members w o u l d n o t h e l p t h e d e f e n d a n t .
Such an
argument d i d not help the defendants i n S c o t t i s h Co-operative
W h o l e s a l e S o c i e t y v . M e y e r (19597 A.C. 3 2 4 ; £ 1 9 5 8 / 3 W.L.R. 4 0 4 ;
102 S.J.
6 1 7 ; [ 1 9 5 8 J 3 A l l E.R. 66 a n d i n Re H a r m e r ( H . R . ) L t d .
( 1 9 5 9 J 1 W.L.R. 6 2 ; / 1 9 5 8 / 3 A l l E.R, 6 8 9 . w h e r e a l l m e m b e r s ,
qua members, s u f f e r e d ( t h o u g h t h e w r o n g d o e r s b e n e f i t e d i n a n o t h e r
capacity).
See Gower, S u p p l e m e n t t o 4 t h e d . , p a r a g r a p h 6 7 0 .
1
courts
that
It
1.
As
they
may
be
i s proposed
a
to deal
conduct
s u f f e r e d by
member.
Otherwise
overlooked.
way
as
of
the
to
do
under
The
and
the
as
new
between
a director,
commercial
reality
section should
case
i n the
a l s o be
same way
as
the
appropriate
case, where
a director-shareholder
pany
2.
into
on
parties
liquidation.
Perhaps
the
t o be
brought
into
shares.
3.
the
new
by
to
The
the
action
be
which
should
given
to the
be
i n a small
private
Remedy u n d e r
Section
aggrieved
minority
section
222(f) of
t h e Companies A c t
t h e c o u r t s may
have
the
an
i s removed
from
t o impose a
the
just
com-
to permit
debentures
a
petition
are c o n v e r t i b l e
proposition that
c o m p a n y be
disputes
subjected
to
com-
222(f)
An
are
in
arbitration.
winding-up
should
a
have u n f e t t e r e d d i s c r e t i o n .
amended
holders
be
prepared
Thus,
able
a
circumstances
without putting
c o u r t should
section should
among s h a r e h o l d e r s
opinion
be
debenture
Consideration
pulsory
the c o u r t would
of
i n such
court i s
1948.
be
that
to a l l the
the Companies A c t
settlement
than
amended
a
prejudicial
i n many c a s e s w o u l d
s.222(f) of
of directors,
of
should
unfairly
under
the board
rights
the court
section with
the c o u r t t o have r e g a r d
particular
the
a member i n a c a p a c i t y o t h e r
new
to enable
that:
to distinguish
shareholder
allowed
-
timorous.
f o r reform
i t is difficult
member as
less
37
of
be
order
the winding-up
the c o u r t , i t i s j u s t
wound up.
so-called
shown
shareholder
One
line
of
1948.
of
and
ready
(8) Under
section
a company w h e r e ,
equitable that
cases
to recognise
( 8 ) See g e n e r a l l y M.R. C h e s t e r m a n
( 1 9 7 5 ) 125 M . L . J . 7 8 6 .
a l s o have r e c o u r s e
cases where
'quasi-partnership'
themselves
may
(1973)
this
36
has
i n which
that
the
behind
in
to
222(f)
the
company
occurred
the
courts
the
company
M.L.R. 1 2 9 ;
J.
Birds
structure
applied
Thus
there
e x i s t s what
partnership
the
of
the
an
order
exclusion
business
under
Limited
an
has
conduct of
the
winding-up of
because
the
be
as
of
the
found
to exist,
d i r e c t o r s by
the
articles
the
making of
the
exercise
rations,
the
of
then
the
I f such
of
an
removal
legal
and
to
insist
on
It
i s not
just
of
the
business
It
may
be
rights
legal
which
rights
legal
or
rights
t h a t can
done i n r e s p e c t
be
of
of
the
character
may
to exclude
subjected
other
them
the
can
arise
company
was
incorpor-
the
is
board
a power c o n f e r r e d
1948
courts
may
will
by
justify
subject
considerations;considearising
between
in a
to equitable
Thus,
one
inequitable,
particular
a member f r o m
rights,,
of
the
for
the
from
make i t u n j u s t , o r
exercise
in
understanding
Companies Act
because
existence
i n management o r i t
petitioner
use
Galleries
the
parties after
the
of
authority is
order
before
(9).
making
understanding
share
to equitable
a personal
another,
of
the
make an
agreement o r
the
a winding-up order
of
the
effective
association or
leading
have
management
participate
business,
an. e q u a l
conduct
the
shall
would
the
Westbourne
agreement or
with
legally
that i s , of
individual
An
v.
i n the
justify
The
and
winding-up
substantiate
t h a t he
c a r r i e d on
partners
company.
can
courts
their
to
Act.
i n Ebrahimi
the
company.
from
1948
petitioner
p a r t i e s had
deduced
the
decision
business,
ation
of
of
a partnership
participation
sufficient
understanding
the
incorporated,
can
been h e l d
I f the
agreement or
i s , i n substance,
a member f r o m
s.222(f)
(10).
-
principles i n ordering
of
t h e House o f L o r d s
38
the
way.
running
considerations.
i f in a
family
( 9 ) See e . g . Y e n i d j e T o b a c c o Co. L t d . / " l 9 1 6 ] 2 Ch. 4 2 6 ; 86
L.J.
Ch. 1 ; 115 L . T . 5 3 0 ; 32 T.L.R. 7 0 9 ; 6 0 ~ S . J .
674
( 1 0 ) L 1 9 7 2 J 2 A l l E.R.
492;
[ 1 9 7 3 J A.C.
360;
]\912] 2 W.L.R. 1 2 8 9 ;
116 S.J.
412.
See a l s o Re L u n d i e B r o s . L t d . [1965] 2 A l l E.R.
692
w h e r e i t was h e l d i n r e l a t i o n t o a t h r e e - m a n c o m p a n y t h a t t h e
u n j u s t i f i e d e x c l u s i o n o f a m e m b e r - d i r e c t o r f r o m management d i d n o t
amount t o o p p r e s s i o n u n d e r s e c t i o n 210, b u t j u s t i f i e d t h e m a k i n g
o f an o r d e r u n d e r s e c t i o n 2 2 2 ( f ) .
company,
the d i r e c t o r s ,
provision
persons
and
i n the a r t i c l e s ,
t o whom t h e
for
a winding-up
Section
as
inevitably
bring
usually
up
would
tioner;
be
the
not,
of
threat,
very
useful
rightly
dealt
equitable
grounds under
to think
i s to get
a petition
by
the
executors
s u c c e s s f u l (1)..
remedy
1948
the p e t i t i o n e r
losses
threat
of
redress
f o r an
practical
i t s use
which
for a l l that
aggrieved
shareholder
is
windingthe
will
petioften
shareholder,.
i s simply
- or
will
indeed
wants,because
expected
shareholder
some
for a l l including
ruin
as
has
not because
winding-up,
interpretation
Galleries
in
price,
a good
else
h i m s e l f , stands
v. westbourne G a l l e r i e s
H o w e v e r , as
reason
those
their
price
everyone,
to lose a
for-
future.
a liberal
prove
motive
the outcome
the aggrieved
those
that
the aggrieved
i n the near
would
that
members
bequeathed
in substantial
than
Ebrahimi
a
thing
particular
member h a v e b e e n
t h e company i n t o
in obtaining
shares
be
as
a
a deceased
t h e Companies A c t
i n s t e a d i t i s the
including
tune
may
shareholder's
result
More o f t e n
the
order
last
effective
for
a
i n accordance w i t h
a t a low
222(f) of
importance
of
suggest
f o r themselves
-
refuse to register
shares
the circumstances
shares
acting
39
with
that
Bentley-Stevens
pointed out
i t s ratio
v. Jones
of
as
principles
minorities.
by
to wind
s.222(f)
important
o f Westbourne G a l l e r i e s
i n favour of
a petition
L t d . i s not o n l y
the
i s not of
Sullivan
up
a company on
1948
Act,
general
( 3 ) Plowman J .
( 2 ) , Westbourne
so
just
t h e r e i s good
application.
refused
to
and
Indeed
extend
(1)
I n Re C u t h b e r t C o o p e r & S o n s L t d . [1931] Ch. 3 9 2 ; £L937/ 2
A l l E.R.
4 6 6 ; 106 L . J . C h . 2 4 9 ; 157 L.T.
5 4 5 , 53 T.L.R. 548 t h e
court refused to grant a winding-up order i n s i m i l a r s i t u a t i o n , but
the
d e c i s i o n was d i s a p p r o v e d b y E b r a h i m i v . W e s t b o u r n e G a l l e r i e s L t d .
(2)
See G.R.
S u l l i v a n ( 1 9 7 7 ) 4 1 C o n v . ( N . S . ) 169 a t 1 7 6 .
(3)
[ 1 9 7 4 J 1 W.L.R. 6 3 8 ;
f l 9 7 4 j 2 A l l E.R.
6 5 3 ; 118 S.J. 3 4 5 .
See
a l s o D.D.
P r e n t i c e ( 1 9 7 6 ) 92 L.Q.R. 5 0 2 .
Westbourne G a l l e r i e s
while
t h e company was s t i l l
winding
tiff
i t up h a v i n g
with
such
a
the
defendant
its
still
my j u d g e m e n t
plaintiff
been
a going
filed.
leaves
i se n t i t l e d
what
be e n t i t l e d
t h ep l a i n t i f f
an i n t e r l o c u t o r y
met w i t h
then
t o a winding
and
more
Ltd., Berry,
principles
n o tfaced
But
suggests
that
with the
the plaintiff
from
h e may, i n a p p r o p r i a t e
up o r d e r on t h e j u s t and
i n Bentley-Stevens
before
with
v. Jones
Plowman J . ,
injunctions
company w h i c h
elsewhere t h e
and M o r a y b e l l
S e c u r i t i e s L t d . v. Venida
Farr, McLelland,
Macphail
t o a company w h i c h
a petition
applied the
was s t i l l
f o r winding
and N a t i o n w i d e
a going
u p t h e company
'Westbourne
concern,
under
interlocutory
(6).
Furthermore,
suit
failed to
luck.
s . 2 2 2 ( f ) o f t h e Companies A c t 1948 and g r a n t e d
followed
point.
i f t h ep l a i n t i f f i s
Homes L t d . ( 5 ) , T e m p l e m a n J . ( a s h e t h e n w a s )
Galleries
the plain-
to interfere
t o remove
i sthat
i n law,
injunction
Pennell, Sutton
Investments
away
for
ground." ( 4 )
Although
In
right
i t does d e c i d e
circumstances,
plaintiffs
no p e t i t i o n
case which
t o an i n j u n c t i o n
a power v a l i d
get
with
Plowman J . s e n t
there i snothing i n that
removed under
equitable
concern
the Westbourne G a l l e r i e s
company's s t a t u t o r y
board.
t o a q u a s i - p a r t n e r s h i p company
statement:
"However, t h a t
in
principles
40 -
i nClemens v . Clemens B r o s .
and extended
was s t i l l
L t d . (7) Foster J .
Westbourne G a l l e r i e s
a going
concern.
p r i n c i p l e s to
I n that
case
another
the plaintiff
(4)
/.'1974] 1 W.L.R. 6 3 8 . a t p . 6 4 1 .
(5) J u l y 25, 1974,so f a r u n r e p o r t e d .
F o r t h ef a c t s t h e r e o f , see
S.J. B u r r i d g e ( 1 9 8 1 ) 4 4 M.L.R. 4 0 .
( 6 ) U n f o r t u n a t e l y B e n t l e y - S t e v e n s v . J o n e s was n o t r e f e r r e d t o
T e m p l e m a n J . S i r S y d n e y T e m p l e m a n i s now a L o r d J u s t i c e o f A p o e a l
a n d a c c o r d i n g l y t h e P e n n e l l c a s e may c a r r y some w e i g h t .
(7)
[ 1 9 7 6 ] 2 A l l E.R. 2 6 8 . See a l s o V. J o f f e ( 1 9 7 7 ) 4 0 M.L.R. 7 1 .
and
of
a
her
45
aunt were
t o 55
per
director.
cent.
share
capital
holding
The
Although
meeting,
the aunt
and
(Article
emption
i f another
200
850
a
or extraordinary
purchase
the
order
result
aunt's
for
an
the
order, Foster J.
Galleries
"I
setting
that
have r e f e r r e d
pleases."
With
judgement
the
one
be
(10).
to transfer
resolution
and
her
6.
after
referring
thing
which
emerges f r o m
the
company's
of
right
her
The
aside.
the
company's
a right
affect
under A r t i c l e
the
non-share-
h i s shares,
losing
left
as
extraordinary
four
Under
t h e company had
post
to increase
the
ratio
pre-
and
to
the
veto
existing
right
plaintiff
In
sued
granting
to Ebrahimi
v.
Westbourne
i n such
to e x e r c i s e her
and
( 9 ) , i t seems t h a t
Act.
a case
as
the cases
to which
the present Miss
majority
vote
I
Clemens
i n whatever
way
(8)
of
c o m p a n i e s w h e r e no
1948
were passed.
her
she
an
f o r the
said
Tempieman J's
possibility
the
to a trust
the three resolutions
i s that
not e n t i t l e d
she
At
t o each o f
i n the p l a i n t i f f
from
a director,
directors.
i n the
Ltd.:
think
is
shares
shares
resigned
still
shares
member w i s h e d
would
had
forward proposals
6 ) , members o f
proposals
to
put
three resolutions
article
special
was
non-shareholding
issuing
directors
e m p l o y e e s and
plaintiff
the board
by
-
the sole shareholders h o l d i n g shares
management t o f o u r
general
41
F o s t e r J's
judgements
the weight
of
judicial
e x t e n d i n g Westbourne G a l l e r i e s
petition
I t remains
has
t o be
been p r e s e n t e d
s e e n how
a g a i n s t Plowman
wide
opinion
supports
principles
under
J's
s.222(f)
the a p p l i c a t i o n
to
of
will
( 8 ) B e n t i e y - S t e v e n s v . J o n e s was n o t r e f e r r e d t o F o s t e r , J .
( 9 ) E b r a h i m i v . W e s t b o u r n e G a l l e r i e s L t d . was a l s o a p p l i e d i n
Re A & BC C h e w i n g Gum L t d . [1915] 1 A l l E.R.
1017;
[1915] 1 W.L.R.
5 7 9 ; ( 1 9 7 4 ) 119 S.J.
233.
( 1 0 ) See a l s o B.A.K. R i d e r ( 1 9 7 9 ) 38 C . L . J . 1 4 8 .
Costs
In
another
Wallersteiner
minority
case
v. Moir
the c o u r t ruled
indemnify
plaintiff
to bring
( 1 ) may
because o f
and
Shareholder
of Appeal
i t s ruling
that
the action
on
costs.
In
to the c o u r t i n a
incurred
minority
should
i n the
i n t h e company's i n t e r e s t
and
i t i s brought
by
by
that
t h e company c o n c e r n e d
against the costs
prudent
decision in
e n c o u r a g e more l i t i g a t i o n
i t i s open
to order
the p l a i n t i f f
i t i s reasonable
the Court
(No.2)
that
action
-
the Minority
direction,
shareholders
shareholder's
if
and
42
him
action
f o r the
i n good
faith.
Contingency
In
Wallersteiner
minority
made b y
far
shareholder,
near
exception
although
claims,
he
was
be
forced
still
still
Seeing
of
be
t o use
Lord
outweighed
which
'may
unfair
by
would
and
this,
as
Lord
Denning
that
the advantage
o t h e r w i s e have
that
t o be
contributions
1
disadvantages
abandoned
that
an
(2)
contingency
Denning
t o t a k e on
legitimate
seemed
policye
fees, Lord
success,
a
b e e n made o u t
generally
lawyers
'these
was
agreed
against public
means t o a c h i e v e
felt
the
s h a r e h o l d e r s had
contingency
stimulate
and
who
yet the l i t i g a t i o n
the opinion that
prohibited
Denning
h i s funds
shareholders
t h e end.
the system
or
But
to
exhausted
the disadvantages of
that
(No.2) t h e p l a i n t i f f ,
i n the case o f m i n o r i t y
should
On
out
had
other minority
from
fees
v. M o i r
Fees
unworthy
(3)
are b e l i e v e d
claims
by
pointed
are
reason
enof
the
(1)
[ 1 9 7 5 ] 1 A l l E. R. 8 4 9 ;
[197 5] Q.B. 373 ; £19757 2 W.L.R. 3 8 9 ;
119 S.J. 9 7 .
See a l s o H„ R a j a k ( 1 9 7 5 ) 125 N . L . J . 1 1 0 9 ; A . J .
Boyle
( 1 9 7 6 ) J.B.L. 18.
( 2 ) L o r d D e n n i n g was i n a m i n o r i t y w i t h B u c k l e y and S c a r m a n L J J
d i s s e n t i n g on t h i s p o i n t .
( 3 ) ( 1 9 7 5 / 1 A l l E.R.
849, p . 8 6 1 .
-
poverty
It
of the claimant.'
seems t h a t L o r d
contingent
of
legal
It
there
for
i s submitted
that
h i s d i s a p p r o v a l o f use o f
the present
i s comprehensive
as t h e p r e s e n t
(5)„
system o f l e g a l
a r e beyond
are without sufficient
system
a i d stands,
the financial
money
limits
to fight
a long
( 6 ) .
the determination
able
Kingdom
must be remembered
everyone
based
whose r e s o u r c e s
Human R i g h t s , w h i c h
'In
Denning
a i d , y e t they
action
It
(4)
a i d i n the United
legal
-
g e n e r a l l y on h i s o p i n i o n t h a t
a r e many p e o p l e
legal
on
fees
4 3
i s entitled
that
Article
6 o f t h e European
Convention
a p p l i e s t o t h e U n i t e d Kingdom, p r o v i d e s
of his c i v i l
to a fair
t i m e b y an i n d e p e n d e n t
rights
and o b l i g a t i o n s
and p u b l i c
hearing within
and i m p a r t i a l
tribunal
that
<> <» .
a
reason-
e s t a b l i s h e d by
law. '
But
t h e r e may
Wallersteiher
To t h e s e
on
out
some
sufficient
basis.
(No.2)
may b e a d d e d
like
money
those
to retain
weapon i n c o m b a t t i n g
in
aid i s not available.
attempting to bring
a test
b u t who n o n e t h e l e s s
a lawyer
shareholder
the availability
the p l a i n t i f f
f o r whom l e g a l
or uncertain principles
For the m i n o r i t y
mentioned),
ful
v. Moir
people
novel
n o t be f e w p e o p l e
on t h e u s u a l
(as well
are with-
fee paying
as t h e o t h e r
o f a c o n t i n g e n t f e e would
an o p p r e s s i v e
(orunfair)
case
people
be a power-
or fraudulent
majority.
One o f t h e r e a s o n s o p p o s i n g
supposed
i m m o r a l i t i e s o f commercial
contingent
and
( 4 )
(5)
( 6 )
2 0 .
contingency
fees w i l l
bring
harmful
life
fees
as w e l l
effects
upon
might
be t h e
as t h e b e l i e f
lawyers,
that
clients
courtSo
Ibid,
Ibid,
See M o
p . 8 6 1 .
p . 8 6 1 .
Sander, Lawyers
and t h e P u b l i c I n t e r e s t
( 1 9 6 8 )
at
1 1 5 -
-
But
of
any attempt
t o deny
4 4
-
t h e commercial
l a w i n 1981 must be u n r e a l ; few would
fees
course
guarded
both
as t o t h e amount o f f e e s
ing
bodies
the
safeguards
Moir
these
as s u g g e s t e d
tion
t h e U n i t e d Kingdom
a n d so s h o u l d
should
be drawn
a socially
used
Denning
useful
litigation
be used
t o be s a f e But
by t h e govern-
p r o f e s s i o n and
along
i n Wallersteiner
v.
into
of equality
i s considered
as a l a s t
resort
as
socially
(7).
But a t t e n t -
t o the United
S t a t e s where
device.
t h e c o n t i n g e n t f e e system i s
That
successfully i n the United
principle
o f access
States
litigation
i s seen
and o t h e r c o u n t r i e s and t h e
to the courts j u s t i f y
further
study
t h e c o n t i n g e n t f e e system.
It
system
may b e t h a t
the non-introduction of the contingent fee
i s due t o s h o r t a g e
Wal l e r s t e i n e r
v. Moir
t h e Law C o m m i s s i o n
"Although
from
i n 1966, complained
I c o u l d have wished
the 'further
(which
for
of parliamentary
( N o . 2 ) Scarrnan L . J . ,
study'
C o m m i s s i o n recommended
t o have
that
c o n t i n g e n t f e e system.
to minority
who h a d b e e n
Such
shareholders
results
t h e Law
I do n o t k n o w ) i s no e x c u s e
of the legislature." (8)
be i n t r o d u c t i o n
as m i d d l e
(7) Indeed d i s i n c e n t i v e s e x i s t because
winner's costs.
(8)
( 1 9 7 5 / 1 A l l E.R. 8 4 9 , a t 8 7 3 .
words:
i n the matter
a s y s t e m c o u l d be o f
as w e l l
chairman
the following
fees which
(para. 2 0 ) ,the delay
there should
Indeed i n
s e e n b y now some
o f contingency
may o r may n o t b e i n e v i t a b l e ,
i s proposed
time.
with
t h e c o u r t a t t e m p t i n g t o do t h e work
It
use
need
c a n be c o n t r o l l e d
by Lord
legal
nowadays.
and m e r i t s o f c l a i m s .
o f t h e two b r a n c h e s o f t h e l e g a l
disruptive
of
matters
that
(No.2).
In
of
that
of the practice
consider
t h e use o f c o n t i n g e n t fees would
i s submitted
as
still
a r e mere h o n o r a r i a f o r a s e r v i c e t o j u s t i c e
Of
it
aspects
income
the loser
o f some
form
particular
groups.
has t o pay t h e
-
Finally
difficulties
and
other
ing
them,,
i t i s perhaps
breaches of
this
p o i n t i n time
vide
duty
company r e a c h e s
directors
the
run,
and
the
not
the
to emphasise
place
breaches of
personal
likely
wrongs or
economic
and
management p l a c e s
social
law
as
role
to play
i n the
i t is submitted
future
education
should
e x t e r n a l mechanisms
to
improve
Chapter
committee or
b a s i s , who
graces,
which
will
the
have
which
3 h e r e i n , has
cipation,
and
s u p e r v i s i o n of
mere s o c i a l
stands
duty
h a r m may
loss,
can
that
be
the
of
only
far greater
money
to
pro-
that
may
incompet-
be
very
great.
creditors,
and
as
have a
can
be
limited
internal
will
In
outside
something
a major
be
of
be
role
of
form
and
mechanisms w i t h i n
management.
use
practical
c o n t i n u i n g improvement
i n i t s many v a r i e t i e s
of
executive
insufficient
of
At
(9).
Therefore
watching
detected
insurance
shareholders,
from
i t now
only
i s n e g l i g e n t l y or
seen
the
negligence
liquidation.
breaches of
suppliers at risk
managerial
practical
then s u b s t a n t i a t -
are
into
t o be
and
above,
and
duty
going
employees, consumers
ficance
the
fortunes including
'Where a c o m p a n y
resultant
incompetent
first
point of
f o r the
have been c o m m i t t e d ,
Bad
i n the
i n d e f a u l t are
f o r compensation
ently
important
More o f t e n than
the
the
-
involved i n detecting fraud, self-serving
when
of
4 5
this
definite
to o f f e r
more p a r t i c u l a r l y
to play
more p a r t i c u l a r l y
as
on
of
the c r e a t i o n
the
connection
directors
a
company
the
non-
other
than
described
does employee
described
signi-
in
parti-
i n Chapter
2
herein o
See, e . q . W a l l e r s t e i n e r v . M o i r ( N o . 2 ) / 1 9 7 5 / 1 A l l E.R. 8 ^ 9 ;
Q.B.
3 7 3 ;
/"19 7 5 J
2
W.L.R. 3 8 9
although r e c e n t l y the c o u r t s
have been more r e a d y t o i n t e r v e n e t o c o r r e c t abuse o f m a j o r i t y
p o w e r and u n f a i r n e s s .
( 9 )
[ 1 9 7 5 ]
- 46 CHAPTER
Until
recently
2
EMPLOYEE
company
law d i d not set o u t t o recognise the
i n t e r e s t s o f t h e employee.
creditors,
auditors,
Parke v . D a i l y
"The v i e w
is
News
care
b u t n o t employees.
shareholders,
T h u s P l o w m a n J„ s a i d i n
(1):
i nhaving
i n t h ebest
interests
o f t h e i r company a r e e n t i t l e d t o t a k e
account
held
theinterests
. o
benefit
and
however e n l i g h t e n e d
relations
were prompted
were
such
justification.
directors
order
t h e 23rd
their
such
by motives
which
thepoint
of
those
be g i v e n
employees
1980,p r o v i d e s
o f t h e company
shall
that
t h ematters
a r e t o have r e g a r d
include
as w e l l
theinterests
i n general
this
i s t o be owed b y t h e d i r e c t o r s
enforceable
to
t h e company b y i t s d i r e c t o r s .
as such d i r e c t l y b e n e f i t
shareholders
r
(2) t o take
a very
employees
t h e company."
came i n t o
force
t o which t h e
o f t h e company's
o f i t s members. B u t
alone and
f i d u c i a r y duty
owed
The employees a r e n o t g i v e n any
Therefore
this provision
e m p l o y e e s who w o u l d
action
that
t o t h e company
i n t h e same w a y a s a n y o t h e r
r i g h t o f enforcement.
that the
i n t h eperformance o f
as t h e i n t e r e s t s
is
as s u f f i c i e n t
t o i t s former
than
laudable
of industrial
i sthis,
rather
employees
collective
view
46 o f t h e C o m p a n i e s A c t 1 9 8 0 , w h i c h
June,
o f any
may b e w i d e l y
however
company a r e p r o p o s i n g
should
what
i s not thelaw . . .
as t h e l a w does n o t r e c o g n i s e
o f i t s funds
functions
duty
irrespective
i s one which
The e s s e n c e o f t h e m a t t e r
to benefit
Section
directors
from
o f t h edefendant
part
t o t h equestion
o f t h e employees
. B u t „ „ » i n my j u d g e m e n t
defendants
large
regard
t o t h e company
the
not
of directors,
directors
consequential
on
I t took
that
into
in
PARTICIPATION
and w i l l
require
presumably
come
will
t o be
within
( 1 ) / 1962/ C h . 9 2 7 ; / l 9 6 2 j 3 W.L.R. 5 6 6 ; /1962J 2 A l l E.R. 9 2 9 ;
106 S.J. 7 0 4 .
( 2 ) B u t , o f c o u r s e , t h e t r a d e u n i o n s may b u y s h a r e s i n c o m p a n i e s
e m p l o y i n g t h e i r members so t h a t t h e y c a n s u e q u a members o n b e h a l f
o f t h e c o m p a n i e s v/hen t h a t i s a l l o w e d .
See a l s o p o s t , p . 8 9 .
the
r u l e i n Foss
provision
before
v.
Harbottle
i s probably only
this
provision
was
however,
empowered
so
do
may
event of
a s e s s a t i o n or
exercise
of
the
the
last
organisation
has
have c r e a t e d
vast
rise
of
the
If
the
i t s own
state.
state
and
To
ditions
for
on
or
significantly
industrial
aspect
influence
of
growth of
size
and
law
the
Daily
so
of
with
News
their
seems not
power a s
New
law
of
i s being
the
been
trading
said
of
the
that
law
modern s t a t e .
to
of
taken of
the
economic
dominate
corporation
can
the
the
be
modern
political
(6).
influence
to get
its first
first
the
business
forms of
terms with
Sometimes
the
Arguments
I t has
a large
the
(5)
constitutional
t o be
in
whole s c a l e of
decisions
the
are
though
i t even a t t e m p t s
the
of
i n t e r e s t s of
concentration
equal
then,
the
best
the
47
employees
even
the
i t stood
Section
for
the
as
and
d i r e c t o r s who
business
i n the
affected,
consumer demands.
i t s shareholders
of
increased.
l a r g e company t o d a y h a s
and
i s changed
force.
empires.
c o m p e t e on
some e x t e n t ,
an
little
that
f o r C h a n g e and
increasing recognition
social
The
be
twenty y e a r s
i t can
as
and
not
Parke v.
i n t e r e s t s are
considered
provides
modern c o r p o r a t i o n
power b e h i n d
into
t r a n s f e r of
company, t h u s r e v e r s i n g
In
So
make p r o v i s i o n
power may
Pressures
(3).
brought
1980,
to
-
declaratory
Companies Act
(4)
47
on
the
con-
largest profits
goal;
objective
market
i t
concentrates
(7).
( 3 ) ( 1 8 4 3 ) 2 Hare 261.
( 4 ) T h e power m u s t be e x e r c i s e d by t h e g e n e r a l m e e t i n g u n l e s s t h e
d i r e c t o r s a r e a u t h o r i s e d by t h e memorandum o r a r t i c l e s ( s . 7 4 ( 3 ) o f
the Companies Act 1980).
S t e p s a r e , however, t a k e n to e n s u r e t h a t
t h i s i s n o t u s e d t o t h e d e t r i m e n t o f c r e d i t o r s ; p r o v i s i o n may
be
made o n l y o u t o f p r o f i t s a v a i l a b l e f o r d i v i d e n d o r , i f t h e company
i s i n l i q u i d a t i o n , a v a i l a b l e f o r d i s t r i b u t i o n t o t h e members ( s . 7 4 ( 6 )
o f t h e 1980 A c t ) .
( 5 ) A n t e , p.46
( 6 ) C f . Gower, pp.58-9
(7) C f
Gower, p. 59
0
A
further
enterprises
to
one
has
trading
1968,
tional
will
the
consequence o f t h e growth
only.
assumed
world
companies
told
alarm.
nel,
proportions,
which
either
Governments
of parish
will
span
company
b y way
of
by
Britain
and
there
more and more
tasks
the
interna-
including
councils
our
i n dealing
own,
with
the world."
i s no
mergers has
need
f o r two
caused
person-
departments.
many d e v e l o p e d
t o b e c o m i n g an a u t o m a t e d s o c i e t y .
ticated,
the giant
companies o r
development of i n t e r n a t i o n a l
or accounting
Furthermore
foreign
National
I f two companies merge,
marketing
one where
allegiance
t h e H o u s e o f Commons, "As
develop,
corporations
current
t o owe
companies o r branches i n o t h e r c o u n t r i e s ( 8 ) .
be r e d u c e d t o t h e s t a t u s
large
of giant commercial
ceased
i s now
international
subsidiary
a Minister
The
way
Our
agreements o r mergers w i t h
operating
In
-
i s t h a t many o f t h e m h a v e
country
already
48
As
c a n be d o n e
nations
a r e on
technology
their
i s so
by m a c h i n e s and
sophis-
jobs
are
lost.
In
ence
the last
levels
Britain's
times
half
o f t h e 1980s W e s t e r n Europe began
o f unemployment
unemployment
greater
than
Together with
stimulant
moral
fulfil
for political
6 p e r c e n t was
acceptable
expected
and
discontent.
that
usually
By
level
Our
A man
and
three
o f t h e mid
t o go u p .
Unem-
difficulties.
traditional
who
experi-
1978
nearly
i s the greatest
t h e husband,
requirement of society,
( 8 ) Gower, p . 6 1 .
( 9 ) A.W.
Benn, M i n i s t e r
Col. 491).
social
people work
to work.
years.
to continue
unemployment
requires
a r e t o o young
this
of over
a l o t o f economic
head o f t h e h o u s e h o l d ,
t h o s e who
and
inflation,
principles
for forty
the p o l i t i c a l l y
1950s; y e t i t i s g o i n g
ployment creates
rate
unknown
to
economic
system o f
for a living
i s expected
and
the
t o keep
i s o u t o f work c a n n o t
i s looked
of Technology: O f f i c a l
down u p o n
R e p o r t (H.C.
because
1968,
he i s c o n s i d e r e d
have
can
A long
ability
t o work.
t o prevent
Unemployment
amongst
and
h a v e no s o u r c e
they
meaningful
that
they
that
industrial
from
are being
t o d o , some y o u n g s t e r s
are better
h i s mental
finding
i s even worse.
o f income.
i s b e l i e v e d , however,
there
children
young p e o p l e
a feeling
may
and
T h e r e a r e c a s e s w h e r e men p r e t e n d t o
their
may h a v e
This
p e r i o d o f unemployment
d e s t r o y a man's p r i d e a n d e v e n t u a l l y r e m o v e
t o work
It
of supporting h i sfamily.
a bad p s y c h o l o g i c a l e f f e c t .
physical
go
n o t capable
49 -
rejected
Because
turn
The
youngsters
by a d u l t
they
have
t o vandalism
t h e unemployment
relations
the truth.
rate
society
nothing
and c r i m e ( 1 0 ) .
will
and r e v i t a l i s a t i o n
fall i f
of British
i n d u s try„
Recently
which
and
will
educational opportunities
accelerate with
an i n c r e a s e
opportunities
advancement
i n further
raise
education
the aspirations
i s producing
authoritarianism
the raising
within
to
way; t h e y
The
arisen
mergers
Such
have
by p a r t i c i p a t i n g
the right
i t are matters
need
o f urgency."
f o r employee p a r t i c i p a t i o n
out of fear
( 1 ) . T h e new
and e d u c a t i o n a l
are urging that
ideas
have
are against
man
permeated
o f unemployment
and c o n v e n t i o n a l f i r m s
t o determine
i n a widening
management b u t t h e r e c o g n i t i o n
secure
l e a v i n g age
should
into
(2).
o n l y must w o r k e r s
environment
facilities
o f young people
have a g r e a t e r say i n h i s d e s t i n y .
"Not
o f the school
a s o c i e t y where younger people
i n a positive
the work environment
have e x p a n d e d , a phenomenon
economic
range o f d e c i s i o n s
of that
right
and measures
(3)
on t h e b o a r d
and r e d u n d a n c i e s
going
their
has
partly
resulting
bankrupt.
( 1 0 ) See g e n e r a l l y B u l l o c k R e p o r t , Cmnd 6 7 0 6 , C h a p t e r 3.
( 1 ) See W.B. C r e i g h t o n ( 1 9 7 7 ) 4 B r i t . J . L . & 3 o c . 1 , 6.
( 2 ) See B u l l o c k R e p o r t , p a r a . 3 . 7 .
( 3 ) L a b o u r P a r t y document on I n d u s t r i a l Democracy 1967.
from
Another
base
50 -
f o r advocating
employee
the
e m p l o y e e s o f a b i g company i n f a c t
and
practical
its
business
shareholders
play
those
employees
may
some i n i t i a l
t o be e n t i t l e d
both
should
be e n t i t l e d
be a r g u e d
that
t h e power
may
shares,
whereas
company.
to
and
sever
The s h a r e h o l d e r s ,
return
some p r o f i t
remaining
holders
his relationship
an e m p l o y e e
a reasonable
after
shareholders,
paying
sums
these
over
i t .
management
Indeed
i s probably
since
should
the
of profit
sanctity
A company
ployees,
should
be s h a r e d
interests
should
not o n l y r i g h t s
pany d i r e c t o r s
place
consumers,
have
live
and r e s t r i c t s
be a m e e t i n g
suppliers,
We
A
ny
f o rcapital,
and t h e p u b l i c
a s t a t u s i n company
by t h e s h a r e -
as w e l l .
on b e h a l f o f s h a r e h o l d e r s
responsibilities
as w e l l
as t o p r o t e c t
questions
interest.
management,
em-
A l l these
Ownership i n v o l v e s
This
r e q u i r e s com-
to discharge
their
notional
of self
together.
law.
invested
profit
i n an e r a t h a t
the pursuit
but responsibilities
share-
entitled
on t h e c a p i t a l
investment.
should
be
and employees e q u a l l y o r i n p r o p o r t i o n t o t h e i r
be.
a
t o lose by l e a v i n g t h e
i ti s submitted,
o f making
of
a company by s e l l i n g h i s
h a v e much
f o r the risk
as t h e c a s e may
their
legitimate
social
interests
investors.
There
It
may
with
as
employees'
f o r shareholders,
b y way o f i n t e r e s t
contribution
as
to control
than
as g r e a t
Since
of
that
b u t they
the a c t i v i t i e s
those
of
Therefore
at least
in profits.
than
it.
to sharing control
more i m p o r t a n t f o r employees
holder
i n running
i n controlling
longer
I ti s true
o r new c a p i t a l ,
to rights
and i n p a r t i c i p a t i n g
t o t h e company l a s t
make a g r e a t e r c o n t i n u i n g
and i n v e s t o r s .
or continuing part
of shareholders
i s that
t o t h e s u c c e s s and p r o f i t a b i l i t y
shareholders
contributed
ought
management
it
than
no a c t i v e
employees
ties
contribution
participation
are other
i s argued
that
reasons
t h e new
f o r demanding
system w i l l
employee
participation.
end t h e e x p l o i t a t i o n
o f human
beings.
I t i s alleged that
objects.
This
stopped.
I t i s said that
employees
of
phenomenon.
such
would
been
viding
of
said
board
would
capital
find
through
and
level.
ment w o u l d
i t difficult
them
to their
directors
would
feel
stituents
or
On
the other
boards would
socialism.
formation
be
able
point
out
suggest
will
the
further
about
their
be
carried
production.
an
out
an
early
(4).
the
I t has
by
pro-
of
directors
corporate
policies
and
those
they
and
at crucial
participation
of
capitalism
stages
The
con-
in
policy
employees
will
a decision i s taken,
f o r the
what
and
they
i n so
A
J.L.
take
&
interests
are
proposing
the
joint
decision
Soc.
1,6.
and
to
workforce
disputes
longer
to
of
doing
industrial
i t may
See W.S.
Creighton (1977) 4 B r i t .
Bullock Report, para.
6.27.
employee
themselves ( 5 ) .
employee
stage.
the
and
and
consult their
committing
that
manage-
t o them
represent
down b e c a u s e
t o t h e company.
initially
be
employee
a proposal
without costly
would
training
opinions before
alterations,
Although
check
decisions
optimum c o m b i n a t i o n
management on
or
end
i n making
before
interests
at
implications
to question
and
explaining policies
i t i s argued
solved
alternatives
assist
slowed
represent
hand,
the
employee d i r e c t o r s
o b l i g e d t o r e p o r t back
commit t h e m s e l v e s more
usually
(4)
(5)
be
the
necessary
more t i m e
Conflicting
would
that
to understand
they
income
participation
wealth
hands
be
democracy.
c o n s t i t u e n t s or
bring
to express
employees,
of
those
in
t o see
employee
fewer
as
should
f o r more r e s p o n s i b l e c i t i z e n s h i p
the
be
and
like
production of
and
treated
inequalities
said that
to e f f e c t i v e l y
have t o spend
rights
many w o u l d
fewer
argued
Without
might
and
into
unable
decision-taking
on
i n the
to provide
be
natural
and
I t is further
i t may
inexperienced
at
employers
f o r more i n d u s t r i a l
However
their
t h e r e are u n f a i r
i n v o l v e more p e o p l e
concentration
also
and
-
some e m p l o y e e s h a v e b e e n
is contrary to
between
51
time
and
to
can
loss
formulate
corporate
obtained,
decisions will
will
more t h a n
policy
that
p a r e n t s would
be c a r r i e d
in
Kingdom w h i c h
would
ments e l s e w h e r e .
the instructions
o u t by t h e b o a r d
Bullock
But once
of companies,
t h e c o m p a n i e s more p r o f i t a b l e ,
i n the United
that
that
s o many
it.
level
i s seen
There
may
i n some f o r m
drawn
the t r a d i t i o n a l
a s one o f o p p o s i n g
then
foreign
investwould
relations
be a n i n c r e a s e
Furthermore
t o t h e new
foreign
system,
c o u n t r i e s i n Europe have adopted
Some a t t e n t i o n h a s b e e n
which
at first
rule of
t h e new s y s t e m
Kingdom.
expecially
with
of the foreign
t h e r e would
e v e n t u a l l y become a c c u s t o m e d
might c o n f l i c t
Kingdom
improve i n d u s t r i a l
i n v e s t o r s would
model o f c o - d e t e r m i n a t i o n
inter-
f o r e i g n e r s m i g h t make
i t was proved
which
o f a s u b s i d i a r y company
(7) considered
and
when
o f employee
i s s u b j e c t t o t h e new p r o p o s e d
d e c l i n e ( 8 ) because
foreign investment
system
economy, and f e w e r
the e f f i c i e n c y
of
corporate
on f o r e i g n i n v e s t m e n t ,
increase
make
t h e new
s e t up b u s i n e s s e s i n t h e U n i t e d
of the uncertainty that
investment
over
part i n the B r i t i s h
co-determination.
in discussing
This
(6).
companies would
the United
o f employees h a s been
and q u i c k e r t o i m p l e m e n t .
might have a bad e f f e c t
an i m p o r t a n t
because
the consent
be e a s i e r
has been e x p r e s s e d
participation
national
once
make u p f o r t h e l o s s o f t i m e
a t the beginning
Concern
plays
policy,
52 -
t h e German
(9).
to that
role
board
representation
of c o l l e c t i v e
bargaining,
management, n o t c o l l a b o r a t i n g
be c o n t r a d i c t i o n b e t w e e n
r e p r e s e n t a t i o n and c o l l e c t i v e
the o b j e c t i v e s
bargaining
(10).
of
with
board
But i t i s
( 6 ) Cf„ B u l l o c k R e p o r t , p a r a s . 6.28, 6 . 2 9 .
( 7 ) S e e B u l l o c k R e p o r t , p a r a s , 6.33 t o 6 . 4 1 .
( 8 ) I t w a s t h o u g h t t h a t e m p l o y e e p a r t i c i p a t i o n was o n l y o n e o f many
e c o n o m i c and p o l i t i c a l r e a s o n s t h a t w o u l d a f f e c t f o r e i g n i n v e s t m e n t ,
s o i t w o u l d b e v e r y d i f f i c u l t t o e s t i m a t e i t s a c t u a l e f f e c t on
investment.
S e e B u l l o c k R e p o r t , p a r a . 6.36.
(9) F o r e i g n i n t e r e s t s have adapted to employee r e p r e s e n t a t i o n i n
W e s t G e r m a n y and t o some e x t e n t Y u g o s l a v i a .
See B u l l o c k Report,
p a r a . 6.41,
( 1 0 ) B u l l o c k R e p o r t , p a r a , 5.18.
argued
are
that
board
not incompatible
of
enabling
in
which
other.
they
work.
unable
means
of principle
and employee
t o cope w i t h
Bullock's
In
response
a c t i o n t h e Government
mittee
of Inquiry
Bullock.
towards
statutory
main
Proposals
marked
Democracy
the f i r s t
issued,
Report
Bullock
each
repre-
bargaining
may b e u s e d
alone
as an
(1).
sort
of
legis-
( 2 ) under
real
S i r Alan
move b y t h e G o v e r n m e n t
The B u l l o c k
a unanimous d e c i s i o n .
signed
(later
b y s e v e n members
Two r e including
members and a M i n o r i t y R e p o r t
signed
t h r e e m e m b e r s who w e r e a l l i n d u s t r i a l i s t s .
(3) proposed
companies employing
possibility
a Main
and t r a d e u n i o n
the remaining
level
r e g u l a t i o n o f employee p a r t i c i p a t i o n .
ports
by
and a s s i s t
s e t u p a c o m m i t t e e k n o w n a s t h e Com-
n o t reach
academic
collective
matters
however, c o u l d
the
which
purpose
i n t h e company
a r e r a i s e d by b o a r d
participation
Committee,
were
are similar
those
on I n d u s t r i a l
This
bargaining
t h e same
t o t h e i n c r e a s i n g demand f o r some
lative
Lord)
serve
part i n decision-making
a r e some m a t t e r s
t o handle
additional
t o take
processes
The two p r o c e s s e s
No new i s s u e s
There
r e p r e s e n t a t i o n and c o l l e c t i v e
because both
employees
sentation.
is
level
53 -
a r e c o n s t i t u t e d board
2,000 o r more e m p l o y e e s
o f lowing
t h e number f r o m
of directors f o r
( 4 ) , envisaging the
2,000 t o 1,000 i n d u e c o u r s e ( 5 ) „
(1) I b i d , para. 10.54.
( 2 ) Cmnd 6 7 0 6 .
The t e r m s o f t h e B u l l o c k C o m m i t t e e were as f o l l o w s :
" A c c e p t i n g t h e need f o r a r a d i c a l e x t e n s i o n o f i n d u s t r i a l democracy
i n t h e c o n t r o l o f c o m p a n i e s b y means o f r e p r e s e n t a t i o n o n b o a r d s o f
d i r e c t o r s , and a c c e p t i n g t h e e s s e n t i a l r o l e o f t r a d e u n i o n o r g a n i s a t i o n s i n t h i s p r o c e s s , t o c o n s i d e r how s u c h an e x t e n s i o n c a n bestbe a c h i e v e d , t a k i n g i n t o a c c o u n t i n p a r t i c u l a r t h e p r o p o s a l s o f t h e
T r a d e s U n i o n C o n g r e s s r e p o r t o n i n d u s t r i a l d e m o c r a c y . . ."
The
terms o f r e f e r e n c e o f t h e Committee have been c r i t i c i s e d s i n c e t h e
t e r m s r e c o g n i s e d t h e e s s e n t i a l r o l e o f t r a d e u n i o n s i n t h e new s y s t e m .
Furthermore Bullock d i d not consider the a l t e r n a t i v e o f extending
p u b l i c ownership by government.
( 3 ) B u l l o c k R e p o r t , p a r a . 1 1 . 4 . See a l s o g e n e r a l l y O.
Kahn-Freund
(1977) 6 I . L . J . 65. Except where i n d i c a t e d B u l l o c k ' s m a j o r i t y p r o p o s a l s a r e r e f e r r e d t o as B u l l o c k .
( 4 ) As t o g r o u p s o f c o m p a n i e s , s e e b e l o w p p . 8 0 - 1
( 5 ) B u l l o c k R e p o r t , p a r a . 1 1 . 5 . T h e new s y s t e m w o u l d a f f e c t f o r t h e
t i m e b e i n g some 7 3 8 e n t e r p r i s e s e m p l o y i n g 6 o r 7 m i l l i o n p e o p l e i n
t h e U n i t e d Kingdom ( o n e t h i r d o f t o t a l p r i v a t e s e c t o r w o r k f o r c e ) .
The
new
board
directors
case
The
would
and
a third
third
group
and
experience
opted,
an
group
of
directors
employees
(6).
and
Commission would
numbers o f
with
directors
co-opted
would
be
chosen
disagreement
t o be
t r y to c o n c i l i a t e .
number o f Y members s h o u l d
be
but
should
number o f
Bullock
or
employee d i r e c t o r s
rejected
the
that
the e x i s t i n g
said
be
system
unitary
board
British
be
company
board
law
and
and
of
with
the
there might
t h e management b o a r d
70%
or
of
pointed that
the
more.
total
avoid
workforce)
Furthermore,
m e m b e r s h i p was
The
union
still
the p o s s i b i l i t y
participation
on
the appointment
ery
as
of
of
Democracy
failed
as
well,
sides ( 7 ) .
the
t o be
as
equal
of
system
felt
and
that
proposed
two-tier
high
afore-
two-tier
the
of
super-
system.
representation,
(on
average
companies w i t h
increase of
as
flexibility
between
of
a
(8),
course).
restructured
friction
i n the
t h a n one
2,000
about
employees
unemployment
union
up ( 9 ) .
Congress
strongly
of c o n f l i c t
the board
for
was
in spite
going
Trades Union
i n large
co-
shareholder
they
m e m b e r s h i p was
be
either
traditional
be
and
more
When c o n s i d e r i n g t h e q u e s t i o n o f c h a n n e l
Bullock
should
upon b o t h
a two-tier
alia,
share-
n u m b e r and
are
structure
inter
inconsistent
odd
(which
introduction
i n t r o d u c e d because,
would
visory
the
an
formula).
the
Industrial
impose a b i n d i n g s o l u t i o n
either
expertise
I f conciliation
The
directors
t o who
in
+ Y
by
for their
called
Commission would
smaller than
2X
jointly
as
the
be
four
(the so-called
be
commission
shareholder
a minimum o f
would
I n case o f
independent
-
of equal
employee d i r e c t o r s
and
holders
consist
54
and
argued
between
collective
employee d i r e c t o r s
established for collective
the
that
in order
processes
of
b a r g a i n i n g , the
should
be
employee
channel
t h e same
bargaining (10).
(6)
I b i d . , p a r a s . 9.13, 9.14
and
9.19.
(7) I b i d . , p a r a .
9.43.
( 8 ) I t was so p r o p o s e d as t o p r e v e n t a d e a d l o c k
( 9 ) B u l l o c k R e p o r t , p a r a . 2.9 t o p a r a .
2.17.
( 1 0 ) I b i d . , p a r a . 4.4.
from
to
arising.
machin-
Bullock
suggested
on
a
ery
that
single
(1)=
which
other
policy
of
would
see
i t as
an
great
support
to propose
supported
a
by
sary
expertise
unions
the
that
the
trade
various
a committee
suggested
JRC.
The
between
JRC
the
that
on
the
(3).
to
the
and
had
choice
and
the
directors
or
felt
to
the
run
able
was
necesa
to
system
establish
(4).
company
Bullock
should
should
of
be
collective
(JRC)
l i e with
discussions
union
questions
should
of
set
Committee
bargaining
kinds
was
representatives
for arranging
through
which
bargaining
collective
democracy
justification
be
key
unions,
i t imprac-
board
representatives
questions
trade
to possess
would
bar-
interests.
Representation
different
the
the
the
further
other
responsible
and
collective
effectively
and
machin-
industrial
members i n t h e
of
f o r example whether
A
based
established
Bullock
on
and
be
union
established
collective
the J o i n t
be
trade
expected
board
with
t o d e c i d e how
of
their
be
should
o p p o s s e d by
strength
employee d i r e c t o r s
meetings of board
contrary
representation
shop s t e w a r d s
also
board
through
unions
unions
called
the
strengthening
on
reasonably
the
would
representatives
solved,
of
u n i o n s who
t o be
on
i n proceeding with
conflict
the
Trades Union Congress
strongly
independent
to avoid
be
trade
trade
could
recommended
be
the
system
and
be
dangers
of
the
and
attack
employee p a r t i c i p a t i o n
procedures
and
encouraging
also
the
up
method would
would
the
view of
representation
and
that
of
of
-
participation
(2)
without
not
the
employee
T h e r e w o u l d be
tical
to
channel
Any
published
gaining
agreed
55
should
raised
at
bargaining
machinery.
Bullock
the
board
trade
also
should
unions
recommended
be
that
"trigoered"
recognised
by
the
process of
reconstituting
the
request
the
for collective
(1) I b i d . , p a r a . 10.8.
( 2 ) I b i d . , p a r a . 10.G.
( 3 ) I b i d . , p a r a . 10.5.
(4) Bullock Report, para.
10.7.
of
bargaining
one
or
more
representing
at
5 6
-
least
into
a fifth
account
suggesting
of
the
total
there
employees before
pany.
Bullock
those
eligible
would
be
the
the
should
system
proposed
to vote
about
70
per
I t i s submitted
cent,
of
good
for confining
workforce,
be
the
'democratic'
argued
the
of
r e p r e s e n t a t i o n once
to
employees would
possibility
unions
a ballot
and
f o r i t t o be
one
third
of
Bullock
union
ped
take
also
so
of
to decide
tasks.
board
failed
to non-union
some 30
that
of
upon
employees.
that
seem t o
p a r t i n t h e more t e c h n i c a l
five
be
a
i s no
with
aspects
would
of
so
system
a union
should
of
be
the
simple
be
be
education
the
the
new
for
or
allowed
system,
majority
of
continuance.
there should
such
employees.
cent, of
years
the continuance
against
be
(6) considered i t
the workforce
purpose of
the employee r e p r e s e n t a t i v e s
per
covered
However, t o a l l o w
after
there should
to
companies
democracy
started.
employee d i r e c t o r s
The
the
t o d i s c o n t i n u e t h e new
to vote
recommended
that
wish
cent,
eligible
then
Bullock
Bullock
com-
to one-third of
i n the
industrial
proposed
per
given
members, t h e r e
excluding
i t was
discontinued
those
education
for their
equip
Bullock
r e p r e s e n t i n g 20
request
by
by
of a l l
representation to trade union
name s u g g e s t s , ( 5 ) .
that
board
the board
the workforce
system
unlikely
i n any
votes
took
members
a ballot
equal
that
trade union
that
proposed
as
are
on
of
triggered
affirmative
no
i t can
be
nevertheless
non-union
a requirement
casted
proposals
reason
of
i f a majority
the Bullock
such
be
could
by
Indeed
position
employee p a r t i c i p a t i o n
Although
Bullock
that
reconstituted.
guarantee
workforce.
t o some d e g r e e
that
-
better
trade
properly
equip-
was
. . .
necessary
to "
ability
the board's work.
to
For
( 5 ) T h e B u l l o c k C o m m i t t e e was t o some e x t e n t r e s t r i c t e d b y i t s
terms of r e f e r e n c e .
The M i n o r i t y R e p o r t , h o w e v e r , s u g g e s t e d
that
e m p l o y e e d i r e c t o r s s h o u l d be e l e c t e d b y a l l t h e e m p l o y e e s , and t h e
i n s t i t u t i o n l i n k i n g t h e e m p l o y e e d i r e c t o r s and t h e w o r k f o r c e s h o u l d
b e an e m p l o y e e o r c o m p a n y c o u n c i l , w h i c h c o u n c i l w o u l d b e a c o n s u l t a t i v e body s e p a r a t e from the r e c o g n i s e d t r a d e u n i o n s .
(6) Bullock Report, para. 10.21.
this,
cial
some a c q u a i n t a n c e
systems,
economics,
some a s p e c t s
of
Fifth
The
the
Labour
Party
hands.
participation
The
accession
Communities required
those of
other
proposed
the
countries
in
1975
provides
the
Britain
i n t r o d u c t i o n of
But
after
a
to
objectives
the
adopt."
(1)
and
i n March
the
European Assembly
of
finan-
information
and
so
(9).
the
on."
and
(7)
Report.
compulsory
not
Kingdom
to
the
the
company
European
negotiations
recommended
t o be
reached
as
to
the
the
the
"a
precise
and
which
Economic
law
with
Commission
EEC
consultation,
which
leaves
models which
Affairs
own
in a l l
framework
i n a way
Legal
in i t s
European
German t w o - t i e r m o d e l
of
However,
i n t r o d u c t i o n of
entirely
British
Initially
series
1981
Bullock
are
to harmonise
suggested
law
the
t o any
United
member s t a t e s
may
to
events
European Commission
f o r the
discretion
the
presentation
Directive
( 8 ) , but
member s t a t e s
(10).
company
i s opposed
of
the
management
i s committed
p r e s e n t Government
employee
-
i s needed w i t h
information, basic
control
57
Committee
f o l l o w i n g a l t e r n a t i v e s to
they
of
the
European Commission ( 2 ) : -
(7) I b i d . , para.12.22.
( 8 ) The L i b e r a l s and S o c i a l D e m o c r a t s a p p r o v e o f t h e F i f t h D i r e c t i v e .
( 9 ) See a l s o t h e D r a f t S t a t u t e o n t h e E u r o p e a n C o m p a n y .
( 1 0 ) D r a f t F i f t h D i r e c t i v e t o h a r m o n i s e Company Law
i n Member S t a t e s
(1972).
( 1 ) EEC C o m m i s s i o n , E m p l o y e e P a r t i c i p a t i o n and C o m p a n y S t r u c t u r e
(1975).
( 2 ) The F i f t h D i r e c t i v e i s s c h e d u l e d t o be f i n a l i s e d b y t h e
Council
o f M i n i s t e r s i n September 1981.
The p r e s e n t G o v e r n m e n t i s o p p o s e d
t o a n y c o m p u l s o r y i n t r o d u c t i o n . The F i f t h D i r e c t i v e d e r i v e s i t s
l e g a l f o r c e f r o m A r t . 5 4 ( 3 ) ( g ) o f t h e T r e a t y o f Rome t h e r e l e v a n t
t e r m s o f w h i c h r e a d as f o l l o w s : " . . .
c o - o r d i n a t i n g to the necessary e x t e n t the safeguards which, f o r the p r o t e c t i o n of the i n t e r e s t s
o f m e m b e r s a n d o t h e r s , a r e r e q u i r e d b y member s t a t e s o f c o m p a n i e s
o r f i r m s . . . w i t h a view t o making such s a f e g u a r d s e q u i v a l e n t
throughout
the Community."
I t i s debatable whether the question of
i n d u s t r i a l democracy f i t s c o m f o r t a b l y w i t h i n the A r t i c l e .
I f the
f i n a l v e r s i o n o f t h e F i f t h D i r e c t i v e i s u n a c c e p t a b l e t o and
forced
u p o n t h e U n i t e d K i n g d o m , t h e U n i t e d K i n g d o m w o u l d be e n t i t l e d t o
c h a l l e n g e a n y c o n t e n t i o u s a r t i c l e s i n t h e F i f t h D i r e c t i v e as u l t r a
vires.
See a l s o W. D a u b l e r ( 1 9 7 7 ) 14 C.M.L. Rev.
457.
(i)
under
A
half
supervisory
A u n i t a r y board
consult
with
sented.
0R_
( i i i )
but
final
but which
from
Government a c t i o n
employee
A view
best
t h e EEC
participation
has been
one
not lose
( 5 ) because,
any
particular
cipation,
and
employer
i n large
aspect
that
reason f o r
context
the i n t e r e s t s
o f employees
structures f o r
I t i s pointed
i s both
i n employee
difficult
and
usefully
apart
from
out that
danger-
examine
i t s institu-'
i n c l u d i n g i n t h e case o f employee
operation
representation,
of collective
the p o l i t i c a l
to fail
situation
other
and t h e r o l e o f
practices, attitudes
t o recognize
of the context,
See M a d d e n , p.44 7.
See g e n e r a l l y S. S i m i t i s
See a l s o B u l l o c k R e p o r t ,
bargaining,
parti-
t h e s t r u c t u r e and f u n c t i o n s o f u n i o n s
i t i s so e a s y
elements
o f board
companies ( 3 ) .
t h i n g s , one c a n n o t
and
(3)
(4)
(5)
be i s c o n j e c t u r a l ,
the principal
of law o f a country
associations,
important
when
col-
Choices
and t h e i m p a c t o f s o c i a l
pret
ballot
i n t r o d u c t i o n o f some f o r m
government,
because
are repre-
of
secret
D i r e c t i v e would
countries
other
the practical
forms o f worker
a
to
a system
s i g h t o f t h a t making c o m p a r i s i o n s
among
and s o c i a l
to time
employees
involve
slightly,
OR
time
through
o r c o n s u l t a t i o n (4)«
in different
ous
from
by t h e development o f e x i s t i n g
bargaining
participation
employees
board.
derived
has been
put forward
represented
should
must
i n discussing
collective
tional
i s obliged
the Fifth
The
are
with
representatives.
version
the pressure
level
which
A c o n s u l t a t i o n system
t h e employee
What
board
a c o n s u l t a t i v e c o u n c i l on which
bargaining
choosing
and management
of the d i r e c t o r s of the supervisory
(ii)
lective
58 -
or correctly
a n d o n e may
( 1 9 7 5 ) 38 K,L.R.
p a r a . 6.48.
and
1.
values
inter-
particularly
fail
t o sense d e e p l y - r o o t e d
tudes
understand
perspective
o u r own
should
bear
this
German model
suit
needs
t h a t t h e German s y s t e m
t h t United
to
Kingdom because
of industrial
make a n y d i r e c t
impractical.
established
an
ure
board
o f labour
a preference
u
n
f o rcollective
legal
their
win
than
development
antagonistic
British
towards
fixed
ers
f o rbreach
of contract
p.448.
a
success
i s that there
between
i n German
to other
on a
countries
long-
a supervisory
t h e most
as
trade
significant
trade
During
unions
been
u n i o n s and
500 y e a r s
upon
o f t h e law' b u t
the c r i t i c a l
collective
The
does n o t r e s t
have found
periods
that
industrial
they
of
could
strength
Historically
the workers
The j u s t i c e s
o f t h e peace,
and f i n e d
and i m p r i s o n e d
1375, were n e a r l y
and
feat-
has g e n e r a l l y
'the a b s t e n t i o n
the law.
until
bargaining
well
differences i n
organization
o f power between
the judiciary.
wages f o r n e a r l y
( 6 ) Hadden,
such
through
r e l i a n c e upon
who
union
bargaining
experience.
more e c o n o m i c g a i n s
through
and one
t o have been
i n Germany i s b a s e d
r e l i a n c e upon c o l l e c t i v e
on p r a c t i c a l
and weaknesses
s o l u t i o n as a m e t h o d o f r e g u l a t i n g j o b s .
some p h i l o s o p h i c a l b a s i s ,
simply
different
of our society.
seems
the contrary
us
with modifications to
are s u f f i c i e n t
and t r a d e
relations i n Britain
employers over
traditional
there
division
(6).
helps
the introduction of
t r a n s f e r o f t h e German model
and p r e c i s e
a
atti-
mean t h e G e r m a n m o d e l w o u l d w o r k
Co-determination
executive
although
and c o n d i t i o n s
in
only
has l e d us t o o v e r l o o k
to our country,
GermanY'does n o t n e c e s s a r i l y
patterns
i t from
i n m i n d when one a d v o c a t e s
in
the
by s e e i n g
become c o n s c i o u s o f gaps
familiarity
the particular
Accordingly
Making comparisions
system
so t h a t we may
o u r system which
the
b u t u n a r t i c u l a t e d assumptions or
i n an u n f a m i l i a r s o c i e t y .
better
of
59 -
always
were
work-
landowners
and
employers.
High
Court
The
The
redress
the basic
i n which
bargaining
ordinary
of
common l a w
dealing
and
a
with
ready
perity
body
there are
of
i t is better
conflicts
than
t h e company
interests
into
cannot
to the
e m p l o y e e s who
determined
an
to
lawyer,
the
the
an
disputes i n
or
by
traditional
this
not.
and
elect
the
jurisdiction
enforce
law
now
employers'
and
should
consider
own
introducing
an a l -
structures.
a l l direc-
take
always
instructions
whether
compatible
the
with
companies
employees'
wages.
that
of
stands,
the
the
the
Board
pros-
company's
particular
nevertheless
or
wishes.
I t
expectations of
the
company's
policy
of
representatives
to act o u t s i d e the c o l l e c t i v e
t r y to f i x t h e i r
new
representatives;
their
Furthermore,
shows
possibly conflicting
to decide
are
means f o r
a d e q u a t e means f o r
the
any
to follow
e l e c t e d them
g r a d u a l l y tend
They w i l l
them
of
thus
representatives
interests
t o use
As
account
irrespectively
expect
may
relation-
establishment
a
legal
to
f a r outweigh
i n the
i n c l u d e employee d i r e c t o r s )
they
is
anti-trade
hostility
of
the
did l i t t l e
because exoerience
t o be
difficulties.
E m p l o y e e s may
best
This
with
t o i n t r o d u c e and
interests.
the
to deal
of
employment
consisting
I t i s easier t o extend
(which would
up
judges
employer
nowadays,
tribunals,
agreements appear
existing
Besides
that
industrial
participation.
is
the
worker.
even
trade unionist,
the
individual
of
individual
industrial
i s argued
collective
best
the
fundamentally
down by
the
attitudes
(7).
It
tors
of
judicial
being
laid
courts is reflected,
employer
as
and
property rights
power o f
tripartite
field
rules
inequality
the
-
origins
were a l s o p e r c e i v e d
union.
ship,
social
60
which
jointly
b a r g a i n i n g system
r e p r e s e n t a t i o n thus
(7) F o r c o l l e c t i v e b a r g a i n i n g , see g e n e r a l l y C D .
Drake, Labour
Law ( 2 n d e d . ) p p . 2 7 3 - 2 7 6 ; C r o n i n a n d G r i m e , L a b o u r Law
(1970)
pp.303-318.
( 8 ) S. S i m i t i s ( 1 9 7 5 ) 38 M.L.R. 1 , 2 0 .
(8)
leads
t o self-governing
welcome
such
lated.
As a r e s u l t
run,
from
any form
bargaining.
argued,
take
and
they
risk
a branch,
o f board
The r i g h t
i f board
part
corporate
board
preventing
i s also
representation
strike
i s t h e t h r e a t and e x e r c i s e
takes
behind
or
(10) t h a t board
a secondary
participation
it
i s also
favour
which
is
schemes d e t e r m i n e
up t o t h e s e
e v i d e n t l y cannot
(l)
as a d u t y
bargaining
to strike
leads
(9)
therefore
as an
agreements
to a
auxiliary
and n o t employee
i t i s n o t necessary
with
i n connection
by c o l l e c t i v e
of collective
necessary w i l l
and
l a w . I t i s sug-
be seen
Hence
planning i n
to resort t o
with
matters
agreements. I t
bargaining
The l a r g e r t h e r e f o r e i s t h e a r e a
the less
t o accept
may b e c o m e i n c r e a s i n g l y
to control corporate
schemes e x c e p t
that the usefulness
under-estimated.
bargaining,
agreements
be c o p e d
i t i s
t h e p o s i t i o n o f t h e employees.
Consequently
participation
argued
should
mechanism, b u t c o l l e c t i v e
o f employees.
employee
representation
collective
as a r i g h t t o
r e c o n s i d e r a t i o n o f t h e mechanisms o f f e r e d by l a b o u r
gested
policy.
I n fact,
the collective
sanction
iso-
i n t h e long
challenge
of the right
away t h i s
be
n a t i o n a l wage
affected.
activities
machinery
which
unions,
would
but also
The u l t i m a t e s a n c t i o n
suggestion
gradually
i s treated not only
decisions
decisions,
trade
representation
dubious.
any
Some e m p l o y e e s may
r e g i o n a l o r even
to strike
i n making board
defend
wage p o l i c y . .
phenomenon, b u t such companies w i l l
defending
Therefore
61 -
has been
of collective
be t h e i n t r o d u c t i o n o f a u x i l i a r y
means.
It
sent
by
i s , however, accented
inadequate
and l a r g e
t o cover
confined
that collective
bargaining
t h e process o f corporate
to the traditional
i s a t pre-
planning.
wages and h o u r s
( 9 ) Iv.B. C r e i g h t o n ( 1 9 7 7 )
4 B r i t . J . L . & Soc. 1 , 14.
( 1 0 ) S. S i m i t i s ( 1 9 7 5 ) 38 M.L.R. 1 , 2 1 .
( 1 ) S. S i m i t i s ( 1 9 7 5 ) 38 K.L.R. 1 , 2 1 .
I ti s
issues o f
industrial
such
r e l a t i o n s and
as
investment
It
i s observed
industry
trade
are
through
not
there
which
law
rights,
redundancy
order
present
The
to help
the
right
employers.
T h o s e who
include,
of
to
through
the
inter
sell
labour
of
labour
The
cost
disclosure of
with
employees represented
of
range of
e.g.
the
The
of
to
the
their
areas
of
power
to
areas.
in
the
recognise
representatives
topics
lends
entitled
e m p l o y e e who
output,
to
the
brings
disclosure
the
to
from
money t o
compulsory
against
or
plant,
covered
should
on
employees'
given
company a r e
i s the
that
topics
t o p i c s or
areas or
c r e d i t o r who
list
be
areas
law
that i t is
i n the
should
required
number
and
should
type
e t c
t h o s e who
seek
industrial
bargaining
i n f o r m a t i o n advocate
machinery,
place.
is effected
representatives.
areas or
changes
particular
collective
sory
consultative
and
bargaining,
payroll,
Kingdom
extension
take
with
scarcely
specify
employee
the
Minister
list
I f the
company.
employed,
with
should
methods, d i s m i s s a l s ,
proposed
proposed
reasons,
democracy
law
out
must
t o d i s c l o s u r e , so
alia,
the United
an
set
nationalised
i t i s proposed
the
e m p l o y e e s and
i t s affairs.
employees
In
the
of
the
is entitled
labour
for various
consult
also
the
seek
i f industrial
working
collective
about
his
are,
appropriate
information
company
new
extend
forms of
know a b o u t
and
consultations,
enforce
negotiations
substantial closures
etc.
after
obligations to
bargaining
include
issues
of
bargaining,
should
to cover
policy.
negotiations;
to bargain
the
should
pension
and
seek
extends
public corporations
So
collective
just
this,
legal
courts.
c o n s u l t a t i o n or
topics
In
to
the
these d u t i e s
i n the
i s a duty
Besides
vary,
but
extended
enough
that
-
exceptionally
pricing
a l l under
unions,
enforceable
and
only
62
s o l e l y by
through
and
a greater
either joint
trade
democracy
unions or
works c o u n c i l s
compul-
decision-making
extension
of
representing a l l
employees r a t h e r
Another
be
achieved
of
supervision
by
pursuing
control
on
A
the
(3)
is that
employee p a r t i c i p a t i o n
giving
and
veto
that
are
and
come i t s c u r r e n t
the
proposed
companies
(
must
and
industrial
the
tation
employees'
led
to
attempt
for trade
the
of
(2)
(3)
(4)
(5)
the
a s t r i k e or
It
issues'
i s argued
would
be
that,
besides
would
as
not
a result
only
new
needed
improve
forms of
i f Britain
economic d i f f i c u l t i e s .
interests
of
At
the
the
the
of
are
and
over-
Board
repre-
bargaining;
efficiency
satisfaction
present
lack
of
of
communication
are
at
has
been
interests,
unless
industrial action
p.484.
to
consul-
announced
Once a d e c i s i o n
persuade employers
reached,
which
i t is
to reconsider
there
i s a work
produce
a
much
between
considerations
to
that
without
frequently
of
employees
i t is believed
arrived
effici-
i s to
the
employees'
See G o w e r , p . 6 9 .
E.g.
see H a d d e n ,
I b i d . , p . 1 6 0„
Ibid.
and
repre-
co-operation
what were
unions
than
employee/management
(4).
representatives,
similar
rather
increase
Decisions
to explain
powers
would
are
i n the
by
likely
industrial relations
board
community).
management.
difficult
rule,
be
economy
those decisions.
light
would
the
i s caused
and
any
effective
necessarilyconf1ict with c o l l e c t i v e
employees
without
joint
e s s e n t i a l to developing
the
unrest
of
board.
argument,
on
limited
i s more
level.
i n d u s t r i a l and
and
and
goal
c a p i t a l , which
not
gradually
of
the
change would
(5)
representatives
employee p a r t i c i p a t i o n
productivity
indeed
labour
sentation
of
e m p l o y e e s on
unions ( 2 ) .
specific
more a t t r a c t i v e
Employee r e p r e s e n t a t i o n
between
on
responsibility
and
ency but
employee
alternative
of
social
improve
trade
a l l issues' a t b o a r d
third
sentation
through
by
the
-
than
view
to
63
in
to
direct
-
confrontationo
with
considered
h i s t o r y , but
unworkable
The
They
a
may
by
d e c i s i o n s were made
long
i n our
demand b u t
trade
their
the
of
board
British
D
many o f
their
modern
which
selection
the United
of
(6)
In
other
determination
level
and
have
f e a t u r e s have
another
proved
proposal„
the
independent
has
right
board
trade
be
union
through
been
to
little
legal
progress
p a r t i c i p a t e i n management
Q
two
A Works C o u n c i l
5 persons<>
to d i s c u s s problems
The
has
reached
and
been made
the
most s o p h i s t i c a t e d
sometimes
three
( 8 ) i s required
This Council
and
the
Council
Council
has
the
Co-
0
separate
i n each
must meet
right
from
to h e a l t h
safety precautions
engagement of
the
management
to veto
management a c t i o n s r a n g i n g
and
company
makes r e p o r t s
wide range of
and
a
Experience
there
through
employees regularly,,
relations
e m p l o y e e s on
and
i n West Germany has
e m p l o y i n g more t h a n
t i m e when
forward
c o u n t r i e s more p r o g r e s s
i s imposed
institutionso
monthly
(7)
the
0
Kingdom
d e c i s i o n making
directors at
r e p r e s e n t a t i v e s m u s t be
t o w a r d s g i v i n g e m p l o y e e s any
or
been
society»
European
In
co-operate
had
historic
a recognised
union machinery
to
interests
industrial
that r e p r e s e n t a t i o n of
right
more w i l l i n g
knew t h a t
T r a d e s Union Congress put
suggest
legal
-
e m p l o y e e s m i g h t be
management i f t h e y
seriously
the
The
64
pay
and
to
over
a
holidays
new
staffo
Bullock Report, para
4 3 o
( 7 ) T h e r e h a s b e e n much a c t i v i t y b u t l i t t l e p r o g r e s s
regarding
t h e F i f t h D i r e c t i v e , and i n Cmnd„ 7 6 5 4 ( 1 9 7 9 ) t h e g o v e r n m e n t s t a t e s
t h a t no u s e f u l p u r p o s e w o u l d be s e r v e d by i n t r o d u c i n g l e g i s l a t i o n r e q u i r i n g t h e i n c l u s i o n o f d e t a i l e d e m p l o y m e n t and
other
n o n = f i n a n c i a l i n f o r m a t i o n i n company accounts„
The government i s
now c o n s i d e r i n g a d r a f t r e p o r t p r e p a r e d b y t h e D u t c h r a p p o r t e u r
(Geurtsen)o
(8)
See g e n e r a l l y Hadden, p p 4 7 4 - 6 „
i6)
c
0
0
In
case of disagreement there
Further
topics
require
between
cipates
must
of
the plant
company,,
as i t s sale
takes
t h e members
Where
vise
and a p p o i n t
third
boardo
by t h e d i r e c t
directors
Numerous
parti-
circumstances
t h e y go t o
form w h i c h c o board of the
industries,
i t must
o f such
with
then
half
and t h e o t h e r
a board
i scarried
have
i s to super-
o u t through a
500 t o 2 , 0 0 0 e m p l o y e e s ,
one t h i r d
of the
b o a r d a p p o i n t e d by t h e e m p l o y e e s and
I n p r a c t i c e workers tend
election
and t h e u n i o n s u s u a l l y
visory
committee
committee
a board i so b l i g a t o r y ,
i s required
Where
2,000 e m p l o y e e s o r i s
Where a company e m p l o y s
by t h e shareholders«
be r e p r e s e n t e d
as
such
t h e management w h i c h
co-determination
thirds
and s t e e l
The f u n c t i o n
members o f t h e s u p e r v i s o r y
tives
Third
a r e a p p o i n t e d by t h e s h a r e h o l d e r s
b y t h e employees,,
management
This
o r c l o s u r e , . Once a g a i n
Where a company h a s more t h a n
half
two
economic
The employer
0
i s through the s u p e r v i s o r y
i n the mining o r i r o n
dismissalo
i n t h e economic
i n case of disagreement.
s u p e r v i s o r y board,,
one
be f o r m e d
any proposed change
such
determination
of
include
i n t h e p r o c e e d i n g s b u t i s n o t a member.
arbitration
a
these
f o r arbitration.,
100, a permanent
3 and 7 e m p l o y e e s must
agree with
engaged
i s provision
discussion;
t h e c o m p a n y e m p l o y s more t h a n
of
65 -
appoint
of their
own
notto
representa-
semi-professional
super-
(9)„
surveys
and r e p o r t s
( 1 0 ) i n Germany h a v e
reported
follows;
M o s t German w o r k e r s a r e h a p p y
formal
structures
development
with
f o rco-determination
o f a much more e x t e n s i v e
t h e German
system,.
have r e s u l t e d
informal
network
The
i n the
o f communi-
( 9 ) S e e g e n e r a l l y H„ Wiedemann ( 1 9 8 0 ) Am. J„ Comp L„ 7 9 ; M e r t e n s
And S c h a n z e ( 1 9 7 9 ) 2 J
Comp Corp„ L
& Sees,, R e g s * 75„
( 1 0 ) Hadden, p p 4 5 5 - 7
0
c
0
0
0
0
-
66 -
cation
b e t w e e n managment a n d e m p l o y e e r e p r e s e n t a t i v e s a t a l l
levels
o f t h e company.
formally
the
constituted bodies
supervisory
search
side,
with
the r e s u l t
and t h e w o r k s c o u n c i l
that
proceedings
significant.
earliest
company.
possible
stage
level,
largely
t o an
a t the meetings
as a result
informal
each
themselves
of co-operation
results
by t h e p l a n t
to d i s c u s s w i t h
at supervisory
repre-
management a t
a l l problems of the p l a n t
Most o f t h e d e c i s i o n s
unanimous,
way, b o t h a t
t h e l e a d e r s on
The s u c c e s s
and i n t h e o p p o r t u n i t y
d i s c u s s i o n on
to have given
the r e c e i p t of comprehensive information
sentatives
the
board
appears
f o r c o n s e n s u s o r compromise between
h a v e become l e s s
from
The requirement of j o i n t
board
of prior negotiation
and t h e
level are
between t h e
parties.
It
to
i s also reported
delays
are dealt with
problems i n preparing
looked
what
i n some c a s e s
i n decision-making while
representatives
be
that
major
the system
i s for.
more s c r u t i n y a s t o t h e i r
and some d i r e c t o r s h a v e
Management
and
t h e demands a n d e x p e c t a t i o n s
contribution
economy, b u t i t i s d i f f i c u l t
has
played
dealing
the
some p a r t
with
British
( 1 ) Hadden,
and t h a t
the inherent
o f employee
greater
this
should
this
may
i s exactly
be s u b j e c t e d
and a
to
balance
considerations
o f employees,*
that co-determination
to the s u c c e s s
as such
o f t h e German
t o deny t h e i m p l i c a t i o n t h a t i t
i t i s a more e f f e c t i v e
conflicts
model o f a r m s - l e n g t h
p.456.
hand
t e c h n i c a l and e c o n o m i c
i t c a n n o t be p r o v e d
been any d i r e c t
plans
has l e d
( 1 ) . While
i m p a c t on t h e w o r k f o r c e
t o be s t r u c k
has
plans
on t h e o t h e r
has
Although
between
the representations
investment
a t a s some d e f e c t ,
the system
within
collective
method o f
an e n t e r p r i s e
bargaining.
than
I t appears
-
that
the
thirty
German s y s t e m h a s
years
The
Holland
supervisory
boards of
members a p p r o v e d
was
divisive
avoid
the
the
German m o d e l
France,
adopt
so.
Proposals
so
levels*
as
to
tion
effect
s t r u c t u r e , but
facilitate
which
p r i o r consent
of working
d u t i e s of
but
there
( 2 ) Hadden,
Gower,
(4) I b i d .
(3)
i s not
e
o
object
of
this
that
an
the
has
100
at
least
100
consulted
have
at
done
corporate
various
essential
so
Their
as
including
important
e m p l o y e e s must
on
plans
affecting
m u s t be
health
and
supervisory
the
i s appointed
German
way
by
safety
0
net
board.
position
the
the
expansion
obtained
p e o p l e t h e company h a s
correspond with
to
co-determina-
as mergers, c l o s u r e s ,
i t must have a
board
few
to
(4),
i n t e r e s t i n g d i f f e r e n c e i n the
p 447.
the
German r u l e s i n some
conditions,
board
Initially
p 70o
the
such
to employing
this
i s an
appointed,.
board
t h e Works C o u n c i l
£1% m i l l i o n , then
The
by
f o r a wide v a r i e t y of
w h i c h m u s t be
of
a s s e t s of
i t i s learned
ones.
in addition
and
f o r companies
small
etc.
If,
an o p t i o n
l a r g e c o m p a n i e s from
field
be
characteristic
company l a w
way,
the
The
their
employment i n a g e n e r a l
in
shareholders
t o be
the
eventually
revised
corporation
with
system whereby
thought
f o r employee d i r e c t o r s
h a v e a Works C o u n c i l
The
the
though
employee r e p r e s e n t a t i o n
two-tier
N e t h e r l a n d s has
Any
about
8
r u l e s a r e d i f f e r e n t from
ways.
a
the works c o u n c i l s -
introduced
a formal
precondition
distinguish
b o t h by
w e r e made i n 1975
But
The
(3)
i n 1966,
a two-tier
forms
introduced
followed,
i t s l a r g e r companies w i l l
through
of
successfully for
been w i d e l y
i n 1971
employees a c t i n g
to
operated
German s y s t e m h a s
of
-
(2).
variationso
made up
67
board
is
shareholders
= 68
and
replacements
shareholders
make and
are appointed
and
veto
recently
provided
the u n i t a r y
Denmark h a s
and
the
i s unlikely
participation
the EEC
of
and
will
that
go
to
the
though
into
(7)«
and
(6)
example of
this
prepared
actually
that
between
employee
a German
the
to
Kingdom c o m p a n y u n l e s s
to g r a n t
co-determination
h a p p e n i n g was
the
Royal
f o r c e d the
i n t h e D u t c h p a r e n t company
the
joined
form
e m p l o y i n g company
t h e German s i d e
i n t r o d u c t i o n of
Dutch
even
co-determination
lawo
Sweden and
Denmark
employee r e p r e s e n t a t i v e s
p
o
7 0
on
modifications
unions
to
the c u r r e n t
Under
0
board,
their
t h e German m o d e l
to r e f l e c t
o r g a n i z a t i o n o f management a n d
a unitary
( 8 ) have based
substantial
t w o - t i e r German s t r u c t u r e
( 5 ) Gower,
(5)„
t h e U n i t e d Kingdom h a v e
a United
Kingdom company was
c a s e , t h e r e have been
formal
i n the i d e a of
I t i s unlikely
a c q u i r e d by
Belgium,
d u c t i o n of
companies
i s half-way
t o t h e c h o i c e b e t w e e n a t w o - t i e r and
Holland,
each
which
a substantial
i t took p l a c e b e f o r e
As
to
Participation
away b e c a u s e
co-determination
Dutch
i t s larger
interest
S t e e l w o r k s merger where
s e t up
right
i t s e q u i v a l e n t i n c o u n t r i e s adopting
merge w i t h , o r be
Dutch
of
a system
Form o f
German m o d e l w o u l d p e r m i t
An
the
two-tier (6)0
democracy
Works C o u n c i l o r
rightSo
however, have the
m o s t c o u n t r i e s i n W e s t e r n E u r o p e h a v e some
industrial
the United
Both
0
for minority representation
boards
introduced
Proposed
It
itself
nominations.,
e m p l o y e e s on
the u n i t a r y
b y the Board
the works c o u n c i l ,
Sweden h a s
of
-
0
introBut
the
practice
the t w o - t i e r
o
I b i d o
(7)
S e e Wo B o C r e i g h t o n ( 1 9 7 7 )
Bullock Report, para
3 < > 1 3 and
( 8 ) Hadden, p 4 5 8
Q
0
0
4 Brit„ J o L
& Soc
Conclusion, para
8
e
0
c
C
1,
in
1-2;
structure,
d a y - t o - d a y management
management b o a r d w h i c h
supervisory
policy
0
bound
board.
the
undertaking
(iii)
and
and o b t a i n
The F i f t h
Directives (9)
the executive
c a n be a r g u e d
Kingdom was c r e a t e d
of the a c t i v i t i e s
that
of the
changes w i t h i n
of long-term
undertaking;
the
co-operation
t h e u n i t a r y board
system
interested basically
only
in profits
I t i s not s u i t a b l e f o r non-executive d i r e c t o r s ,
rejects
I t has been argued
u n i t a r y board
The
d i s s o c i a t i o n of the o v e r a l l o b j e c t i v e s , p o l i c i e s
a c l e a r e r check
t h e l o g i c o f modern
and e n a b l e s
t h a n when d e b a t i n g
minority
day-to-day
that
organisation.
and c o n t r o l
non-executive d i r e c t o r s ,
w h e t h e r e m p l o y e e s o r n o t , t o make a more m e a n i n g f u l
The
i n the United
normally
the
have spent
other
thereof.
f o r employee d i r e c t o r s .
who
undertaking;
with
a t a t i m e when d i r e c t o r s w e r e
and were
themselves.
affords
board i s
o r of a s u b s t a n t i a l part of i t ; ( i i )s u b s t a n t i a l
( i v ) establishment
particularly
Draft
( i ) the closure or t r a n s f e r of
undertakings or the termination
for
to, a
the authorisation of the supervisory
includes
or extension
entrepreneurs
or
c o n s i s t s of r e p r e s e n t a t i v e s of the
substantial organisational
It
by, and r e s p o n s i b l e
o f m e a s u r e s on w h i c h
The c a t a l o g u e
curtailment
board
and employees,.
to c o n s u l t
i n an e x e c u t i v e
a l s o determines matters of fundamental
The s u p e r v i s o r y
a catalogue
i s vested
i s appointed
board which
shareholders
suggest
69 -
problems with
contribution
executive
directors
h o u r s o r d a y s on t h e p r o b l e m s a n d t h e b a c k g r o u n d .
Bullock
report
considered
that
the i n t r o d u c t i o n of
e m p l o y e e d i r e c t o r s on t o t h e m a i n b o a r d o f a company w o u l d
to
t h e d i l u t i o n o f management e x p e r t i s e and t h e c o n f u s i o n
objectives.
(9)
Their
r e c o m m e n d a t i o n was t h a t
S e e C . M. S c h m i t t h o f f
(1973) J.B.L.
any employee
312, 320.
lead
of
representation
visory
of
and
be on a s u p e r v i s o r y
board, where e s t a b l i s h e d , would
detailed
should
should
be p r i m a r i l y c o n c e r n e d w i t h
t h e company a n d i t s c a p a c i t y
competitively
majority
Bullock
to introduce
Kingdom.
I tfelt
little
real
(1) considered
the two-tier
power and p r o p o s e d
system
supervisory
The
affairs
p o l i c y board
to leave
that
the two-tier
there
reasons
should
board
structure
responsible
t h e management
of function.
companies have
and s u p e r v i s o r y
traditionally
functions
and i t seems
the p r e c i s e a l l o c a t i o n of r e s p o n s i b i l i t y f o r
i s such
functions
to each
i n d i v i d u a l company
a wide range of d i f f e r e n t managerial
i n companies and groups i n v a r i o u s
T h e German s y s t e m
The p r e s e n t
s a y which
board
I n p a r t i c u l a r the
a s a watchdog o v e r s e e i n g
and s u p e r v i s o r y
structures
powers.
the United
o f t h e company and an i n d e p e n d e n t
boards o f large B r i t i s h
executive
to
into
board.
(2) stated
combined both e x e c u t i v e
e
with
i t was n o t
that representation
b o a r d was s e e n a s a d e s i r a b l e s p l i t
society
that
o f r e s p o n s i b i l i t y b e t w e e n a management b o a r d
t h e day-to-day
because
itself
t h e q u a l i t y o f t h e management
c e r t a i n advantages over a u n i t a r y board.
better
super-
t h a t e m p l o y e e d i r e c t o r s on a s u p e r v i s o r y
White Paper
division
for
not involve
a
t o r u n t h e company p r o f i t a b l y
report
o n t h e e x i s t i n g company
The
had
Such
(10).
practical
be
board.
d e c i s i o n making o f e x i s t i n g b o a r d s o f d i r e c t o r s , b u t
The
had
70 -
system
f o r changing
British
achieves
system
sectors of the
a clearer allocation of
i s more f l e x i b l e .
i s t h e b e t t e r one, so t h e r e
the present
British
system.
a r e no
I t i s hard
compelling
I ti s better
(10) See B u l l o c k Report, p.167. P r o f e s s o r S c h m i t t h o f f a l s o
f a v o u r e d t h e t w o - t i e r b o a r d . S e e h i s a r t i c l e , New C o n c e p t s i n
Company L a w ( 1 9 7 3 ) J . B . L . 3 1 2 , 3 2 0 .
( 1 ) B u l l o c k R e p o r t , Cmnd. 6 7 0 6 ( 1 9 7 7 ) . S e e a b o v e , p . 5 4 .
( 2 ) I n d u s t r i a l D e m o c r a c y , Cmnd. 7 2 3 1 ( 1 9 7 8 ) . S e e G o w e r , p . 7 5 .
to
l e t things a s they
a r e , and t h e r e f o r e i t i s proposed
for
every
for
e v e r y company e m p l o y i n g more t h a n
be
public
71 -
company o r l a r g e u n q u o t e d
a reconstituted
holder
unitary
board
and employee d i r e c t o r s
recognised
directors
by t h e government
may b e e l e c t e d
unions. There
through
should
with
f o rthat
should
to help
The p a r t i c i p a t i o n
may n o t b e a m a t c h f o r f u l l - t i m e
w a t c h d o g and c h e c k
proposed
that
practice;
The t h i r d
the a c t i v i t i e s
there should
p r o f e s s i o n . The t h i r d
conduct
understand
effective
a c t a s an
o f management.
group a r e expected
institutions
of their
maintain
also
a staff
or unit
at least
trusts
investor-clients.
of s k i l l e d
competent to monitor,
or clarify
managerial
independent
I ti s also
apart
be an e v o l u t i o n o f a
o f t h e company's a f f a i r s
investment
behalf
they
professional
g r o u p may b e i n a
f o r t h e companies under d i s c u s s i o n ,
employee d i r e c t o r s ,
of the
the part-time or full-time
t h e employee d i r e c t o r s
and o f f i c e
employees, e x e c u t i v e s ,
one r e p r e s e n t a t i v e o f
t h e sake of t h e s h a r e h o l d e r d i r e c t o r s
planning
or their
of representation
salaried
on t h e b o a r d .
group i s n e c e s s a r y because
position
The employee
by t h e e m p l o y e e s t h e m s e l v e s
shareholder director/managers.
for
purpose.
professionals
t o r e p r e s e n t a t i o n a c c o r d i n g to t h e i r
appear
employee d i r e c t o r s
should
number o f s h a r e -
group from
n o t be a s i n g l e c h a n n e l
be e n t i t l e d
class
third
an e q u a l
and a t h i r d
numbers i n t h e company, b u t a t l e a s t
each
company o r a l t e r n a t i v e l y
50 e m p l o y e e s t h e r e
t r a d e u n i o n s . Manual w o r k e r s ,
etc. will
(3) that
managerial
t o k e e p an e y e o n t h e
as well
a s many o f t h e
a r e a t p r e s e n t d o i n g on
Most o f t h e s e
investment
from
analysts
q u e s t i o n and s c r u t i n i z e
institutions
each;
they a r e
t h e management
( 3 ) S e e g e n e r a l l y N„ M a r t i n - K a y e ( 1 9 7 6 ) J . B . L . 2 3 5 ; N.M.
Hunnings (1976) J . B . L . 377; C M . S c h m i t t h o f f (1975) J . B . L . 265;
C M . Schmitthoff (1973)
J . B . L . 3 1 2 ; C.W. Summers ( 1 9 8 0 ) 28 Am.
J . Comp. L . 3 6 7 ; P . L . D a v i e s ( 1 9 7 5 ) 38 M.L.R. 2 5 4 .
of
a n y company a n d may
of
their job. Alternatively
nature
(4)
While
prove
than
regulation
any o t h e r
directors
help
not
of major
legislative
on t h e b o a r d
that
important
out of account
the neutral
t h i r d group,
by
t h e government.
What
sufficient
i s needed
regulation
plant
level
that
The
those
decisions
i t i s further
f o r every
See post,
See ante,
likely
to improve e x i s t i n g forms o f
The p r e s e n c e
and a c c e s s
o f employee
to documents would
from p r o f e s s i o n a l s
a t board
with,
level
and a s u f f i c i e n t l y
proposed
public
the board
(5) that
o f com-
assistance
recognised
a r e n o t by t h e m -
well
developed
i s important.
the law should
company o r l a r g e u n q u o t e d
a minimum
1 to 2 i n every
o f 3 members.
pp. 137-8
p.71, n . ( 3 ) .
should
I t should
There-
require
a works
company o r
f o r e v e r y c o m p a n y e m p l o y i n g more t h a n
number o f members o f t h e w o r k s c o u n c i l
ployees with
a n d i s more
an e x t e n s i o n o f i n d u s t r i a l democracy.
number o f e m p l o y e e s , s a y r o u g h l y
(4)
(5)
an e s s e n t i a l p r e r e q u i s i t e t o
a t a l l l e v e l s o f t h e company, o r a t l e a s t a t
to s t a r t
alternatively
extension of
o f t h e i m p a r t i a l i t y and
changes
to ensure
may
i s s u e s of i n d u s t r i a l r e l a t i o n s a r e
s t r u c t u r e o f p a r t i c i p a t i o n below
council
3
i s an i n t e r - r e l a t e d s t r u c t u r e o f p a r t i c i p a t i o n o r
joint
fore
representation
i n t h e p r e p a r a t i o n and d i s c u s s i o n
of
i s submitted
level
level.
as of right
to say nothing
selves
policy
measure
pany p o l i c i e s ,
It
be s i m i l a r i n
i n Chapter
to secure a r e a l
i t i s at least
democracy below board
to ensure
left
r i g h t o f board
insufficient
democracy,
industrial
t h e t h i r d group should
as part
0
i n due c o u r s e
joint
a t t e n d company m e e t i n g s
c o m m i t t e e s t o be d i s c u s s e d
a statutory
industrial
the
a t any time
to the watching
herein
72 -
50 e m p l o y e e s .
d e p e n d on t h e
100 t o 200
em-
r e p r e s e n t manual
workers, white c o l l a r
bers.
The
there
may
functions.
should
form
be
employees of
less
employees, e.g.
career
hours
and
the
take
payment o f
holdiays,
the
and
In
they
the
and
matters
case
the
of
of
the
diseases,
to
the
p r o d u c t i o n or
the
t r e a t m e n t of
a l l persons
not
functions,
be
and
the
employed w i t h i n
the
the
the
or
disturbed
discriminated
within
time
of
system
of
the
industrial
plant,
improvement.
the
works
council,
a l e g a l d u t y on
trade
the
unions,
plant.
the
plant,
Members o f
i n the
against
of
and
overtime,
of
be
ensure
interfered with
juvenile
involving
a c t which might have a
must a l s o
5
employees i n the
There should
they
established
be
place,
management and
them.
be
the
prevention
of
not
plants,
determination
r a t e s and
any
may
against
the
working peace of
works c o u n c i l
be
should
introduction
the
any
should
r e l a t i n g to
piece
num-
perform
more t h a n
questions
works c o u n c i l , u n l i k e
the
should
matters
conduct of
from d o i n g
discrimination
there
salaries,
with
are
following
r e l a t i n g to
the
independent
s p e c i a l i n t e r e s t s of
The
of
their
w o r k s c o u n c i l , and
d e t e r m i n a t i o n of
arbitration.
the
age,
the
disagreement between
go
several
works c o u n c i l ,
w a g e s and
e m p l o y e r and
of
the
regulations
t h e y must r e f r a i n
on
of
establishment
e m p l o y e r and
effect
of
to
c o m m i t t e e s to
Where t h e r e
training.
in connection
should
are
0
determination of
remuneration,
form o t h e r
number o f
years
care
work,
method o f
accidents
18
work o f
days of
formulation
I f there
than
to
scope of
also
works c o u n c i l
a youth c o u n c i l
the
may
a corresponding
a joint
-
employees, e t c . i n proportion
works c o u n c i l
specialised
73
that
harmful
Both
l e g a l and
and
the
the
the
fair
absence
works
e x e r c i s e of
by
both
reason of
council
their
their
activities.
The
reform,
last
i s the
but
not
the
least,
development of
the
as
an
a l t e r n a t i v e or
c o n c e p t by
way
of
ancillary
education
and
- 74
professional
conduct i n r e l e v a n t
company i s f o r b o t h i n v e s t o r s
t h e consumer and
-
professional
and
bodies (6) t h a t a
employees e q u a l l y ,
t h e c o m m u n i t y a t l a r g e as well„
and
indeed
Much e x i s t i n g
management t r a i n i n g i s c o n c e r n e d w i t h m a x i m i z a t i o n o f p r o f i t s
s h a r e h o l d e r s and
organisation.,
crucial
and
creating higher
A new
commerce and
l o n g - t e r m s u c c e s s and
their relationships to society
status of
(7),
s h a r e h o l d e r s , good wages f o r employees and
after
sion
the primary requirements of
and
The
t h e i r f a m i l i e s and
charitieso
and
The
duty
t h e modern c o n d i t i o n s
m e a n i n g f u l p a r t i c i p a t i o n i n any
appropriate
be
These t y p e s o f c o n c e p t may
p r i s e i s t o be
of
i t i s submitted
s t a b l e and
p h i l o s o p h y o f e t h i c s and
expan-
liability,.
national
i n our
allowed
society
the
In order to
priintroduce
depth, i t i s necessary to create
change i n p e o p l e s ' w h o l e p h i l o s o p h y t o management and
but
by way
r e c r e a t i o n o f t h e employees i n c l u d i n g
vilege of incorporation with l i m i t e d
company l a w ,
t o consumers
s h o u l d e x t e n d t o making
on w h i c h p r i v a t e c a p i t a l i n a m i x e d economy can
work.
of
dividends
f o r r e a s o n a b l e c o n t r i b u t i o n s t o l o c a l and
These a r e
the
industry
task
prices
t h e company i t s e l f
r e i n v e s t m e n t have been met.
p r o v i s i o n f o r the w e l f a r e
fair
the
exploring
management i s t o s t r i k e a f a i r b a l a n c e b e t w e e n r e a s o n a b l e
to
for
s t a n d a r d s o f management w i t h i n
s y s t e m s h o u l d s u p p l e m e n t t h i s by
f a c t o r s a f f e c t i n g the
for
be
a r g u e d as
the purposes of
foreign to p r a c t i c a l
t h a t i f a modern t h e o r y
r e s p e c t e d , i t must p r o v i d e
social aspirations
(8)
a
c
The
an
way
of
enter-
up-to-date
to
reform
( 6 ) C f Hadden, p 4 8 4
See a l s o M„Po F o g a r t y , Company and
C o r p o r a t i o n - One Law? ( 1 9 6 5 ) pp<,12-17
( 7 ) See C h a r l e s de H o g h t o n , t h e Company ( 1 9 7 0 ) p,>29o
( 8 ) See a l s o EEC C o m m i s s i o n ' s Green P a p e r on Employee P a r t i c i p a t i o n
and Company S t r u c t u r e E o C B u l l o Supp= 8/75;
"Company l a w s o f t h e
t r a d i t i o n a l p a t t e r n have n o t c o n t a i n e d such p r o v i s i o n s i n t h e p a s t
p r e c i s e l y b e c a u s e t h e y w e r e b a s e d on e c o n o m i c and s o c i a l p o l i c i e s
w h i c h saw e m p l o y e e s ' r e l a t i o n s h i p s w i t h c o m p a n i e s as e s s e n t i a l l y
contractualo
I n so f a r as e c o n o m i c and s o c i a l p o l i c i e s come t o
r e g a r d t h e company as an e n t e r p r i s e w h e r e l a b o u r and c a p i t a l c o m b i n e
i n t h e i r own s o c i e t y ' s i n t e r e s t , t h e n t h e l a w s r e l a t i n g t o c o m p a n i e s
w i l l sooner o r l a t e r have t o r e f l e c t t h i s ' c h a n g e o f u n d e r l y i n g p h i l o sophy and i n c l u d e p r o v i s i o n s e x p r e s s l y d e a l i n g w i t h r e l a t i o n s h i p s
b e t w e e n t h e p r o v i d e r s o f c a p i t a l , t h e management and t h e
employees
i r r e s p e c t i v e o f w h e t h e r t h e y a r e f o r m a l l y deemed t o be 'company l a w ' "
0
0
0
0
- 75
-
d o e s n o t l i e i n law a l o n e ; management e d u c a t i o n
parallel
importance
too.
i s o f paramount
Business education helps
corporate r e s p o n s i b i l i t y .
As
and
t o encourage
an a c a d e m i c d i s c i p l i n e , i t d e f i n e s
i t s o b j e c t i v e s a r o u n d t h e c o n c e p t o f an e n l i g h t e n e d b u s i n e s s m a n ;
by
t h i s s t a n d a r d , the educated businessman w i l l
have l e a r n e d t o
think of himself i n the perspective of the t o t a l
ness s y s t e m .
institutions
rations,
It
Such a r o l e r e q u i r e s an u n d e r s t a n d i n g
t h a t a company e n c o u n t e r s
c e p t s and
directors
aspect
relating
o f any
to directors'
Under t h e e x i s t i n g
company's b u s i n e s s
will
decisions.,
be m a t e r i a l l y
law, d i r e c t o r s
Law
affected
f o r the b e n e f i t
are r e q u i r e d to conduct
o f t h e company ( i n c l u d i n g
Thus d i r e c t o r s
by
in certain
p a r t i c u l a r group o f
persons,
representa-
t i v e s t o p u r s u e t h e i n t e r e s t s o f t h o s e whom t h e y r e p r e s e n t .
t o v o t e f o r r e d u n d a n c y i f he
b u t such an a c t w o u l d e a s i l y
the
t h i s w o u l d make
s i t u a t i o n s , f o r employee
e x a m p l e on r e d u n d a n c y i t seems most l i k e l y
the
are r e q u i r e d t o take a
w h e t h e r s h a r e h o l d e r s , e m p l o y e e s o r o t h e r w i s e , and
has
con-
duties.
d e t a c h e d v i e w o f t h e i n t e r e s t s o f any
very d i f f i c u l t ,
institutions.,
p r o p o s a l s on c o - d e t e r m i n a t i o n i s t h a t
e m p l o y e e s ) as a w h o l e ( 9 ) .
it
o f i t s ope-
o f Employee P a r t i c i p a t i o n on Company
o f company l a w w h i c h
implementation
busi-
and managers t o e x a m i n e t h e p r i n c i p l e s ,
r e s p o n s i b i l i t i e s u n d e r l y i n g business
Implications
the
i n the course
and
of the various
and o f t h e i n t e r - r e l a t i o n s h i p s b e t w e e n such
enables
An
social
t h a t an e m p l o y e e
F
or
director
i s t o do h i s d u t y as a d i r e c t o r ,
be m i s r e p r e s e n t e d
by
those
electing
him.
( 9 ) See R e p o r t o f t h e I n s p e c t o r o f J u n e 14, 1954 i n t h e second
Savoy H o t e l I n v e s t i g a t i o n (HMSO); Gaiman v . N a t i o n a l A s s o c i a t i o n
f o r M e n t a l H e a l t h t l 9 7 l j Ch. 317; A 9 7 0 J 3 W L Ro 42; /"1970J 2
A l l E.R. 362; 114 S.J. 416; G r e e n h a l q h v A r d e r n e Cinemas L t d .
[ 1 9 5 1 / Ch. 286; [1950J 2 A l l E.R.
1120; 94 S.J. 855; S e c t i o n 46
o f Companies A c t 1980; b e l o w pp.88-9
0
a
0
- 76
One
may
-
n o t e t h a t u n d e r s.448 o f t h e Companies A c t
1948
the
Court
i s empowered t o r e l i e v e , e i t h e r w h o l l y o r p a r t l y and on
terms
as i t t h i n k s
d e f a u l t , breach
satisfied
sonably
in
a d i r e c t o r from l i a b i l i t y f o r negligence,
o f duty o r breach
of t r u s t .
t h a t the d i r e c t o r concerned
and
has
The
C o u r t must
those connected
t o be e x c u s e d .
a case i n v o l v i n g
The
with
Court
be
a c t e d h o n e s t l y and
t h a t having regard f o r a l l the circumstances
case, i n c l u d i n g
fairly
fit,
such
h i s appointment,
he
c o u l d , o f c o u r s e , use
rea-
of the
ought
this
power
an e m p l o y e e d i r e c t o r , b u t i t i s d o u b t f u l
whe-
t h e r o r not the Court would
c o n s i d e r t h a t an e m p l o y e e d i r e c t o r
acted reasonably
f o r example, c o n s i d e r e d o n l y
i f he h a d ,
had
the
i n t e r e s t s o f t h e employees.
Bullock
(10) proposed t h a t
employee d i r e c t o r s
lities.
in principle a l l directors
s h o u l d be u n d e r t h e same l e g a l d u t i e s
Codification
o f two
standards
shareholder d i r e c t o r s respectively
b e t w e e n e m p l o y e e and
would
people
sentation.
would
i n t h e new
system o f board
v i e w p o i n t a t board
meetings ( 2 ) .
s h o u l d be r e c o g n i s e d
The
special
on
or those
a p a r t i c u l a r issue.
must be a r e p r e s e n t a t i v e , ,
h i s own
status
s h o u l d n o t be a l l o w e d t o be
v o t e i n a p a r t i c u l a r way
h i s v i e w , w e i g h up
f r o m an
( 1 ) ; nor
level repre-
employee's
of
i n order to take proper
r e s p o n s i b i l i t y to t h e i r constituents
b u t employee d i r e c t o r s
tor
and
B u t t h e law s h o u l d p r o v i d e t h a t t h i s s h o u l d n o t impede
from a r g u i n g s p e c i f i c a l l y
their
liabi-
not promote c o o p e r a t i o n
employee d i r e c t o r s
directors
and
f o r employee d i r e c t o r s
s h a r e h o l d e r d i r e c t o r s on t h e b o a r d
have c o n f i d e n c e
including
He
s h o u l d be f r e e
An
employee
account
they represent,
instructed
employee
t o f o r m and
t h e v a r i o u s i n t e r e s t s i n t h e company and
c o n c l u s i o n s about which
(10) B u l l o c k Report, para.8.37.
(1) I b i d .
(2) B u l l o c k Report, para.
8.40.
policies will
of
to
direcexpress
reach
work f o r t h e g r e a t e r
- 77 good o f t h e company.
company as a w h o l e .
The e m p h a s i s s h o u l d be on t h e b e n e f i t o f t h e
An e m p l o y e e d i r e c t o r s h o u l d n o t be a d e l e g a t e ( 3 )
This i s t o ensure t h a t a l l d i r e c t o r s should
look t o t h e long-term
i n t e r e s t s o f t h e company and a r e f r e e f r o m e x t e r n a l p r e s s u r e .
o t h e r words, a l l d i r e c t o r s w i l l
be r e q u i r e d t o a c t on t h e i r own
a u t h o r i t y and r e s p o n s i b i l i t y b u t must keep i n t o u c h w i t h
o f those
they represent.
i n g and c o n f l i c t i n g
d e c i s i o n s which
all
i n t e r e s t s i n t h e company i n o r d e r t o r e a c h
t h e y g e n u i n e l y b e l i e v e t o be i n t h e company's o v e r -
t o r s s h o u l d be e n t i t l e d
B u l l o c k ( 4 ) a l s o proposed t h a t
direc-
t o take account o f t h e i n t e r e s t s o f share-
h o l d e r s and e m p l o y e e s i n s u b s i d i a r y c o m p a n i e s .
a l l d i r e c t o r s should, o f course,
information.
the opinion
They h a v e t o t a k e i n t o a c c o u n t t h e d i f f e r -
b e s t i n t e r e s t as a w h o l e .
board,
In
As members o f t h e
have t o t a l
access t o
B u t how c a n t h e e m p l o y e e r e p r e s e n t a t i v e ' s d u t y t o
r e p o r t back t o h i s c o n s t i t u e n t o r t h o s e he r e p r e s e n t s be r e c o n c i l e d
w i t h h i s d u t y as a d i r e c t o r n o t t o d i s c l o s e c o n f i d e n t i a l
ation?
T h r e e o b s e r v a t i o n s c a n b e made on t h i s .
First,
n o t u s u a l l y be n e c e s s a r y t o d i s c l o s e c o n f i d e n t i a l
o r d e r t o make an e f f e c t i v e r e p o r t .
reason
informi t would
informationi n
Secondly, there i s l i t t l e
t o suppose t h a t e m p l o y e e r e p r e s e n t a t i v e s a r e more
likely
t h a n o t h e r d i r e c t o r s t o d i s c l o s e t h e i r company's t r a d e s e c r e t s o r
t o use c o n f i d e n t i a l
i n f o r m a t i o n which
company f o r p e r s o n a l g a i n .
m i g h t be d e t r i m e n t a l t o t h e
T h i r d l y , many t r a d e u n i o n
representa-
t i v e s and o f f i c i a l s have a l r e a d y had a c c e s s t o , and have d e a l t w i t h ,
confidential
i n f o r m a t i o n f o r many y e a r s w i t h o u t any p a r t i c u l a r
difficulties
appearing
t o have a r i s e n .
But t h e r e a l
when an employee d i r e c t o r o b t a i n s c o n f i d e n t i a l
i n f o r m a t i o n which
p l a c e s him i n a p o s i t i o n where h i s r e s p o n s i b i l i t y
(3) I b i d .
(4) I b i d . ,
p a r a . 8.38„
problem a r i s e s
t o t h e company
- 78 comes i n t o d i r e c t c o n f l i c t w i t h h i s r e s p o n s i b i l i t y t o t h o s e he
represents.
F o r e x a m p l e , t h e company may be f o r m u l a t i n g
plans which would s e r i o u s l y
a f f e c t the workforce but which, f o r
b u s i n e s s r e a s o n s , t h e management may w i s h t o k e e p s e c r e t
are
finalised.
duties,
frank
long-term
until
they
Where t h e d i r e c t o r s a r e i n b r e a c h o f t h e i r f i d u c i a r y
t h e shareholders i n general meeting can, a f t e r f u l l
disclosure,
ratify
t h e i r actions
by o r d i n a r y
and
resolution.
The
e f f e c t o f such a r e s o l u t i o n i s , i n most c a s e s , t o a b s o l v e t h e d i r e c t o r s from l i a b i l i t y
(5).
However i f an e m p l o y e e d i r e c t o r w e r e i n
b r e a c h o f h i s d u t y b e c a u s e he c o m p l e t e l y s u b o r d i n a t e d
of
the interests
t h e company t o t h o s e o f t h e e m p l o y e e s , i t w o u l d be most u n l i k e l y
t h a t such an a c t w o u l d be r a t i f i e d
by t h e s h a r e h o l d e r s .
Bullock
thought t h a t t h e problem o f c o n f i d e n t i a l i t y o f i n f o r m a t i o n
overstated
(6)
had been
and was r e l u c t a n t t o see a s t a t u t o r y r e d e f i n i t i o n o f
confidentiality„
I t i s c o n c e i v a b l e t h a t i n t h e absence o f such
r e d e f i n i t i o n , a d i s g r u n t l e d s h a r e h o l d e r may i n some c a s e s b r i n g
derivative action
a
t o c o m p l a i n o f a b r e a c h o f d u t y by an e m p l o y e e
director i n releasing
confidential information,
t o harass him o r
o t h e r w i s e , and t h e employee d i r e c t o r m i g h t j u s t as w e l l be a d v i s e d
to
ask t h e b o a r d t o a g r e e on w h a t i n f o r m a t i o n
Where t h e b o a r d has a g r e e d o n t h e d i s c l o s u r e
it
i s doubtful
i f the courts
would allow
i s confidential.
of certain
a derivative action
the employee d i r e c t o r concerned f o r d i s c l o s i n g
t i n u o u s a t t e n t i o n t o t h e company's a f f a i r s .
requires
against
the information.
As t h e l a w now s t a n d s , a d i r e c t o r i s n o t o b l i g e d
law
information,
t o give
con-
I f any change o f t h e
a h i g h e r s t a n d a r d o f such d u t y and t h e d i r e c t o r s h i p o f
employee d i r e c t o r s i s p a r t - t i m e ,
t h i s may p r o v i d e some s h a r e h o l d e r s
(5) See, e . g . B a m f o r d v . B a m f o r d [1969] 1 A l l E.R.
Cho 212; £19697 2 W.L.R. 1107; 113 S . J . 123.
( 6 ) B u l l o c k R e p o r t , p a r a . 8.54.
9 6 9 ; [1910]
- 79 with
an o p p o r t u n i t y t o h a r a s s
distinction
an e m p l o y e e d i r e c t o r , u n l e s s a
i s made b e t w e e n t h e d u t i e s o f a s h a r e h o l d e r
repre-
s e n t a t i v e and an e m p l o y e e r e p r e s e n t a t i v e ( 7 ) .
An e f f e c t i v e s h a r i n g o f power by e m p l o y e e d i r e c t o r s
n e c e s s i t a t e t h e severe
shareholders.
c o u r t a i l m e n t o f t h e ownership
will
rights of
T h e r e f o r e t h e r e l a t i o n s h i p b e t w e e n t h e new b o a r d
and t h e s h a r e h o l d e r s has t o be a d j u s t e d i n o r d e r t o e n s u r e
e m p l o y e e d i r e c t o r s on t h e b o a r d
on f u n d a m e n t a l
and i l l o g i c a l
questions l i k e winding-up.
I t would
be f r u s t r a t i n g
democracy t o p u t
and t h e n a l l o w t h e s h a r e h o l d e r s
power t o r e t a i n c o n t r o l o f a l l m a j o r d e c i s i o n s .
Bullock
buted
mit
say i n d e c i s i o n making
to the true objective of industrial
e m p l o y e e d i r e c t o r s on t h e b o a r d
the
have a r e a l
that
( 8 ) proposed t h a t i n c o n n e c t i o n w i t h c e r t a i n
functions'
t h e board
s h o u l d have t h e e x c l u s i v e r i g h t
a r e s o l u t i o n f o r consideration t o the shareholders
meeting.
These a t t r i b u t e d
directly
related
i n general
t h e company's memo-
randum and a r t i c l e s o f a s s o c i a t i o n , w i n d i n g - u p ,
structure,
posals o f a s u b s t a n t i a l
t o sub-
f u n c t i o n s a f f e c t t h e p r e s e n t powers o f
shareholders i n f i v e i m p o r t a n t areas: changing
company's c a p i t a l
'attri-
changes i n t h e
t h e f i x i n g o f d i v i d e n d s , and t h e d i s -
part o f the undertaking.
These m a t t e r s a r e
t o t h e e m p l o y e e s ' f u t u r e employment and income b u t
a r e g e n e r a l l y s u b j e c t t o s h a r e h o l d e r s ' power o f i n i t i a t i v e b y
requisitioning
an e x t r a - o r d i n a r y g e n e r a l m e e t i n g
pursuant
to section
132 o f t h e Companies A c t 1 9 4 8 , a p a r t f r o m r e t a i n i n g u l t i m a t e
by a p p r o v i n g o r r e j e c t i n g
p r o p o s a l s p u t t o them by t h e b o a r d .
control
The
new l a w s h o u l d g i v e t h e b o a r d o f d i r e c t o r s t h e e x c l u s i v e r i g h t t o
initiate
(7)
the
(8)
proposals f o r approval o r veto a t the shareholders'
B u t t h i s would v i o l a t e t h e p r i n c i p l e a l l d i r e c t o r s should
same l e g a l d u t i e s and l i a b i l i t i e s .
B u l l o c k R e p o r t , p a r a . 8.27.
meeting.
have
= 80 Thus, i n e f f e c t ,
As
t h e s h a r e h o l d e r s have o n l y a power o f
to the r i g h t
veto.
t o dispose o f a s u b s t a n t i a l p a r t o f the under-
t a k i n g , w h i c h w o u l d be a f f e c t e d by t h e B u l l o c k p r o p o s a l s , i t i s
p e r h a p s o f i m p o r t a n c e t o n o t e t h a t i n some c a s e s
'substantial
p a r t ' may
cause d i f f i c u l t y
and u n r e a s o n a b l y d e l a y t h e
s a l e ( a n d p u r c h a s e ) o f c h a t t e l s and m a c h i n e r y .
tial
part*
It
may
to i n i t i a t e
s h o u l d be w e l l d e f i n e d
t h e meaning o f
t o a v o i d any
be a r g u e d t h a t i t w o u l d be u n f a i r
The w o r d s ' s u b s t a n ambiguity.
to bar the shareholders
proposals i n respect of the a t t r i b u t e d
functions
g e t h e r , and t h e r e f o r e i t i s p r o p o s e d t h a t as an a l t e r n a t i v e
t o t h e B u l l o c k ' s p r o p o s a l s , t h e s h a r e h o l d e r s may
still
altosolution
requisition
an e x t r a o r d i n a r y g e n e r a l m e e t i n g i n r e s p e c t o f t h e a t t r i b u t e d
t i o n s , b u t t h e i r r e s o l u t i o n need
b o a r d t o be
The
t o be a p p r o v e d by t h e new
func-
proposed
effective.
proposed
i n t r o d u c t i o n o f employee d i r e c t o r s c r e a t e s
p r o b l e m s i n t h e case o f g r o u p s o f c o m p a n i e s ,
or m u l t i - n a t i o n a l basis ( 9 ) .
special
w h e t h e r on a n a t i o n a l
B u l l o c k proposed t h a t employee
parti-
c i p a t i o n on t h e b o a r d s h o u l d a p p l y b o t h t o t h e h o l d i n g company i n
a g r o u p w h e r e t h e g r o u p employ
2,000 o r more i n t o t a l
i n the United
Kingdom and t o any s u b s i d i a r y company i n t h e g r o u p w h i c h
a l o n e has 2,000 o r more e m p l o y e e s i n t h e U n i t e d K i n g d o m .
power o f h o l d i n g c o m p a n i e s t o c o n t r o l
sidiaries,
subsidiary
To
ensure
the a c t i v i t i e s of t h e i r
sub-
B u l l o c k recommended t h a t t h e p a r e n t o f a B r i t i s h - b a s e d
g r o u p s h o u l d be e n t i t l e d
t o a p p o i n t t h e n e u t r a l members o f t h e b o a r d
i n any s u b s i d i a r y w i t h i n w h i c h t h e r e has been a v o t e f o r b o a r d
( 9 ) See g e n e r a l l y Hadden, pp„466-7; D.D. P r e n t i c e ( 1 9 7 8 ) 56 Can.
Rev. 277, 293-5; D.B. B r o a d h u r s t ( 1 9 7 8 ) 128 N.L.J. 1227, 1228;
L e w i s and C l a r k ( 1 9 7 7 ) 40 M.L.R. 323, 337.
level
B.
- 81 representation.
I n t h e c a s e o f an E n g l i s h s u b s i d i a r y o f a f o r e i g n
p a r e n t B u l l o c k proposed t h a t t h e u l t i m a t e r i g h t
n e u t r a l members t o t h e b o a r d
t o appoint the
s h o u l d be w i t h t h e I n d u s t r i a l
Commission i n case o f d e a d l o c k ,
b u t suggested
Democracy
t h a t s u c h an a p p o i n t -
ment s h o u l d o n l y be made a f t e r c o n s u l t a t i o n b y t h e I n d u s t r i a l
Democracy Commission w i t h
of
t h e f o r e i g n p a r e n t and w i t h
State f o r Industry (10).
based m u l t i - n a t i o n s which
As r e g a r d s
the Secretary
subsidiaries of foreign-
have n o t been a c t u a l l y i n c o r p o r a t e d i n t h e
U n i t e d Kingdom, B u l l o c k p r o p o s e d t h a t t h e s u b s i d i a r i e s s h o u l d be
required
t o be i n c o r p o r a t e d i n t h e U n i t e d Kingdom i f t h e n e c e s s a r y
m a j o r i t y i n f a v o u r o f employee r e p r e s e n t a t i o n i s o b t a i n e d ( 1 ) .
Bullock recognised
it
i s unavoidable
t h a t i n t h e case o f f o r e i g n - b a s e d
t h a t m a j o r d e c i s i o n s a r e o f t e n made o u t s i d e t h e
U n i t e d Kingdom and t h e b o a r d
say
i n the decisions.
of a British
A s i t u a t i o n which
subsidiary w i l l
a g r e a t p o r t i o n o f p r o f i t s made b y a B r i t i s h
p l o w i n g back t h e p r o f i t s
expansion
t h e business
as d i v i d e n d o f
subsidiary instead o f
i n the United
i n t h e U n i t e d Kingdom.
Kingdom
But unless
agreements on t h e m a t t e r , B u l l o c k f e l t
p r o p o s a l s w e r e t h e b e s t t h a t c o u l d be d e v i s e d
Another problem concerning
case o f t a k e o v e r s .
little
s u b s i d i a r y w i s h e s t o make u s e o f t h e p r o f i t s f o r
o f t h e business
were i n t e r n a t i o n a l
into
have
i s r e a d i l y conceivable i s
w h e r e t h e f o r e i g n p a r e n t recommends t h e d i s t r i b u t i o n
while the British
multi-nationals
Since
there
that
their
i n t h e circumstances.
groups o f companies a r i s e s i n t h e
by v i r t u e o f t h e r e s i d u a l
power f o r h o l d i n g
( 1 0 ) B u l l o c k R e p o r t , p a r a . 11.59* The M i n o r i t y B u l l o c k R e p o r t was
a g a i n s t e m p l o y e e p a r t i c i p a t i o n o n t h e b o a r d s o f s u b s i d i a r y companies*.
I f l e g i s l a t i o n was i n s i s t e d u p o n , i t recommended t h a t t h e n t h e o t h e r
s u p e r v i s o r y b o a r d s s h o u l d have more power t h a n t h e s u p e r v i s o r y b o a r d
o f a s u b s i d i a r y company.
I n any e v e n t i t p r o p o s e d t h a t s u b s i d i a r i e s
o f f o r e i g n c o m p a n i e s s h o u l d be e x e m p t e d ; o t h e r w i s e t h e r e w o u l d be
a d e l e t e r i o u s e f f e c t on i n w a r d i n v e s t m e n t b y f o r e i g n e r s , w h i c h p l a y s
an i m p o r t a n t p a r t i n t h e economy o f t h e U n i t e d K i n g d o m .
( 1 ) B u l l o c k R e p o r t , p a r a . 11.52*
- 82
-
c o m p a n i e s , an i n t e n d i n g h o l d i n g company w o u l d
control
t h e s h a r e h o l d e r d i r e c t o r s on
company b u t a l s o r e p l a c e t h e c o - o p t e d
be a b l e n o t o n l y t o
the board
of the
taken-over
d i r e c t o r s of the l a t t e r
com-
p a n y , t h e b e n e f i t s o f e m p l o y e e p a r t i c i p a t i o n m i g h t be d e s t r o y e d i f
t h e i n t e n d i n g h o l d i n g compamy h e l d o b j e c t i v e s d i f f e r e n t f r o m
of
the taken-over
of
'subsidiary'
company,.
B u l l o c k (2) proposed t h a t the
i n s e c t i o n 154(1)
be amended so t h a t a t a k e n - o v e r
d i a r y i f an a d d i t i o n a l
requirement
i s complied w i t h ,
namely
t h e R e g i s t r a r o f Companies o f an a g r e e d
of c o n t r o l " .
B u l l o c k was
other legal
s y s t e m s . The
new
would
d e f i n i t i o n would
s y s t e m t h e e m p l o y e e d i r e c t o r s and
control
i s s i g n e d by
failing
t h i s would
in
the board.
the co-opted
With
directors
t o the workforce
investment before the instrument of
the board o f the taken-over
s u b m i t t e d t h a t w h i l e such a p r o p o s a l w o u l d
capital,
"instrument
a p p l y t o a l l companies
be a b l e t o demand u n d e r t a k i n g s o f i m p o r t a n c e
such as s e c u r i t y o f j o b s and
the
a b l e t o p o i n t t o s i m i l a r methods
w h e t h e r o r n o t t h e r e i s e m p l o y e e p a r t i c i p a t i o n on
t h i s new
should
o n l y become a s u b s i -
registration with
(3)
definition
o f t h e Companies A c t 1948
company w o u l d
those
company.
curtail
I t is
t h e power o f
a c t as a d i s i n c e n t i v e t o t h e t a k e o v e r o f a
business.
T h e r e a r e some c o m p a n i e s whose a r t i c l e s
f r o m v o t i n g on m a t t e r s i n w h i c h
B u l l o c k p r o p o s e d t h a t t h e new
preclude
directors
t h e y have a p e r s o n a l i n t e r e s t .
l a w s h o u l d p r o v i d e t h a t employee
And
direc-
t o r s s h o u l d n o t be a f f e c t e d by t h e s e a r t i c l e s o r p r o v i s i o n s s i m p l y
( 2 ) B u l l o c k R e p o r t , p a r a s . 11.37 t o 11.44.
( 3 ) The i n s t r u m e n t o f c o n t r o l m i g h t be c a n c e l l e d l a t e r on by a g r e e ment b e t w e e n t h e h o l d i n g company and s u b s i d i a r y , , B u t t h e e x p e c t e d
o p p o s i t i o n by t h e employee d i r e c t o r s o f t h e s u b s i d i a r y t o any a t t e m p t
by t h e h o l d i n g company t o b r i n g a b o u t such c a n c e l l a t i o n w i t h o u t t h e
r e a l c o n s e n t o f t h e s u b s i d i a r y was t h o u g h t t o be a s e r i o u s check o f
such a t t e m p t . See B u l l o c k R e p o r t , p a r a . 11.44.
- 83 because t h e y t a k e p a r t i n board d e c i s i o n s concerned
with
industrial
r e l a t i o n s or c o l l e c t i v e bargaining ( 4 ) .
Under t h e p r e s e n t l a w an e m p l o y e e d i r e c t o r w o u l d
liable
t o removal
from t h e board
always
be
by o r d i n a r y r e s o l u t i o n u n d e r s e c t i o n
184 o f t h e Companies A c t 1948 b e f o r e t h e e x p i r a t i o n o f h i s p e r i o d o f
office,
n o t w i t h s t a n d i n g a n y t h i n g i n i t s a r t i c l e s o r i n any a g r e e m e n t
b e t w e e n i t and h i m , and a c c o r d i n g l y s.184 s h o u l d be amended so as t o
curtail
t h e s h a r e h o l d e r s ' r i g h t o f removal
i n t h e c a s e o f an e m p l o y e e
director*
The p r e s s u r e f o r e m p l o y e e p a r t i c i p a t i o n has been g r o w i n g ,
the
B
ullock
Report
c o n s t i t u t e s by f a r one o f t h e most t h o r o u g h
and
and
t h o u g h t f u l e x a m i n a t i o n s o f t h e impact o f employee p a r t i c i p a t i o n
the customary
r u l e s o f company l a w .
on
Implementation of proposals to
g i v e an e f f e c t i v e v o i c e t o e m p l o y e e s i n c o r p o r a t e management w i l l
b r i n g i n i t s t r a i n a h o s t o f s i g n i f i c a n t changes i n company l a w ,
e s p e c i a l l y t h e r i g h t s o f s h a r e h o l d e r s and d i r e c t o r s '
(4) Bullock Report, para.
10.58.
duties.
- 84 CHAPTER 3
DIRECTORS' DUTIES
The e f f e c t i v e l e g a l c o n t r o l o f l i m i t e d c o m p a n i e s r e q u i r e s
imposition
on d i r e c t o r s o f s u i t a b l y s t r i n g e n t
enforceable.
directors
duties
which are r e a d i l y
So i t i s o f i m p o r t a n c e t o see w h a t d u t i e s
and managers
a r e owed by
i n t h e e x e r c i s e o f t h e i r powers i n t h o s e a r e a s
w h i c h have been s u b j e c t s o f d e b a t e o r w h i c h have c a u s e d some
c u l t i e s and t o d i s c u s s t h e e n f o r c e m e n t o f d i r e c t o r s *
The powers and d u t i e s
panies Acts provide l i t t l e
o f a company d i r e c t o r a r e d e r i v e d
tor,
meetings, e t c .
he a c c e p t s w i t h
duties
g u i d a n c e on t h e n a t u r e o f a
primarily
The Com-
director's
a p a r t f r o m t h e f o r m a l r e q u i r e m e n t s as t o t h e h o l d i n g
periodic
diffi-
duties.
f r o m t h e company's memorandum and a r t i c l e s o f a s s o c i a t i o n .
duties,
the
of
When a p e r s o n a c c e p t s t h e o f f i c e o f a d i r e c -
i tcertain duties
t o w a r d s t h e company.
These
a r e p a r t l y d e p e n d e n t on t h e l a w o f a g e n t s and p e r s o n s i n a
f i d u c i a r y p o s i t i o n , p a r t l y s t a t u t o r y , and p a r t l y r e g u l a t o r y ( 1 ) .
Such d u t i e s
v a r y f r o m company t o company, and w i t h i n any g i v e n com-
pany t h e d i r e c t o r s may
these d u t i e s
tor
have d i f f e r e n t r e s p o n s i b i l i t i e s .
Breach o f
o r n e g l i g e n c e i n p e r f o r m i n g them on t h e p a r t o f a d i r e c -
g i v e s t h e company, and, i n i t s w i n d i n g u p , t h e l i q u i d a t o r , r i g h t s
and r e m e d i e s a g a i n s t h i m f o r any damage w h i c h has been s u f f e r e d
the
by
company as a r e s u l t o f t h e b r e a c h o r n e g l i g e n c e ( 2 ) .
Directors
a r e a g e n t s o f a company.
As a g e n t s t h e y s t a n d i n a
f i d u c i a r y r e l a t i o n s h i p t o t h e i r p r i n c i p a l , t h e company.
The
duties
o f good f a i t h w h i c h t h i s f i d u c i a r y r e l a t i o n s h i p i m p o s e s a r e v e r y
s i m i l a r t o t h o s e imposed on t r u s t e e s ,
can
be r e g a r d e d as t r u s t e e s
(3).
and t o t h i s e x t e n t
directors
But t h e p o s i t i o n o f a d i r e c t o r
d i f f e r s c o n s i d e r a b l y f r o m t h a t o f an o r d i n a r y
( 1 ) See P a l m e r ' s Company Law, V o l . 1 , p.684.
( 2 ) I b i d . , V o l . 1 , p.684.
( 3 ) Gower, p.572.
trustee.
The d u t y o f
- 85
the
trustees
-
of a s e t t l e m e n t or w i l l
r i s k s t o the
c a p i t a l of
the
i s t o be
t r u s t ( 4 ) , but
careful
taking
i n e v i t a b l e i n r u n n i n g a company, w h i c h w o u l d n o t
s i b l e f o r a trustee.,
ferent
former to the
"It
has
i t would not
of
wholly misleading.
of directors
The
be
l e g a l l y permisis entirely dif-
realistic
to subject
i n the
trustees.
the
performance of
I f this
their
s t a n d i n a f i d u c i a r y r e l a t i o n s h i p t o t h e company,
i n d i c a t i o n by way
wise.
be
t h a t d i r e c t o r s are
more t h a n t h a t d i r e c t o r s
s t a t e m e n t i s t r u e enough.
an
be
avoid
same r u l e s .
sometimes been s a i d
means no
duties
and
to
r i s k s seems t o
A businessman seeking p r o f i t
from a t r u s t e e ,
and
But
i f the
the
s t a t e m e n t i s meant t o
analogy o f what those d u t i e s
are,
be
i t is
I t i s indeed impossible to d e s c r i b e the
i n g e n e r a l t e r m s , w h e t h e r by way
p o s i t i o n of
the d i r e c t o r c a r r y i n g
business i s very d i f f e r e n t from t h a t of
of
on
duties
analogy or
a small
a d i r e c t o r of
a
other-
retail
railway
company."
( p e r Romer J . ,
I n Smith v
"A
trustee
it
as
a t p.426)
A n d e r s o n ( 6 ) , James, L . J .
e
i s a man
who
p r i n c i p a l , as
equitable
in
the
of
a paid
(5)
o w n e r , and
obligation
r e l a t i o n of
i s t h e owner o f
as
had
t h i s to
p r o p e r t y and
t o a c c o u n t t o some p e r s o n s t o whom he
trustee
. . .
The
o f f i c e of
the
company.
contract f o r himself,
but
for his principal . . .
nor
F u r t h e r , the
section
61
be
sued on
provisions
(the r e l i e f
deals
master, subject o n l y to
servant of
such c o n t r a c t s ,
say;
of
an
stands
a director is
that
A d i r e c t o r never e n t e r s i n t o a
he
c a n n o t sue
the Trustee Act
do
provision
not
1925
including
a p p l y t o d i r e c t o r s , and
(section
448)
has
t o be
a
provided
( 4 ) Gower, p,.572
( 5 ) I n r e C i t y E q u i t a b l e F i r e I n s u r a n c e Co. /19257 1 Ch. 407.
( 6 ) ( 1 8 8 0 ) 15 Ch. D. 247; 50 L.J.Ch. 39; 43 L.T. 329; 29 W.R, 2 1 .
9
on
them."
provision)
a s i m i l a r l y worded r e l i e f
with
- 86 by
t h e Companies
It
A c t 1948.
i s convenient
u n d e r two h e a d i n g s :
faith,
t o d i s c u s s t h e d u t i e s o f d i r e c t o r s (7)
(A) f i d u c i a r y d u t i e s o f l o y a l t y
and ( B ) d u t i e s o f c a r e d i l i g e n c e and
(A)
and good
skillo
Fiduciary Duties
As f i d u c i a r i e s , d i r e c t o r s must d i s p l a y t h e u t m o s t
towards
good
faith
t h e company i n t h e i r d e a l i n g s w i t h i t o r on i t s b e h a l f
Before proceeding
further,
i t i s u s e f u l t o emphasize
0
certain
pointSo
F i r s t , each d i r e c t o r owes h i s d u t i e s o f good
faith
individually.
S e c o n d l y , t h e d u t i e s a r e owed t o t h e company and t o t h e
company a l o n e
0
This p r i n c i p l e
d e c i s i o n i n P e r c i v a l v. Wright
shares
i s regarded
as e s t a b l i s h e d by t h e
( 8 ) w h e r e a d i r e c t o r b o u g h t some
i n t h e company f r o m a member who w i s h e d
to sell
them
0
The
d i r e c t o r knew a t t h e t i m e t h a t n e g o t i a t i o n s w e r e i n p r o g r e s s f o r
a s a l e o f a l l t h e company's s h a r e s
a t a h i g h e r p r i c e t h a n he
p a y i n g , b u t he d i d n o t d i s c l o s e t h i s f a c t t o t h e s e l l e r
held
0
was
I t was
t h a t t h e s a l e s h o u l d n o t be s e t a s i d e b e c a u s e t h e d i r e c t o r
owed no d u t y t o t h a t i n d i v i d u a l
member.
Sometimes, h o w e v e r , t h e d i r e c t o r s a r e i n t h e p o s i t i o n o f
a g e n t s o f t h e s h a r e h o l d e r s as w e l l o
T h i s can a r i s e w h e r e t h e
s h a r e h o l d e r s e x p r e s s l y a p p o i n t them t o a c t as t h e i r
agents,
B r i e s s v. Woolley
( 9 ) , o r w h e r e b y t h e i r own b e h a v i o u r
render themselves
agents
But
they
f o r t h e s h a r e h o l d e r s , A l l e n v . H y a t t (10)
t h i s i s n o t t h e normal
legal
p o s i t i o n and o n l y a r i s e s i n
( 7 ) Gower, p 5 7 2
( 8 ) [1902/ 2 Cho 421; 71 L J C h
846; 18 T L „ R . 697; 9 Mans. 4 4 3
( 9 ) /1954/ A.C. 333; [1954J 2 W.L.R, 832; [19 5 47 1 A l l EoR.
909; 98 S = J . 2 8 6
( 1 0 ) (1914) 30 T.LoRo 444.
0
0
0
D
0
0
0
D
- 87 exceptional circumstances
Thirdly
(Do
the fiduciary duties
a r e imposed on d i r e c t o r s
b e c a u s e o f t h e n a t u r e o f t h e work t h e y p e r f o r m .
r e a s o n t h a t t h e same d u t i e s
on
(although less
I ti s f o r t h i s
rigorous
depending
t h e p a r t i c u l a r c i r c u m s t a n c e s o f t h e c a s e ) a p p l y t o any o f f i c i a l s
(other
than d i r e c t o r s
i n t h e u s u a l s e n s e ) o f t h e company who a r e
a u t h o r i s e d t o a c t on i t s b e h a l f , p a r t i c u l a r l y t o t h o s e i n a
managerial capacity a t the material
As P r o f e s s o r Gower h a s s t a t e d
time ( 2 ) .
( 3 ) , the fact that
are
f i d u c i a r i e s i m p o s e s o n them ( i ) s u b j e c t i v e
and
good f a i t h ,
and ( i i )
objective
i n a p o s i t i o n where t h e i r d u t i e s
private
duties
duties
not t o place
might c o n f l i c t w i t h
they tend t o blend t o g e t h e r ) .
a c t bona f i d e ,
the
themselves
their
i t i s c o n v e n i e n t t o b r e a k down e a c h o f t h e s e
i n t o t h r e e subheadings f o r purposes o f a n a l y s i s
of
o f honesty
interests.
In practice,
practice
directors
First,
t h a t i s i n what they b e l i e v e
(although i n
the directors
t o be t h e b e s t
must
interests
t h e company. S e c o n d l y , t h e y must e x e r c i s e t h e i r p o w e r s f o r
p a r t i c u l a r p u r p o s e f o r w h i c h t h e y w e r e c o n f e r r e d and n o t f o r
some e x t r a n e o u s p u r p o s e ( 4 ) .
Thirdly,
t h e d i r e c t o r s must n o t ,
w i t h o u t t h e c o n s e n t o f t h e company, p l a c e t h e m s e l v e s i n a p o s i t i o n
i n w h i c h t h e r e i s a c o n f l i c t between t h e i r d u t i e s
personal i n t e r e s t s
1.
(5).
Bona F i d e s
It
(1)
(2)
(3)
(4)
(5)
(6)
Ch.
and t h e i r
h a s been s t a t e d
by L o r d Green ( 6 ) t h a t " ( t h e
directors)
See f o r e x a m p l e Coleman v . M y e r s [1977] 2 N.Z.L.R. 2 5 5
See Gower, p.574.
Gower, p.576.
Ibid.
Gower, pp.576=-7
See Re S m i t h & F a w c e t t L t d . /1942J 1 A l l E.R. 5 4 2 ; [1942]
304; 1 1 1 L.J.Cho 265; 166 L.T. 279.
0
0
= 88 must e x e r c i s e t h e i r d i s c r e t i o n bona f i d e i n w h a t t h e y c o n s i d e r
n o t w h a t a c o u r t may c o n s i d e r —
—
t o be i n t h e i n t e r e s t s o f t h e
company, and n o t f o r any c o l l a t e r a l
purpose,,"
A q u e s t i o n i s sometimes asked whether o r n o t t h e e x p r e s s i o n
• t h e company' means a l l t h e s h a r e h o l d e r s , o r t h e m a j o r i t y
share-
h o l d e r s , o r t h e company as a b u s i n e s s
total
concern,
o r t h e sum
o f t h e p r o p r i e t a r y , e m p l o y e e s ' and p u b l i c i n t e r e s t s as r e p r e s e n t e d
by t h e s h a r e h o l d e r s , t h e company's e m p l o y e e s , and t h e c o n s u m e r s
or public at large.
M e g a r r y J . was o f t h e v i e w
that
' t h e company' d o e s n o t mean
t h e s e c t i o n a l i n t e r e s t o f some o f t h e p r e s e n t members, b u t o f
p r e s e n t and f u t u r e members o f t h e company and t h a t a l o n g - t e r m
v i e w has t o be b a l a n c e d
members.
Mental
against short-time i n t e r e s t s o f present
Thus he r e m a r k e d i n Gaiman v . N a t i o n a l A s s o c i a t i o n f o r
Health ( 7 ) ;
"The i n t e r e s t s o f some p a r t i c u l a r s e c t i o n o r s e c t i o n s o f t h e
company c a n n o t
would
of
accept
be e q u a t e d
with
t h o s e o f t h e company, and I
t h e i n t e r e s t s o f b o t h p r e s e n t and f u t u r e members
t h e company, as a w h o l e , as b e i n g a h e l p f u l e x p r e s s i o n o f
a human e q u i v a l e n t . "
And L o r d D i p l o c k was o f t h e o p i n i o n t h a t
cover c r e d i t o r s .
Petroleum
"it
of
' t h e company'
may
Thus he commented i n L o n r h o L t d . v . S h e l l
(8)t
i s t h e d u t y o f t h e board
t h e company.
to consider.
the best
interests
These a r e n o t e x c l u s i v e l y t h o s e o f i t s s h a r e -
h o l d e r s b u t may i n c l u d e t h o s e o f i t s c r e d i t o r s "
The e x p r e s s i o n
9
t h e company" now i n c l u d e s t h e e m p l o y e e s
( 7 ) [ 1 9 7 1 ] C h 317 a t 330. B u t c f . Hogg v . Cramphorn /1967/ Ch.
254; £19667 3 W.LoR. 9 9 5 ; 110 S.J. 887; /19667 3 A l l E.R. 4 2 0 .
See a l s o above p 7 5 „
( 8 ) /19807 1 W.L.R. 6 2 7 , 634.
0
s
= 89 b e c a u s e t h e d i r e c t o r s have now t o r e g a r d t h e i r i n t e r e s t s i n
g e n e r a l as w e l l
2.
as t h e
i n t e r e s t s o f t h e members o f t h e
Proper Purpose
If
d i r e c t o r s do n o t
which they are
are
e x e r c i s e t h e i r powers f o r p u r p o s e s f o r
c o n f e r r e d , t h e y have exceeded t h e i r a u t h o r i t y and
l i a b l e accordingly.
rule
(10),
i s generally
The r u l e , known as t h e
applicable
other than, o r i n addition
i sspecially relevant
powers t o p r o t e c t
take-over t h r e a t .
proper
i n cases i n which
h a v e u s e d t h e i r powers as d i r e c t o r s
It
company ( 9 )
f o r an u l t e r i o r
purpose
directors
purpose
t o , t h e i r apparent o r professed
i n cases where d i r e c t o r s misuse t h e i r
their position
as d i r e c t o r s
i n the
face o f a
L i k e any o t h e r power v e s t e d i n t h e
directors,
t h i s power must be e x e r c i s e d i n t h e b e s t i n t e r e s t s o f t h e
as
purpose
company
a w h o l e , as o p p o s e d t o t h o s e o f i n d i v i d u a l directors«
I n Hogg v . Cramphorn ( 1 ) , t h e d i r e c t o r s w i s h e d t o g e t
in order t o f o r e s t a l l
a t a k e - o v e r b i d , and t h e r e f o r e
u n i s s u e d s h a r e s i n t h e company t o t r u s t e e s
b e n e f i t o f the
trustees
held
out
t o be h e l d
The s h a r e s w e r e p a i d
o f an i n t e r e s t - f r e e l o a n f r o m t h e
f i d u c i a r y power.
influenced
interests.
"I
transferred
for the
f o r by t h e
company.
I t was
b y B u c k l e y J . t h a t t h a t was a w r o n g f u l e x e r c i s e o f t h e
directors'
was
employees..
control
I n reaching
by t h e d i r e c t o r s
taking
his decision,
i n t o account the
Buckley J .
staff's
Thus he s a i d ;
am s a t i s f i e d t h a t Mr. B a x t e r ' s o f f e r , when i t became known
t o t h e company's s t a f f , had an u n s e t t l i n g e f f e c t o n t h e m .
I am
( 9 ) S e c t i o n 46 o f Companies A c t 1980. See a l s o a b o v e , p p 4 6 ~ 7 and
below, p 92
(10) See g e n e r a l l y Gower, pp.580=2; Hadden, pp„245-8; P e n n i n g t o n ,
Company Law ( 4 t h e d . ) p p 5 3 8 = 4 2 .
(1) [19677 Cho 254; /19667 3 W.LoRo 995; /1966J 3 A l l E.R. 420;
110 S.J. 887. See a l s o L.S. S e a l y (1967) C.L.J. 33; K.W.
W e d d e r b u r n (1967) 30 M.L.R. 77; (1968) 31 M.L.R. 688.
0
0
e
- 90 also s a t i s f i e d that the directors
deed g e n u i n e l y c o n s i d e r e d
that t o give the s t a f f
t r u s t e e s a s i z e a b l e , though
the
and t h e t r u s t e e s o f t h e t r u s t
through the
i n d i r e c t , voice i n the a f f a i r s of
company w o u l d b e n e f i t b o t h t h e s t a f f
and t h e company„
s u r e t h a t C o l o n e l Cramphorn and a l s o p r o b a b l y h i s f e l l o w
I am
directors
f i r m l y b e l i e v e d t h a t t o k e e p t h e management o f t h e company's
affairs
i n t h e hands o f t h e e x i s t i n g b o a r d
w o u l d be more
a d v a n t a g e o u s t o t h e s h a r e h o l d e r s , t h e company's
customers t h a n i f i t were committed
Mr.
t o a board
staff
and i t s
s e l e c t e d by
Baxter."
However B u c k l e y
J . took t h e view
that
t h e d i r e c t o r s had no r i g h t
t o e x e r c i s e t h e i r power t o i s s u e s h a r e s ,
attempt t o secure
c o n t r o l o f t h e company,
t h a t i n d o i n g so t h e y w e r e a c t i n g
Buckley
staff's
J's v i e w
i n t h e company's
"In defining
Cramphorn L t d
considered
b e s t interests«
i n t o account t h e
b y h i s c o u n t e r p a r t i n Canada
b e c a u s e i n Teck C o r p o r a t i o n v . M i l l a r
B
even i f t h e y
about t h e d i r e c t o r s t a k i n g
i n t e r e s t s was n o t s h a r e d
f o l l o w Hogg y
i n o r d e r t o d e f e a t an
( 2 ) Berger J . r e f u s e d t o
Thus he commented?
c
t h e f i d u c i a r y d u t i e s o f d i r e c t o r s , t h e law ought
t o take i n t o account the f a c t t h a t the c o r p o r a t i o n provides t h e
l e g a l framework f o r t h e development o f resources
r a t i o n of wealth i n the private
s e c t o r o f t h e C a n a d i a n economy.,
A c l a s s i c a l t h e o r y t h a t o n c e was u n c h a l l e n g e a b l e
the
f a c t s o f modern l i f e , ,
and t h e gene-
I n f a c t , o f course,
must y i e l d t o
i t has.
I f today
t h e d i r e c t o r s o f a company w e r e t o c o n s i d e r t h e i n t e r e s t s o f
its
e m p l o y e e s no one w o u l d a r g u e t h a t i n d o i n g so t h e y w e r e
not acting
bona f i d e i n t h e i n t e r e s t s o f t h e company
itself
Similarly,
i f t h e d i r e c t o r s were t o c o n s i d e r t h e consequences
0
( 2 ) ( 1 9 7 2 ) 33 DoLoRo ( 3 d ) 2 8 8 , a d e c i s i o n f r o m Supreme C o u r t o f
B r i t i s h Columbia
See a l s o B V. S l u t s k y ( 1 9 7 4 ) 37 M„L Ro 457;
MoEo Bennun ( 1 9 7 5 ) 24 I o C L o Q o 359„
0
0
0
- 91
t o t h e c o m m u n i t y o f any
p u r s u e , and
-
p o l i c y t h a t t h e company i n t e n d e d
were d e f l e c t e d i n t h e i r commitment t o t h a t
as a r e s u l t , i t c o u l d n o t be
s a i d t h a t t h e y had
bona f i d e t h e i n t e r e s t s o f t h e s h a r e h o l d e r s .
it
w o u l d be
entirely
not
But
considered
that
to disregard
t h e i n t e r e s t s o f a company's s h a r e h o l d e r s
i t s employees.
policy
I appreciate
a breach o f t h e i r duty f o r d i r e c t o r s
c o n f e r a b e n e f i t on
to
i n order
to
i f they observe a decent
r e s p e c t f o r o t h e r i n t e r e s t s l y i n g beyond t h o s e o f t h e company's
shareholders
i n the s t r i c t
sense, t h a t w i l l
n o t , i n my
view,
l e a v e d i r e c t o r s open t o t h e c h a r g e t h a t t h e y h a v e f a i l e d
in
t h e i r f i d u c i a r y d u t y t o t h e company." ( 3 )
The
Teck c a s e was
a p p r o v e d by
S m i t h L t d . v . Ampol P e t r o l e u m
the P r i v y Council
Ltdo
( 4 ) , another
i n Howard
take-over
battle
case, L o r d W i l b e r f o r c e commenting;
"(Berger J's) d e c i s i o n u p h o l d i n g
t h i s b a s i s a p p e a r s t o be
t h e a g r e e m e n t w i t h Canex on
in line with
the English
A u s t r a l i a n a u t h o r i t i e s t o w h i c h r e f e r e n c e has
It
i s o f importance
t h e Teck c a s e .
had
reasonable
The
t o note
and
been made." ( 5 )
t h e approach B e r g e r J . used i n
r u l e he u s e d seemed t o be w h e t h e r t h e
directors
grounds f o r t h e i r b e l i e f (6) not whether t h e i r
( 3 ) B e r g e r J . was o f t h e v i e w t h a t Hogg v . Cramphorn /1967/ Ch. 254;
£19667 3 w.L.R. 995; /1966J 3 A l l E.R. 420; 110 S.J. 887 was i n c o n s i s t e n t w i t h t h e v i e w o f t h e l a w t a k e n i n Re S m i t h and F a w c e t t L t d
[1942] 1 A l l E.R.
542 t o t h e e f f e c t t h a t t h e d i r e c t o r s must e x e r c i s e
t h e i r d i s c r e t i o n bona f i d e i n w h a t t h e y , and n o t t h e c o u r t , c o n s i d e r
t o be t h e i n t e r e s t s o f t h e company and f o r no c o l l a t e r a l p u r p o s e .
He t r i e d t o d i s t i n g u i s h Hogg c a s e f r o m t h e c a s e b e f o r e him by
s t a t i n g t h a t i n Hogg c a s e t h e d i r e c t o r s w e r e s e e k i n g t o r e t a i n
c o n t r o l o f t h e i r company w h i l e he was c o n c e r n e d w i t h a case w h e r e
t h e i r p r i m a r y p u r p o s e was t o make t h e b e s t c o n t r a c t f o r t h e company
t h a t t h e y c o u l d , n o t b e i n g m o t i v a t e d p r i m a r i l y by a d e s i r e t o
r e t a i n control„
( 4 ) f l 9 7 4 ] A.Co 821;
[1914] 2 W.L.R 689; /1974J 1 A l l E.R.
1126.
See a l s o J.R. B i r d s (1974) 37 M.L.R. 580; M.E. Bennun (1975) 24
I.C.L.Q. 359.
(5) I t i s i n t e r e s t i n g t o n o t e t h a t t h e P r i v y C o u n c i l appears t o
h a v e s i m u l t a n e o u s l y a p p r o v e d b o t h Hogg v . Cramphorn and Teck c a s e
a l t h o u g h t h e two c a s e s a r e i n c o n s i s t e n t w i t h each o t h e r
( 6 ) (1973) 33 DoLoRe (3d) a t 3 1 5 - 6
e
0
D
0
- 92 b e l i e f was c o r r e c t o
He was a p p a r e n t l y t r y i n g
what t h e reasonable
circumstances
he
to establish not
d i r e c t o r o u g h t t o do u n d e r a g i v e n s e t o f
b u t what t h e r e a s o n a b l e
d i r e c t o r might
do
Thus
e
remarked?
"My own v i e w ,
i s t h a t t h e d i r e c t o r s o u g h t t o be a l l o w e d t o
c o n s i d e r who i s s e e k i n g c o n t r o l
there w i l l
the
I f they b e l i e v e t h a t
be s u b s t a n t i a l damage t o t h e company's i n t e r e s t s i f
company i s t a k e n o v e r ,
to
and why.
d e f e a t those
seeking
then t h e exercise o f t h e i r
a majority w i l l
powers
n o t n e c e s s a r i l y be
c a t e g o r i s e d as i m p r o p e r . . 1 t i s no p a r t o f t h i s c o u r t ' s
0
f u n c t i o n t o d e c i d e w h a t c o n t r a c t A f t o n s h o u l d have made o r
whom i t s h o u l d h a v e made i t w i t h o "
On t h e o t h e r hand t h e P r i v y C o u n c i l a d o p t e d a more o b j e c t i v e
t e s t i n t h e Howard S m i t h
case.
"o..the C o u r t . . . i s e n t i t l e d
Thus L o r d W i l b e r f o r c e s a i d :
t o look a t t h e s i t u a t i o n
i n o r d e r t o e s t i m a t e how c r i t i c a l
or per contra, i n s u b s t a n t i a l
beerio
was
reason
o r pressing, or substantial,
an a l l e g e d r e q u i r e m e n t
I fi t finds t h a t a p a r t i c u l a r requirement,
not urgent, or c r i t i c a l ,
objectively
may h a v e
though
a t t h e r e l e v a n t t i m e , i t may have
t o doubt, o r d i s c o u n t , t h e a s s e r t i o n o f i n d i v i d u a l s
they acted s o l e l y i n order t o deal w i t h i t , p a r t i c u l a r l y
the
real,
a c t i o n t h e y t o o k was u n u s u a l
that
when
o r even e x t r e m e o " ( 7 )
S e c t i o n 46 o f t h e Companies A c t 1980 ( 8 ) h a s now come t o
the
a i d o f d i r e c t o r s who t a k e i n t o a c c o u n t e m p l o y e e s '
in
t h e performance o f t h e i r
if
s i m i l a r f a c t s arose
manner as B u c k l e y
(7)
(8)
J
c
f u n c t i o n s , and i t i s d o u b t f u l w h e t h e r ,
today,
t h e c o u r t would decide
d i d i n t h e Hogg case=
/19747 1 A l l E Ro 1126 a t 1131-2.
See a l s o a b o v e , p p 4 6 - 7
0
a
interests
0
Indeed
i n t h e same
i t looks
likely
- 93 =
t h a t the c o u r t would g i v e a judgment i n f a v o u r o f t h e
It
i s not very c l e a r whether the proper
directors*
purpose d o c t r i n e i s
a director's
f i d u c i a r y d u t y o r a mere r u l e o f i n t e r p r e t a t i o n o f
the a r t i c l e s
so t h a t i t c a n be e x c l u d e d
The
by a p p r o p r i a t e d r a f t i n g ( 9 )
v i e w t h a t t h e p r o p e r p u r p o s e d u t y c a n be e x c l u d e d i s
f o u n d e d o n Re S m i t h & F a w c e t t ( 1 0 ) w h e r e t h e a r t i c l e s gave t h e
d i r e c t o r s an u n c o n t r o l l e d d i s c r e t i o n
transfer.
A, a s e x e c u t o r
o f h i s f a t h e r , claimed
t h e r e g i s t e r i n r e s p e c t o f 4,001
directors
refused
t o refuse t o register a
t o be p u t on
s h a r e s h e l d b y h i s f a t h e r . The
t o put A on the r e g i s t e r unless
he s o l d
2,000
shares t o a d i r e c t o r , i n which case they would r e g i s t e r A i n
r e s p e c t o f 2,001
The
in
shares.
A challenged
refusal.
C o u r t o f A p p e a l h e l d t h a t as t h e d i r e c t o r s w e r e
the best
acting
i n t e r e s t s o f t h e company a s t h e y saw them t h e
d i s c r e t i o n was u n l i m i t e d .
and
the
the r e f u s a l
directors
F u r t h e r , no m a l a f i d e s h a d been shown
t o r e g i s t e r t h e t r a n s f e r was a l l o w e d
t o stand.
L o r d G r e e n , M.R. commented:
"...this
type o f a r t i c l e
i s one w h i c h i s f o r t h e most
confined
t o p r i v a t e companies.
separate
e n t i t i e s i n l a w j u s t a s much as a r e p u b l i c
but from
t h e b u s i n e s s and p e r s o n a l
P r i v a t e companies a r e , o f c o u r s e ,
more a n a l o g o u s t o p a r t n e r s h i p s t h a n
Accordingly,
part
companies,
p o i n t o f v i e w t h e y a r e much
t o public
corporations.
i t i s t o be e x p e c t e d t h a t , i n t h e a r t i c l e s o f such
a company, t h e c o n t r o l o f t h e d i r e c t o r s o v e r t h e m e m b e r s h i p may
( 9 ) See J.R= B i r d s ( 1 9 7 4 ) 37 M.L.R. 580; B.V. S l u t s k y ( 1 9 7 4 ) 37
M.LoR. 457, 460? D.D. P r e n t i c e ( 1 9 7 0 ) 33 M.L.R. a t 703. See a l s o
D.D. P r e n t i c e ' s m o d i f i e d v i e w s i n h i s a r t i c l e ( 1 9 7 7 ) 40 M.L.R.
589. Gower o n Modern Company Law, 3 r d e d . , s t a t e d a t p.524, " i t
i s f o r the c o u r t t o decide on a t r u e i n t e r p r e t a t i o n o f t h e
a r t i c l e s w h a t t h e ;purpose was f o r w h i c h t h e power was c o n f e r r e d
b u t i t a p p e a r s t h a t he h a s n o t r e f e r r e d t o a n y i n t e r p r e t a t i o n
o f a r t i c l e s i n t h e S e c t i o n on Proper Purpose (p.580) i n h i s
4th e d i t i o n .
( 1 0 ) [19A2] 1 A l l E.R. 5 4 2 ; /1942/ Ch. 304; 1 1 1 L.J.Ch. 2 6 5 ;
166 L.T. 279.
-
be v e r y s t r i c t
indeed.
94
-
T h e r e a r e v e r y good b u s i n e s s
why
reasons,
t h e r e may be v e r y good b u s i n e s s
reasons,
companies i n t o e x i s t e n c e s h o u l d
g i v e them a c o n s t i t u t i o n
t h o s e who b r i n g
i s as f o l l o w s :
r e g i s t e r any t r a n s f e r o f s h a r e s . "
question that that i s a fiduciary
e x e r c i s e i t bona f i d e
of
t h e company.
The
I n the
"The d i r e c t o r s may
t i m e i n t h e i r a b s o l u t e and u n c o n t r o l l e d d i s c r e t i o n
such
which
g i v e s t o t h e d i r e c t o r s powers o f t h e w i d e s t d e s c r i p t i o n , .
p r e s e n t case t h e a r t i c l e
or
a t any
refuse to
As I h a v e s a i d , i t i s beyond
power, and t h e d i r e c t o r s
i n what they c o n s i d e r
must
t o be t h e i n t e r e s t s
l a n g u a g e o f t h e a r t i c l e does n o t p o i n t t o
any p a r t i c u l a r m a t t e r as b e i n g
the only matter
d i r e c t o r s a r e t o pay a t t e n t i o n
i n d e c i d i n g whether o r not they
will
a l l o w the t r a n s f e r
a r t i c l e s a r e framed w i t h
ary
if
power o f r e f u s a l
t o be r e g i s t e r e d
t o which the
„ . . I n cases where
some such l i m i t a t i o n on t h e d i s c r e t i o n -
as . . . i t f o l l o w s on p l a i n
principle
t h e y go o u t s i d e t h e m a t t e r s w h i c h t h e a r t i c l e s
the o n l y matters
will
that,
say a r e t o be
t o w h i c h t h e y a r e t o have r e g a r d , t h e d i r e c t o r s
have e x c e e d e d t h e i r
powers
From t h e c a s e i t seems t h a t
pretation of a relevant a r t i c l e
the c o u r t d e a l t w i t h
the i n t e r -
a t g r e a t e r l e n g t h than
t h e bona
fides of directorso
In
in
recent years
t h e r e has been a g r o w t h
t h e Commonwealth ( 1 )
one a s p e c t
fide
For
that
of
r e g a r d i n g t h e ' p r o p e r p u r p o s e s ' as
o f t h e much w i d e r
i n the best
of school
duty r e q u i r i n g a d i r e c t o r
i n t e r e s t s o f t h e company as a w h o l e
e x a m p l e i n Teck C o r p o r a t i o n L t d o
t h e 'proper purpose r u l e '
(1)
i s merely
v. M i l l a r
an a s p e c t
thought
merely
t o a c t bona
(2).
(3)
i t was
of the
held
broader
See BoVo S l u t s k y ( 1 9 7 4 ) 37 M.LoRo 4 5 7 ; S . J . B u r r i d g e ( 1 9 8 1 )
40 a t 4 4 .
( 2 ) See a l s o S e a l y ' s Cases and M a t e r i a l s on Company Law ( 2 n d ed.)
pp„468-70o
44
(3)
M.LcRo
(1972)
33
DoL.Ro
(3d)
288.
- 95 principle
of
that directors
t h e company
m u s t a c t bona f i d e i n t h e b e s t
as a w h o l e .
"The c a s e s d e c i d e d
Thus B e r g e r J . r e m a r k e d
interests
there:
i n t h e U n i t e d Kingdom make i t p l a i n
that
d i r e c t o r s , i n t h e e x e r c i s e o f t h e i r p o w e r s , must a c t i n w h a t t h e y
bona f i d e c o n s i d e r t o be t h e b e s t
they i s s u e shares
improper
rule
to retain control
purpose . . .
in
f o r themselves,
L o r d G r e e n M.R., e x p r e s s e d
i n t h i s way i n Re S m i t h & F a w c e t t
p.306: "They ( t h e d i r e c t o r s )
fide
i n t e r e s t s o f t h e company.
i s an
the general
L t d . , ZJ942.7 Ch.304 a t
must e x e r c i s e t h e i r d i s c r e t i o n
bona
i n w h a t t h e y c o n s i d e r - n o t w h a t a c o u r t may c o n s i d e r - i s
t h e i n t e r e s t s o f t h e company,
purpose."
t o r s may
and n o t f o r any c o l l a t e r a l
Y e t , i f Hogg v . C r a m p h o r n L t d . , s u p r a ,
not a l l o t
shares
t o f r u s t r a t e an a t t e m p t
of
t h e company, e v e n i f t h e y b e l i e v e t h a t
of
t h e company
laid
that
I f
t o do s o .
down i n Re S m i t h
is right,
direc-
to obtain
control
i t i s the best
This i s inconsistent with
& Fawcett
Ltd.
How
interests
t h e l a w as
c a n i t be s a i d
that
d i r e c t o r s h a v e t h e r i g h t t o c o n s i d e r t h e i n t e r e s t s o f t h e company,
and
t o e x e r c i s e t h e i r powers a c c o r d i n g l y , b u t t h a t
t h e r e i s an
e x c e p t i o n when i t comes t o t h e power t o i s s u e s h a r e s ,
the
e x e r c i s e o f s u c h power t h e d i r e c t o r s
issue shares
It
t o d e f e a t an a t t e m p t
seems t o me
cannot
and t h a t i n
i n any
t o gain control
o f t h e company?
t h i s i s w h a t Hogg v . Cramphorn L t d . s a y s
g e n e r a l r u l e i s t o be i n f r i n g e d h e r e , w i l l
circumstances
i t n o t be
e
I f the
infringed
e l s e w h e r e ? I f t h e d i r e c t o r s , e v e n when t h e y b e l i e v e t h e y a r e s e r ving
t h e b e s t i n t e r e s t s o f t h e company, c a n n o t
i s s u e shares
d e f e a t an a t t e m p t t o o b t a i n c o n t r o l , t h e n p r e s u m a b l y t h e y
to
cannot
e x e r c i s e any o t h e r o f t h e i r powers t o d e f e a t t h e c l a i m s o f t h e
majority o r , f o r that matter, t o deprive the majority of the
advantages o f c o n t r o l .
c a n be s e g r e g a t e d ,
I do n o t t h i n k
on t h e b a s i s t h a t
t h e power t o i s s u e
shares
t h e r u l e i n Hogg v . Cramphorn
- 96
-
L t d . a p p l i e s o n l y i n a c a s e o f an a l l o t m e n t o f
shares."
i n t h e P e n n e l l c a s e Templeman J .
t h e n was)
And
favoured t h i s
As
school o f thought
t h e c a s e law now
( a s he
(4).
stands
( 5 ) , the o p e r a t i o n of the
p u r p o s e d o c t r i n e r e m a i n s some k i n d o f g u e s s w o r k f o r t h o s e
and
be
seemingly
proper
concerned
i t i s t o be hoped t h a t i n t h e n e x t Companies A c t
i twill
expressly
s t a t e d w h e t h e r o r n o t t h e p r o p e r p u r p o s e d u t y has
been o r
should
be r e g a r d e d
as a f i d u c i a r y d u t y .
I t s h o u l d be n o t e d
that the
appli-
c a t i o n o f t h e p r o p e r p u r p o s e d o c t r i n e i s n o t c o n f i n e d t o a power t o
issue shares
and
i t i s as w e l l
t h a t i n the next proposal
to
govern-
ment t h e D e p a r t m e n t o f T r a d e s h o u l d r e c o g n i s e t h a t i n s t e a d o f
v i d i n g f o r a general statement of the d u t i e s of d i r e c t o r s
l a w , t h e r e s h o u l d be d e t a i l e d
3.
C o n f l i c t o f D u t y and
As
stated
s t a t u t o r y d u t i e s of
i n which
company and
For
i n t o two
in statute
directors.
Interest
f i d u c i a r i e s , d i r e c t o r s must n o t p l a c e t h e m s e l v e s
position
pro-
in a
t h e r e i s a c o n f l i c t between t h e i r d u t i e s t o t h e
t h e i r personal
interests.
purposes of a n a l y s i s i t i s convenient
subheadings,
namely ( a ) c o n t r a c t s w i t h
t o break
t h i s down
t h e company and
(b)
use o f c o r p o r a t e p r o p e r t y , i n f o r m a t i o n o r o p p o r t u n i t y .
(a)
C o n t r a c t s w i t h t h e Company
D i r e c t o r s have been e n t e r i n g i n t o t r a n s a c t i o n s w i t h
companies.
their
Commonly such t r a n s a c t i o n s a r e i n t h e f o r m o f a s a l e
t o t h e company by
the d i r e c t o r of assets i n which
he
i s interested,
( 4 ) See SoJo B u r r i d g e ( 1 9 8 1 ) 44 M.L.R. 40 a t 50.
( 5 ) See, e.g., P i e r c y v . S. M i l l s & Co., L t d . ^1920j 1 Ch. 77 where
a company was i n no f u r t h e r need o f c a p i t a l , b u t t h e d i r e c t o r s used
t h e i r powers t o i s s u e s h a r e s by a l l o t t i n g some t o t h e m s e l v e s s o l e l y
i n o r d e r t o a c q u i r e t h e m a j o r i t y o f t h e v o t i n g p o w e r , and t o d e f e a t
t h e w i s h e s o f t h e e x i s t i n g m a j o r i t y s h a r e h o l d e r s ; P u n t v . Symons &
Co., L t d . /"1903J 2 Ch. 506 w h e r e t h e d i r e c t o r s i s s u e d s h a r e s w i t h
t h e s o l e o b j e c t and i n t e n t i o n o f c r e a t i n g v o t i n g power t o c a r r y o u t
a p r o p o s e d a l t e r a t i o n i n t h e a r t i c l e s ; Gaiman v . N a t i o n a l A s s o c i a t i o n
o f M e n t a l H e a l t h {19707 2 A l l E.R.
362.
- 97 or
a p u r c h a s e o f p r o p e r t y f r o m t h e company b y t h e d i r e c t o r .
a f o r e s a i d , as f i d u c i a r i e s ,
a p o s i t i o n i n which
d i r e c t o r s must n o t p l a c e t h e m s e l v e s i n
t h e r e i s a c o n f l i c t between t h e i r d u t i e s t o t h e
company and t h e i r p e r s o n a l i n t e r e s t s .
which
As
p r o d u c e s such a c o n f l i c t
So a c o n t r a c t o r t r a n s a c t i o n
i sliable
t o be r e s c i n d e d o r a v o i d e d
by t h e company.
The a u t h o r i t y f o r t h i s p r o p o s i t i o n i s f o u n d e d i n
Aberdeen Railway
v. Blaikle
( 6 ) where L o r d Cranworth
L.C. had t h i s
to say:
"A c o r p o r a t e body c a n o n l y a c t b y a g e n t s ,
the
of
d u t y o f those agents
and i t i s , o f c o u r s e ,
so t o a c t as b e s t t o p r o m o t e t h e i n t e r e s t s
t h e c o r p o r a t i o n whose a f f a i r s
they are conducting.
have d u t i e s t o d i s c h a r g e o f a f i d u c i a r y n a t u r e towards
cipal.
And i t i s a r u l e o f u n i v e r s a l a p p l i c a t i o n
Such
agents
their
prin-
t h a t no o n e ,
h a v i n g such d u t i e s t o d i s c h a r g e , s h a l l be a l l o w e d t o e n t e r
engagements i n w h i c h
c o n f l i c t i n g , o r which
of
he h a s ,
o r can have, a p e r s o n a l
p o s s i b l y may c o n f l i c t , w i t h
t h o s e whom he i s bound t o p r o t e c t
. . .
into
interest
the interests
So s t r i c t l y
i s this
p r i n c i p l e a d h e r e d t o t h a t no q u e s t i o n i s a l l o w e d t o be r a i s e d as
to
t h e f a i r n e s s o r u n f a i r n e s s o f a c o n t r a c t so e n t e r e d
It
to
i snot surprising
t h e business
strict
r u l e was n o t a c c e p t a b l e
c o m m u n i t y and i t soon became t h e p r a c t i c e
t h a t t h e company w a i v e d
i t .
a r t i c l e s could e f f e c t i v e l y
which were f r a u d u l e n t .
Co.
that this
into."
P r i o r t o 1929 i t was e s t a b l i s h e d t h a t
exempt f r o m l i a b i l i t y
except
Thus i n Re C i t y E q u i t a b l e F i r e
( 7 ) a p e t i t i o n was f i l e d
t o ensure
f o r the winding-up
f o r breaches
Insurance
o f an i n s u r a n c e
company a t one t i m e d o i n g a l a r g e b u s i n e s s , o w i n g t o l o s s e s c a u s e d
by t h e f r a u d and m i s a p p r o p r i a t i o n o f t h e managing d i r e c t o r ,
and i t
( 6 ) ( 1 8 5 4 ) 1 Macq. 4 6 1 .
( 7 ) [1925] 1 Ch.407; 94 L.J.Ch. 4 4 5 ; 133 L.T. 520; 40 T.L.R. 8 5 3 ;
[1925] B. & C.R. 1 0 9 . See a l s o t h e c a s e s r e f e r r e d t o t h e r e i n and
Re B r a z i l i a Rubber P l a n t a t i o n s and E s t a t e s L t d . / l 9 1 l j 1 Ch. 425„
- 98 was d i s c o v e r e d
funds which
t h a t t h e r e was a d e f i c i t o f a b o u t £1,200,000
t h e company s h o u l d have p o s s e s s e d .
showed l a r g e t r a d i n g p r o f i t s ,
of
industrial
The b a l a n c e
t h e company's money had been
i n v e s t e d , and t o a l l o w i n g t h e company's manager and t h e i r
firm
sheets
and t h e l o s s was due t o d e p r e c i a t i o n
s e c u r i t i e s i n which
b r o k e r s , o f which
i n the
stock-
t h e i r m a n a g i n g d i r e c t o r was s e n i o r p a r t n e r ,
to
become p o s s e s s e d o f v e r y l a r g e sums o f money p r o p e r l y b e l o n g i n g
to
t h e company, w h i c h
as l i q u i d a t o r ,
were e n t i r e l y
lost.
The o f f i c i a l r e c e i v e r ,
t o o k o u t a m i s f e a s a n c e summons a l l e g i n g
negligence, breach
of trust,
and b r e a c h
of duty against the d i r e c -
tors.
I t was h e l d t h a t i n c e r t a i n p a r t i c u l a r s
failed
i n their f u l l
liability
by a r t i c l e
duty
t h e d i r e c t o r s had
t o t h e company, b u t w e r e e x c u s e d
150 o f t h e company's a r t i c l e s ,
"None o f t h e d i r e c t o r s
misfeasance,
which
from
provided:
. . . s h o u l d be a n s w e r a b l e f o r t h e a c t s ,
r e c e i p t s , n e g l e c t s , o r d e f a u l t s o f t h e o t h e r s o f t h e m , o r f o r any
b a n k e r s o r o t h e r p e r s o n s w i t h whom any moneys o r e f f e c t s
to
t h e company s h o u l d be l o d g e d
f o r safe custody,
c i e n c y o r d e f i c i e n c y o f any s e c u r i t y upon w h i c h
belonging
or for insuffi-
any moneys o f t h e
company s h o u l d be i n v e s t e d , o r f o r any o t h e r l o s s , m i s f o r t u n e , o r
damage i n r e l a t i o n
through
t h e r e t o , unless
t h e i r own w i l f u l
t h e same s h o u l d happen by o r
neglect or default."
As a c o n s e q u e n c e o f t h i s d e c i s i o n , t h e Greene C o m m i t t e e R e p o r t (
recommended t h a t such a r t i c l e s
m e n d a t i o n was d u l y e n a c t e d
sequently reenacted
s h o u l d be f o r b i d d e n .
T h i s recom-
i n t h e Companies A c t o f 1929 and s u b -
as s e c t i o n 205 o f t h e Companies A c t 1948.
S e c t i o n 205 o f t h e Companies a c t 1948 p r o v i d e s as f o l l o w s :
o
. any p r o v i s i o n , w h e t h e r c o n t a i n e d
company o r i n any c o n t r a c t w i t h
e x e m p t i n g any o f f i c e r
(8)
Cmdo 2657.
„ „ . from
i n the a r t i c l e s of a
t h e company o r o t h e r w i s e , f o r
„ . . any l i a b i l i t y w h i c h
by
- 99 v i r t u e o f any r u l e o f l a w w o u l d o t h e r w i s e a t t a c h
of
t o him i n respect
any n e g l i g e n c e , d e f a u l t , b r e a c h o f d u t y o r b r e a c h o f t r u s t o f
w h i c h he may be g u i l t y
All
i n r e l a t i n g t o t h e company s h a l l be void«,"
t h i s c a u s e s no d i f f i c u l t y ,
and no p o s s i b i l i t y o f d o u b t as
t o t h e m e a n i n g o f s.205 o f t h e 1948 A c t c o u l d have a r i s e n
not
i f i t had
been f o r t h e f a c t t h a t A r t i c l e 8 4 ( 3 ) o f T a b l e A, w h i c h i s c o n -
tained
i n t h e v e r y same 1948 A c t as i s s.205 o f t h e 1948 A c t , a p p e a r s
on t h e f a c e o f i t t o r e l i e v e d i r e c t o r s
from t h e consequences o f a
b r e a c h o f d u t y w h i c h t a k e s t h e f o r m o f h a v i n g an i n t e r e s t i n any
contract
t o which
t h e company i s a party»
A r t i c l e 8 4 ( 3 ) r e a d s as
follows:
". o «, n o r s h a l l
of
e
« . any c o n t r a c t
e n t e r e d i n t o by o r on b e h a l f
t h e company i n w h i c h any d i r e c t o r i s i n any way i n t e r e s t e d ,
liable
t o be a v o i d e d , n o r s h a l l any d i r e c t o r so c o n t r a c t i n g
b e i n g so i n t e r e s t e d
profit
realised
be l i a b l e
thereby
If
o r arrangement
by r e a s o n o f
that o f f i c e o r of the f i d u c i a r y r e l a t i o n
established.,"
such an a r t i c l e had n o t a p p e a r e d
A c t 1948, i t w o u l d n o t h a v e been d o u b t e d
of
or
t o a c c o u n t t o t h e company f o r any
by any s u c h c o n t r a c t
such d i r e c t o r h o l d i n g
be
t h e 1948 A c t and was
therefore
i n T a b l e A o f t h e Companies
t h a t i t c o n t r a v e n e d s„205
voido
What i s even w o r s e i s t h a t some c o m p a n i e s a d o p t a r t i c l e s i n
terms s i m i l a r t o t h e f o l l o w i n g
instead
of adopting a r t i c l e 84(2)o f
T a b l e A, w h i c h p r o h i b i t s a d i r e c t o r f r o m v o t i n g
on a c o n t r a c t i n
w h i c h he has an i n t e r e s t o r b e i n g c o u n t e d i n t h e quorum a t t h e b o a r d
meeting a t which t h e board o f d i r e c t o r s decides t h a t
s h o u l d e n t e r i n t o such a
contract:
"A d i r e c t o r may v o t e i n r e g a r d t o any c o n t r a c t
w h i c h he i s i n t e r e s t e d
t h e company
o r arrangement i n
o r upon any m a t t e r a r i s i n g t h e r e o u t and i f
he s h a l l so v o t e h i s v o t e s h a l l be c o u n t e d and he s h a l l be r e c k o n e d
in estimating
t h e quorum p r e s e n t o "
- 100
Such an
205
article
seems t o be
o f t h e Companies A c t
form
a r e a d o p t e d by
One
school
1948,
Act
e x c l u d e d by
the a r t i c l e s , but
can
t h e i r own
fraud
But
liability,
l o n g as one
t h a t n o t a l l t h e d u t y had
Birds
205
(10)
o f t h e 1948
Act
c l e a r as
be
still
principle
o f t h e 1948
articles
Act
does
refer
t h e scope o f any
particular
A l t h o u g h such a s u b m i s s i o n
to release
d i r e c t o r s from
remained because i t c o u l d
been e x c l u d e d ; i t had
that,
still
be
m e r e l y been
literally
duty which the general
than
o f t h e 1948
be m o d i f i e d
law
Act.
validity
they
construed,
r e l i e s on
their
section
articles
c a s t s upon a
void
Sometimes i t i s t r u e t h a t t h e s e
to c e r t a i n e x t e n t , but
are best
nearly
restricted.
the p o s i t i o n i s not
I t i s unfortunate
t h e r e a r e some A r t i c l e s i n T a b l e A w h i c h seem t o e x c l u d e a d u t y
But
has
argued
the proper purposes d o c t r i n e , are
t o t h e e x t e n t o f such m o d i f i c a t i o n .
directors.
that
the consequences o f
refers only to exclusion of l i a b i l i t y ,
company d i r e c t o r , o t h e r
u n d e r s e c t i o n 205
cannot
t o the general
n o t on
is this.
argues t h a t d e s p i t e
p u r p o r t i n g t o e x c l u d e any
d u t i e s can
subject
s e c t i o n 205
the d i f f i c u l t y
d u t i e s so
this
0
some m e r i t , i t w o u l d p e r m i t
all
f o r breach of duty
p r o t e c t the d i r e c t o r s against
t o r e s t r i c t i o n s on
duty.
in
t h a t t h e scope o f t h e d u t y can
the a r t i c l e s ,
Construed l i t e r a l l y ,
only
y e t i t appears t h a t a r t i c l e s
is that l i a b i l i t y
(9)
section
i s o f t h e o p i n i o n t h a t t h e e f f e c t o f s.205
o f t h e 1948
no c l a u s e
i n more f l a g r a n t b r e a c h o f
some p r i v a t e c o m p a n i e s .
of thought
be d e t e r m i n e d by
-
t r e a t e d t o be
i n c l u s i o n i n an
exceptional
for
that
of
their
Act.
( 9 ) E.g. Gower and Gore-Browne. I n 4 t h edn. o f P r i n c i p l e s o f Modern
Company Law, Gower a r g u e s ( i n a d d i t i o n ) a t p.586 t h a t j u s t as t h e
n o r m a l o b l i g a t i o n s o f t r u s t e e s can be w a i v e d o r m o d i f i e d by e x p r e s s
p r o v i s i o n s i n t h e t r u s t deed u n d e r w h i c h t h y y were a p p o i n t e d , so
( w i t h i n l i m i t s ) can t h e n o r m a l f i d u c i a r y d u t i e s o f d i r e c t o r s be
m o d i f i e d by e x p r e s s p r o v i s i o n i n t h e company's c o n s t i t u t i o n .
( 1 0 ) See J.R. B i r d s ( 1 9 7 6 ) 39 M.L.R. 394, 399.
- 101 It
seems t h a t t h e s p e c i a l
article
allowing
a d i r e c t o r t o vote
in
regard t o contracts
in
l i e u o f A r t i c l e 8 4 ( 2 ) o f T a b l e A, a l t h o u g h i n t h e o p i n i o n o f t h e
writer
the
i n w h i c h he i s i n t e r e s t e d
a b r e a c h o f s.205 o f t h e 1948 A c t , i s f a i r
case o f a s m a l l p r i v a t e
minority
shareholders o r a public
1
p e r p l e x i t i e s i n this
set
o f company l a w has t o c a t e r
c h a r a c t e r and f o r m .
o fdirectors*
field
and r e a s o n a b l e i n
company.
I t goes t o show
o f company l a w a r i s e
I t i s high
duties
t o be u s e d
company, b u t n o t so f o r a company
the
rules
quoted
with
that
o u t o f t h a t one
f o r companies o f a v a s t l y d i f f e r e n t
time t h a t t h e r e s h o u l d be s e p a r a t e
f o r public
(or large)
c o m p a n i e s , medium
( o r medium u n q u o t e d ) c o m p a n i e s and s m a l l c o m p a n i e s r e s p e c t i v e l y
(1)
The l a w o n w a i v e r c l a u s e s i n a r t i c l e s i s t h u s c o n f u s e d . B u t
it
i s inevitable
contracts
with
t h a t companies w i l l
their directors,
t h e y may be a b l e t o do s o .
the
and i t i s t h e r e f o r e
Some f o r m o f s o l u t i o n
t o t h e problem o f
disclose
o f r e l y i n g o n some
sort
h i s i n t e r e s t t o t h e share
h o l d e r s o f t h e company and t o have t h e c o n t r a c t
entered i n t o o r
b y t h e company i n g e n e r a l m e e t i n g o r , i f t h e a r t i c l e s o f
association
directors
t o be
himself against the p o s s i b i l i t y o f
i n these circumstances ( i n s t e a d
exclusion clause) i s t of u l l y
ratified
that
t h a t a more e f f e c t i v e s a f e g u a r d f o r a
d i r e c t o r who d e s i r e s t o p r o t e c t
rescission
into
necessary
r e s u l t i n g c o n f l i c t o f d u t y and i n t e r e s t has t h e r e f o r e
f o u n d , and i t i s s u b m i t t e d
of
w i s h and need t o e n t e r
c o n t a i n an a p p r o p r i a t e p r o v i s i o n ,
t o t h e board o f
(2) .
( 1 ) See b e l o w , p.123.
( 2 ) H e l y - H u t c h i n s o n v . B r a y h e a d L t d . /19687 1 Q.B 549; /1967/ 3
W.L.R. 1408; /19677 3 A l l E , R . 9 8 ; 111 S . J . 830.
Disclosure t o
d i r e c t o r s i s i n e f f e c t i v e even i f t h e i n t e r e s t e d d i r e c t o r s r e f r a i n
f r o m a t t e n d i n g and v o t i n g l e a v i n g an i n d e p e n d e n t quorum t o d e c i d e ,
f o r t h e company has a r i g h t t o t h e u n b i a s e d v o i c e and a d v i c e o f
every d i r e c t o r .
B e n s o r v . H e a t h o r n ( 1 8 4 2 ) 1 Y. & C.C.C. 326, p e r
^ n i g h t - B r u c e V„-C. a t p p . 3 4 1 - 3 4 2 , and I m p e r i a l M e r c a n t i l e C r e d i t
A s s o i c a t i o n v . Coleman ( 1 8 7 1 ) L.R. 6 Ch. App. 558, p e r H a t h e r l e y
L.C. a t p p . 5 6 7 - 5 6 8 . B u t c_f= Q u e e n s l a n d M i n e s L t d . v . Hudson ( 1 9 7 8 )
52 A . L . J . R . 399. F o r comments o n Q u e e n s l a n d M i n e s L t d . v . Hudson,
see GoRo S u l l i v a n ( 1 9 7 9 ) M.L.R. 711 and Gower, S u p p l e m e n t t o 4 t h ed
p a r a . 598.
/3^P\.
0
;
- 102 A d i r e c t o r who makes p r o p e r
shareholders
i s entitled
sary r e s o l u t i o n
disclosure of h i s i n t e r e s t t o the
to participate
approving
t h e t r a n s a c t i o n b e c a u s e on t h e a u t h o r i t y
o f N o r t h - W e s t T r a n s p o r t a t i o n Co. L t d . v
prietary rights,
shares,
these
w h i c h t h e h o l d e r may
may
0
Beatty
(3) votes
n o t be c o n s i d e r e d
blem, b u t i t i s submitted
r e l y i n g upon w a i v e r
e x e r c i s e i n h i s own
interests.
as a v e r y good s o l u t i o n o f t h e p r o -
that this
clauses.
i n t e r e s t s even i f
s o l u t i o n i s safer than
I t need o n l y be added t h a t
o f s e r i o u s a b u s e , f o r e x a m p l e company p u r c h a s e s a t g r o s s
are w i t h i n
are pro-
t o t h e same e x t e n t as any o t h e r i n c i d e n t s o f t h e
a r e opposed t o o t h e r h o l d e r s '
It
i n and v o t e upon t h e n e c e s -
one
instances
over-value,
t h e scope o f m i n o r i t y p r o t e c t i o n u n d e r s e c t i o n 75 o f t h e
Companies A c t 1 9 8 0
o
P a r t i c u l a r Transactions
g i v i n g Rise to a C o n f l i c t o f
Interest
The Companies A c t 1980 has r e c e n t l y e x t e n d e d t h e r e g u l a t i o n
of p a r t i c u l a r
t r a n s a c t i o n s i n which t h e r e i s l i k e l y
t o be a
conflict
of interests ( 4 ) .
Under s e c t i o n 47 o f t h e Companies A c t 1980, t h e c o n s e n t o f t h e
g e n e r a l m e e t i n g i s r e q u i r e d f o r any t e r m w h e r e b y a d i r e c t o r ' s
em-
p l o y m e n t c a n n o t be t e r m i n a t e d by t h e company by n o t i c e ( o r by n o t i c e
only i n s p e c i f i e d circumstances)
If
no c o n s e n t i s o b t a i n e d ,
t h e employment
f o r a period exceeding f i v e
the term i n q u e s t i o n w i l l
i s deemed t o be d e t e r m i n a b l e
sonable n o t i c e being g i v e n .
years.
be v o i d and
by t h e company on
The s e c t i o n i s an a t t e m p t
rea-
to protect
c o m p a n i e s a g a i n s t t h e abuse w h e r e b y d i r e c t o r s , p o s s i b l y i n a n t i c i pation o f attempt
to dismiss
them u n d e r s.184 o f t h e Companies A c t
( 3 ) ( 1 8 8 7 ) 12 App. Cas. 589; 56 L . J . P . C . 102; 57 L.T. 426; 3 T.L.R.
789; 36 W.R.
647. See a l s o B u r l a n d v . E a r l e fl902j A.C. 83 and
D o m i n i o n C o t t e n M i l l s Co. L t d . v . Amyot /1912J A.C. 546. B u t see
a l s o P r u d e n t i a l A s s u r a n c e Co. L t d . v . Newman I n d u s t r i e s L t d . And
Other's"!No.2) 1198073 W.L.R. 543; above pp.29-30; b e l o w pp.111-5
( 4 ) See g e n e r a l l y Gower, S u p p l e m e n t t o 4 t h e d . , p a r a . 5 8 9 - 5 9 2 .
- 103
1948,
be
enters
dismissed
wrongful
into
long term
e x c e p t on
dismissal.
-
s e r v i c e c o n t r a c t s so t h a t t h e y
payment o f h e a v y c o m p e n s a t i o n p a y m e n t s f o r
Section
54 o f
t h e 1980
o f such agreements i n t h e a c c o u n t s .
e x t e n d s s.26
o f t h e Companies A c t
service c o n t r a c t s being
Section
general
And
1967
Act
requires
s e c t i o n 61 o f t h e 1980
i n respect
of
Act
provides
i . e . worth
o r more n o n - c a s h a s s e t s
£50,000 o r 10
company's a s s e t s .
The
i n t o an
the
(minimum £1,000) o f
associated
body c o r p o r a t e
together
o f t h e v o t i n g power; and
any
i n w h i c h t h e d i r e c t o r and
a r e i n t e r e s t e d i n more
a f f i r m e d by
body c o r p o r a t e .
innocent
third
t h e company w i t h i n
one-fifth
Any
arrange-
t r a n s a c t i o n are
liable
company a g a i n s t
any
any
d i r e c t o r s who
to r e s t o r e t h e i r gains
loss, subject to a limited
Under s e c t i o n 49 o f t h e 1980
company a r e p r o h i b i t e d f r o m
Act,
and
by
a reasonable
p a r t y are p r o t e c t e d , but
i n g d i r e c t o r , c o n n e c t e d p e r s o n and
viding
than
i n c o n t r a v e n t i o n of the s e c t i o n i s avoidable
t h e company u n l e s s
r i g h t s o f an
spouse;
t r u s t e e f o r or partner of the d i r e c t o r
o r h i s spouse, c h i l d r e n o r a s s o c i a t e d
The
the
illegitimate
o n e - f i f t h o f t h e e q u i t y s h a r e c a p i t a l o r c o n t r o l more t h a n
into
or
the
as
but not a divorced
i n c l u d i n g s t e p c h i l d r e n and
person connected w i t h him
ment e n t e r e d
him
"requisite
A person connected w i t h a d i r e c t o r i s d e f i n e d
h i s c h i l d r e n u n d e r 18,
any
from
arrange
t o d e a l i n g s w i t h persons connected w i t h
d i r e c t o r ' s spouse, i n c l u d i n g a separated
c h i l d r e n ; an
of
the
s e c t i o n extends to dealings w i t h d i r e c t o r s
o f h o l d i n g c o m p a n i e s and
directors.
per cent
t h e company
t h a t the consent o f
m e e t i n g i s r e q u i r e d i f a company i s t o e n t e r
one
Act
directors'
ment w i t h a d i r e c t o r w h e r e b y t h e company i s t o a c q u i r e
value",
disclosure
open t o i n s p e c t i o n by members o f
48 o f t h e 1980
t o d i s p o s e o f t o him
cannot
the
offend-
authorised
to indemnify
right
to
the
or
of
pro-
s e c u r i t y f o r l o a n s made by o t h e r s , t o t h e i r d i r e c t o r s o r
d i r e c t o r s o f t h e i r h o l d i n g companies.
In relation
the
relief.
prima f a c i e a l l types
making l o a n s , o r g u a r a n t e e i n g
time.
to relevant
the
- 104
companies t h e r e are
and
similar prohibitions in relation
c r e d i t transactions both
with
them.
-
t o d i r e c t o r s and
A r e l e v a n t company i s d e f i n e d
company f o r m i n g
as
to
to those
quasi-loans
connected
a p u b l i c company
and
p a r t o f a g r o u p c o n t a i n i n g a p u b l i c company.
q u a s i - l o a n i s a t r a n s a c t i o n b e t w e e n t h e company and
A
the d i r e c t o r or
c o n n e c t e d p e r s o n w h e r e b y t h e company p a y s , o r p r o m i s e s t o pay,
third
p a r t y on
t e r m s t h a t t h e d i r e c t o r ( o r p e r s o n on
r e i m b u r s e t h e company.
A credit
t r a n s a c t i o n i s one
which
o f goods, s e r v i c e s
on
These w i d e p r o h i b i t i o n s c o v e r t h e use
terms.
c a r d s by d i r e c t o r s and
cardholder
standing
and
l a n d by
his behalf)
the supply or lease
deferred
or
a
involves
a r e l e v a n t company
of
credit
c o n n e c t e d p e r s o n s w h e r e t h e company i s
t h e p r o v i s i o n o f goods and
t h a t payment w i l l
be
services
made l a t e r .
will
on
the
the
under-
I n the case o f
non-relevant
companies, t h e r e i s a s t r a i g h t p r o h i b i t i o n o f loans t o d i r e c t o r s
d i r e c t o r s o f h o l d i n g companies, but
loans,
credit
transactions,and
the p r o v i s i o n s r e l a t i n g
to
l o a n s t o c o n n e c t e d p e r s o n s do
and
quasi-
not
apply.
Section
50 o f t h e 1980
Act
t i o n s i n s e c t i o n 49 o f t h e
l o a n s and
credit
1980
sets out
Act;
exceptions
these i n c l u d e
to the p r o h i b i loans,
t r a n s a c t i o n s w i t h a h o l d i n g company, t h e
quasiprovision
o f funds to enable a d i r e c t o r t o perform h i s d u t i e s p r o p e r l y
case o f
to
a r e l e v a n t company t h e r e
various
c o n d i t i o n s , and
i s a c e i l i n g o f £10,000),
l o a n s and
quasi-loans
c o m p a n i e s i n t h e o r d i n a r y c o u r s e o f b u s i n e s s on
Section
in
52 o f t h e 1980
contravention
s a c t i o n and
1980
of
confers
the
1980
recover the p r o p e r t y .
b e n e f i t i n g , and
liable
o f s.49
Act
any
d i r e c t o r who
to account f o r r e s u l t i n g
Act
imposes c r i m i n a l
S e c t i o n s 54
t o 60 o f
on
Act
The
money
normal
subject
lending
terms.
a company m a k i n g a
a right
to avoid
and
loan
the
d i r e c t o r or connected
authorised
losses
by
( i n the
tranperson
t h e t r a n s a c t i o n , may
gains.
Section
53 o f
sanctions.
t h e 1980
Act
make new
provisions
for
be
the
- 105
disclosure of transactions
197
o f t h e Companies A c t
Act
1967.
involving directors, replacing
1948
In particular,
-
and
s e c t i o n 1 6 ( l ) ( c ) o f t h e Companies
accounts w i l l
have t o d i s c l o s e
t r a n s a c t i o n or arrangement o f a k i n d described
1980
Act
hibited
by
s e c t i o n 49 o f
i n the case o f p r i v a t e companies, they w i l l
and
( i i ) any
other
company o r w i t h a s u b s i d i a r y
indirectly
substantial
property
(b) consultancy
and
be
required
because they
outside
have a m a t e r i a l i n t e r e s t
of
be
the
directly
or
s s . 48
and
than
(a)
the
t h e 1980
49 o f
as
1967;
t h e 1980
and
Act
the s p e c i f i e d range o f
a d i r e c t o r might
i n a t r a n s a c t i o n b e t w e e n h i s company
A director involved
t h e d i r e c t o r c o n c e r n e d may
Act;
not disclosed
t h e Companies A c t
c o n s u l t w i t h h i s f e l l o w d i r e c t o r s and
excluding
of
a s i t u a t i o n where, say,
a company r u n by h i s f a t h e r .
to
i n s.48
for services
a r e made t o p e r s o n s o t h e r
connected persons t o catch
had
i n the accounts of
contracts
c o n t r a c t s o f employment u n d e r s.26
transactions f a l l i n g
pro-
H e a d i n g ( i i ) i s d e l i b e r a t e l y vague
transactions described
other
have t o
the
i n w h i c h a d i r e c t o r o f t h e company o r
a material interest.
that disclosure w i l l
not
t r a n s a c t i o n or arrangement w i t h
i t s h o l d i n g company o r a p e r s o n c o n n e c t e d w i t h h i m
(c)
( i ) any
( t h u s even t h o u g h l o a n s t o c o n n e c t e d p e r s o n s a r e
disclosed)
so
section
i s under a
and
duty
the board of d i r e c t o r s
decide t h a t h i s i n t e r e s t
is
not m a t e r i a l .
Various minor t r a n s a c t i o n s i n v o l v i n g d e f e r r e d
payment by
t o r s a r e e x c l u d e d f r o m t h e d i s c l o s u r e p r o v i s i o n s o f s.54 o f
1980
Act.
(b)
Use
of Corporate Property,
Because t h e powers and
nature,
fiduciary
Any
profit
t h e company i n p r o c e e d i n g s a g a i n s t
in
a d i r e c t o r from
p r o f i t o r b e n e f i t ( a s opposed t o d i r e c t o r s '
or remuneration) from h i s o f f i c e .
the
Opportunity
d u t i e s of d i r e c t o r s are
fundamental p r i n c i p l e s of e q u i t y preclude
d e r i v i n g personal
a b l e by
Information or
direc-
so r e c e i v e d
is
fees
recover-
t h e d i r e c t o r concerned,,
The
leading
case
i s Regal
case
the appellant
With
a view
company w e r e
c o m p a n y was
meet v a r i o u s
be
£5,000 b u t u n f o r t u n a t e l y
the
capital
This
only
was
subsidiary
and
t o buy
One
o
was
cash
each
(the appellant
agreed
upon
the subsidiary
sale of a l l three
was
sold
at a profit
that
a l l t h e t r a n s a c t i o n s were bona f i d e
bound
On
t o pay
that
"At
t o t h e company
position,
acquired
and
as
such
t h e company t o do
to the
profits
ciary
( 5 ) /1942.7
that
were
a
fact
the
t h e company and
this
i n my
in a
were
position„
fiduciary
exclusive
resolutions
They
reason o f
f o r which,
sought
their
no
by
which
authority
position
view,
knowledge
and
from
actions,
they are l i a b l e
to
0
of Killowen
of equity which
position
held
and
their
They framed
by
was
shares
company "
while Lord Russell
rule
and,
the
said:
f o r themselves.
so,
the
out, the
f o u n d as
made o u t o f
a c t e d upon
directors.
t h e y made a p r o f i t
account
and
in
shares).
the d i r e c t o r s
I t was
e
the
shares
the sale of
towards
the p r o f i t s
and
£1
t o o k 2,000
by
times they were d i r e c t o r s
t h e y used
t h e y made l a r g e
by
to
to find
events turned
sold
position
o c c a s i o n V i s c o u n t Sankey
a l lmaterial
"The
shares
ls» 6d« p e r s h a r e
were i n a f i d u c i a r y
I n order
to the appel-
t o t a k e 500
effected
this
t h e company had
available
As
i n t h e two companieso
o f £2
The
do
at a board meeting o f both
company,,
properties
they
To
cinemas.
of
company
held
directors
i n Hastings.,
t h e two
that
i n Hastings*
o f t h e methods used
f o r the d i r e c t o r s
In
0
a going concern
cinemas
the t o t a l
£2,000
company
arrangement
appellant
as
demands t h e p a i d - u p c a p i t a l
c o m p a n y was
extra
other
formed
to
(5)
the owners o f a cinema
to the sale of the property
subsidiary
lant
-
( H a s t i n g s ) L t d . , v„ G u l l i v e r
were a n x i o u s t o a c q u i r e two
a
106
insists
make a p r o f i t ,
1 A l l E.Ro
378;
commented;
on
t h o s e , who
being l i a b l e
fl967]
2 A.Co
by
use
t o account
134n„
of a
fidu-
f o r that
profit,
upon
or
i n no
way
d e p e n d s on
questions
or
should
otherwise
have gone
the
was
or whether
the b e n e f i t of
the
b e e n damaged o r
from
b e e n made.
The
of
was
profiteer,
clear that
t h e company o f
any
property), or,
might
as
found,
to
acquire
which
the
had
has
the
law
having,
being
The
robbed
the
i t of
an
advantage;
as
not
to
the courts
O'Malley
for
did for
has
in
fact
arises
circumstances
c a s e had
not
deprived
be
regarded
o p p o r t u n i t y which i t
the
adopts
the
the
account."
3,000 s h a r e s
have a v a i l e d i t s e l f
a n y o n e who
he
stated
would
profit
liability
company's p r o p e r t y and,
a g r e a t e r degree o f
L i m i t e d v.
the
i n f o r m a t i o n can
i t exemplifies the high
requires of
or whether
or
and w e l l - i n t e n t i o n e d ,
upon
(unless
profit
plaintiff
i n the
called
the
acted
the
his action.
f o r i t s own
been r e q u i r e d by
Aero Services
or
however honest
seemingly,
But
a risk
or whether
i t s property
never been
them.
took
bona f i d e s ;
source of
d i r e c t o r s i n the Regal
t h e company c o u l d
Recently
tors
of
have e x e r c i s e d
subsidiary
he
a profit
of
plaintiff,
to o b t a i n the
b e n e f i t e d by
cannot escape t h e r i s k
^t
to the
plaintiff,
t h e mere f a c t
absence o f
c o n s i d e r a t i o n s as w h e t h e r
under a duty
plaintiff,
-
fraud, or
such
profiteer
as
107
of
fiduciary
i n Canada.
J.
the
the
facts
the o p p o r t u n i t y
standards
the
(6) Laskin
on
in
of
status of
detachment
trustee.
obligation
of
direc-
Thus i n Canadian
(as
he
then
was)
said:
.
table
. what
these
principle
have a l r e a d y
of
a conflict
directors
and
decisions
i s an
whose r o o t s l i e i n t h e
mentioned,
of
indicate
duty
namely,
and
updating
general
loyalty,
self-interest.
s e n i o r management o f f i c i a l s
good
of
the
standards
faith
Strict
that
I
avoidance
application
i s simply
( 6 ) ( 1 9 7 3 ) 40 D.L.R. ( 3 d . ) 3 7 1 .
See a l s o S.M. B e c k
B. R e v .
7 7 1 ; M. I a c o n o ( 1 9 7 5 ) 2 1 M c G i l l L . J . 4 4 5 .
and
equi-
against
recognition of
(1975)
53
Can.
the
degree of
operations,
a
which
their
positions
control
which
rises
above d a y - t o - d a y
owning
shareholders
at
annual
general
or
i n the
accountability
the
its
community
promoters,
and
at
which
special
public
which
acknowledgment of
of
-
control
to
supplement,
108
the
and
comes u n d e r
meetings.
i n t e r e s t , of
themselves
are,
importance of
of
the
directors
need
and
give
to
them
I t is
one
the
accountability
a
and
only
necessary
regulation
the
corporation
norms o f
and
same t i m e ,
in
the
compel o b e d i e n c e by
managers t o
corporate
some s c r u t i n y
statutory
at
in
an
life
i t and
by
exemplary
behaviour
The
Canadian Aero
doctrine
of
who
for
take
acting,
corporate
and
be
a
of
the
by
benefit
their
they were
more f l e x i b l e
established
that
office
some b y
or
of
not
duties
directors*
resignation
from
bidding
the
mation
".
o . the
tor
or
a
either
would
have t o
(7)
(8)
than
Regal
(8).
that
In
the
with
They d i d
contract.
officer
secretly
as
the
or
or
not
But
without
the
manifested
business
i n the
use
there
upon
least
and
J.
this
from
full
test
and
in
case
the
after
in
infor-
observed:
far: a
direc-
for
company
him(which
of
belonging
See g e n e r a l l y D„D<, P r e n t i c e
( 1 9 7 4 ) 37 M„L„R= 4 6 4 *
( 1 9 7 3 ) 40 D.L.R. ( 3 d ) 3 7 1 , 386 p e r L o r d
Russell.
their
succeeded
disclosure
advantage e i t h e r
course
the
company
obtaining
of
to
requires
confidential
Laskin
approval
case
course of
plaintiff
any
while
thought
reason
plaintiff
goes a t
the
test
narrower
by
them
The
Canadian Aero
contract
the
came t o
narrower
the
directors
directors.
obtained
the
with
first
„ „ . i s precluded
properly
property
deal
case which
relevant
positions
contract.
be
which
They competed w i t h
their
senior
any
a
those cases w i t h i n
acting,
fiduciary relationship
self,
facts),
the
obtained
in obtaining
so
rule
directors
had
for
(7)
a d v a n t a g e m u s t be
directors
as
opportunity
themselves o p p o r t u n i t i e s
because
establishes
case e x e m p l i f i e s
the
to
the
- 109 company o r f o r w h i c h
this
so w h e r e
negotiations
ethic
with
his
on b e h a l f
company
be s a i d
self
. . .
a maturing
pursuing;
business
he i s a l s o
h i s r e s i g n a t i o n where
w i t h t h e company r a t h e r t h a n
t o t h e o p p o r t u n i t y w h i c h he l a t e r
we
duties,
i ti s convenient
t o discuss
briefly
be l e s s e n e d
extent
good
It
t o which
faith
may
t h e law would
o r excluded
could
Exempting by
rid
liability
again
cast
duties of
on
fiduciary
the extent t o
upon
directors
could
of the articles
i n general
or otherwise,
cast
and
meeting,,
upon
be i n s e r t e d i n t h e a r t i c l e s .
o f , or otherwise
be o r become
interested
a n d no d i r e c t o r
or officer
or other
o f , o r from
t h e company o t h e r w i s e
directors
F o r example
a director
or other
promoted
be i n t e r e s t e d
shall
as
benefits received
his interest
by
share-
be a c c o u n t a b l e
directs."
getting
provides:
i n , any company
t h e c o m p a n y may
company f o r any r e m u n e r a t i o n
company u n l e s s
that led
way o f l e s s e n i n g o r e v e n
the law would otherwise
o f t h e c o m p a n y may
as a d i r e c t o r
f o r him-
f o r breaches o f d u t i e s
by r a t i f i c a t i o n
a convenient
company o r i n w h i c h
holder
fairly
i t was h i s
the topic
78 i n T a b l e A o f t h e C o m p a n i e s A c t 1 9 4 8
officer
so
Drafting
be t h o u g h t
"A d i r e c t o r
the
otherwise
of directors
be r e l e a s e d
appropriate clauses
article
leave
by a p p r o p r i a t e d r a f t i n g
o f the duties which
that
t o acquire
directors'
and b e f o r e
d u t i e s which
from
acquired."
strict,
1.
precluded
a fresh initiative
are very
of
o p p o r t u n i t y which
t h e o p p o r t u n i t y s o u g h t by t h e company, o r where
loyalty
the
usurping f o r
t h e r e s i g n a t i o n may
A s we h a v e s e e n , t h e r u l e s c o n c e r n i n g
which
from
this
p e r s o n o r c o m p a n y w i t h whom o r
t o be prompted o r i n f l u e n c e d by a w i s h
position
i n the
I n my o p i n i o n
or senior o f f i c e r
t o another
i s actively
even a f t e r
i s a participant
o f t h e company
a director
or diverting
n e g o t i a t i n g ; and e s p e c i a l l y i s
or o f f i c e r
w h i c h he i s a s s o c i a t e d
acting
him
the director
disqualifies
himself
i thas been
to the
by h i m
i n , such
other
May a r t i c l e s
in
be d r a f t e d
a l l circumstances
from
110 -
so as t o p u r p o r t t o r e l i e v e
the duty,
the director
f o r e x a m p l e , n o t t o make a s e c r e t
profit?
As s u b m i t t e d
which
before,
the general
articles
lawcasts
upon
p u r p o r t i n g t o exclude
a director,
purposes d o c t r i n e ( 9 ) , a r ev o i d under
Act
to
1948.
some e x t e n t .
appear
the
However,
very
fact
a duty
that
than
they
t o treat
the articles
as e x c e p t i o n a l ; t h e y
a r econtained
t h e proper
s e c t i o n 205 o f t h e Companies
sometimes i t i s p o s s i b l e t o a l t e r
I ti s b e t t e r
t o exclude
other
any duty
these
duties
i nTable
arev a l i d
A
that
because o f
i nan A c t .
As f a r as c o n t r a c t s b e t w e e n t h e company and i t s d i r e c t o r s o r
c o n t r a c t s o f t h e company i n w h i c h
are
concerned,
sting
from
n o t been
to
way
the general
the practice
account
clauses
that
equitable principle
to insert
of their
waiver
position
such w a i v e r
Ratification
i nGeneral
t h eshareholders
traditional
directors
of
test
a c t mala f i d e
clauses
t o remove t h e
faith.
excluding
directors
would
interested
I t has
liability
o b t a i n i n some o t h e r
( 1 0 ) ; and i t i s
be v o i d .
Meeting
i ngeneral
(1) i sthat
o f good
i n t h e company
clauses
Some b r e a c h e s o f f i d u c i a r y
by
arei n d i r e c t l y
have been h e l p f u l
t o t h e company f o r p r o f i t s
as a r e s u l t
submitted
2.
some w a i v e r
they
duty by directors
meeting
a n d some c a n n o t ,
ratification
o r where
c a n be r a t i f i e d
i sd i s a l l o w e d where t h e
some " p r o p e r t y " ( l e g a l
t h e company h a s been m i s a p p r o p r i a t e d
and t h e
directly
or equitable)
or indirectly.
(9) There i s a growth o f school o f thought r e g a r d i n g t h e 'proper
p u r p o s e s ' a s m e r e l y o n e a s p e c t o f t h e much w i d e r d u t y r e q u i r i n g a
d i r e c t o r t o a c t bona f i d e i n t h e b e s t i n t e r e s t s o f t h e company as
a whole.
S e e a b o v e , p p , 9 4 - 6 ; T e c k C o r p . v . M i l l a r ( 1 9 7 2 ) 33 D.L.R.
(3d) 288
( 1 0 ) Gower, p . 5 9 1 .
( 1 ) S e e K.W. W e d d e r b u r n ( 1 9 8 1 ) 4 4 M.L.R. 2 0 2 , 2 0 6 . I n h i s a r t i c l e ,
P r o f e s s o r Wedderburn s t r o n g l y d i s a g r e e s t o V i n e l o t t J.'s t e s t about
r a t i f i c a t i o n i ngeneral
meeting.
In
Prudential
Vinelott
holders
the
majority
vent
use
of their
voting
giving
voting
i n default
Ltd.
(No.2)(2)
who a r e a l s o
share-
b u t i t i s "unconscionable" f o r
power
against
i n general
them.
meeting
The f r a u d
not i n thecharacter
t o pre-
lies
i n their
o f the actor tran-
t o t h e cause o f a c t i o n . " ( 3 )
strongly
disagrees with
V i n e l o t t J . may b e r i g h t
on h i s
Transportation
Company v . B e a t t y
Baggallay
that
held
v . Newman I n d u s t r i e s
meeting,
brought
power
rise
-
directors
i n general
being
Wedderburn
but
that
t o "use t h e i r
an a c t i o n
saction
Assurance L t d .
J . remarked
can vote
I l l
V i n e l o t t J . on t h i s
point,
i n t e r p r e t a t i o n o f North-West
(4).
I n t h a t case,
t h e d i r e c t o r ' s breaches o f duty
Sir
Richard
could
be
confirmed:
o o provided
by
affirmance
u n f a i r o r improper
oppressive
It
it
such
towards
should
those
able
b o a t was a v a i l a b l e ,
different,
theuncontradicted
concerned
(6).
i t might
was s u i t a b l e ,
and t h a t
that
e v i d e n c e was
no o t h e r
was n e i t h e r
the transaction
would
that
boat,
equally
I f any o f t h e u n c o n t r a d i c t e d
be t h a t
or
i t . " (5)
t o buy another
theprice
about
or fraudulent
who o p p o s e
t o t h e company's b u s i n e s s
t h eboat
unreasonable
shareholders
that
that
nor
i s not brought
means, and i s n o t i l l e g a l
be n o t e d
was e s s e n t i a l
o r adoption
suit-
excessive
facts
n o t have
had been
been
capable o f confirmation.
Further
marks
"The
i n that
only
admitted
(2)
support
c a n be f o u n d
i nSir
Richard
Baggallay's r e -
case:
unfairness
o r impropriety
and e s t a b l i s h e d
/"1980/ 3 WoL.R.
543;
which,
f a c t s , could
A98Q7
consistently
be s u g g e s t e d ,
2 A l l E.R. 8 4 1 .
with the
arises
See a l s o
out of
above,
pp.29-30.
(3)
/"1980J
2 A l l
E.R.
841,862.
(4)
( 1 8 8 7 ) 12 A p p . C a s . 5 8 9 ; 5 6 L.J.P.C. 1 0 2 ; 57 L„T„
789;
3 6 W.R. 6 4 7 .
(5)
(6)
(1887)
(1887)
12 A p p . Cas. 5 8 9 , 5 9 4 .
12 A p p . C a s . 5 8 9 , 5 9 4 .
4 2 6 ; 3 T.L.R.
-
the
fact
that
the defendant
-
112
J . H. B e a t t y p o s s e s s e d
a
voting
power 0 0 °
It
may
minority
be
quite
s h o u l d be
transaction,
freed
But
able,
in a
like
a suit
the
this,to
opposing
challenge the
improper one,
with
such
an
and
object
voting
the
defendant
power...he had
a
perfect
to
t h e e l e c t i o n o f d i r e c t o r s whose v i e w s
upon p o l i c y
agreed
and
to support those views
a t any
shareholders'
t h e a c q u i s i t i o n o f t h e U n i t e d E m p i r e was
there would
be
as
t o which
differences
voice of the majority
i t m i g h t be
of opinion,
ought
and
a
pure
expected
that
upon w h i c h
to prevail; to reject the
t h e d e f e n d a n t upon t h e q u e s t i o n o f t h e a d o p t i o n o f
byelaw would
be
to give
to disregard
effect
those of
the
T h e i r L o r d s h i p s were o f
C a n a d i a n Supreme C o u r t
as
to invalidate
they were unable
t o adopt
B e a t t y ' s c a s e may
case decided
that
resolution
being
of
"the
of the
votes
the
minority,
the opinion
that
the judges of
t o have regarded
the
t h e e x e r c i s e by
p o w e r as o f so o p p r e s s i v e a
the adoption o f the buy-law,
such
also
be
a
view
the d i r e c t o r s
t o mean t h a t
i n general meeting
and
using their
but
0
interpreted
resolution
of the majority
brought
to the views
the
majority."
appeared
defendant o f h i s voting
question
can
a m a n n e r as
h i s own,
character
be
t h e c o m p a n y i t s e l f <>
exercise his voting
question of policy,
and
to
power i n such
meetings
the
a case,
i t i s an
that
Beatty to acquire this
secure
the
suit
t o show t h a t
m a i n t a i n e d by
right...to
of
i n such
t h e c o n s t i t u t i o n o f t h e company e n a b l e d
H.
with
and
that,
from the objection
o n l y be
J.
right
t h e r e was,
the
superseded
therefore,
v o t e s t o p r e v e n t an
to set aside a transaction
between t h e board
no
action
of
-
directors
and one o f t h e i r
113 -
number,,"
( 7 )I n other words,
was no c o n f i r m a t i o n o f t h e t r a n s a c t i o n
directors
and one o f them
because,
i t may b e a r g u e d ,
of
t h eo l d c o n t r a c t which
meeting
great respect
that
Vinelott
one;
Beatty s
1
case
in
meeting
general
new c o n t r a c t w a s c o n c l u d e d
t o Professor
as a d i r e c t o r ,
from
bringing
a derivative
Vinelott
Jo
in
i norder
by reference
meetingo
t h e law should
majority
injury
legal
for
of
that
to therule
t o resolve i n general
action
allowed
themajority
way t o d e f i n e
i n Foss v . H a r b o t t l e
o f acts o r t r a n s a c t i o n s which
so w i s h ,
should
( 7 ) P r u d e n t i a l v . Newman ( N o 2 )
Vinelott J
( 8 ) See a l s o a b o v e , p 2 9
( 9 ) P r u d e n t i a l v . Newman ( N o » 2 )
a
may b e
t o forget
fraudulent,
about t h e
any a c t i o n *
under c e r t a i n
be a l l o w e d
D
I f the
circumstances
t o be r a t i f i e d
T h e r e may b e g o o d
0
be i n j u r e d
by t h e m a j o r i t y
t o t h e power o f t h e
meeting
n o t t o be t a k e n
0
(10)
Ibido
at p 568
3
e
and
reasons
thereputation (10)
by t h e proposed
legal
[1980J
3 WoL Ro
5 4 3 , 570p e r
£1980]
3 WoLoR*
5 4 3 , 568=
e
action;
0
0
of his
t h ebest
so d e c i d i n g because, e g ,
t h e company m i g h t
can use h i s votes
action (8)o
n o t impose a l i m i t
a fraudulent transaction
that
shareholder
authorised or ratified
meeting
i s the correct
a minority
A relevant transaction
a t general
case
b u t was a b r e a c h
done t o t h e company a n d n o t t o t a k e
majority
i t i s submitted
an a c t o r t r a n s a c t i o n
t o prevent
t o any c a t e g o r y
incapable o f being
but
at the
f o rtheproposition
vires,
( 9 )does n o t agree
o f theexception
general
1
of Beatty s
to confirm or r a t i f y
was n o t f r a u d u l e n t o r u l t r a
limit
Wedderburn,
who i s a l s o a d i r e c t o r
duty
are
t h e r e w a s a new c o n t r a c t i n t e r m s
i snot authority
shareholder
is
c o n f i r m a t i o n was n o t n e c e s s a r y
Jo's interpretation
a majority
the
t h e board o f
o f the shareholders.
With
which
Such
0
between
there
0
-
the
outcome o f
would
for
be
the
l i t i g a t i o n may
disrupted
trial
costs
the
and
may
by
etc
t o be
company as
the
The
a
company t h a t
test
would
voting
their
an
power
action
power'
in
by
Jo
important.
new
cast"?
first
shareholders'
W o u l d we
(1)
(
2
)
done
such
P
(3)
Ibid,
(1868)
uLoRo 5 E q . 4 6 4
T19801 3 WoL.R. 5 4 3 , 5 7 9 .
( 1 9 8 1 ) 44 M.LoRo 2 0 2 a t 2 0 8
Ibido at 208
(8)
Ibid,
o
at
-hew
211
0
o
A
s
of
better
their
manipulation
test
to
prevent
of
'use
of
of
voting
V -C
0
0
decisions i s
shows t h a t
t o i t may
being
justify
action "
taken
a
some q u e s t i o n s
votes
"capable
judged?
with
those
the
t h e use
by
of
a
minority
(5)
0
|1980]
0
interests
( l )
as
proceedings
into
Q
the
t h e wrongdoers use
t o be
p 577.
of
the
said:
"conflict"
(4)
(5)
(6)
(7)
from
S i r W i l l i a m P a g e Wood
as? W h a t a r e
(No,2)
to
D
raised
to inquire
legal
damage
i n the
brought
his
a derivative
Prudential v
Newman
I b i d o a t po568.
at
them
to prevent
interests
need
business
benefit
means s u c h
( 4 ) and
has
be
i n general meeting
i s the " c o n f l i c t "
always
'the
s h o w s . . .The s e c o n d
Wedderburn
principles
the
obtained
b e t w e e n P a g e Wood V o - C . ' s t w o
bringing
( 6 ) How
be
decisions of
company t o remedy a wrong
Jo's
on
not
to support
( 3 ) two
a wrongdoer's votes
Professor
or
against
sought
The
shareholder
should
some i m p r o p e r
Merryweather
"The c o n t r a s t
be
t o be
i t is truly
whether
brought
citing
Atwood V o
should
i n t h e company
being
Vinelott
be
t h e r e may
benefits
proceedings
(2) or
position
any
or whether
therefore
uncertain;
irrecoverable;
emphasis
a whole'
be
at c o u r t to give evidence;
company g r e a t e r t h a n
action,
-
d i s c o v e r y o f documents, p r e p a r a t i o n
attendance
prove
114
(7)
of
Vinelott
of
being
when
do
t h e company?
subjective
3 WoL.R.
on
543,
motives
583o
of
(8)
each o f
the
It
into
should
whole
the
shareholders voting?
i s submitted
the
motives of
be
applied
(10)
and
conflict
holders
and
tries
that
the
voting
not
been
that
the
(1).
able
to
s h o u l d be
need
point
to
inquire
a common s e n s e
test
the
a
company
applied
and
to
as
determine
between
Regal
see
v.
Gulliver
nothing
directors
in
in
the
the
share-
anything
i n the
with
Cook
report
Regal
P r o f e s s o r Wedderburn d i s a g r e e s ,
to
to
whole.
could
defendant
no
for
themselves
reconcile
he
is
i s good
test
shareholders
a
there
shareholders,
determine what
c o m p a n y as
J.
(9)
in practice
a reasonableness
the
-
disinterested
to
remarking
indicated
that
between
Vinelott
Peeks by
115
case
which
controlled
( 2 ) , but
relevant
v.
he
report
has
which
so
indicated.
If
ficulty
as
the
one
favours
of
explaining
"advantages",
I t may
corporate
those
traditional
company's " p r o p e r t y " .
many t h i n g s .
used
the
why
the
ratification.
said
the
On
the
reconcile
the
portation
Company v .
Cook c a s e w i t h
Skill"
i t is
"property"
directors
t e s t would
could
to
the
Regal
find
face
or
may
the
cover
i n the
e
has
c a s e and
dif-
"information"
many,
Regal
case
profit,
and
i t difficult
have been v a l i d a t e d
Vinelott J
suggested
to
by
a way
North-West
to
Trans-
Beatty.
Insider
B e f o r e we
the
breach
contrary
has
i n some s e n s e t o make a
traditional
directors'
one
"opportunities"
word
that
"information"
favouring
explain
be
The
test,
pass on
perhaps of
to
the
Dealing
topic
importance
"Duties of
to
n o t e one
Care D i l i g e n c e
particular
and
aspect
( 9 ) ( 1 9 8 1 ) 44 M . L c R o 202 a t
211.
( 1 0 ) See
a l s o above, p.17-8.
( 1 ) I n any e v e n t , i t i s s u b m i t t e d t h a t i t i s r e a s o n a b l e t o f o r b i d
r a t i f i c a t i o n i n t h e Cook c a s e and t o a l l o w i t i n t h e R e g a l c a s e
b e c a u s e i n t h e f o r m e r t h e d i r e c t o r s had p r o f i t e d a t t h e company's
e x p e n s e w h i l e i n t h e l a t t e r t h e d i r e c t o r s had p r o f i t e d w i t h o u t
d o i n g any h a r m t o t h e company.
( 2 ) ( 1 9 8 1 ) 44 M.L.R. 2 0 2 ,
210.
of
directors'
The
that
ideal
and
and
rities
use
the insider
criminal
An
he
i s connected
i f he
may
a philosophy
equal access
on
dealing(3).
to
material
w h e r e one
party
to confidential
the value of
a loss,
can
were
either
lead
infor-
those
secu-
to a profit
an o u t s i d e r ,
be
1980
now
he
unjust
makes i n s i d e r
in
would
i n the form of
b u t i n both cases
not deal i n securities
i f he
i s , or
which
that
he
h o l d s by
be
by
be
a
enrishment.
dealing
(4).
An
the following
except
to that
a
company, w h i c h
means a
or
that
employee o f
as
he
t h e company;
i f he
has
with
the
so
knows t h a t
information
in relation
may
connected
a director
subsidiary
connected
i s so c o n n e c t e d
i f he
only
with
time i n the previous six
not
f o r the proper performance
position;
individual
ways:
t h e company
v i r t u e of being connected
v i r t u e of which
information
attaching
with
of
reasonable t o expect a person
unpublished price-sensitive
securities
a t any
been, k n o w i n g l y connected
i n the position
functions
in
on
securities
bearing
t h e Companies A c t
company; i f i t w o u l d
is
i s based
trading
information
This p r o f i t
i n d i v i d u a l may
information
disclose
insider
offence.
months has
and
of
wrong.
which
gain or avoiding
Part V of
question
does n o t have access
a substantial
to obtain.
positive
which
party
of confidential
hands o f
unable
t h e vexed
i n corporate
a r e c o n s i d e r e d t o be
The
the
has
-
should have r e l a t i v e l y
dealings
the other
mation which
namely
o f Stock Market
a l l investors
information,
has
duties,
116
be
of that
company o r o f a r e l a t e d
of
to
with
company; as
company;
as
the
information
those
a
company
company o r o f a
of a holding
to
a
an
related
officer
person
( 3 ) T h i s d u t y i s a l s o i m p o s e d on o f f i c e r s and members o f a company
and o t h e r s when d e a l i n g
i n t h e company's s e c u r i t i e s w i t h
inside
information which a f f e c t s t h e i r value.
See g e n e r a l l y L . L o s s ( 1 9 7 0 )
33 M.L.R. 3 4 ; N. S p i n k s ( 1 9 7 3 ) 123 N . L . J . 7 7 9 ; N. S p i n k s ( 1 9 7 3 ) 123
N . L . J . 8 0 9 ; T.M. A s h e ( 1 9 7 3 ) 1 2 3 N . L . J , 2 1 6 .
(4) s . 6 8 ( l ) o f Companies A c t 1980.
occupying
ship
may
in
and
relation
person
The
and
functions
an
obtained
by
connected) w i t h
he
to believe
being
so
believe
be
position
to disclose
apply
Crown
i n the
connected
latter's
The
(7)
Crown s e r v a n t s
(9)
indirectly
i n d i v i d u a l who
a
case
which
price-
to
expect
proper
per-
and
official
capacity.
has
indirectly
has
functions
i s contemplating
(10).
1980.
has
the
from
reasonable
information
and
the
the
has
to
that
information
in relation
to
who
has
to
information
to
the
parti-
tippees
knowingly
is
of
obtained
price-sensitive information
or
by
position, i t
attaching
know t h a t
was
reasonable cause
to disclose
i n d i v i d u a l who
unpublished
s . 7 3 ( l ) o f Companies A c t
s.68 o f 1980
Act.
s . 6 9 o f 1980
Act.
s . 6 8 ( 3 ) o f 1980
Act.
s.69
o f 1980
Act.
s . 6 8 ( 5 ) o f 1980
Act.
about
w h e r e he
or
knows o r
connection
not
must a l s o
t o an
information
deal
similar p r o h i b i t i o n applies
and
f o r the
in their
knows o r
performance of
A
information
directly
price-sensitive information
securities.
over o f f e r
t o e x p e c t him
tippee
is
in either
i n d i v i d u a l s (6)
person held
the
proper
he
w i t h i n s i x months p r e v i o u s l y
t h a t because of
or
case o f
persons must not
tippee
reasonable
which
reasonable
except
group of
servants
( o r who
the
to
relation-
(5).
the
(8).
access
i t w o u l d be
and
unpublished
directly
him
knowingly obtained
that
connected;
save f o r the
a company o f
a p a r t i c u l a r company; he
cause
(5)
(6)
(7)
(8)
(9)
(10)
which
from connected
which
business
e i t h e r company, i s u n p u b l i s h e d
i n d i v i d u a l or
i n d i v i d u a l connected
cular
to give
p o s i t i o n not
by
tippee
information
an
expected
or
a r e l a t e d company w h i c h
securities of
his
bids
employer or
company o r
in his
information
would
his
p r o h i b i t i o n s also
takeover
A
to
or
information,
formance of
an
the
r e a s o n a b l y be
sensitive
a
-
a position involving a professional
between himself
director
117
contemplated
a
from
take-
- 118
To b e c a u g h t
vidual
or
as a t i p p e e
has k n o w i n g l y
i n d i r e c t l y from
will
prohibitions
t o have o b t a i n e d
receive
apply,
will
would
the
b u t such
information
Accordingly
from
tippees
a sub-tippee,
be r e a s o n a b l e
that
i s price-sensitive.
on
'Unpublished
price-sensitive
information'
or
o f concern
generally
likely
of
to deal
It
t o those
i n those
p e r s o n s who
securities
i s provided
matter
relates
that
sensitive
known
information
most
and
that
sub-tippees
i n the
matters
company
relating
and i s n o t
a r e accustomed o r would
b u t which would
materially
the information
be
i f i t were
to affect
i s that which
t h e company w i l l
i f they
are s p e c i f i c
or indirectly or relate
In
practice,
to
be u n p u b l i s h e d
the price
affect materially
not to a
matters,
the price
the construction
infor-
price-
of concern
are not
generally
o f the securities.
a r e more
likely
information.
of 'materiality'
s.73(2) o f Companies A c t 1980.
to
matter
Accordingly
however, i ti s i n t e r n a l matters which
price-sensitive
relates
be u n p u b l i s h e d
t o t h e company,
"the b a s i c t e s t o f m a t e r i a l i t y i s whether
(1)
connection i t
of this legislation.
to specific
e t c . s p e c i f i c a l l y t o t h e company.
t o the market,
On
a connected
i s defined
r e l a t i n g e t c . t o t h e company,
mation o f matters outside
directly
will
securities ( 1 ) .
a specific
which
relates
known t o them be l i k e l y
those
the wording
d i r e c t l y or i n d i r e c t l y to that
known
generally
which
from
I t seems t h a t
t o be c o n v i c t e d
1980 A c t as i n f o r m a t i o n
within the
h i s confidence
w o u l d be u n l i k e l y
will
t o whom t h e
individual's
f o r him n o t t o breach
directly
f o r example,
i n d i r e c t l y information
because o f t h a t
indi-
there
to fall
h a v e t o be an i n d i v i d u a l who,
and know
information
certain
information
have had t o k n o w i n g l y o b t a i n
individual
b y t h e C o m p a n i e s A c t 1 9 8 0 , an
t h e p e r s o n s mentioned,,
b e some p e r s o n s who
legislation
-
9
U.S.
judges have
a r e a s o n a b l e man
saids
would
attach
importance
transaction
"material
earnings
which
facts include
may
(2)
not
distributions
affect
-
i n determining
i n question"
and
119
the
his
action
in
the
and
only
of
desire
choice of
information disclosing
a company b u t
of
investors
also
t o buy
those
sell
the
facts
or
hold
the
company's s e c u r i t i e s . " ( 3 )
The
p r o h i b i t i o n s apply
Exchange, c o u n s e l l i n g
on
the
dealers
i n advertised
making a market
There
i s an
otherwise
than
of
by
loss
other
the
liquidators,
Secretary
it
of
to
the
or
by
The
victim
or
by
passing
to o f f
professional
p r o h i b i t i o n s i f the
to
the
making o f
information.
and
a profit
There are
i n bankruptcy
Wales can
with
1980
should
be
the
Act
on
i n the
case o f
Duties
the
are
of
their
duties
d i r e c t o r may
company.
stock
thing is
avoidance
also
various
fiduciary
duties
c a r e d i l i g e n c e and
Thus i t i s t h e
rely
duty
on
of
brought
the
Director
a civil
his
the
I t is
transactions
and
of
by
remedy, b u t
t r a n s a c t i o n on
for
jobbers.
confer
a civil
Care D i l i g e n c e
reasonably
be
done
or
exchange.
particular
a normal
of
only
does n o t
a
and
consent of
denied
t h a t matching-up of
Having discussed
the
or
or
and
the
insider dealing
(B)
A
is likely
to
trustees
i n England
State
t h a t the
impossible
of
of
Prosecutions.
i s due
what
a view
use
to deal
i n the s e c u r i t i e s .
receivers,
of
a victim
able
someone e l s e
Stock
i n c l u d i n g defences under c e r t a i n circumstances
Proceedings
on
a recognised
s e c u r i t i e s through
exception
with
defences
Public
procuring
on
i n f o r m a t i o n when s u b s e q u e n t d e a l i n g
market deals
a
or
to dealing
the
the
of
remedy
deplorprobably
is
stock
almost
exchange.
Skill
d i r e c t o r s , l e t us
skill
at
law.
co-directors
general
see
and
officers
manager t o
go
( 2 ) See L i s t v . F a s h i o n P a r k I n c . , 340 F 2 d 4 5 7 p e r W a t e r m a n C i r c J .
( 3 ) SEC
v. Texas G u l f S u l p h u r C
4 0 a F2d 833 a t 849 p e r W a t e r m a n
C i r c . J.
0 o
carefully
matter
through the returns
requiring
i snot guilty
himself,
notwithstanding
for reference
On t h e o t h e r
that
by
t h e board
In
both
trusted
their
director
was
held
In
at
the
they
are laid
them f o r
on t h e t a b l e
o ft h e
(4).
hand
a director
who s i g n s a c h e q u e
liable
act.
I f he n e g l e c t s
t o t h e company i f t h e cheque
t h e Denham c a s e
co-directors
not liable
cannot
claim
inquiry,
o r one o f t h e company's o f f i c e r s ,
o r i f i t i s an i m p r o p e r
Ramskill
making
Stock
i s not authorised
case,
t h e defendants
i n t h e Denham c a s e ,
of directors)
whereas
he
payment ( 5 ) , .
and J o i n t
(although
v . Edwards
meeting
t h e defendant
t h e defendant
the co-
i n t h e former
i nthe latter
( 6 )where a d i r e c t o r
case
was n o t p r e s e n t
when a l o a n was a u t h o r i s e d ,
o f i t , i t was h e l d
that
thedirector
a n d h a d no p a r t i n
was u n d e r
no
lia-
i n respect o f the loan.
But where an u l t r a
a director
There
vires
a c t was d e c i d e d
who w a s n o t p r e s e n t b u t a d o p t e d
was h e l d
In
and a
liable.
t h e board
bility
ing
that
was t h e c h a i r m a n
c a s e was h e l d
directors
o f negligence i n n o t examining
i n h i sc o - d i r e c t o r s
be h i m s e l f
b e f o r e t h e board any
o f theother
he d i d so as a mere m i n i s t e r i a l
trusting
will
and t o b r i n g
theconsideration
director
board
120 -
liable
duty f o r a director
o f Bute's
Case
( 9 ) where
meeting,
i t a t a subsequent
as i f he had been an o r i g i n a l
i s no r e a l
Marquis
a t a board
meet-
party ( 7 ) .
t o attend
board
meetings(8)
t h e r e were
fifty
trustees
(4)
Re Denham & C o . ( 1 8 8 3 ) 25 C h . D. 7 5 2 ; 50 L . T . 5 2 3 ; 32 W.R.
487.
(5)
J o i n t S t o c k D i s c o u n t C o . v . B r o w n ( 1 8 6 9 ) L.R, 8 Eq„ 3 8 1 .
See
a l s o C o a t s v . C r o s s l a n d ( 1 9 0 4 ) 20 T . L . R . 8 8 ;
(6)
( 1 8 8 5 ) 3 1 C h . D. 1 0 0 ; 55 L . J o C h . 8 1 ; 53 L . T . 9 4 9 ; 34 W.R. 9 7 ;
2 T.L.R. 3 7 .
(7)
Re L a n d s A l l o t m e n t Co. [1Q9A]
1 C h . 6 1 6 ; 63 L . J . C h . 2 9 ; 70
L.T. 2 8 6 ; 1 0 T.L.R. 2 3 4 ; 1 M a n s . 1 0 7 ; 7 R. 1 1 5 ; 42 W.R. 4 0 4 .
(8)
I n Re Denham & Company ( 1 8 8 3 ) 25 C h . D. 7 5 2 ; 50 L . T , 5 2 3 ; 32
W.R. 4 8 7 .
(9)
(1892] 2 Ch. 100.
(namely
a
persons
"trustee"
held
who
not l i a b l e
i n the p o s i t i o n
a t t e n d e d no
said
o f the breaches
In
of
meetings
that
case
a chartered
security
tion
of suitable
were h e l d
ensure
that
supervised.
fifty
of a
of
While delivering
by
director
others.
warehouse-keeper
p e o p l e on
committeemen o f
f o r losses resulting
the a c t i v i t i e s
Sutton(lO)
might render a
which were committed
and
was
"co-trustees."
t o make l o a n s t o p o o r
pledges
liable
of his
the responsibility
corporation
bank,
f o r a number o f y e a r s
at meetings
of trust
i t was
of a savings
i n C h a r i t a b l e C o r p o r a t i o n v.
continuous non-attendance
guilty
-
of directors)
f o r the misconduct
But Lord Hardwicke
that
121
from t h e i r
the
the corporafailure
to
t h e warehouse-keeper
were adequately
the judgement,
Hardwicke
Lord
commented:
"In
this
or
omission, o f malfeasance
a
trust
of this
fidelity
that
and
t h e y had
honorary
And
"...
to
respect (directors)
sort,
no
benefit
affairs,
A
position,
of acts
of
. . .
i t i s no
commission
By a c c e p t i n g
t o execute
i t with
excuse
i t was
though
( 1 ) J e s s e l M.R.
to
say
merely
attention
p r o b a b l y an o r d i n a r y
to act
partnership,
but
be
as
having regard
director,
expected
the sole
t h e y a r e bound
i n t h e management o f
to
who
only
devote
managing
to
their
use
company's
honestly."
i s not expected
T h u s i n Re
cannot
to the business
reasonable diligence
and
said:
reasonable diligence
at the board occasionally,
director
possess.
and
from i t , but that
a r e ) t o use
p a r t n e r o f an o r d i n a r y
and
i s obliged
F o r e s t o f D e a n Co.
a s much t i m e a n d
fair
a person
guilty
non-feasance
reasonable diligence;
(Directors
attends
or
be
..."
i n Re
their
may
Brazilian
to exercise
skill
which
Rubber P l a n t a t i o n s &
he
does
not
Estates L t d . (2)
(
1 0 ) (1742) 2 Atko 400, 405.
( 1 ) ( 1 8 7 8 ) 10 C h . D. 4 5 0 , 4 5 2 .
( 2 ) [19117 1
4 2 5 ; 80 L . J . C h . 2 2 1 ;
103
L.T.
697;
27 T.L.R.
109.
- 122
-
N e v i l l e J «> r e m a r k e d ;
"(A d i r e c t o r ) i s , I t h i n k
n o t bound t o b r i n g
fications to his officeo
He
r u b b e r company i n c o m p l e t e
with
may
In
t h e management o f a
f o r the
mistakes
(3)
f o r losses
from a ruinous s p e c u l a t i o n i n rubber p l a n t a t i o n s ,
and
t h i s t o comment:
d i r e c t o r s o f t h e company . . .
d i r e c t o r s by H a r b o a r d
...
ignorant of business.
He
in
quali-
ignorance o f e v e r y t h i n g connected
r e s u l t f r o m such i g n o r a n c e . "
N e v i l l e J . had
out
special
t h a t case t h r e e d e f e n d a n t s were h e l d n o t l i a b l e
resulting
told
undertake
rubber, without i n c u r r i n g r e s p o n s i b i l i t y
which
"The
may
any
the o f f i c e would
were a l l induced
S i r A r t h u s A y l m e r was
o n l y consented
g i v e him a l i t t l e
h i s i n c u r r i n g any r e s p o n s i b i l i t y .
a f i r m o f bankers
f i v e y e a r s o f age
r u b b e r b r o k e r and was
told
t o a c t b e c a u s e he
H.W. T u g w e l l was
v e r y d e a f ; he was
by r e p r e s e n t a t i o n s made t o him
absolutely
p l e a s a n t employment
i n a good p o s i t i o n
and
t o become
was
with-
partner
i n B a t h ; he was
seventy-
induced
the board
i n January,
to j o i n
1906.
t h a t a l l he w o u l d
B a r b e r was
a
h a v e t o do w o u l d
be
t o g i v e an o p i n i o n as t o t h e v a l u e o f r u b b e r when i t a r r i v e d i n
England.
Hancock was
a man
o f b u s i n e s s who
t o j o i n by s e e i n g t h e names o f T u g w e l l
s i d e r e d good men."
And
induced
B a r b e r , whom he
con-
(4)
i n Re Denham & Co.
not
detecting
was
"a c o u n t r y g e n t l e m a n
( 5 ) a d i r e c t o r was
the f r a u d s o f the chairman
and
From t h e above c a s e s ,
directors'
and
s a i d he was
very s t r i c t
of d i r e c t o r s
not a s k i l l e d
i t is fairly
held not l i a b l e f o r
accountanto"
clear that
J.
he
(6)
( i n contrast
duties of l o y a l t y ) d i r e c t o r s '
( 3 ) /1911] 1 Ch. 425 a t 437.
( 4 ) {19117 1 Ch. 425, 437.
( 5 ) ( 1 8 8 3 ) 25 Ch. D. 752.
( 6 ) I b i d . a t p„767, p e r C h i t t y
because
to
duties of care,
d i l i g e n c e and
is
difficult
sistencies;
Insurance
are
to deal
-
l a x o r f a r from
i n general
(7) " t o the q u e s t i o n
of
skill
do
not, I think,
d i l i g e n c e required of
g i v e any
very
rigorous.
propositions.
i n t h e w o r d s o f Romer J .
Co.
and
skill
123
i n Re
pect
can
be
attributed
(a d i r e c t o r ) ,
c l e a r answer."
to the f a c t
feel
the
In setting
o f good f a i t h
are confronted
out
b u s i n e s s e s o f a l l s i z e s and
more t h a n h o n e s t y and
i s submitted
i s the c o u r t s '
standards
i s submitted,
and
so
as
t h a t another
be
loyalty,
with complicated
trading,
pro-
resulting
business
t o a t t r a c t men
of
sound
little
business
world.
failure
may
res-
of conduct a p p l i c a b l e t o
reason f o r i n c o n s i s t e n c y of
to distinguish
f r o m one
p o s i t i o n s of d i r e c t o r s i n d i f f e r e n t classes
it
in this
k i n d s , t h e c o u r t s have r e q u i r e d
effort
acumen t o t h e c o m m e r c i a l
It
authorities
judges are w e l l
t h e i r reluctance to i n t e r f e r e w i t h the d i r e c t o r s '
judgement ( 9 ) .
law
the
degree
(8)
b l e m s o f b u s i n e s s a d m i n i s t r a t i o n , e c o n o m i c s and
in
Fire
Companies
that while
questions
n o t s u r e when t h e y
some i n c o n -
City Equitable
t h e d i f f i c u l t y w h i c h t h e c o u r t s have had
c o m p e t e n t t o a d j u d i c a t e on
they
There are
o f what i s the p a r t i c u l a r
A Case f o r d i f f e r e n t i a t i n g
Part of
Beyond t h a t , i t
classified
into
another
t h r e e g r o u p s as
(Class
I c o m p a n i e s ) ; medium c o m p a n i e s (medium u n q u o t e d o r
n e r s h i p companies) (Class
l a r g e unquoted
a rough
namely l a r g e companies ( p u b l i c o r
I I c o m p a n i e s ) ; and
I I I companies).
the
o f companies, which,
guide,
f a m i l y companies) (Class
case
companies)
large
s m a l l companies
(part-
(10)
( 7 ) /1925] Cho 407; 94 L c J o C h „ 4 4 5 ; 133 L.T, 520; 4 0 T X . R . 853;
/"19257B. & C.R.
109.
( 8 ) /I9257 Ch. 407, 427. Romer J . a l s o s a i d i n t h a t c a s e : " T h e r e
a r e , i n a d d i t i o n , one o r two o t h e r g e n e r a l p r o p o s i t i o n s t h a t seem
t o be w a r r a n t e d by t h e r e p o r t e d c a s e s : ( 1 ) A d i r e c t o r need n o t
e x h i b i t i n the performance of h i s d u t i e s a g r e a t e r degree o f s k i l l
t h a n may r e a s o n a b l y be e x p e c t e d f r o m a p e r s o n o f h i s k n o w l e d g e and
experience."
( 9 ) See Gower, p.603.
( 1 0 ) On p a r t n e r s h i p c o m p a n i e s , see g e n e r a l l y Morse & Tedd ( 1 9 7 1 )
J.B.L. 2 6 1 . C f Hadden, P.239.
e
- 124
The
differentiating
-
mark o f l a r g e c o m p a n i e s ( p u b l i c o r l a r g e
u n q u o t e d companies) ( C l a s s I companies) i s t h e s e p a r a t i o n o f owners h i p and
c o n t r o l among s h a r e h o l d e r s , management and
R o u g h l y t h e y a r e t h e c o m p a n i e s as d i s t i n g u i s h e d
century middle-class family-owned
t h i s c l a s s w o u l d be
directors.
from n i n e t e e n t h -
personal companies.
t h o s e huge c o m p a n i e s w h i c h
Included i n
are a t present
char-
a c t e r i s e d by a l a r g e number o f s h a r e h o l d e r s , i n many c a s e s more
shareholders
t h a n e m p l o y e e s ; by
by b o a r d s o f d i r e c t o r s ,
and
of
p r o f e s s i o n a l management teams;
and
s o m e t i m e s s e l e c t e d f r o m o u t s t a n d i n g names
owning minor or n e g l i g i b l e percentages
of total
t h e s e huge c o m p a n i e s a r e d o m i n a n t c o n t r o l l i n g
shares.
Examples
g r o u p s and
foreign
interest.
Class
I companies s h o u l d a l s o i n c l u d e those
p a n i e s o u t s i d e t h e heavy s e c t o r o f i n d u s t r i a l
of
and
l a r g e - s i z e d com-
activity,
companies
t h e s e r v i c e t y p e , c o m p a n i e s r e p r e s e n t i n g l i g h t o r new
companies dominant i n t h e i r
p a r t i c u l a r f i e l d s which
industries,
have
recently
moved o u t o f t h e p r i v a t e s e c t o r .
It
i s proposed t h a t a l l p u b l i c companies i r r e s p e c t i v e o f
number o f t h e i r e m p l o y e e s and a l l
limited
e m p l o y e e s o r more s h o u l d be r e g i s t e r e d
e n t e r p r i s e s w i t h i n a g r o u p s h o u l d be
purpose of
I c o m p a n i e s w o u l d be
decision-making
The
the question of
social
performance.
other than p r o f i t ,
more l i k e l y
a r t s and
as an e n t i t y
All
f o r the
t h o s e c o m p a n i e s i n whose e x e c u t i v e
c r i t e r i o n of p r o f i t
t e s t o f good b u s i n e s s
criteria
treated
I companies.
classification.
Class
heavily.
2,000
companies employing
as C l a s s
the
to find
sciences.
responsibility
ability
And
s h o u l d n o t be
weigh
their
because t h e y s h o u l d
sole
have
i t i s i n t h e s e c o m p a n i e s t h a t one
attention
is
g i v e n t o such i s s u e s as p a t r o n a g e
These c o m p a n i e s a r e t h o s e w h i c h
a d u t y t o p r o v i d e and
should
stabilise
employment.
w o u l d be
of
under
- 125 It
should
i s proposed t h a t t h e g e n e r a l
be t h e same f o r d i r e c t o r s o f a l l t h r e e
It
classes.
i s f u r t h e r proposed t h a t a d i r e c t o r should observe t h e
u t m o s t good f a i t h
act
f i d u c i a r y duty o f d i r e c t o r s
t o w a r d s h i s company i n a l l o f h i s a c t i o n s and t o
h o n e s t l y i n t h e e x e r c i s e o f t h e powers and i n t h e d i s c h a r g e o f
the d u t i e s o f h i s o f f i c e .
A director
should
n o t do a n y t h i n g o r o m i t t o do a n y t h i n g i f
the doing o f t h a t t h i n g o r t h e omission
be,
gives r i s e
give r i s e
to a conflict,
In particular a director
any money o r p r o p e r t y b e l o n g i n g
self;
reasonably
be e x p e c t e d
to
t o a c o n f l i c t , b e t w e e n h i s p r i v a t e i n t e r e s t s and t h e
duties of h i s office.
of
o r might
t o do i t , as t h e c a s e may
should
n o t make use
t o h i s company t o b e n e f i t h i m -
n o r o f any r e l e v a n t i n f o r m a t i o n a c q u i r e d b y h i m o r r e l e v a n t
o p p o r t u n i t y a f f o r d e d t o h i m by v i r t u e o f h i s p o s i t i o n as a d i r e c t o r
of
a company, i f b y d o i n g
so he g a i n s an a d v a n t a g e f o r h i m s e l f w h e r e
t h e r e may be a c o n f l i c t w i t h t h e i n t e r e s t s o f t h e company.
The e x p r e s s i o n
'relevant information'
should
mean any i n f o r m -
a t i o n whieh a d i r e c t o r obtained w h i l e a d i r e c t o r o r o t h e r
of
t h e company and w h i c h i t was r e a s o n a b l e
t o expect
officer
him t o d i s -
c l o s e t o t h e company o r n o t t o d i s c l o s e t o p e r s o n s u n c o n n e c t e d w i t h
t h e company.
The e x p r e s s i o n
' r e l e v a n t o p p o r t u n i t y ' should
mean an o p p o r t u -
n i t y w h i c h a d i r e c t o r had w h i l e a d i r e c t o r o r o t h e r o f f i c e r o f t h e
company and w h i c h he had ( i ) b y v i r t u e o f h i s p o s i t i o n as a d i r e c tor
or
o t h e r o f f i c e r o f t h e company; o r ( i i ) i n c i r c u m s t a n c e s i n
w h i c h i t was r e a s o n a b l e
had t h a t o p p o r t u n i t y
t o expect
him t o d i s c l o s e t h e f a c t
t o t h e company.
However, i t i s p r o p o s e d t h a t a d i r e c t o r s h o u l d
i n manner a f o r e s a i d f o r any a c t o r o m i s s i o n
or
ratified.
t h a t he
n o t be l i a b l e
which i s d u l y a u t h o r i s e d
- 126
-
• P r o p e r p u r p o s e s ' s h o u l d be m e r e l y one
duty requiring a d i r e c t o r
of
t o a c t bona f i d e i n t h e b e s t
interests
t h e company as a whole,,
As
Class
t o the degree o f c a r e , d i l i g e n c e
and
skill
of directors i n
I c o m p a n i e s , i t i s s u b m i t t e d t h a t t h e d e g r e e s h o u l d be
high.
The
rather
o l d r u l e t h a t company d i r e c t o r s a r e n o t bound t o do
t h a n a c t h o n e s t l y and
a c t u a l l y do
is
aspect of the wider
to the best of t h e i r a b i l i t y
i s c l e a r l y inadequate.
c e r t a i n l y more d e m a n d i n g .
unreasonable
more
i n whatever
C u r r e n t commercial
they
attitude
(1)
I t i s r e c o g n i s e d , however, t h a t i t i s
t o e x p e c t e v e r y d i r e c t o r t o have e q u a l k n o w l e d g e
and
e x p e r i e n c e o f e v e r y a s p e c t o f t h e b u s i n e s s o f t h e company ( 2 ) .
T h e r e f o r e , i t i s proposed
t h a t i n t h e case o f Class
I companies'
d i r e c t o r s , w i t h t h e e x c e p t i o n o f employee d i r e c t o r s , w i t h i n
field
of professed or i n f e r r e d
s h o u l d be
tor
such as l a c k o f k n o w l e d g e o r l a c k o f
not h e l p the d i r e c t o r concerned.
should conform
to professional
I n the said
i s proposed
required
that a director
to exhibit
degree o f s k i l l
k n o w l e d g e and
In
is
i n Class
i n the performance
t h a n may
experience
field
the
direc-
Outside
the said
accountfield
I companies s h o u l d n o t
be
of his duties a greater
r e a s o n a b l y be e x p e c t e d
from a person
of his
experience.
t h e case o f an e m p l o y e e d i r e c t o r
proposed
skill
s t a n d a r d s much as l a w y e r s ,
ants, a r c h i t e c t s , engineers, doctors, e t c .
it
there
imposed an o b j e c t i v e s t a n d a r d o f c a r e , d i l i g e n c e and
so t h a t d e f e n c e s
will
c o m p e t e n c e o f each d i r e c t o r
the
t h a t he need n o t e x h i b i t
a g r e a t e r degree o f s k i l l
t h a n may
p e r s o n o f h i s k n o w l e d g e and
s i o n a l l y q u a l i f i e d , he
i n Class
I companies, i t
i n the performance
of h i s duties
r e a s o n a b l y be e x p e c t e d
experience.
However, i f he
from a
i s profes-
s h o u l d be d e a l t w i t h e x a c t l y as a non-employee
(1) Hadden, p„322„
(2) F o r e x a m p l e i n a b u i l d i n g c o n s t r u c t i o n company, one d i r e c t o r may
have e x p e r t i s e i n f i n a n c e and a n o t h e r i n c o n s t r u c t i o n e n g i n e e r i n g .
- 127 director«
It
i s a l s o proposed t h a t i n t h e case o f C l a s s I companies'
d i r e c t o r s , with the exception
be
o f employee d i r e c t o r s ,
an e v o l u t i o n o f m a n a g e r i a l p r o f e s s i o n , ,
apart from
there
I ti s high
time
should
that,
e m p l o y e e d i r e c t o r s , company management i n t h e c a s e o f
large (Class
I ) c o m p a n i e s be a r e c o g n i s e d
profession with objective
professional
standards.
t o be such d i r e c t o r s w o u l d
be
p r o f e s s i o n a l m a n a g e r s , b u s i n e s s c o n s u l t a n t s , management
accountants,
tects etc.
be
Persons e l i g i b l e
lawyers,economists, s o c i a l s c i e n t i s t s ,
standing
engineers,
I t i s n o t p r o p o s e d t h a t t h e management p r o f e s s i o n
a graduate p r o f e s s i o n .
profession
specialists,
archineed
The r e a s o n f o r r e q u i r i n g a m a n a g e r i a l
i s t h a t i n order
to maintain
and t o g a i n and r e t a i n
i t s members' r e p u t e and
p u b l i c confidence
i n their
a d e v e l o p e d p r o f e s s i o n u s u a l l y l a y s down and m a i n t a i n s
abilities,
standards o f
e t h i c a l c o n d u c t beyond t h o s e r e q u i r e d o f t h e o r d i n a r y c i t i z e n by l a w ,
and
b y r e q u i r i n g a d i r e c t o r and o r e x e c u t i v e
and o r manager t o be a
member o f a r e c o g n i s e d
p r o f e s s i o n , i t w o u l d be s a f e g u a r d e d t o a
r e a s o n a b l y good e x t e n t
t h a t t h o s e c o n t r o l l i n g c o m p a n i e s a r e imposed
by r u l e s o f p r o f e s s i o n a l c o n d u c t w h i c h c a n s a t i s f y
modern s o c i e t y .
The s a n c t i o n o r p o s s i b i l i t y
t h e needs o f
thereof of d i s c i p l i n a r y
p r o c e e d i n g s o r s u s p e n s i o n o r r e m o v a l o f membership f r o m
p r o f e s s i o n would operate
pursuing
recognised
t o d e t e r d i r e c t o r s from
f r a u d u l e n t o r negligent courses o f conduct.
business eduction
porate
to a great extent
a
and p r o f e s s i o n a l t r a i n i n g h e l p
Moreover,
t o encourage
cor-
responsibility.
Small companies ( p a r t n e r s h i p companies) (Class
III
companies)
w o u l d be t h o s e c o m p a n i e s w h i c h a r e i n e s s e n c e i n c o r p o r a t e d
partnerships
or
sole
128
t r a d e r s nowadays ( 3 ) .
-
They w o u l d i n c l u d e
t h o s e companies
w h i c h have been r e g i s t e r e d t o t a k e o v e r b u s i n e s s e s o r
p r a c t i c e s p r e v i o u s l y c a r r i e d on
by
companies the
to j o i n t l y
and
regard
company.
shareholders wish
partnerships.
themselves f o r p r a c t i c a l
p u r p o s e s as
They have been i n c o r p o r a t e d
advantage of l i m i t e d
l i a b i l i t y or
which f l o w from i n c o r p o r a t i o n .
take
professional
Usually
p a r t i n management
partners
principally
in
the
to obtain
the
tax advantage or o t h e r
The
i n these
advantages
p r e s e n t Companies A c t s a r e
adapted f o r r e g u l a t i n g the r e l a t i o n s h i p w i t h i n a group o f
who
consider
t h e m s e l v e s as p a r t n e r s
i n a small
h a v e t h e same f r e e d o m i n t h e r u n n i n g
regulation of t h e i r i n t e r n a l
able
degree o f f l e x i b i l i t y
wish
in
l e g a l r e l a t i o n s h i p s as w o u l d be
There should
i n the r u l e s governing the
met
Acts,
by
amendments w i t h i n t h e f r a m e w o r k o f
but c a l l
It
These p r o b l e m s c a n n o t
f o r a new
legislative
avail-
be
a
external
f a i t h , mutual t r u s t ,
be
g o v e r n e d by
and
unanimity
require-
satisfactorily
t h e e x i s t i n g Companies
approach.
i s proposed t h a t the b u s i n e s s r e l a t i o n s h i p between
shareholders should
to
the
i n t e r n a l r e l a t i o n s o f such c o m p a n i e s t o meet t h e v a r y i n g
ments o f t h e e n t r e p r e n e u r s .
be
persons
company and
i t s b u s i n e s s and
t o them u n d e r a p a r t n e r s h i p r e g i m e ( 4 ) .
greater
and
of
i l l -
the
such s i m p l e a s s u m p t i o n s as
i n reaching
decisions
of
good
basic
( 3 ) The l a w s o f many c o u n t r i e s draw a c l e a r d i s t i n c t i o n b e t w e e n
j o i n t s t o c k c o m p a n i e s and o t h e r c o m p a n i e s , e.g. i n F r a n c e t h e
s o c i e t e anonyme and t h e s o c i e t e a_ r e s p o n s i b i l i t y l i m i t e e and i n
Germany t h e A k t i e n q e s e l l s c h a f t and t h e G e s e l l s c h a f t m i t b e s c h r a n k t e r
Haftunq.
I n U.S.
some s t a t e l e g i s l a t u r e s have p a s s e d l a w s s p e c f i c a l l y r e g u l a t i n g c l o s e companies. Brightman J . once a t t e m p t e d t o
d e f i n e a p a r t n e r s h i p company; see h i s j u d g e m e n t i n Re L e a d e n h a l l
G e n e r a l H a r d w a r e S t o r e s L t d . ( 1 9 7 1 ) 115 S.J„ 202.
( 4 ) The d i f f i c u l t i e s c a u s e d by p a r t n e r s h i p c o m p a n i e s a r e w e l l
i l l u s t r a t e d by Re W e s t b o u r n e G a l l e r i e s L t d . [1910] 3 A l l E.R. 374;
f l 9 7 l j 1 A l l E.R. 5 6 .
A l t h o u g h t h e case a s s e r t s the a b i l i t y of the
c o u r t s t o a c t on e q u i t a b l e g r o u n d s i n c o m p u l s o r y w i n d i n g up, t h i s
remedy may i n many c a s e s be w o r s e t h a n t h e d i s e a s e .
I t i s submitted
t h a t i t i s d e s i r a b l e t o have a new s e t o f s t a t u t o r y r u l e s r e g u l a t i n g
t h e i r i n t e r n a l r e l a t i o n s h i p s a c c o r d i n g t o t h e i r own i n t e n t i o n s .
See
a l s o a b o v e , pp.37-8.
- 129
i m p o r t a n c e and s i m i l a r p a r t n e r s h i p
There
fied
of
for
t h e memorandum and a r t i c l e s o f a s s o c i a t i o n ,
ordinary
the Partnership Act.
t h e Companies A c t 1948,
articles
instead
p r i m a r i l y as a g u i d e
be a d o p t e d i n w h o l e o r i n p a r t .
a r t i c l e s may
i s proposed
more t h a n 50
that only
p e o p l e may
Again, a l l enterprises
purpose o f
be m o d i f i e d
in writing
on a p u b l i c
register.
those intending
be r e g i s t e r e d
companies t h a t
as C l a s s I I I c o m p a n i e s .
w i t h i n a group are t r e a t e d
as an e n t i t y f o r
( 5 ) , the general f i d u c i a r y duty o f d i r e c t o r s of
C l a s s I I I c o m p a n i e s s h o u l d be t h e same as t h a t o f d i r e c t o r s
As
employ
classification.
As a f o r e s a i d
Class I
Of
b u t such a s u p p l e m e n t a l a g r e e m e n t , i t
p r o p o s e d , need n o t be f i l e d
It
a simpli-
Class I I I companies b u t which c o u l d , l i k e T a b l e A
by a s u p p l e m e n t a l a g r e e m e n t ,
the
under
a set of partnership
course the set of partnership
not
rules
s h o u l d a l s o be an e a s y r e g i s t r a t i o n p r o c e d u r e and
c o n s t i t u t i o n - perhaps
under
is
-
of
companies.
t o t h e degree of d i l i g e n c e
companies,
i t i s proposed
and c a r e o f d i r e c t o r s o f C l a s s I I I
t h a t i t s h o u l d be s e t t l e d by a g r e e m e n t so
t h a t t h e p a r t i e s c o n c e r n e d can a g r e e on t h e amount o f t i m e t o be d e v o t e d
by each
party
agreement,
t o t h e b u s i n e s s , b u t i n t h e absence o f any
each d i r e c t o r s h o u l d a t t e n d
diligently
and
contrary
exclusively
t o t h e management o f t h e b u s i n e s s .
As
regards t h e degree of s k i l l ,
i t i s proposed
t h a t each
tor
o f a C l a s s I I I company s h o u l d e x e r c i s e t h e d e g r e e o f s k i l l
may
r e a s o n a b l y be e x p e c t e d o f a p e r s o n o f h i s k n o w l e d g e
Limited
c o m p a n i e s w h i c h do n o t f a l l
The
family
and e x p e r i e n c e .
companies)
as medium c o m p a n i e s
(Class I I companies).
c h a r a c t e r i s t i c s o f C l a s s I I c o m p a n i e s a r e t h a t t h e r e i s no
( 5 ) See
a b o v e , pp.125-6.
which
w i t h i n C l a s s I companies
and C l a s s I I I c o m p a n i e s s h o u l d be r e g i s t e r e d
(medium u n q u o t e d o r l a r g e
direc-
such
- 130 s e p a r a t i o n o f o w n e r s h i p and c o n t r o l
panies.
The o w n e r s h i p ,
much more c o i n c i d e n t .
as i s e v i d e n t i n C l a s s I com-
t h e d i r e c t i o n and t h e management a r e a l l
But they a r e l a r g e r than Class I I I companies.
Some o f t h e s e c o m p a n i e s do have p r o f e s s i o n a l managers and d i r e c t o r s ;
w h i l e o t h e r s have s e v e r a l o u t s i d e m i n o r i t y s h a r e h o l d e r s .
Together
w i t h C l a s s I I I companies t h e y a r e t h e t r u e p r i v a t e c a p i t a l i s m o f
the
nineteenth-century type.
a r e more a m b i t i o u s
B u t on t h e w h o l e C l a s s I I c o m p a n i e s
than Class I I I companies.
I n some o f t h e s e
C l a s s I I c o m p a n i e s one sees t h e f e r m e n t o f p r i v a t e
capitalism.
Here i s t h e f i e l d
for
f o r bold exercise of i n t u i t i o n ,
someness and f o r a g i l i t y .
with
Risks
are recognised
and u n d e r t a k e n
t h e a i m o f b e c o m i n g b i g g e r , s t r o n g e r and f i n d i n g
tion i n theindustrial
tion.
adventure-
s t r u c t u r e e i t h e r through growth
a firm posio r combina-
Some o f t h e s e c o m p a n i e s a r e d i v i s i o n s o f t h e g r e a t
institu-
t i o n a l o r g a n i s a t i o n s ( C l a s s I companies) b u t , f o r one reason o r
a n o t h e r , have n o t moved i n t o
It
the
their
areas.
i s i n r e s p e c t o f C l a s s I I companies t h a t
comparatively
q u e s t i o n o f p r o t e c t i o n o f m i n o r i t i e s a r i s e s more
As
frequently.
aforesaid ( 6 ) , t h egeneral f i d u c i a r y duty o f d i r e c t o r s of
C l a s s I I c o m p a n i e s s h o u l d b e t h e same as t h a t o f d i r e c t o r s o f C l a s s I
companies.
However,as t o t h e d e g r e e o f c a r e , d i l i g e n c e and s k i l l ,
tor
of
o f C l a s s I I c o m p a n i e s s h o u l d be r e q u i r e d t o e x e r c i s e t h a t
c a r e and d i l i g e n c e t h a t a r e a s o n a b l y
prudent
person
would
c i s e i n c o m p a r a b l e c i r c u m s t a n c e s and t h e d e g r e e o f s k i l l
reasonably
It
be e x p e c t e d
o f a person
which
degree
exermay
o f h i s k n o w l e d g e and e x p e r i e n c e .
i s p e r h a p s n o t o u t o f p l a c e t o n o t e c e r t a i n comment g i v e n
by L o r d Macnaghten i n Dovey v . C o r y ( 7 ) :
(6)
(7)
a direc-
See a b o v e , p p . 125-6.
[1301] A.C. 477 a t 4 8 8 .
- 131
"I
do
not t h i n k
Parliament
has
-
i t d e s i r a b l e f o r any
abstained
tribunal
t o do
that
which
from doing - t h a t i s , to f o r m u l a t e
p r e c i s e r u l e s f o r t h e guidance o r embarrassment o f businessmen
in
the conduct of business
I think
any
t h e r e never w i l l
p a r t i c u l a r case on
speaking
do
T h e r e n e v e r has
be, much d i f f i c u l t y
i t s own
f a c t s and
been,
and
i n dealing with
circumstances;
and,
f o r m y s e l f , I r a t h e r d o u b t t h e wisdom o f a t t e m p t i n g t o
more."
But
to
affairs,.
a r e n o t d i r e c t o r s , e x e c u t i v e s , and
demand f r o m t h e law some r e a s o n a b l y
conduct?
their advisors
certain
entitled
rules of permissible
When l a w s become outmoded i n s o c i e t y , when t h e y do
r e f l e c t t h e way
s h o u l d be
i n which
people
live,
then serious c o n s i d e r a t i o n
given to t h e i r m o d i f i c a t i o n or a b o l i t i o n .
be a sane r a t i o n a l i s a t i o n and
not
There
should
c o d i f i c a t i o n o f t h e law r e l a t i n g
to
company d i r e c t o r s .
As
t o the problem o f enforcement o f d i r e c t o r s '
d u t i e s , the
s h o u l d be amended so t h a t i t i s a c o n d i t i o n o f t h e r e c e i p t o f
tain
s u b s i d i e s o r l i c e n c e s g r a n t e d by g o v e r n m e n t t h a t t h e
proposed r e f o r m i n these
observed.
manently,
t h r e e C h a p t e r s and
O t h e r s a n c t i o n s may
be
law
cer-
new
o r c e r t a i n d u t i e s be
suspension,
temporarily or
per-
f r o m p r a c t i c e as a p r o f e s s i o n a l d i r e c t o r , manager o r
e x e c u t i v e , a s s u m i n g t h e l a w i s amended so as t o r e q u i r e t h a t
a
d i r e c t o r o f a l a r g e company s h o u l d bea member o f a r e l e v a n t p r o f e s s i o n a l b o d y ; a c o m p u l s o r y w i n d i n g up o f t h e c o m p a n i e s c o n c e r n e d ;
striking
that
tor
from
the r e g i s t e r o f t h e companies concerned; a d e c l a r a t i o n
t h e d i r e c t o r c o n c e r n e d be b a r r e d f r o m b e i n g e m p l o y e d as
by
anyone o r any
court order
(8).
company f o r a number o f y e a r s
P r o v i s i o n s should
( 8 ) Cf„ Companies A c t
Companies (No.2) B i l l
from
direc-
the date
of
a l s o be made t o a l l o w e m p l o y e e s ,
1948, s . 1 8 8 ( 1 ) ; I n s o l v e n c y A c t 1976, s.9;
1981 (As Amended i n C o m m i t t e e ) , c l a u s e 6 1 .
- 132
unions or shareholders
-
t o t a k e d i r e c t o r s i n c l u d i n g employee d i r e c -
t o r s t o c o u r t f o r incompetence o r f a i l u r e
d u t i e s and
in
t o a l l o w t h e c o u r t s t o suspend o r r e p l a c e
directors'
the d i r e c t o r s
default.
Enforcement o f Corporate
In
is
to observe
order
important
Duties
t o make t h e d u t i e s o f d i r e c t o r s more e f f e c t i v e , i t
t o have a good s y s t e m o f e n f o r c e m e n t o f
corporate
duties.
T h e r e a r e s e v e r a l ways o f e n f o r c i n g c o r p o r a t e d u t i e s .
First,
for
t h e company may
breaches of d u t i e s o f
b r i n g an
action against i t s d i r e c t o r ( s )
l o y a l t y , care,diligence or
skill.
Secondly, t h e r e are t h e d e r i v a t i v e a c t i o n , personal
a l t e r n a t i v e remedy u n d e r s e c t i o n 75 o f t h e Companies A c t
winding
up u n d e r s . 2 2 2 ( f ) o f t h e Companies A c t
were d i s c u s s e d
Two
and
a l l o f which
o t h e r means o f e n f o r c e m e n t (one o f w h i c h i s p r o p o s e d )
t r a d e i n v e s t i g a t i o n s and
r e m a i n t o be d i s c u s s e d ,
and
t o t h e s e we
shall
watching
now
committees
turn.
Department of Trade I n v e s t i g a t i o n s
The
D e p a r t m e n t o f T r a d e now
g a t e c o m p a n i e s ( 9 ) , and
both
1980
i n Chapter 1 h e r e i n .
namely d e p a r t m e n t o f
1.
1948,
action,
have e x t e n s i v e
the existence
as a remedy a g a i n s t u n f a i r
of these
treatment
and
powers t o
powers i s
investiimportant
as a p r e l i m i n a r y t o
civil
or c r i m i n a l proceedings a g a i n s t the wrongdoers.
these
powers w e r e e x e r c i s a b l e o n l y by
Until
1967
the formal appointment of
i n s p e c t o r t o i n v e s t i g a t e t h e company's a f f a i r s
and
t h e y were
e x e r c i s e d owing t o the o v e r l a p i n the f u n c t i o n s of v a r i o u s
an
rarely
government
( 9 ) The G o v e r n m e n t ' s Companies (No.2) B i l l 1981 (As Amended i n
C o m m i t t e e ) p r o p o s e s t h a t t h e c l a s s e s o f p e r s o n s who may be r e q u i r e d
t o g i v e e v i d e n c e i n t h e c o u r s e o f i n v e s t i g a t i o n s s h o u l d be e x t e n d e d
and p r o p o s e s t o p r o v i d e i n s p e c t o r s w i t h power t o e x a m i n e d i r e c t o r s '
bank a c c o u n t s . See c l a u s e s 57 and 59. See a l s o c l a u s e s 56, 58 and
60 t h e r e o f .
- 133 a u t h o r i t i e s i n t h e a f f a i r s o f p u b l i c c o m p a n i e s and t h e a b s e n c e o f
any c l e a r l y d e f i n e d r e s p o n s i b i l i t y w i t h i n
predecessor o f t h e Department
market.
it
t h e Board
o f Trade, t h e
o f Trade, f o r t h e o v e r s i g h t o f t h e
They t o o k t h e v i e w t h a t i f an a p p o i n t m e n t was made b e f o r e
was a b s o l u t e l y n e c e s s a r y , e x p e c i a l l y i n t h e case o f a p u b l i c
company, i r r e p a r a b l e damage m i g h t be o c c a s i o n e d t o t h e company i f
the
or
the
a l l e g a t i o n s made a g a i n s t i t w e r e p r o v e d t o be f r i v o l o u s ,
incorrect.
Department
T h i s d i f f i c u l t y has been removed by t h e g r a n t t o
o f new powers o f p r e l i m i n a r y e n q u i r y , b y v i r t u e o f
w h i c h i t may demand t h e p r o d u c t i o n o f d o c u m e n t s and a c c o u n t s
any company w i t h o u t n e c e s s a r i l y c o n d u c t i n g a f u l l
To
ing
from
inspection (10).
s a v e c o s t s and i n c r e a s e manpower, a f t e r 1967 a c o r p s o f i n s p e c t o f f i c e r s was e s t a b l i s h e d o n a f u l l
time basis t o undertake t h e
more r o u t i n e i n s p e c t i o n s w h i c h w o u l d n o t m e r i t
eminent
professional
There
out
false
the appointment o f
l a w y e r s and a c c o u n t a n t s .
a r e t h r e e t y p e s o f i n v e s t i g a t i o n w h i c h c a n be c a r r i e d
by t h e Department,
n a m e l y an i n v e s t i g a t i o n o f t h e company's
a f f a i r s , o f t h e company's o w n e r s h i p and o f s h a r e
The
Department
dealings.
may a p p o i n t i n s p e c t o r s t o i n v e s t i g a t e and
r e p o r t on a company's a f f a i r s o n t h e a p p l i c a t i o n o f a t l e a s t 200
members o r members h o l d i n g a t l e a s t o n e - t e n t h o f t h e s h a r e s i s s u e d
in
t h e c a s e o f a company h a v i n g a s h a r e c a p i t a l
and o n t h e a p p l i -
c a t i o n o f a t l e a s t o n e - f i f t h o f t h e members i n t h e c a s e o f a company h a v i n g no s h a r e c a p i t a l ( 1 ) .
The
Department
pany's a f f a i r s
may a p p o i n t i n s p e c t o r s t o i n v e s t i g a t e t h e com-
i f i t appears
been c o n d u c t e d w i t h i n t e n t
or
(10)
(1)
u n l a w f u l purpose,
( i ) t h a t t h e b u s i n e s s i s b e i n g o r has
to defraud c r e d i t o r s ,
f o r a fraudulent
i n a manner w h i c h i s o p p r e s s i v e t o any o f i t s
S e c t i o n 109 o f Companies A c t 1967.
S e c t i o n 1 6 4 ( 1 ) o f Companies A c t 1 9 4 8 .
- 134 members, o r t h a t t h e b u s i n e s s was f o r m e d f o r a f r a u d u l e n t o r u n l a w ful
purpose, o r ( i i ) t h a t
t h e persons concerned w i t h f o r m a t i o n o r
management have been g u i l t y o f f r a u d , m i s f e a s a n c e o r o t h e r
duct
t o w a r d s t h e company o r t h e members.
appoint
i n s p e c t o r s i f i t appears
The D e p a r t m e n t
may
e x p e c t ( 2 ) . I n t h i s way t h e D e p a r t m e n t
entitled;
t h e y add somewhat t o t h e i r
T h i s b e n e f i t i s sometimes
aggrieved
shareholder
One o f t h e g r e a t weaknesses o f an
t o a c c e s s t o t h e company's b o o k s and r e c o r d s
w h e r e a s t h e d i r e c t o r s have such
access.
an i n s p e c t o r t h i n k s i t n e c e s s a r y , he may a l s o i n v e s t i g a t e
the a f f a i r s of r e l a t e d
All officers
agent f o r t h i s
companies ( 3 ) .
and a g e n t s o f t h e company ( a n d an a u d i t o r i s an
p u r p o s e ) must a t t e n d b e f o r e t h e i n s p e c t o r s when
r e q u i r e d and g i v e a l l t h e a s s i s t a n c e t h a t
doing,
t h a t t h e member's
who has been o p p r e s s e d by t h e d i r e c t o r s i s
t h a t he i s n o t e n t i t l e d
If
already
legal entitlement.
very useful to establish
r i g h t s have been i n f r i n g e d .
they
may n o t
o n l y h e l p t h e members t o g e t i n f o r m a t i o n t o w h i c h t h e y w e r e
legally
also
t h a t t h e members o f a company h a v e
n o t been g i v e n a l l t h e i n f o r m a t i o n a b o u t i t s a f f a i r s w h i c h
might reasonably
miscon-
they are n o t e n t i t l e d
t h e y can ( 4 ) . I n so
t o make s t i p u l a t i o n s , o r r e q u i r e
a s s u r a n c e s f r o m t h e i n s p e c t o r s , as t o t h e p r o c e d u r e t o be f o l l o w e d .
This
i s an e x p l i c i t d u t y o n t h e o f f i c e r s
investigated
to attend before
and t h e y c a n n o t use e x c u s e s
questioned.
A refusal
o r a g e n t s who a r e b e i n g
t h e i n s p e c t o r s i f r e q u i r e d t o do s o ,
not t o attend i n order
being
t o a t t e n d b e f o r e i n s p e c t o r s when r e q u i r e d
t o do so i s a g r o u n d f o r b r i n g i n g an o f f i c e r
(2) S e c t i o n
(3) S e c t i o n
(4) S e c t i o n
Act.
t o avoid
o r an a g e n t
before
1 6 5 ( b ) o f 1948 as amended by s e c t i o n 38 o f 1967 A c t .
166 o f 1948 A c t .
1 6 7 ( 1 ) o f 1948 A c t as amended by s e c t i o n 39 o f 1967
- 135 the
c o u r t , and i f t h e y s t i l l
r e f u s e t o produce t h e books,
this
w o u l d be a c o n t e m p t o f c o u r t .
The
and
it
i n s p e c t o r may e x a m i n e t h e o f f i c e r s o r a g e n t s o n o a t h ( 5 )
may a p p l y t o t h e c o u r t f o r an o r d e r f o r t h e e x a m i n a t i o n
before
o n o a t h o f any o t h e r p e r s o n s whom he t h i n k s i t n e c e s s a r y t o
examine
(6).
S e c t i o n 41 o f t h e Companies A c t 1967 empowers t h e i n s p e c t o r
at
any t i m e i n t h e c o u r s e
o f h i s i n v e s t i g a t i o n t o inform t h e Depart-
ment o f m a t t e r s t e n d i n g t o show t h e c o m m i s s i o n o f an o f f e n c e , w i t h o u t t h e n e c e s s i t y o f m a k i n g an i n t e r i m r e p o r t .
I t had been
found
t h a t t h e i n f o r m a t i o n o b t a i n e d b y i n s p e c t o r s was s o m e t i m e s c o n f i d ential
and c o u l d be made a v a i l a b l e t o t h e B o a r d o f T r a d e o n l y b y
means o f a f o r m a l i n t e r i m r e p o r t o r a f o r m a l f i n a l
s e c t i o n removes t h e d i f f i c u l t y
t o r s may i n f o r m a n y t i m e
If
over c o n f i d e n t i a l i t y
report.
This
and t h e i n s p e c -
now.
i t a p p e a r s t o t h e D e p a r t m e n t f r o m any i n s p e c t o r ' s r e p o r t o r
f r o m any i n f o r m a t i o n o r document o b t a i n e d u n d e r s.109 o f t h e 1967
Act
that i t i s expedient
i n the public interest
s h o u l d be wound u p , i t may, u n l e s s
t h e company i s a l r e a d y
wound up b y t h e c o u r t , p r e s e n t a p e t i t i o n
if
t h a t t h e company
being
f o r i t t o be so wound up
t h e c o u r t t h i n k s i t j u s t and e q u i t a b l e .
If
i t a p p e a r s t o t h e D e p a r t m e n t f r o m any i n s p e c t o r ' s r e p o r t o r
f r o m any i n f o r m a t i o n o r document o b t a i n e d u n d e r s.109 o f t h e 1967
Act
t h a t t h e company's b u s i n e s s
conducted
i n a manner u n f a i r l y
b e r s , i t may, as w e l l
petition,
i s being conducted
prejudicial
o r has been
t o any p a r t o f i t s mem-
as o r i n s t e a d o f p r e s e n t i n g a w i n d i n g up
present a p e t i t i o n
f o r an o r d e r u n d e r s e c t i o n 75 o f t h e
Companies A c t 1 9 8 0 .
The
of
(5)
(6)
D e p a r t m e n t may i t s e l f b r i n g c i v i l
proceedings
i n t h e name
any company w h e r e v e r i t a p p e a r s i n t h e p u b l i c i n t e r e s t
S e c t i o n 1 6 7 ( 2 ) o f 1948 A c t .
S e c t i o n 1 6 7 ( 4 ) o f 1948 A c t .
t o do s o .
- 136
It
-
i s a d v a n t a g e o u s t o make a c o m p l a i n t
a view t o t h e i r e x e r c i s i n g t h e i r powers.
member f o r w i n d i n g
up o r
t o the Department w i t h
L i k e a p e t i t i o n by
t h e a l t e r n a t i v e remedy i t can
a s i n g l e member w i t h o u t r e g a r d
be
t o t h e r u l e i n Foss v .
b u t , u n l i k e t h o s e r e m e d i e s , i t may
a
made by
Harbottle,
lead to a successful
conclusion
e n t i r e l y w i t h o u t expense o r t r o u b l e t o t h e c o m p l a i n a n t .
Moreover,
t h e D e p a r t m e n t i n e x e r c i s i n g t h e i r f o l l o w - u p powers may
stronger
p o s i t i o n than
t h e y , u n l i k e him,
left
will
t h e member, f o r on
powers may
c i s e d i n good
An
prevent
oppression
Another reason f o r the delays
i s submitted
This
and
t h a t the
exercised
of s k i l l e d
legal
and
and
i s t h a t eminent
f u n c t i o n s of
Receiver, the D i r e c t o r of
by
experienced
accounting
important
t h a t our
There should
Public
be
enforcement
relevant
be
a body
i n v e s t i g a t o r s i n such a u n i t w i t h i t s
a d v i s e r s , who
under the e x i s t i n g
r e p o r t i n g on
arrange-
Much t i m e can
i n d i v i d u a l cases.
s y s t e m o f i n v e s t i g a t i o n and
Gower, p.679,
Trade
should
a s i n g l e company law
lack i n d i v i d u a l l y .
saved i n i n v e s t i g a t i n g and
( 7 ) See
non-official
the Department o f
ments a r e n o t e a s i l y a v a i l a b l e a t s h o r t n o t i c e .
be
delays
i s necessary between
t h a t t h e r e i s independence o f a c t i o n which the
a u t h o r i t i e s at present
own
caused
t h e P o l i c e F r a u d Squad i n t h i s f i e l d
b r o u g h t t o g e t h e r and
u n i t so
had
Official
part-time.
i t s inspectors, the O f f i c i a l
Prosecutions
inquisi-
w h e r e a d e t a i l e d s c r u t i n y o f t h e company's
i n s p e c t o r s work o n l y
and
Department's
i n s p e c t i o n i s u s u a l l y c o n d u c t e d t o g e t h e r w i t h an
books o f account i s necessary because c o n t a c t
It
something
time.
some c a s e s , e s p .
them.
be
up
from o c c u r r i n g at a l l i f exer-
R e c e i v e r ' s o r F r a u d Squad i n v e s t i g a t i o n s .
in
The
in a
to wind
n o t have t o show t h a t t h e r e w i l l
i n t h e company f o r t h e members ( 7 ) .
torial
a petition
be
enforcement
thus
I t is
should
- 137 be
f l e x i b l e w i t h e x t e n s i v e s t a t u t o r y power f o r i n v e s t i g a t i o n and
enforcement o
2.
Watching Committees
The
position of the minority
s h a r e h o l d e r has a l w a y s been
u n e n v i a b l e , as i s e v i d e n t f r o m a passage i n t h e j u d g e m e n t i n
W a l l e r s t e i n e r v. Moir
(No.2)
" T h i s case has b r o u g h t
stration of justice
(8).
t o l i g h t a serious defect i n the admini-
. . . ( M r . M o i r ) a p p l i e d many t i m e s t o t h e
D e p a r t m e n t o f T r a d e t o a p p o i n t an i n s p e c t o r , b u t t h a t
put him o f f . . .
nothing.
He r a i s e d
He a p p l i e d t o t h e ombudsman, b u t he c o u l d do
t h e matter a t shareholders' meetings, b u t
was a b r u p t l y c u t o f f .
The o n l y way i n w h i c h
t o have h i s c o m p l a i n t i n v e s t i g a t e d
And
he h a s been a b l e
i s by a c t i o n
h e r e he has come t o t h e end o f h i s t e t h e r .
t h i s case f o r over
financial
department
t e n y e a r s on h i s own.
H
e
i n these c o u r t s .
He has f o u g h t
has expended a l l h i s
r e s o u r c e s o n i t and a l l h i s t i m e and l a b o u r .
He has
r e c e i v e d c o n t r i b u t i o n s f r o m o t h e r s h a r e h o l d e r s b u t t h e s e a r e now
exhausted."
Crusading
plaintiffs
between.
I n t h e t e n y e a r s o r so o f h a z a r d s and c o m p l i c a t i o n s o f
litigation
i n d e r i v a t i v e a c t i o n s a r e v e r y f e w and f a r
t h e r e must have been many t i m e s when Mr. M o i r was c l o s e
to abandoning t h e a c t i o n .
and
T h e r e a r e n o t many d e d i c a t e d ,
determined
r e s o u r c e f u l m i n o r i t y s h a r e h o l d e r s as Mr. M o i r , and i t pays t o
p r e v e n t c o r p o r a t e abuses a r i s i n g
c u r e them a f t e r t h e e v e n t .
i n the f i r s t
place r a t h e r than t o
I t i s true that criminal
proceedings
and
Department o f Trade i n v e s t i g a t i o n s f o r c o r p o r a t e m a l p r a c t i c e a r e
not i n f r e q u e n t today, b u t they are u s u a l l y
happened ( 9 ) , as a r e s u l t o f w h i c h
t a k e n when t h e w o r s t has
the interests o f shareholders,
( 8 ) [1915] 1 A l l E.R. 849 a t p.846 p e r L o r d D e n n i n g M.R.
( 9 ) See Mr. M o i r ' s example i n W a l l e r s t e i n e r v . M o i r (No.2)
- 138 employees, c r e d i t o r s , consumers e t c
damaged ( 1 0 ) ,
have a l r e a d y been s e v e r e l y
The p r e v e n t i v e measure takes t h e form o f i n t e r n a l
self-
r e g u l a t i o n , and i t i s proposed t h a t f o r every p u b l i c company o r
l a r g e unquoted company, w a t c h i n g committees
( l ) be s e t up.
committees should be composed e n t i r e l y o f t h e company's
directors.
These
outside
T h e i r f u n c t i o n i s t o s u p e r v i s e management and company
o p e r a t i o n s g e n e r a l l y , and i n p a r t i c u l a r t o examine t h e adequacy o f
a c c o u n t i n g procedures, t o analyse t h e o v e r a l l f i n a n c i a l
and t o s e l e c t t h e company's a u d i t o r s .
position
The w a t c h i n g committee should
have i t s own s m a l l independent s t a f f which i s o n l y answerable t o t h e
non-executive d i r e c t o r s and t o t a l l y independent o f management control.
F u r t h e r , t h e committee should be a u t h o r i s e d t o h i r e
skilled
c o n s u l t a n t s t o a d v i s e i t and p r o v i d e an independent source o f expertise.
Any person who i s an e x e c u t i v e o f t h e company, o r who has a
p r o f e s s i o n a l r e l a t i o n s h i p o r m a t e r i a l business d e a l i n g s w i t h t h e
company, and any c l o s e r e l a t i v e s o f such persons should be d i s q u a l i f i e d from b e i n g a p p o i n t e d as a committee member.
The
committee
members should p r e f e r a b l y be drawn from p r o f e s s i o n a l managers, b u s i ness c o n s u l t a n t s , management s p e c i a l i s t s , a c c o u n t a n t s , l a w y e r s ,
economists o r s o c i a l s c i e n t i s t s , b u t o n l y those w i t h an e n q u i r i n g
mind and s t r e n g t h o f c h a r a c t e r . The committee members should no
l o n g e r be honorary o r ornamental and should be amply rewarded.
In
o r d e r t o ensure t h a t t h e committee members have s u f f i c i e n t t i m e and
energy t o do t h e i r work p r o p e r l y , i t i s proposed t h a t a person
should n o t h o l d more than t h r e e such committee memberships a t any
given time.
(10) See a l s o above, p.45.
(1) C f . A.J. Boyle (1978) 27 I.C.L.Q. 487.
- 139 CONCLUSIONS
R e c e n t l y the c o u r t s have been more ready t o i n t e r v e n e t o c o r r e c t abuse o f m a j o r i t y power and u n f a i r n e s s , which
a b l e t o do s t i l l
they should be
more e f f e c t i v e l y under the newly improved
remedy
a l t e r n a t i v e t o w i n d i n g up.
It
i s t o be hoped t h a t the c o u r t s w i l l adopt a much more
l i b e r a l a t t i t u d e t o the q u e s t i o n o f t h e m i n o r i t y s h a r e h o l d e r s '
l o c u s s t a n d i i n d e r i v a t i v e a c t i o n s so as t o remove any need t o
c a t e g o r i s e types o r degrees o f breach o f d u t y by d i r e c t o r s i n
terms o f t h e i r b e i n g e i t h e r r a t i f i a b l e o r n o n - r a t i f i a b l e and o r
the
law w i l l be changed by l e g i s l a t i o n t o g i v e the c o u r t s an e x p l i -
c i t d i s c r e t i o n t o p e r m i t a d e r i v a t i v e s u i t f o r any breach o f d u t y
i n c l u d i n g perhaps t h a t o f care d i l i g e n c e and s k i l l t o o , and whether
or
n o t the wrongdoers a r e i n c o n t r o l .
It
i s submitted t h a t there are s t i l l
newly enacted
some weaknesses o f t h e
s e c t i o n 75 o f the Companies A c t 1980,
and i t i s
proposed t h a t the c o u r t s should be a l l o w e d t o d e a l under t h e new
s e c t i o n w i t h u n f a i r l y p r e j u d i c i a l conduct
s u f f e r e d by a member i n
a c a p a c i t y o t h e r than t h a t o f a member o r by a debenture
whose debentures
unfettered
holder
are c o n v e r t i b l e i n t o shares; the c o u r t should have
discretion.
As t o the p r o p o s a l t h a t i t might be b e t t e r t o i n t r o d u c e employee r e p r e s e n t a t i v e s d i r e c t l y i n t o t h e s u p e r v i s o r y and o r managing
to
organs o f companies, i t i s s u b m i t t e d t h a t the time has now come
i n t r o d u c e employee p a r t i c i p a t i o n a t board l e v e l .
I t i s proposed
t h a t f o r every p u b l i c company o r l a r g e unquoted company o r a l t e r n a t i v e l y f o r every company employing
more than 50 employees t h e r e
should be a r e c o n s t i t u t e d u n i t a r y board w i t h an equal number o f
s h a r e h o l d e r and employee d i r e c t o r s and an independent
from p r o f e s s i o n a l s o
third
group
I n o r d e r t o ensure an e x t e n s i o n o f i n d u s t r i a l
- 140 democracy s u f f i c i e n t l y , works c o u n c i l s should a l s o be required,,
The management and t h e w o r k f o r c e should be t a u g h t and made t o a c t
on t h e p r i n c i p l e t h a t a company i s f o r b o t h i n v e s t o r s and employees
e q u a l l y and t h e r e i s a d u t y upon employees t o work, upon employers
t o p r o v i d e work, and upon b o t h t o co-operate a t work.
m i t t e d t h a t t h e essence of success i n a c h i e v i n g
p l u r a l i s t i c bargaining
I t i s sub-
u n i t y i s not
o r compromise, b u t c o - o p e r a t i o n .
An e x a m i n a t i o n o f t h e case law about d i r e c t o r s ' d u t i e s seems
t o show t h a t t h e r e a r e some i n c o n s i s t e n c i e s
and d i l i g e n c e .
i n t h e i r d u t i e s o f care
Roughly t h e i r d u t i e s o f l o y a l t y are very
strict,
on t h e o t h e r hand t h e i r d u t i e s o f care d i l i g e n c e and s k i l l a r e
quite lax.
The reason f o r t h e l a t t e r might be t h a t many d i r e c t o r s
worked and work p a r t time and company management i s up t o date n o t
a recognised profession w i t h p r o f e s s i o n a l standards.
mercial
C u r r e n t com-
a t t i t u d e i s now more demanding, and i t i s proposed t h a t i n
the case o f p u b l i c o r l a r g e unquoted companies, w i t h t h e e x c e p t i o n
o f employee d i r e c t o r s , t h e law should r e q u i r e a d i r e c t o r t o possess
a professional q u a l i f i c a t i o n .
Another reason f o r t h e i n c o n s i s t e n c y
o f case law i s t h e c o u r t s ' f a i l u r e t o d i s t i n g u i s h from one another
the p o s i t i o n s o f d i r e c t o r s i n s m a l l companies, medium companies and
l a r g e companies r e s p e c t i v e l y .
Accordingly
i t i s proposed t h a t a l l
companies should be c l a s s i f i e d i n t o t h r e e groups and t h e r e should
be a c o d i f i c a t i o n o f t h e law r e l a t i n g t o d i r e c t o r s ' d u t i e s f o r each
o f t h e t h r e e c l a s s e s o f companies.
I t i s a l s o proposed t h a t f o r
every p u b l i c o r l a r g e unquoted company t h e r e be s e t up a w a t c h i n g
committee c o n s i s t i n g o f independent o u t s i d e d i r e c t o r s who should
p r e f e r a b l y be p r o f e s s i o n a l s .
The t h i r d group o f d i r e c t o r s proposed
t o be r e q u i r e d f o r c e r t a i n companies mentioned e a r l i e r i s meant t o
be t h e same as these w a t c h i n g committees.
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F o g a r t y , M.P.
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Gower, L.C.B. &
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Hadden, T.
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Ivamy, E.R.H.
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O'Neal, F.H.
Oppression o f M i n o r i t y Shareholders (1975)
Pennington, R.R.
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S c h m i t t h o f f , CM.
Palmer's Company Law ( 7 6 t h ed.) V . l
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