Question:
Prepare a report to be submitted to the AICD evaluating the evidence that the responsibility of a company director is to place shareholder interests above those of other stakeholders.
The company form of business structure, in every part of the world, has a common feature of separate legal entity. Under the principle of separate legal entity, the companies are treated in a separate manner from their owners (Latimer, 2012). Further, due to this status of the companies, the company can sue and be sued by other, can individually purchase shares of any company, and it continues to have a perpetual succession, even when the owners of the company die (Wibberley, Chambers and Gioia, 2017). Eccles and Youmans (2015) stated that the companies only have the option of surviving and thriving. They believed that the shareholder value was not something which could be deemed as being the only objective for the companies in Australia. Further, the shareholder value was deemed as just a result of the company’s activities. So, they put the shareholders as any other stakeholder.
Though, the reality is far from truth. The shareholder interest is something which is always given the emphasis by the board of directors and the key example of this can be found in the governing act for the corporations in Australia, i.e., the Corporations Act, 2001 (Cth). In the following parts, the evidence from the Corporations Act, along with some other points, has been presented to show that the company directors keep the shareholder interest as their primary goal. This report is to be submitted to AICD, so that the evidence presented here, can be presented before the general public.
AICD, i.e., the Australian Institute of Company Directors is a body in Australia, the purpose of which is to stay committed towards excellence in governance. This is done to obtain a positive impact on the society and economy and to provide leadership to the issues related to directors (Australian Institute of Company Directors, 2017). This report has been prepared as AICD has been apprehensive about the opinion of the company directors that the shareholder interest takes supremacy over the interest of the others. And to deal with these apprehensions, the recommendations have been drawn whereby the interest of the diverse stakeholder audience can also be given priority.
Stakeholder Theory
This theory examines the economic, social and the political framework, in which the human life is undertaken. The emphasis is upon the financial and economic analysis which cannot be separated from the institutional, political and social frameworks of the society. This theory is focused on the primary interactions of the groups in the society where the negotiation between the company and the interest groups is deemed as the primary activity (Phillips, 2011).
Proprietary Theory
Under this theory, the focus is upon the entity’s owners and for corporations, this is the shareholders. The key goal from the perspective of the shareholders is the rise in the shareholder value and this is deemed as the primary corporate performance indicator. This theory also explains the shareholders’ position under the governing act of Corporations Act and the corporate financial statements’ form and presentation (Obidairo, 2016).
Entity Theory
The basis of this theory is on the lawful fact and the concept of the separate legal entity, which gives the owners of the company and the company, a different and separated concept. Hence, the shareholders under this concept are only considered as a group of companies’ resource provider (Schneeman, 2009).
Enterprise Theory
The company is deemed as a social organization under this concept and it contains different stakeholders like the society in general, agencies of government, regional communities, clients, creditors, employees and shareholders. The economic contribution of the company to the society or the community is also demonstrated under this theory. Further, this is used for measuring the organization’s economic impact in the community and is not simply focused upon the profits or losses of the operations (Dandago, 2009).
The shareholders are such individuals, who purchase the shares of the company, for a sum of amount, for which they are awarded dividends and also certain rights. This money becomes the capital for the company, which is used for diversified purposes by the company. Under the Corporations Act, 2001, at different instances, the supremacy of the interest of the shareholders has been highlighted. Time and again, it would be highlighted how the shareholders interest is protected more and more and there is a lack of evidence which could prove the same for the other stakeholders as well.
The Corporations Act is applicable on all the corporations having its operations in the commonwealth of the nation. The company directors have been imparted with the duty to carry on the operations of the company, on behalf of the shareholders. The emphasis is always upon the stakeholders (Cassidy, 2006). Under section 198A(1) of the Corporations Act, the company carries on its business by the directors of the company and it has to be managed under the directions of the company. In order to keep the directors focused towards their role, they have been given certain duties, which have been covered under Chapter 2D’s Part 2D.1. These duties are focused upon the operations of the company being conducted in a proper and diligent manner, whereby the shareholder rights stay protected (Australian Government, 2017).
Under section 180 of this act, the directors have been given the duty to use their powers and fulfill their duties in a care and diligent manner, as would be done by a prudent individual. Section 181 imposes a duty of good faith over the company directors, where the directors are required to fulfill their duties and use their powers for proper purpose and the company’s best interest (Federal Register of Legislation, 2017). Section 182 imparts the diligence in matter of use of position of the directors in a manner where the company is not detrimental or where the director does not obtain a personal gain (WIPO, 2015). Related provisions like 182 are given under section 183, regarding the use of information of the company. And section 184 makes it a criminal offence for the directors when there is a misuse of the information of the company and the position and is not in the good faith of the company (Australasian Legal Information Institute, 2017).
There are a number of cases, where the directors of the company have been held liable for breaching their duties and for working against the interest of the shareholders. In the case of ASIC v Soust [2010] FCA 68, the Federal Court held Soust liable for breaching the director duties (Hodgkinson, 2010). In HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482, the plaintiff was the shareholders of the company, who had purchased the shares of the company, at inflated prices. The court allowed the plaintiff to recover the losses and there was no need for them to show that there was a linkage between the deceptive and misleading conduct of the company and the purchase decision of the plaintiff (Adams, 2009).
This issue becomes a problem as the act does not pay that much emphasis to the interest of the other stakeholders, as is done by imposing the duties upon the directors and other officers of the company. In order to solve this issue, as a best practice, the company directors should take care of the interest of other stakeholders also, when they discharge their duties and align these with the interest of other stakeholders.
The shareholders have been given the right to inspect the books of the company under this act, through section 247A (ICNL, 2017). The availability of this right is dependent upon the satisfaction of the court that the shareholders are acting for proper purpose and in good faith of the company and the inspection of the books is being carried on for the benefit of the company. A key example of this right was seen in the different cases which were brought before the court, including the case of Hanks v Admiralty Resources NL [2011] FCA 891 and Mesa Minerals Limited v Mighty River International Limited [2016] FCAFC 16 (Mainprize, 2017).
There is a need to provide such rights to the other stakeholders also. As the amendment of acts is not as easy, the companies should, as a best practice, adopt a mechanism through which the other stakeholders can raise voice in such issues.
Under section 1324 of the Corporations Act, the ASIC, i.e., the Australian Securities and Investments Commission and the other individuals who are of the view that their interest is being affected, have been given the legal backing to apply to the competent court and obtain an injunction order, or a declaration from the court against the directors or the other officers, who fail to fulfill the obligations which have been imposed on them through this act. Similar provisions were given under the erstwhile act of Corporations Law through section 574. The court can, through section 1324, make an award for damages for the individual who brought the matter before the court, and to any other related plaintiff, who is affected due to such actions of the director. Hence, by default, the directors have to undertake care and diligence when they perform their duties.
By making an application to the AICD, the other stakeholders can evade the issue which is presented through these rights being available to a specific set of individuals, which may not necessarily include all the other stakeholders.
The company law is historically based on the principle of rule of majority. And so, the decisions of the company are undertaken by a majority vote. However, this does not mean that the rights of the minority shareholders are forgotten. The minority shareholders are specifically protected under the Corporations Act and it always remains of importance, that their rights are not breached. Part 2F.1 of the Corporations Act, 2001 gives the right to the minority shareholders to claim against any such oppression and mismanagement, undertaken by the directors of the company. The significance of the minority shareholders right can be inferred from the power which is available with the shareholders of the company to override the decisions which have been made by the board of the company (Victorian Law Reform Commission, 2013).
In the UK based case of Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34, the board of the company had been given the general power of managing the company, by the internal governance rules of the company. The qualification of these decisions was subjected to a special resolution which had to be passed by the members of the company. Out of the 2700 shares, 1202 shares of the company were held by McDiarmid. He arranged for the assets of the company to be sold and for the company to be undertaken by another. This needed a shareholder resolution so that the same could be used to instruct the board to carry out the transaction. The resolution got 1502 votes and hence was passed with a simple majority. The directors resisted the resolution as this transaction was not deemed to be in the company’s best interest. The matter was brought before the court and the decision was given in favor of the directors. The reason for taking this step was to safeguard the interest of minority shareholders and the interest of the company (Mäntysaari, 2006).
The protection to the shareholder from oppression is provided in every company related act, across the globe. So, when the shareholders are of the view, that due to them being less in number, they are being oppressed, than an action can be brought against the company, against the undertaken oppression. The courts of Australia, including the Supreme Court of NSW, through the Corporations Act have the power of making an order in cases where the director’s conduct is established to be in contravention to the shareholders interest, or is deemed as oppressive or unfairly prejudicial. Though, the company is not generally wound up for such reasons, when a case of oppression has been made and has been established, as winding up of the company is deemed as being a final and concluding step (Baxt, 2007).
One of the manners in which such issues can be resolved was seen in the matter of Hillam v Ample Source International Ltd (No. 2) (2012) FCAFC 73, which was brought before the court of law (BRI Ferrier, 2015). It was stated in this matter that the minority shareholders had been oppressed owing to the board of director’s conduct. And ignoring the solvency, this was considered to be the correct decision in this particular instance, to wind up the company and for the company’s assets to be sold and the proceedings to be distributed in the shareholders of the company (Gibson Howlin Lawyers, 2012). The particular section for minority oppression in the Corporations Act is section 232, where the shareholders are granted relief, when the affairs of the company can be shown to be opposite the shareholder’s interest and also in such cases, where the same seems to be discriminatory in an unfair manner, prejudicial, oppressive against the shareholders. Though, it is significant that the unfairness is present and just the presence of prejudice and discrimination is not sufficient (Australian Institute of Company Directors, 2013).
This issue is more or less aligned to the rights of the shareholders only and hence, the company directors are bound to address this issue. And not much can be done to give this right to the other stakeholders, till the time they are oppressed or mismanaged by the company, owing to the lack of shareholding.
The above issues highlighted a range of options for the company directors, which it is recommended for them to be followed so that they can cater to the different stakeholder audience, in which, the shareholders of the company are included. The directors have to strictly abide by the duties which have been imposed on them and this has to be done in order uphold the best interest of the company, which would automatically be in the interest of all the stakeholders. There is a need for the directors of the company, to keep a special check on the minority shareholders rights, as the majority principle can prove to be a breach of their rights. It is also recommended to the directors of the company to adhere to the provisions of the Corporations Act, as this act takes care of the right of each of the shareholders, which can range from the shareholders of the company, to its creditors. More importantly, before all this is done, there is a need on part of the company to effectively identify its diversified stakeholders and categorize them broadly, where the rights of a similar group are aligned together and such group is made a single group of stakeholders. Lastly, for the company directors to improve upon the safeguarding of the interest of the stakeholders there is a need to go beyond the letter of the law and fulfill its spirit.
Conclusion
The discussion which has been carried in the previous parts has thrown a light on the duties which have been imposed on the directors of the company. One magnified look at these highlight the underpinned theme of protecting the shareholders of the company, from any such action, which harms them, and the company. The governing act, i.e., the Corporations Act, has given different rights to the shareholders of the company, which not only give them an option to have a say in the affairs of the company, but also to raise their voice in case they feel that their rights are being infringed, particularly when they do not favor the company. The case laws highlighted above show the manner in which these rights are granted to the shareholders. When the act is so much emphasized upon the shareholders, it can be clearly stated that the shareholder interest is kept over and above the interest of the other stakeholders. And to improve upon the safeguarding and upholding of the interest of the other stakeholders of the company, the above mentioned recommendations could prove to be helpful
References
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