Whilst the concept of Enlightened Shareholder Value has appeared on the whole to have had a positive effect on ensuring that directors take into consideration the interests of stakeholders, it would appear that there may be serious problems in ensuring directors always take their interests into account. The main recurring question that appears is whether any stakeholders of a company have the ability to take any legal action against directors, if it is found that they have not taken their interests into account when making decisions? The short answer appears to be no, as with the law prior to the Act the only persons capable of bringing an action are the shareholders. Shareholders are, under the Act, given the right to bring derivative proceedings (subject to the court approval) against directors in respect of a cause of action vested in the company (s.260(1)(a) of the Act). Stakeholders do not appear to have any power in enforcing their own interests, however this is nothing new, and it is argued that Parliament should have known this at the time of the creation of
198 S.214(6) Insolvency Act 1986. 199 S.214(3) Insolvency Act 1986. 200 S.214(1) Insolvency Act 1986.
201 See generally, Andrew Keay, ‘Wrongful trading and the liability of company directors: a theoretical perspective.’ (2005) 25(3) Legal Studies 431.
202 [2003] 2 BCLC 153.
136 | P a g e s.172. The CLRSG directly acknowledged that there was already a problem with regards to this issue under s.309 of the Companies Act 1985.204 Under s.309 directors must take into account the
interests of employees as well as shareholders when making decisions, however there is no power for stakeholders to take up proceedings if they consider their interests to have been impugned. It is now widely accepted that s.309 has no teeth, the provision has hardly been used and there is very little case law on the section. Ultimately a right without a remedy is worthless.205
Likewise there is nothing specific in the Act that allows for stakeholders to enforce the duty that is imposed upon them.206 Keay has outlined a number of different situations where an action could be
brought about:
1. Where a member invested in the company for the long haul, and he or she feels that the action of the directors does not have regard to the long term. The member might feel that the directors are overly myopic and that could well mean that the member will receive less in the long run.
2. A member is also an employee of the company and is concerned that the directors did not have regard to the interests of the employees
3. A member is concerned that the directors have not had regard for the need to promote business relationships with suppliers, customers or others and is likely to damage the company in the future.
4. There are members of the company living in the community in which the company operates, and they believe that the community will be adversely affected by the actions of the
directors, and that will, as a consequence, affect the lives of the members.
5. A member has concerns wider that his own interests and feels obliged to take proceedings because of a heightened sense of community interest.207
As is clear to see that under these terms the only time a stakeholder is able to enforce derivative proceedings is when that stakeholder is also a shareholder, and the person brings an action because their own self interest in the company is affected in a detrimental way in another capacity.
204 Company Law Review, Modern Company Law for a Competitive Economy: The Strategic Framework (n 6) para 5.1.21.
205 Morey McDaniel, ‘Bondholders and Stockholders’ (1988) 113 Journal of Corporation Law 205, 209.
206 Demetra Arsalidou, ‘Shareholder Primacy in cl.173 of the Company Law Bill 2006.’ (2007) Comp Law 67, 68. 207 Andrew Keay, Directors’ Duties (Jordans, 2009) 146-147.
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Conclusion
The chapter has analysed the application of the s.172 duty to promote the success of the company. The statutory changes developed under the Companies Act 2006 have established a new system of corporate governance within the UK. The chapter has shown that since the Berle-Dodd debates neither shareholder, nor stakeholder theories of corporate governance have resolved the debate as to ‘’in whose interests should a company be run?’ As an alternative the establishment of the
Enlightened Shareholder Value system of governance has brought greater accountability to directors of financial institutions. ESV like Shareholder Primacy Theory is based on the idea that maximising shareholder value is the best means of securing overall prosperity.208 However, unlike Shareholder
Primacy Theory, this is subject to developing relationships of trust with stakeholders. The greater accountability developed through ESV, whilst clearly acting as an aid to curbing excessive risk taking, is not without its issues. In its inception it was heralded as a radical provision that would ensure directors would take into consideration the wider interests of stakeholders. Whilst it may have been created with the best of intentions, the subjective nature of the provision would appear to be nearly impossible to enforce.209 Some academics have been more critical and have considered that the
effect of s.172 is only likely to be educational, and will have no real restrictive effect on business decisions taken in good faith by directors.210 But whilst this may be true of the current provisions,
whilst some see that as a floor, it is argued that it is just as important to re-educate and adjust the attitudes of directors following the financial crisis. The provision does this without imposing stricter rules on directors.
The behaviour of directors during the crisis was extremely risky and the provisions did little to curb the short term attitude of the directors. It has been purported however that with very small
alterations to the legislation, or alternatively a wider interpretation, s.172 could have a very real and positive curbing effect on rogue directors, who do not act to promote the success of the company for the benefit of its members as a whole. The thesis purports that the easiest way to ensure a shift in the culture of banking is to reinstate the failed objective minimum standard as developed under the 2002 Modernising Company Law White Paper.211 This shift can form part of the multi-faceted
approach that has been developed by the thesis to change the culture of banking and prevent a reoccurrence of the Global Financial Crisis.
208 Company Law Review, Strategic Framework (n 6) para 5.1.11. 209 Fisher (n 32).
210 The Rt Hon The Lord Millet, Alistair Alcock, Michael Todd, Gore-Brown on Companies (45th Ed ,Jordans 2014) Ch15[10A].
138 | P a g e
Chapter VI: The Business Decision Rule
139 | P a g e
Chapter VI: The Business Decision Rule
The primary function of a director is to make decisions on behalf of the company. If the decisions the director make are sub-optimal, then this can have a significant impact on the company. The ability of the courts to question the decisions of directors has been a longstanding issue; there has been reluctance by the judiciary to voice any opinion on such decisions. This has been defined as The Business Decision Rule (BDR).1 The BDR is a 19th Century common law development, whereby the
judiciary will respect the decisions made by a director, and will not question their validity, so long as the director has satisfied their equitable and tortious duties.
The intention of the chapter is to show, that although the Law Commission categorically refused to place the BDR on a statutory footing by codifying directors duties under s. 171-177 of the Companies Act 2006 the legislature has de facto implemented the Business Decision Rule under a process defined by the thesis as the Business Decision Shield. The Business Decision Shield is a doctrine of abstention whereby, if a decision made by a director does not fall within one of the duties as set out under s.171-177 of the Companies Act 2006, the courts will simply refuse to look at any action focusing on the decision. The effect of the Business Decision Shield is to reduce the scope of applicability of the BDR, allowing for an increase in the levels of accountability, in particular following the 2007-09 Global Financial Crisis. The increase in accountability will aid in the
1 The Business Decision Rule has also been called the ‘Internal Management Rule’ and the ‘Business Judgment Rule’ for the purposes of this chapter all are considered to be the same.
140 | P a g e multifaceted approach to bring together both external financial regulations with internal corporate governance structures in the light of the financial crisis.
The chapter will begin by outlining the historical reasoning behind the development of the Business Decision Rule through economic and legal analysis, it will continue by noting the difficulty in finding a single definition of the Business Decision Rule and the reasons for the creation of such a rule. It will then continue to map out the development of the early case law surrounding the BDR and compare the definition with that of the US and Australia, drawing out the points made by the Law
Commission prior to the 2006 Act. The chapter will conclude by purporting that the best definition that can be found for a Business Decision Rule is a de facto rule found collectively under s.171-177 of the Companies Act 2006. Whilst it is not a single definition akin to that of Australia, it is by all sense of the word the definition that has been sought under the UK version of the Business Decision Rule. The Chapter will conclude by showing that following the Global Financial Crisis there has been a decrease in the applicability of the Business Decision Rule following the 2007-09 Global Financial Crisis.