Directors are legally responsible to the shareholders and must prioritise their interests - Essay Example

what a court may consider is in the interests of the company but also introduces the new concept of enlightened shareholder value (Re Smith & Fawcett). It has been argued that the English company law inched closer to, but has not firmly adopted the stakeholder theory. Thus, the test in s.172 remains subjective because what mainly constitutes the success of the company depends on the director’s good faith judgment which may not be objective. It appears that there are no objective criteria in s.

172 against which the actions of directors can be assessed. Therefore, it becomes very difficult to prove a breach of this duty. At common law, the objective considerations were introduced by the courts to supplement the subjective test. For instance, in Charterbridge Corp Ltd v Lloyds Bank Ltd, the courts considered whether an intelligent and honest director could in the whole of the circumstances reasonably believe the transaction to be for the benefit of the company as a whole. However, Section 172 makes no reference to this objective consideration in view of the significant role of common law rules in the interpretation and application of the codified duties (s.170(3) and (4).

Keay (2007) argues that it is most likely that the courts would consider the objective test in assessing directors’ actions in any given scenario. There are quite a number of theories the questions the main interests that are supposed to guide the operations of the company. For instance, the traditional approach in the UK is the shareholder value principle (or shareholder primacy), which stipulates that a company should be run for the wealth maximization of its shareholders above those of other parties such as customers and suppliers.

For instance, the directors have a duty to act in the interests of the company (Percival v Wright), which are interpreted as the best interests of present and future shareholders (Hutton v West Cork Railway Company). The shareholder value theory states that