It is imperative that there be well-established rules for companies to follow as they navigate the course of the growth. To quote Demotti1:
A central question that underlies many analyses of corporate governance is whether the law and legal institutions have a constituent role in shaping governance practices, or whether the law, as well as governance practices, are best viewed as the inevitable results of market forces, centered upon capital markets.
In a company, virtually all policy-making is left in the hands of the Board of Directors or on the majority shareholders. The definition of director given at section 741(1) of the Companies Act 1985 'includes any person occupying the position of director by whatever name called. This definition can also be found in the Insolvency Act 1986 section 251 and the Company Directors Disqualification Act 1986 section 22, where it is extended to include shadow directors. While allowing directors to control business strategies has merit - for instance, decision-making is streamlined and businesses largely depend on the need to be able to respond to issues not only with soundness but also with dispatch -- some problems inevitably arise.
In theory, a director, holding as he does a position of trust, is a fiduciary of the corporationii. As such, in cases of conflict of his interest with those of the corporation, he cannot sacrifice the latter without incurring liability for his disloyal act. The fiduciary duty has many ramifications, and the possible conflict of interest situations are almost limitless, each possibility posing different problems. There will be cases where a breach of trust is clear, as where a director converts for his own use funds or property belonging to the corporation, or accepts material benefits for exercising his powers in favor of someone seeking to do business with the corporation.
In many other cases, however, the line of demarcation between the fiduciary relationship and a director's personal right is not easy to define. The law has attempted at least to lay down general rules of conduct and although these serve as guidelines for directors to follow, the determination as to whether in a given case the duty of loyalty has been violated has ultimately to be decided by the court on the case's own merits. What is clear, however, is that shareholder conflicts are prevalent in virtually all jurisdictions and the law has to formulate appropriate channels of redress in order to resolve these conflicts. As Miller2 said:
Shareholder disputes present one of the most prevalent and destructive problems encountered by the privately-owned business. Shareholder conflicts appear to be universal. Minority shareholder allegations against the majority reverberate in courtrooms throughout the world. Common accusations are that the majority has excluded the minority from active participation in the business or has mismanaged or misappropriated assets. Complaints that the majority has taken excessive remuneration or has failed to pay dividends cross geographical barriers.
There is no surfeit of examples to demonstrate how minority shareholders and their interests can be prejudiced by the director or those with controlling interests in the corporation. One of the most typical situations of self-dealing is