Normally, the directors of a company are not required to own any of its shares. Economists have analysed the problems, which may arise when the people managing a business do not own all of it. Managers in this position are believed to manage the business less efficiently than if they did own it.1
In broad terms the duties can be distilled into three propositions: Firstly, directors are under a duty to act bona fide in the interests of the company. Secondly, to exercise their powers under company's constitution for the proper purpose. Finally, to avoid conflict of interests and to profit from their position. For the first time, however, all the duties owed by directors to their company have been set out in statute, in Part 10 (ss.170-177) of the CA 2006.
Section 171 of Companies Act 2006 states that duty to act within powers. A director of a company must (a) act in accordance with the company's constitution, and (b) only exercise powers for the purposes for which they are conferred.
The constitution of the company is one or more documents setting out the rules by which the company is to be operated. While the constitution is subject to the Act, it sets out what powers directors have and how they are to exercise them. Directors must abide by these rules. If this power is given for one purpose, they cannot exercise it for a different proper purpose, even if they think that to do so would be in the best interests of the company.2
In Re Smith & Fawcett Ltd Lord Greene MR went to add that Directors must not exercise their powers for any "collateral purpose". This is called the proper purpose doctrine. The facts of Extrasure Travel Insurances Ltd v Cohen3, afford a clear illustration of a power being exercised for an improper purpose. More generally, however, the issue of whether Directors have used a power for a proper purpose arises in relation to their authority to issue shares. If shares are allotted in exchange for cash where the company is in need of additional capital the duty will not be broken. But where Directors issue shares in order to dilute the voting rights of an existing majority shareholder because he or she is blocking a resolution supporting, for example a takeover bid, then the duty will be breached.
The Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd4 subjected the content of the duty to through scrutiny. The Directors allotted shares to a company, which had made a takeover bid. The effect of the shares was to reduce the majority holding of two other shareholders who had made a rival bid from 55 to 36 percent. The two shareholders sought declaration that the share allotment was invalid as being an improper exercise of power. The court held that it must be unconstitutional for Directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority, which did not previously exist.
Section 172 of Companies Act 2006 introduces significant change in common law. This Act states that duty to promote the success of the company. Section 172(1) a director of a company must act