A Statutory Contractual Relationship in a Company - Research Paper Example

1 Company Law Question: Section 33 of the Companies Act 2006 heralds a new era in the area of the corporate constitution. In a previous age, Professor Rajak was able to say: ‘The [s.14 Companies Act 1985] contract between the company and the shareholders gives rise to mutual rights and obligations, but these lie in favour of and against the shareholder in the capacity as a member of the company’. (per H Rasak. A Sourcebook of Company Law, Jordans (1989), p. 360). Introduction Corporate constitution or law contains all the rules and regulations for corporations, detailing how they could legally carry out their operations and stating the duties and responsibilities of all the components of the corporations: be they shareholders or directors. In UK, the Company Act contains all these rules and regulations for companies established in the United Kingdom and Northern Ireland. However, two versions of the Company Act, namely Company Act 1985 and Company Act 2006 offer varied rights and obligations for shareholders as explained below. Minority shareholders (those whose shareholding is 50% or less), in particular, are given some forms of protection from majority shareholders. Overview of the Company Act 1985 Section 459 of Company Act 1985 provides shareholders with the following rights and obligations. Considering the main useful part of Section 459 quoted below: 2 ‘A member of a company may apply to the court… for an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members…” [Emphatically a “member” means a shareholder]1 From the statements above, shareholders are expected to enjoy the following rights and undertake these obligations. Instituting a legal suit: Shareholders could start a legal proceeding against the directors and the companies in case unexpected unfair practices are discovered. This empowers shareholders to boldly challenge the directors or other management members whenever they abused their positions and undermine the integrity of the company’s constitution2. Some of the abuses include but not limited to the misuse of company’s asset, exaggerated self-aggrandisement and absolute breach of company’s rules to satisfy personal interests. So, minority shareholders, for instance, could only use the power of law here to seek redress against the majority shareholders, managers and directors. For the fact that bad management on the part of the directors could destroy the company’s operations and plunge everyone into insolvency, the opposing action by the shareholders would help return sanity to the company’s activities. 1. Hannigan, B. (2001). Annotated guide to Company Act 1985. Tottel Publishing, p. 45 2. Griffin, S. (2000). Company law—fundamental principles. Butterworth, p. 120 3 A typical instance of when shareholders kicked against the selfish desires of directors who tried to break the company’s rules in pursuit of a seemingly dangerous commercial relationship is seen in Allen v HART 3. This case reveals how directors of Lakeside Canning Co. Ltd. had connived with one another and pushed the company into a deal which information had been largely hidden from the shareholders. Even though they claimed they were working for the benefits of increasing the company’s share value, however, since they had decided to make their representations for amalgamation with another company, Dominion Company, secret, this action constituted a breach of corporation law4. Quasi-partnership status: Shareholders are granted quasi-partnership status and dully recognized by the court for this nature. What this signifies is that the shareholders are regarded as members of a partnership operating as a limited company, and protected by the law of the company5. Company Act 1985 section 459 endowed shareholders the power to see themselves as inclusive members of an organisation for which they have a constitutional duty to protect the financial health of the organisation by making sure that other members (directors in this case), do not necessarily plunge the organisation into dangerous commercial relationship6. 3. Allen v HART (1914) 30 T.L.R 444 Privy Council 4. Sealy, L. (1971). Cases and materials in company law. Cambridge University Press, p. 365 5. Pettet, B. (2009). Pettet’s company law. Longman, p. 235. 6. Davies, P. and Gower, L. (2003). Gower and Davies’ principles of modern company law. Sweet & Maxwell, p.410. 4 The Controversial Section 14 of Company Act 1985 Despite the benefits stated above for shareholders in section 459 of Company Act 1985, section 14 brings some grave concerns in the fact that it presents some controversial clauses that seem to truncate the obligations and rights of shareholders as vividly stipulated in section 459. These are the dilemmas faced by shareholders whenever the issues of section 14 are raised: Statutory contract: Section 14 technically declares that a company is an entity on its own in any contractual agreement; that is, shareholders are perceived as partners-in-progress. And when there is any problem in the relationship, it is legally possible for the company to reject or challenge any plans or ideas for the day-to-day running of the company’s operations7. Hence, shareholders are robbed of the unique rights to prevent the company’s directors from committing the company into any business relationship they selfishly desire: take for instance, in Bratton Seymour Services Co. Ltd v Oxborough8, the article of association states that the contractual agreement for all the parties involved in the deal is not necessarily binding without the consideration of other terms in the statute that grants special rights to all parties involved7. Ultimately, shareholders, in this case, have lost absolute right to question every business engagement the company, as an entity, may be having. 7. Mantysaari, P. (2005). Comparative corporate governance: shareholders as a rule-maker. Springer, p. 106. 8. Bratton Seymour Services Co Ltd v Oxborough [1992] BCLC 693. 5 Subjection to other provisions: Section 14 is subjected to other provisions in the Company Act 1985: this assertion automatically eradicates or limits the extent of autonomy the “statutory contract” could have provided the parties in the contract, including the shareholders. Since the company can alter the contract by “special resolution”9, the rights and obligations of shareholders would be drastically reduced or totally cut out. This issue complicates the interpretation of the actual rights accruable to the shareholders; for the fact that complete construction of the provisions in Company Act 1985 is required to describe the true scope of autonomy to be enjoyed by each party involved in the contractual agreement. A good example that is always used to understand this issue is that of Bushell v Faith10, where the possibility of removing an erring director became a serious contention that was eventually settled using only the construction of the provisions in section 184 of Company Act 1948. The construction of the section was considered a deciding factor as the judge could not understand why legislature had put such a clause into the law, but its language was understandable enough for the judge to make his ruling. This circumstance puts shareholders on the edge of their seats as they wonder about the reduction in their abilities to frustrate unwholesome practices in a company they are a part of, and to what extent are they expose to liabilities? 9. Section 9 of the Company Act 1985. 10. Bushell v Faith [1970] AC 1099, [1970] 1 All ER 53 (House of Lords). 6 Shareholders’ Troubles Comparing Professor Rajak’s submissions11 and the implications of section 14 of Company Act 1985, shareholders in UK companies may have been facing the following troubles: (i) Inability to salvage the company by using their own influence as shareholders; since the company is independent, though in a contractual agreement it could get out at any time. (ii) Uncertainty about the level of exposure to liabilities and the possible insolvency. (iii) Incapacitated to stop the directors from leading the company into unprofitable ventures or commercial transactions. (iv) Reduction in the power of autonomy as shareholders are liable to obey other provisions stated in the Company Act 1985. (v) There is a condition of mutual relatedness and distrust as shareholders believe they have got some power to influence the company’s activities; an opportunity they also realise may be taken away from them when other provisions in the Company Act are revived. (vi) Non-symbiotic relationship also exists between the company and the shareholders; they cannot always dictate how the company would be run. 11. Rajak, H. (1989). A Sourcebook of company law. Jordans, p. 360. 7 The Needs for Modernising the Company Law Companies are facing new threats as they engage in business relationships with other organisations: these relationships could be in form of partnership, merger and acquisition, corporate investment and other forms of commercial transactions. As the world is fast turning into a global village with new management styles and structures emerging from every corner of the globe due to globalisation, this has called for establishing a new Company Law that would appropriately attend to the modern-day requirements12. This would have necessitated the setting up of Company Law Reviewing Steering Group by the British government to deliberate, formulate and offer suggestions on areas where the past Company Acts have been shortcoming; most especially, in the issues concerning the shareholders, whose rights and obligations have been dramatically shortchanged by Company Act 1985. It was in the 1990s that serious actions were taken towards reviewing the Company Act by the Labour Government through the Department of Trade and Industry (DTI), which in turn set up the Steering Committee13. The Steering Committee composed of experts from diverse sectors, including directors, chairmen, academics, judiciary, industrialists and specialist consultants: in short, all significant players were included. 12. Goddard, R. (2003). “Modernising company law: the government white paper”. Vol. 66, No.3, pp. 402-424 13. Sheikh, S. (2008). A guide to the Company Act. Taylor & Francis, p. 13. 8 Most of the problems inherent in Company Act 1986 would have made competition among UK companies difficult, notwithstanding competing evenly with international rivals. Therefore, the need to position Britain as a viable economy among the global one had pushed the government for modern company law that would produce a competitive economy14. Hence, all the deliberations and discourse on the areas where Company Act 1985 has failed actually produced some encouraging results, which had led to the promulgation of another corporate law for business practices in the UK15: Company Act 2006. The purposes of reforming a country’s company law do not only lie in its attempt to remain quite competitive, but to proffer the following opportunities most businesses need in the 21st century: Provision of platform for accountability. Engendering equality and fruitful inter-dependency among all the members of a company. Creating useful check and balances on the actions of majority shareholders (the directors) as they plan their intrigues of investment. Provision of level-playing business environment for both the domestic and international organisations operation in UK jurisdictions. This, in a sense, helps to establish a condition of pure competitiveness. 14. Law, J. (2002). The reform of United Kingdom Company Law. Routledge, p. 17. 15. Alcock, A., Birds, J. and Gale, S. (2007). Companies Act 2006: the new law. Jordans, p. 10 9 Shareholders’ Rights and Obligations in Company Act 2006 Below are the highlights of the rights and obligations accruable to shareholders in the new UK company law: Company Act 2006. Shareholders’ rights and obligations: Company Act 2006 grants the shareholders a host of rights that are clearly outlined, unlike in Company Act 1985. Some of these important rights are highlighted below section by section: (a) Section 188 requires that members’ approval is highly recommended for any long-term services that the directors ordered for the company. For instance, if the directors are contracting the accounting/auditing of the company to an external finance company, it is important that the members (shareholders) append their signatures to show that such a program has been approved by them. (b) Section 190 mandates directors to seek the approval of the company’s members (shareholders) when they are investing in huge-capital property: these substantial property transactions include buying an old office building, staff quarters, restaurants for staff and giant office buildings. The shareholders, during this time, would be able to fully understand the cost, the processes of acquisition and the purpose of spending huge amount of money on such investment. This action would prevent directors from unilaterally acquiring property for the company. And this would help to eliminate corruption and restore transparency among all the member of a company. 10 (c) Section 197 enforces the rights of shareholders in deciding whether the directors worth receiving loans and quasi-loans from the company or not. The shareholders are expected to decide if they would approve any credit transaction undertaken by the directors in their own interests. Not only this, they would also need to approve the granting of company’s loans and quasi loans to the members of directors’ families. (d) Section 219 makes it compulsory that shareholders’ interests are taken into consideration and their approval must be sought before directors undertake any share transfer. In the case study above, Allen v HART, the director would have to inform the shareholders before transferring their shares into another organisation for profit-making. (e) Section 32 encourages fair dealing and right to all information pertaining to the company: in this case, the shareholders must have in their possession all constitutional documents that detail the rules and regulations guiding the actions of every member of the company. Confusion and misunderstanding have always occurred in companies where all members have no access to the companies’ constitution, or whereby the contents of the constitution are unclear. Whenever legal cases arise from this state of misunderstanding, the affected shareholders often claim that vital information about the company has been hidden from them by the directors. 11 Is Professor Rajak’s Assertion Justified? Section 14 of Company Act 1985 grants shareholder the status of being recognised as a partner within a company, enjoying the right to be part of decision-makers who will determine the fate of the company. However, such an opportunity to influence the activities of directors and safeguard the company into profitable commercial relationships has been drastically reduced owing to the status of the company as a separate entity. With this status, it is possible for the company to be on its own (legally) while rejecting the influence of the shareholders. The effect of this issue is that directors could do whatever they want with little or no resistance from the shareholders. Even though enjoying a statutory contractual relationship in a company, most of shareholders’ activities are subjected to other provisions in the Act, which invariably may truncate the extent of impacts shareholders could make on a company’s operations, while aspiring to curb excesses in the activities of the directors. 12 Bibliography Alcock, A., Birds, J. and Gale, S. (2007). Companies Act 2006: the new law. London. Jordans Davies, P. and Gower, L. (2003). Gower and Davies’ principles of modern company law. 8th edition. London. Sweet & Maxwell. Goddard, R. (2003). “Modernising company law: the government white paper”. Modern Law Review. Vol. 66, No.3, pp. 402-424. Griffin, S. (2000). Company law—fundamental principles. 3rd edition. London. Butterworth. Hannigan, B. (2001). Annotated guide to Company Act 1985. Dublin. Tottel Publishing. Law, J. (2002). The reform of United Kingdom Company Law. London. Routledge. Mantysaari, P. (2005). Comparative corporate governance: shareholders as a rule-maker. New York. Springer. Pettet, B. (2009). Pettet’s company law. London. Longman. Rajak, H. (1989). A Sourcebook of company law. London. Jordans Ltd. Sealy, L. (1971). Cases and materials in company law. Cambridge. Cambridge University Press. Sheikh, S. (2008). A guide to the Company Act. London. Taylor & Francis. Read More