Shareholder Primacy Revisited

Question: Directors of companies have an obligation to act in the best interests of the company. Elaborate on how the courts approach this duty and explain whether the corporations law in Australia has made this duty onerous. Answer: A number of duties have been imposed on the directors of companies. These duties have been imposed by the common law at the same time, the Corporations Act, 2001 (Cth) also prescribes the statutory duties of directors. Among these duties is the duty to act bona fide, in the best interests of the company. In this way, the beauty requires that the directors should exercise their powers bona fide, for the benefit of the company. In this regard, the duty to act in good faith is different from the other duties that have been imposed on the directors. This duty allows a challenge to be made in the court regarding a particular decision that has been taken by the directors or regarding a transaction that has been entered into by the directors.[1] Therefore, a particular transaction can be set aside by the company if it can be established that there has been a breach of duty of good faith by the directors who have made such a decision, depending on the fact that the other party was aware of t he breach of this duty by the directors. However in this regard it needs to be noted that the purpose behind the introduction of the 'assumptions rule' mentioned in section 129(4) of the Corporations Act is to protect the outsiders from having the transactions revoked on the grounds of the failure of the directors. Therefore, this means that a transaction can be removed only if the assumptions that are available under section 129 have been displaced by knowledge or suspicion that the assumption is not correct. In this regard the general approach adopted by the courts in Australia is that the courts have been reluctant to become involved in the disputes that are related with the merits of a particular decision taken by the directors. In this way, the principal related with limited judicial intervention has been expressed in the narrowly cast grounds of judicial review related with the breach of duty of good faith by the directors and also in the procedural rules which restrict the standing of the directors and sue for the breach of duty or irregularities in the procedure adopted by the company and its governance.[2] There are certain elements that are associated with the duty of the directors to act in good faith. Therefore traditionally these require that the directors of the bona fide and for the benefit of the company as a whole. While it is applied to the directors, the inquiry is made regarding the motive, intention and the beliefs of the directors and also the fact is considered if the directors have made interests of the company as the main consideration behind the decision taken by them. On the other hand, the discretionary powers granted to the directors will be considered to be abused by them if these powers are used by the directors for the purpose of achieving a personal advantage or to confer a benefit on a third-party or to cause a loss to the company.[3] In this way, the modern duty to act in good faith has three distinct and independent duties that are also related with each other and applied to the directors when they are acting in the position as the directors of the company an d exercising their corporate powers. Each duty provides an independent ground for judicial review and an intervention by the court in the decisions taken by the directors. Therefore, there should be subjective good-faith, proper purpose and the need one part of the directors to consult and in accordance with the interests of the company. In this way, it is the duty of the directors select honestly and in the best interests of the company as these interests are perceived by the directors. It needs to be noted that in such cases the process of judicial review is restricted to the inquiry that is made regarding the subjective intention of each director. In this context, it is required that the directors should honestly believe that the action taken by them is in the best interests of the company but this fact alone does not validate the action taken by the directors. Therefore such a decision can be appreciated by the breach of other two elements mentioned above that are part of this duty, as each of these elements have an objective content. It is therefore require that the corporate powers should be exercised by the directors for the purpose for which these powers have been granted to the directors. As a result, a particular decision taken by the directives can be invalidated by the courts if it has been found that the motivating purpose behind the decision is one that is allowed by the court as the one those for which the particular powers of the directives can be legitimately exercised or if it is not for the benefit of the company as a whole. Therefore it is recorded this regard that the power should be exercised by the directors bona fide or in other words, for the purpose for which the powers granted to the directors and not arbitrarily or according to the absurd bill of the directors. Therefore the directors should exercise their power honestly and in the best interests of the shareholders of the corporation as a whole.[4] However the need for distinguishing between the requirement of good faith and proper purpose becomes very significant when the power in question can have more objective characterisation. It has been recognized by the courts in Australia that the strict fiduciary standard is not compatible with the realities of the office of the directors, particularly in case of the provide the companies they're generally the directors also have the shareholding interest in the corporation. As a result, the courts came up with a 'mixed purpose' doctrine so that the sickness of this requirement can be reduced. In this way, in Mills v Mills[5], it was stated by the court that if the actions of the directors are merely invalidated due to the presence of such an interest, it will be like setting an impossible standard and the directors will be required to live in unreal era of detached altruism. As a result, it was proposed that the test of validity that can be used in such a case is to see what was the moving cause behind the action taken by the directors? The third head of this duty is to consult and direct according to the interests of which have been identified by the law as interests of the company. The duty to consult the interests of the company represent the long-standing ground of judicial review that is not related with the subjective good-faith of individual directors and denies the role of derivative interpreters of the common interests to the directors. In this way, this legal issue is related with the questions of corporate purpose and the corporate social responsibility. Where the di rectors have been acting in context of the interests that are extraneous to the interests that have been recognized by the law as interests of the company, the action will not be saved by the honest belief of the directors that they were acting in the interests of the company. Under the circumstances, it can be said that the duty has become onerous as a result of the corporations law because the Corporations Act prescribes a civil penalty in case of the breach of this duty. Bibliography E Klein, J du Plessis, Corporate donations, the best interest of the company and the proper purpose doctrine (2005) 28 The University of New South Wales Law Journal 69 Jason Harris, Anil Hargovan, Janet Austin, Shareholder Primacy Revisited: Does the public interest have any role in statutory duty (2008) 26 Company and Securities Law Journal 355 Rosemary T. Langford, The distinction between the duty of care and the duties to act bona fide in the interests of the company and for proper purposes (2013) 41(6) Australian Business Law Review 337 Case law Australian Metro Life Assurance v Ure, Ngurli v McCann (1923) 33 CLR 199 Mills v Mills - [1938] HCA 4